You can thank Warren Buffett for this: He helped focus the spotlight on his fellow millionaires. In August, Buffett wrote an op-ed column for The New York Times complaining that the richest Americans — himself included — pay too little in taxes. Buffett said his own tax rate was 17.4 percent and was “a lower percentage than paid by any of the other 20 people” in his office. From this came the so-called “Buffett Rule”: Taxpayers with more than $1 million of income shouldn’t pay a lower share of their income in taxes than do middle-class families.
There are three key questions about millionaires’ taxes. First, what do they pay in total taxes? Second, what’s their present tax rate? And third, if it’s “unfair,” would raising it hurt the economy?
We’ve now got good answers to the first two. In a recent column on economic inequality, I noted — citing Congressional Budget Office figures — that in 2007 the wealthiest 1 percent of Americans (a category including most millionaires) paid about 28 percent of federal taxes and the richest 10 percent (a category extending below millionaires) paid 55 percent. The average tax rate of the richest 1 percent was 29.5 percent, but this begs the question of whether some — or many — millionaires are like Buffett and pay much less. We now have the answer to that. It’s “yes.”
A new report from Thomas Hungerford of the Congressional Research Service finds that a quarter of millionaires (about 94,500 taxpayers) had a tax rate below 24 percent, while about one in 10 percent of moderate-income taxpayers (about 10.4 million taxpayers) paid a rate of 26.5 percent or higher. Hungerford defined “moderate-income” taxpayers as those with $100,000 or less of adjusted gross income (AGI).
The reason for this is that the rich get their income disproportionately from stocks, which receive preferential treatment. Dividends and capital gains (profits on the sale of stocks) are taxed at a low rate of 15 percent.
The CRS report generally confirms conventional wisdom: federal taxes are broadly progressive, meaning tax rates rise with incomes. Taxpayers with less than $100,000 AGI had an average tax rate of 18.95 percent, while those with incomes from $1 million to $5 million had an average rate of 30.47 percent. Interestingly, taxpayers with more than $5 million of income had a slightly lower average rate, 29.25 percent. Presumably, these taxpayers received more of their income in dividends and capital gains. (All figures cover both income and payroll taxes; corporate income is attributed to the shareholders who own companies.)
But as noted, the report finds that tax rates vary widely within income groups. Thus, about 10 percent of millionaires pay an average rate of roughly 35 percent, much higher than the 24 percent paid by the 10 percent with the lowest rate.
Those are the facts. But they merely set the stage for debate over Question No. 3: what’s “fair,” what’s practical and whether enacting some sort of Buffett Rule might harm investment, innovation and hiring.