— Clinton, Mason City, Iowa, May 18
Sometimes a few words makes a difference in a lot of Pinocchios.
On May 18, Hillary Clinton completely flubbed her talking point. We have examined before her assertion about chief executives’ pay, giving her One Pinocchio, and noted that it stems from a survey about chief executives at the top 350 U.S. firms in terms of sales. So when she refers to the “average American CEO,” as she did on May 18, she gets into trouble because the average CEO makes a little more than $200,000 a year, compared with $15 million for the top-tier brass.
Similarly, she asserted that hedge managers “pay less in taxes than nurses and truck drivers.” In terms of raw numbers, that’s simply false. What she meant to say was they “pay a lower tax rate.” That’s somewhat closer to reality.
We initially started to examine the comment made on May 18. But since we don’t play gotcha at The Fact Checker, we will look at her statement on May 19, since that’s apparently how she was supposed to say it.
So, do hedge fund managers pay a lower tax rate than a truck driver or nurse?
First, let’s define the terms under discussion. The marginal tax rate is what a person pays on each additional dollar that they earn. The effective tax rate is the percentage of income that a person pays in taxes, after deductions, exemptions and so forth. Since the tax system is progressive, the tax rates increase as income increases, so not every dollar is taxed at the marginal rate.
The Clinton campaign indicated that the former secretary of state is talking about marginal tax rates. Hedge fund managers are able to have much of their income taxed at the capital gains rate, rather than as ordinary income, through a tax provision known as carried interest. During his presidency, President Obama has boosted the long-term capital-gains rate for high earners (above $400,000) from 15 percent to 20 percent, plus added a 3.8 percent surcharge to bolster Medicare, so that’s a rate of almost 24 percent. (The top income tax rate, by contrast, is 39.6 percent, so being taxed at the capital gains rate is still a savings. Gains from securities held less than a year are taxed as regular income but some hedge funds have found ways around that.)
The campaign supplied Bureau of Labor Statistics data showing that the median nurse’s salary is $66,640 and the median truck driver’s salary is $39,901.
The nurse’s salary falls into the $37,451 to $90,751 range for single filers and the $50,201 to $129,600 range for head-of-household filers who will be taxed at a 25 percent tax rate in 2015. The truck driver’s salary falls into the $37,451 to $90,751 range for single filers to be taxed at 25 percent.
In theory, for $2,450 of his pay, that truck driver (if single) paid a 25 percent income tax rate; before that, he paid 10 percent (on the first $9,225) and 15 percent (on the amount between $9,226 and $37,451). But let’s not forget that this truck driver can take a personal exemption ($4,000) and a standard deduction ($6,300), which would drop his income back into the 15 percent tax bracket.
When all is said and done, the truck driver would owe about $4,000 in federal income tax, for an effective tax rate of less than 10 percent. Even the nurse, with more of her salary subject to the 25 percent rate, would have an effective tax rate of less than 15 percent.
Meanwhile, that hedge fund manager pays the capital gains rate of 23.8 percent on all income treated under the carried interest rule. (We cannot resist noting that Clinton’s son-in-law helps run a hedge fund, which makes us wonder if he takes advantage of the carried interest rule.)
Payroll taxes complicate the picture somewhat. Social Security tax is no longer collected once a person makes more than $118,500, so the share of such taxes as part of overall income declines quickly for wealthier Americans.
Thus, the top one percent of households in 2010 paid an effective rate of 2.2 percent on social insurance taxes, compared to an effective rate of about 7.7 percent for all households, according to the Congressional Budget Office.
Nevertheless, adding Social Security taxes (6.2 percent) and Medicare (1.45 percent) to the effective tax rates of the proverbial truck driver and nurse still does not reach the same effective tax rate paid by the hedge fund manager.
Indeed, the CBO estimates that in 2013, the average tax rate of the wealthiest Americans was significant higher than other income groups, even including the impact of social insurance taxes. Each quintile is roughly 25 million taxpayers.
Lowest quintile, zero to $23,200: 3.1 percent
Second-lowest quintile, $23,201-$35,700: 8.2 percent
Middle quintile, $35,701-$51,100: 12.5 percent
Fourth quintile, $51,101-75,700: 16.4 percent
Highest quintile, above $71,200: 25.5 percent
Top 1 percent, minimum income of $306,900: 33.6 percent
Obviously, within these groups, there may be significant differences in the tax rates paid. Wealthy retirees earning income mostly from capital gains and dividends, for instance, would have virtually all of their income taxed at the lower capital-gains rates.
“Hillary Clinton is making the point that a nurse making $66,000 per year is in the 25 percent tax bracket while many hedge fund managers are paying less than a 24 percent rate on millions of dollars they earn,” said Clinton spokesman Josh Schwerin.
The Pinocchio Test
In terms of marginal rates, Clinton is marginally right that at least some single nurses might face a slightly higher income tax rate on some dollars earned (25 percent versus 23.8 percent) than hedge fund managers. (Note that the Clinton campaign dropped the reference to truck drivers.)
But the effective tax rate paid is a more logical way to compare the differing tax rates, given that capital gains rates are not progressive; every capital-gains dollar is taxed at the same rate. (After all, Clinton spoke about the rate that people paid.) Under that method, Clinton’s claim becomes a stretch, even when adding in payroll taxes.
Her broad-brush assertion does not hold up to scrutiny, even when the talking point is uttered correctly. Overall, even hedge fund managers pay higher taxes — and tax rates — than middle-class Americans.
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