"I happen to believe in the people and believe that the people are supposed to be dominant in our society. That they, not government, are to have control of their own affairs to the greatest extent possible with an orderly society." - Ronald Reagan

Applying the maths to effective tax rate claims.

Posted: January 26th, 2012 | Author: | Filed under: Uncategorized | No Comments »

So, Warren Buffet says his entire this year is at “between 33 and 41 percent in payroll and income taxes paid to the federal government”.

The top tax bracket is 35%. The social security component of payroll taxes is 4.2% of gross compensation, subject to a limit of $106,800. The medicate component is 1.45%, with no limit.

This means that for most filers the top marginal rate they would ever be… subject to is 36.45%, and only on income over $379,151. Married people filing separately would be slightly higher, hitting a top marginal rate of 38.65% once their earning hit $106,151, but then when they hit $106,800 it drops back down to 34.45% until it hits $189,576 and jumps up to the 36.45% rate.

Note that these are marginal rates. That doesn’t even include the standard deduction or personal exemption, much less anything else.

For his secretary to pay an effective rate anywhere near he claims, she would have to be very highly compensated. Or her husband is, which makes it disingenuous to imply the high tax rate is her own. Consider that a woman filing under the least favourable conditions – married, filing singling – making $386,000 a year (the threshold for being part of the maligned “one percent”) taking nothing but the $5800 standard deduction and $3700 personal exemption would end up paying $109,089 in personal income tax, $4485.60 in social security tax and $5597.00 in Medicare tax, yielding a final effective tax rate of 30.87%.

In fact, you can calculate the minimum income necessary to hit a 35.8% rate pretty easily with a little algebra.

((((X – 5800 – 3700)* 0.35) – 22686.00) + (X * 0.0145) + (108600 * 0.042)) / X = .358

Solve for X (i.e. income) and you get $3,299,969.23. And again, that would assume absolutely *no* tax preferred investments, no retirement fund, no itemized deductions, nothing. So either Buffet got her rate wrong (possibly including state taxes, or conflating marginal rate with effective rate), or his secretary – or maybe her husband – is in the top 0.1% of earners.

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