My good friend Janet is a smart lady who’s worked in IT most of her life, has taught herself the cryptic programming language C++ (I don’t know if it’s even in use anymore) and has a web host certification along with a lot of other skills. She’s been off and on employed since late 2003, currently unemployed. Her husband has a very steady job so she isn’t hurting; she’s been wise enough to pay off her home and I’ll just say, Suze Orman would probably love to make her an example of living lean and not getting into debt.
Anyway, when we visit we usually go out to eat and sit and talk until the restaurant kicks us out. One of our last conversations was about taxes. She’s accepted that she can no longer get the type of IT programming job she once had in the higher income brackets, but the marginal tax brackets made the lower paying jobs less desirable because of the large bite of Federal taxes when her pay was added to her husband’s: in other words, her entire paycheck got taxed at the 15-25% rate once his pay has been subjected to the lower bracket rates. On top of that, she would be hit with 7.65% in payroll taxes.
This is an intro to my conservative counterpart’s most recent missive on PolitiFact’s ruling of True on Warren Buffet’s New York Times op-ed statement “The ‘mega-rich’ pay about 15 percent in taxes, while the middle class ‘fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot..’" You’ll see how it figures in as we go along.
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| Screenprint to prove Bryan's error before he sneaks in and corrects it. |
For purposes of illustration, suppose we have a worker who earned $15,000 over the course of a year. After deductions, the worker has $1,000 of taxable income, and that falls for purposes of our illustration into a 10 percent tax bracket. The worker would owe $100 in taxes, and that tax payment would represent an effective tax rate of 0.67 percent (100/15,000). Alternatively, one might use adjusted gross income as the denominator in the equation. In that event the effective tax rate in our example would equal the marginal rate (10 percent).
He’s saying that the Adjusted Gross Income is $1,000? A review of the adjustments to gross income to be subtracted are not the type of things a “worker who earned $15,000” would be likely to have, such as self-employment taxes, and IRA/HSA deductions are limited in amount. Apparently, Bryan has his taxes done or knows nothing about them. But the 10% of AGI is not correct, it would still have to be taxable income, or the term I think he meant to use, which is the marginal income, or $100/$1000. The other problem here is he’s ignoring the “heavy hit of payroll taxes” as Buffet said in his op-ed, so his example actually paid an effective rate of 8.3% ($1247.50/$15,000). That’s more than 12 times higher than Bryan’s .67% example, but that’s more like reality. So let’s look at that in total compared to Buffet: he made 2,667 times what Bryan’s taxpayer example made in AGI, or 40,000 times what he made in taxable income; percentage wise, though, Buffet paid just less than twice as much tax. Yeah, that probably sounds fair enough to Bryan.
So now that we’ve cleared up Bryan’s muddled way of providing “background” let’s continue with his twisted tale of PolitiFact analysis. He quotes PolitiFact’s story on Buffet, where Buffet establishes the point that writer Angie Drobnic Holan is going to fact-check. He comments:
…it should be instantly obvious that Buffett is talking about effective (federal) income tax rates on adjusted gross income. In Buffett's version of events, the progressive system of tax credits and deductions does not exist. Neither counts against the type of effective tax rate he measures with his informal workplace survey. Misleading? Yeah.
I don’t think Buffet is pretending the “progressive system of tax credits and deductions does not exist.” “Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent” along with the headlined fact-check “the middle class ‘fall into the 15 percent and 25 percent income tax brackets’” indicates he is highly aware of the way progressive taxes work.
But because Drobnic Holan confines her review to Buffet’s contention that the middle class tax rates generally fall between the brackets of 15-25%, and because Bryan believes Buffet is talking about effective rates, he terms Drobnic Holan’s review criteria as “very narrow” and then finds a way to mischaracterize both.
Let’s go with reviewing Bryan’s criticism however, where he relies heavily on a CBO report of effective income tax rates. Does Buffet really mislead because as Bryan states, he ignores “CBO data showing that the mega-rich, in fact, pay a considerably higher effective federal tax rate with corporate taxes figured in”? Here’s the CBO paragraph that Bryan quotes as his vindication:
The overall federal tax system is progressive—that is, effective tax rates generally rise with income. Households in the bottom fifth of the income distribution paid 4.3 percent of their income in federal taxes, while the middle quintile paid 14.2 percent, and the highest quintile paid 25.8 percent. Average rates continued to rise within the top quintile, with the top percentile facing an effective rate of 31.2 percent.
Bryan follows this quote with another dyslexic gaffe, he says “Claiming that the middle class pays a lower effective tax rate than the ‘mega-rich’ in the terms Buffett and PolitiFact use leaves out approximately half the story.” He means “Claiming that the middle class pays a HIGHER effective tax rate than the mega-rich…” It's Bryan’s claim (not Buffet’s) that about half the middle class pays a lower rate than Buffet, according to his CBO charts. Maybe he's just being "Subliminal (Bloviation) Man" and is uttering the real truth under his breath, and just happened to write it.
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| I thought Bryan claimed the middle class paid a lower effective rate. |
Let’s examine the CBO chart from which Bryan takes this quote. It shows that those households in the fourth quintile paid an average of 17.6 percent on average household pre-tax income of $89,500. Buffet paid less than that average, at 17.4% on his income of about $40 million. The rest of the other “400” he refers to paid an average of 21.5% which is less than the top quintile of 25.8% on average household pre-tax income of $248,400.
Buffet pays about 22.5% more in his effective tax rate on his $40 Million income than the middle quintile which pays 14.2% on an average household pre-tax income of $60,700. This is approximately what my good friend’s husband is making right now. So….what happens to her (their) taxes when she gets a job…any job? The answer: her income is taxed at the marginal rate of 15 to 25%, and is “hit with payroll taxes, to boot” of 7.65% (even with the payroll tax holiday, it’s still 5.65%) Say Buffet makes $60 million next year when he rolls over his investments…how does that $20 million more get taxed? At 15 percent. Period.
The issue on the "middle class" is how it is defined. According to Wikipedia:
A persistent source of confusion surrounding the term "middle class" derives predominantly from there being no set criteria for such a definition. From an economic perspective, for example, members of the middle class do not necessarily fall in the middle of a society's income distribution. Instead, middle class salaries tend to be determined by middle class occupations, which in turn are attained by means of middle class values. Thus, individuals who might fall in the middle ground on a societal hierarchy as defined by sociologists do not necessarily fall into a middle ground on an economic hierarchy as defined by economists. As a result, intuitive colloquial and journalistic usage of the term casts a wide net and does not necessarily coincide with an academic sociological or economic definition.
Bryan’s argument rests on the narrow economic definition that the middle quintile in the CBO reports is the “middle class”, meaning that Buffet is misleading that he pays less when he in fact pays more, and that PolitiFact is “leaving the false impression intact”. This, in combination with a non-acknowledgement of the underlying argument that the mega-rich often pay less compared to the top three quintiles of U.S. earners, and that when and if they do pay more, it’s not that much more. I had commented to him on Facebook that, while his observation is technically true, the above definition provides a “way out” for Drobnic Holan since there is no set definition to middle class. Bryan of course twisted my words to the negative, replying that “That's what we want with our fact checking. Stories that need a way out.” But there’s also no way out of ignoring that there are at minimum 23 million U.S. households that pay more in taxes percentage-wise than the Top 400. In Buffet’s case there are almost 46 million households that paid more in taxes than he did percentage-wise.
So Bryan complains about PolitiFact’s narrow interpretation and then insists on his own narrow interpretation of what “middle class” is. But he’s not finished. He wants PolitiFact to consider the entire tax code and all its complexities in the equation: (emphasis added)
The wealthiest 400 taxpayers do pay a slightly lower effective tax rate than others who occupy the highest quintile of earners, and by ignoring the issue of double taxation along with other complexities of the tax system PolitiFact can read Buffett's statement as perfectly true.
Double taxation? Well, what this is mostly about is the fact that corporations pay taxes on their income and then from their after-tax income distribute dividends (but not always). The dividends are also taxable to those receiving them—that’s the double taxation. About half of dividends go into pensions and 401K’s, so that half ends up being retirement income for somebody, who gets taxed on it years later at a much lower rate. Capital gains make up about six times the income that dividends bring for the mega rich. What does Buffet have to say about these capital gains (italics mine): “…Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.” The argument on capital gains is that the money one invests has been taxed. But isn’t ALL money taxed before we invest it in anything? I mean, I had to get a four-year degree to get a foot in the door to a higher paying job: that was an investment I made with dollars I saved--that were taxed. If I received some money from my parents to help with school, they paid taxes on it. If I got a college loan, I repaid it (with interest) with money that was taxed. I had to get a decent car to drive to work, clothes to wear, etc., which I invest in from my money which has been taxed in order to earn an income, which is taxed. So how much does a hedge fund manager invest in that stock index future for 10 minutes? You get my point. I’ll buy the double-taxation argument to some extent about dividends, but not about capital gains. Not only that, if that stock index future loses, it can be offset against other capital gains. If my car breaks down, I can’t write it off and if I am paid hourly and can’t make it to work, I can’t write it off either. For the mega-rich, that’s called preferential tax treatment.
It was something Drobnic-Holan pointed out: “This review proves the point that the federal tax code is extremely complicated, so bear with us.” Not by Bryan White—he wants her to make it more complicated.
Then Bryan tries to say Buffet was ambiguous about who the “400” actually are. Who they were was right there in the ninth paragraph of Buffet’s op-ed:
Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.
Buffet probably got the above information from an IRS report on the Top 400. It should be noted (page 12) that in 2008, 243 of these 400 paid rates of less than 20%, and 105 paid rates from 25 to 35%.
Then Bryan accuses Drobnic Holan of being a telepath—because only he who knows what Buffet is really thinking, saying “The story even treats his middle class examples as coming from the middle quintile.” It does? I did not get that impression at all. The taxable income levels for Married filing Jointly for the 15%-25% bracket are from $17,000 to $139,450. That’s a pretty big spread. The CBO report gives the average middle quintile household income at $60,700. That household income is termed “comprehensive” which is defined in the fine print as follows:
Effective tax rates are calculated by dividing taxes by comprehensive household income.
Comprehensive household income equals pretax cash income plus income from other sources.
Pretax cash income is the sum of wages, salaries, self-employment income, rents, taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, and retirement benefits plus taxes paid by businesses (corporate income taxes and the employer's share of Social Security, Medicare, and federal unemployment insurance payroll taxes) and employee contributions to 401(k) retirement plans. Other sources of income include all in-kind benefits (Medicare, Medicaid, employer-paid health insurance premiums, food stamps, school lunches and breakfasts, housing assistance, and energy assistance).
Such things as the employer’s share of the payroll taxes and the cost of benefits—known as imputed income--would serve to dilute the comprehensive income which in turn would reduce that percentage. Does it do that on Buffet’s capital gains? The problem here is that even if Buffet contributed to an IRA or 401K, it maxes out like the FICA and Medicare, so it would be a miniscule percentage of his income. And I won’t get into the cost of perks such as corporate jets for executives which in all likelihood are a deductible expense for the cost of doing business.
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| I pay Bryan well to help me stay coddled. I write it off, too. |
I can’t ignore that, and neither can PolitiFact’s Angie Drobnic Holan.
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