Taxes and the Rich: Clearing Up The Rhetoric

The big debate in Washington right now is over taxes.  President Obama is calling for a "Buffett Rule", named after Warren Buffett who famously asked that his under-taxed billionaire breathern stop being "coddled" by the US tax code, claiming that he is in fact taxed less then his secretary.  On the right side of the political spectrum, they are saying Obama's call to raise taxes on the wealthy is a form of "class warfare", claiming they pay their fair share, and they are being penalized simply for being successful.  So do they pay less then their secretaries?  We've picked apart the rhetoric and ruffled through some facts in order to get to the bottom of this.

As it currently stands, those making over a million dollars a year will pay 29.1 percent of their WAGE income in federal taxes.  Keep in mind, that there are state, city, social security, and medicare taxes that are not figured into this 29.1 percent.  Households making between 40 and 50 thousand will pay 12.5 percent and those making between 20 and 30 will pay 5.7 percent.  I decided to analyze my own sub-50 thousand a year paycheck.  It seems I'm paying 15 percent in federal income taxes.  (I'll be expecting a hefty return :) )  This all seems fair, so what's the problem?  Investment income.

One of the key things to take away from this data is the source of income.  The top tax rate for wages is 35 percent, while the top tax rate for dividends and capital gains (investments) is 15.  If the majority of a person's income comes from investments, then they are being taxed essentially the same as a person with an income of 50,000 dollars.  Here are a few graphs from 2007 to illustrate income distribution among wealth classes.

 
As you can see, the top 10 percent derive the majority of their income from investment.

The following is a wealth distribution chart broken down into actual, estimate, and ideal.  Note that the two lowest groups (Bottom 20th and 2nd lowest 20) aren't even shown because their percentage is so low.  The Bottom 20 percent has .1 percent of wealth, while the second lowest 20 has .2 percent of wealth. 

The conclusion we've come to is that when it comes to taxed wages, the wealthy do pay their fair share.  Unfortunately, a significant portion of their income does not come from wages but investments, while the bottom 90 percent of earners do not have the expendable income to invest their money.  In fact, they hold most of the debt in this country.  The majority of investment is done by those in the top 10 percent and their profits from this investment is taxed at a rate similar to that of a lower-middle income person.   

I encourage you to peruse my sources if you would like more information.

Who Rules America: Wealth, Income, and Power

Are Rich Taxed Less Than Secretaries?