Taxes & Spending

An Income Tax Fact Check

There’s been a whole lot of buzz generated by President Obama’s latest proposal to make sure the rich pay their “fair share” of the nation’s tax burden. Forget the fact that the administration never tells us how much of our money it thinks is “fair” for us to keep, the real issue here is that Mr. Obama’s so-called “Buffett-rule” proposal to increase taxes on the wealthy is based on a false premise.

The basis for the so-called inequity is, as the president put it, that “Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett. There is no justification for it… It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million.”

But is this true? Do the wealthiest people in American pay a lower tax rate than the middle class or the poor? According to an Associated Press Fact Check story, the answer is a definite no.

In fact, the AP story points out that, on average, the wealthy pay more in taxes, and at a higher rate, as a group, than any other class. Here are the key facts cited by the AP story that essentially debunk the president’s claims:

The 10% of households with the highest incomes pay more than half of all federal taxes. They pay more than 70% of federal income taxes, according to the Congressional Budget Office.

This year, households making more than $1 million will pay an average of 29.1% of their income in federal taxes, including income taxes, payroll taxes and other taxes, according to the Tax Policy Center, a Washington think tank.

Households making between $50,000 and $75,000 will pay an average of 15% of their income in federal taxes.

Households making between $40,000 and $50,000 will pay an average of 12.5% of their income in federal taxes. Households making between $20,000 and $30,000 will pay 5.7%.

According to the latest Internal Revenue Service figures, in 2009, taxpayers who made $1 million or more paid, on average, 24.4% of their income in federal income taxes. Those making $100,000 to $125,000 paid on average 9.9% in federal income taxes. Those making $50,000 to $60,000 paid an average of 6.3%.

Of course, the president’s claim that Mr. Buffett pays a lower tax rate than his secretary hinges on the fact that high-income earners often get the bulk of their earnings from investment income, which is taxed at a lower rate than wages. The top tax rate for dividends and capital gains is 15%. But what the president fails to mention is that this investment capital already has been taxed multiple times at the corporate level, and at the personal level. In fact, dividend taxes essentially amount to a form of double taxation, as the original money that at one time had to come from earnings was already taxed at the income rate (in most cases).

So, no matter how you look at it, the president is off base here. His facts are just wrong on this issue, as apparently are Mr. Buffett’s. Mr. President, before you ignite a new round of class warfare, please at least get your information correct.

[This article is courtesy of the Making Money Alert, which you can get for free here.]


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