Nobody From Nowhere (@i8dc)

Occasional Common Sense

Quick Response To Perry’s Buffett Parry

with 2 comments

or “Damn It’s Late But I Have to Write Something

I’ll have to do a point-by-point.

Perry says that CBO-generated averages of income and tax shares allows “the most accurate ‘apples-to-apples’ analysis of Buffett’s claim that his federal tax rate was 17.4% for income taxes and payroll taxes, compared to the average… of 36% for his employees.”

I find this curious.  Why don’t we all just do what Buffett said?  Take your total taxes (line 60), add in two times your payroll taxes (for you and your employer), and divide by taxable income (line 43).  My “Buffett Rate” was 34.6% (this is a correction from what I posted on Perry’s blog).  Unless you get a big share of your income from capital, you likely won’t be less than 30%.

Perry provided a chart, which is a dramatic improvement over his prior effort.  The most telling part of this chart is almost hidden; the drop in average tax rate from the top 5% to the top 1%.  This flip from progressive to regressive accelerates the closer you get to the top taxpayers; details below.

My response to Perry’s numbered points:

1. Warren Buffett’s tax situation is not typical for “wealthy” taxpayers, because the average tax rate for those in the top quintile is more than 20% compared to Buffett’s 17.4% rate.  As discussed previously, Buffett’s lower-than-average tax rate is because he receives most of his taxable income as dividends (which have been taxed previously at the corporate level) and capital gains – taxed at only 15% – and not as ordinary income, which would be taxed as high as 35%.  He also may receive income from tax-exempt municipal bonds.

I don’t understand how Perry doesn’t get this.  Yesterday we got word of the October 7 Congressional Research Service study of this issue, which makes it clear just how typical Buffett is: 94,500 millionaires paid a lower average tax, including income, payroll, and corporate income taxes, than more than 10,000,000 taxpayers with AGIs of less than $100,000.  Take out the corporate income tax impacts and there will be many more millionaires paying less than many more middle-class taxpayers.

As for Buffett receiving income from municipal bonds — this fairly close to absurd.  Doesn’t Perry know who Warren Buffett is?

2. More importantly, it seems highly unlikely that Buffett’s secretary and other co-workers are paying effective federal tax rates of 33-41%.  It’s important to note that Buffett has only mentioned federal income taxes and payroll taxes, and not state income taxes, and has specifically reported his 17.4% rate on only federal taxes.  Given the tax data in the chart above, it’s either the case that: a) Buffett’s assessment of his co-workers’ tax data is inaccurate, or b) all of his office workers faced extremely unusual tax situations last year, which are not at all representative of the taxes paid by typical Americans.

I think the only logical responses to this, since I’ve already explained this more than once, is either “why aren’t you bothering to follow the instructions Buffett provided to see for yourself?” or “I bet you’re wrong – what amount of money would make such a bet worth your while?”  But I’ve tried both of those approaches before.  So maybe this makes more sense – Perry’s ignorance here appears willful.

3. Our federal tax system is highly progressive on average – higher income groups pay higher rates of federal taxes even when including payroll taxes – in general and on average.  Buffett’s suggestion and anecdotal “evidence” that the federal tax system is regressive in at least some cases (his secretary and lower-paid employees pay a higher federal tax rate than he does) is not typical, but can only be considered as special cases of extreme outliers, both for him and his employees.

The central point here is that the tax system – limited in this case to the individual income tax system – is progressive until you get to the top few percent of all taxpayers.  Most data stops at the top 1%, so this isn’t plainly clear.  But if you dig, you can find data that shows it.  Here are the average income tax rates for some top income percentile slices (based on 2008 IRS data from here and here):

Income range

Returns

Percentile

Tax/AGI

$1,500,000 under $2,000,000

59,460

99.87%

25.00%

$2,000,000 under $5,000,000

86,329

99.91%

24.80%

$5,000,000 under $10,000,000

21,390

99.98%

24.00%

$10,000,000 under $109,736,000

13,080

99.99%

22.20%

$109,736,000 or more

400

100.00%

18.10%

The average tax rate peaks at 25%, and then declines rather precipitously to the very top of the income scale; this fact alone explains how the scenario Buffett described is not just possible, but fairly common.  The 18.1% of AGI paid by the top 400 taxpayers was less than the 19.6% average paid by taxpayers with AGI between $200,000 and $500,000.

Now that Buffett has released some of his tax information, perhaps he should have his employees release their tax information, so that we could see how it’s possible that they are paying an average rate of 36%.  If he claims that he’s adding state taxes to his “analysis” for his employees, then that should be clarified, and he should explain why he didn’t include state taxes in the tax information he released.

Seriously, Dr. Perry – do the math and let us know what your “Buffett Rate” is.  When you go through the exercise, the big problem I have with the method will become clear to you.  Or at least it should.

Until you’ve done this tiniest little bit of research with actual data, you’re just repeating the same nonsense over and over.

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Written by David Clayton

October 14, 2011 at 12:37 am

Posted in Debunkery, Punditry

2 Responses

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  1. Hello and good job, David.

    The first thing that you need understand is that Perry is an on leave “hack” for the AEI (American Enterprise Institute), a right wing political think tank.

    The second thing you need to understand is that Perry was granted a Ph.D. in economics at George Mason University; dumball Boudreaux at Cafe Hayek was his advisor.

    The third thing you need to understand is that Perry is holier than thou.

    Bottom line, Perry is a professorial goof ball who produces colourful charts and bought real estate in Flint, Michigan.

    marmico

    October 14, 2011 at 12:37 pm

  2. Due to technical issues almost out of my control, I deleted this comment earlier. You might blame it on a blogger who’s had few comments not knowing how to manage comments on his phone. Or you might just blame it on me being an ignoramus. Or you might reveal your true colors in your vitriolic response to not having your comment approved.

    David Clayton

    October 14, 2011 at 4:38 pm


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