Nobody From Nowhere (@i8dc)

Occasional Common Sense

In Which Economist Mark Perry Attacks Warren Buffett

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Today Mark Perry posted a critique of the tax analysis published in Warren Buffett’s New York Times op-ed, “Stop Coddling the Super Rich.”  Astonishingly, Perry implies that Buffett’s analysis is completely wrong without describing any of the interesting elements of the topic.

For example, Perry recreates the IRS Statistics of Income table 1 from here.  He notes that the income tax system is “highly progressive (as it’s intended to be, and not regressive as Buffett wants us to believe from his ‘analysis’…),” noting that the average tax rate increases with each income group up to $5 million.  But he doesn’t note that the average tax rate then declines in the highest brackets, from 29.7% to 29.1% in the $5M-$10M range, and then to 26.3% in the $10M+ range.  The table shows that the average income tax of those with AGI in excess of $10M is lower than the average for the $500K-$1M range.

This odd fact apparently isn’t interesting enough for Perry to explore.  Or perhaps even to notice.  The answer’s quite simple – investment income is taxed for the most part at 15%, and the wealthy capture the lion’s share of investment income.  In 2008, it took $109.7 million of adjusted gross income (AGI) to be in the top 400 taxpayers in the country.  The average income tax rate on this select group: 18.11%.

Perry then guesses at the average federal income tax rate of both secretaries (9-12%) and their bosses (25%+), making a comparison that’s plainly different than the one Buffett made, which included all taxes.   He also comes up with the 25% number apparently without even wondering how Buffett could pay only 17.4%.  Seriously, he appears not even curious.

The next paragraph begins with “even if we account for payroll taxes.”  Might as well start it: “even if I attempt to make an apple-to-apples comparison after muddying the waters…”

Perry’s “bottom line” is that he doesn’t believe Buffett’s analysis, and is convinced that the so-called “Buffett Rule” wouldn’t apply to anybody.  And yet, he’s quite fired up against it – why?

Here’s Perry close: “Instead of raising tax rates, we should probably figure out what kind of loopholes allow Warren Buffet to pay taxes of only 17.4% on his $40 million income last year. ”

Amazing.  Perry’s just gotten through a posting seemingly devoid of all inquisitiveness, then says that maybe we should try to figure out how Buffett could game the system to pay such a low rate.

Um, isn’t that, like, your job?

[Incidentally, Perry seems to have deleted the sentence  – without any explanation – from his original blog post.   But as of the afternoon of September 20th, it still exists here and here.] 

Maybe it was just too difficult.  Let’s see how long it takes me.  Buffett said his tax was $6,938,744 and this was 17.4% of his income.  So taxable income was about $39.88 million.  Suppose no deductions and all income is taxed at least at 15% (the long-term capital gains rate) subtract that amount from the total tax, then divide by 20% to find out how much income would have to be taxed at 35% to raise the average to 17.4%.  There – $4.78 million of regular income, taxed at 35%, $35.01 million of long-term capital gains taxed at 15%.

Five minutes with Excel. While watching NCIS.

What did Perry say about Buffett’s scenario?  “[T]hat ‘evidence’ seems pretty far-fetched and not consistent with: a) average federal income tax rates available from the IRS, nor b) average tax rates for all federal taxes paid, from the CBO.”

Far-fetched?  Not consistent?  That’s correct as long as by “not consistent” you mean COMPLETELY CONSISTENT!  If Perry had bothered to look up the top 400 taxpayers file, he would have found the 18.11% number quoted above.  Would he still have questioned Buffett’s math?

Perry’s core dishonesty is that he’s not even trying to compare taxpayers of Buffett’s ilk, even though Buffett clearly designated millionaires and billionaires as the targets of his proposal.  No, Perry prefers to demagogue, repeatedly referring to the “super-rich” (his punctuation) as those making more $200,000.  Where did he get this number?  Certainly not from Buffett.

Perry simply conflates Buffett’s argument with old discussions of allowing the Bush tax cuts to expire only for the top tax brackets.  Like I said – dishonest.  Perry might be shocked to learn that there is nuance in the positions of those who think taxes should be higher; not all Democrats are in favor of all the same taxes at all the same levels.

Here’s how dishonest Perry’s misrepresentation of Buffett’s “super-rich” is: Buffett clearly states that the number of households he would tax under his proposal were the 236,883 making more than $1M in 2009.  Where did Buffett get this number?  The same table that Perry partially recreated to start his rant.  The one that clearly shows that 3,924,490 taxpayers had incomes in excess of $200,000.

I guess Perry just doesn’t have enough confidence in his argument to tell it straight.  Too bad.   Because if Perry had been at all inquisitive he would have figured out that Buffett does fudge his data.

Buffett counts both the employer’s and employee’s side of payroll taxes, but that’s pretty standard in this kind of analysis.  Where he fudges it is by using taxable income for his denominator.

Imagine a secretary making $50,000 per year. Suppose she’s single with one child, and contributes to a regular IRA.  She might have taxable income of $34,000 and pay $3,675 in federal income tax, for an average income tax rate of 10.8%.  But look what happens when you add in her payroll taxes of $7,650 (including the employer’s share).  That’s 15.3% of her salary, but it’s 22.5% of her taxable income.  The total tax of $11,325 is 22.65% of her gross income, but 33.3% of her taxable income.

Using taxable income to assess the impact of payroll taxes isn’t kosher, and Buffett’s analysis fails because of this.  Not that you would learn this from reading Perry.

Perry also ignores the obvious critique of investment taxation, which is the two layers (corporate tax followed by dividend and capital gains tax).  This is the best argument the anti-tax folks have, but sometimes advocacy requires a few minutes’ time.

This stuff isn’t hard.  You just can’t be lazy and expect to understand it.

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Written by David Clayton

September 19, 2011 at 11:55 pm

Posted in Debunkery

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