In a recent op-ed in the New York Times [found here], Warren Buffett is once again insisting on a new super-minimum taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on the super-wealthy. He suggests that the rich pay an effective tax rate of 30 percent on incomes between $1 million and $10 million and a 35 percent effective tax rate on incomes above that.
It is not clear from his editorial whether he wants this higher tax rate for equity reasons or to reduce the deficit, but let’s look at both issues.
Buffett claims that it is an outrage that the average, or effective, tax rate on the so-called Fortunate 400 has been declining since the early 1990s. According to the latest IRS “Fortunate 400” report for 2009, the average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. paid by the 400 largest tax returns was 26.4 percent. By 2009, their average tax rate had dropped to 19.9 percent.
What Buffett fails to mention is that as their average tax rate was falling, their share of total federal income taxes nearly doubled over the 17 year period. In 1992 (two years after Bush Senior’s 1990 tax hike), the top 400 paid 1.04 percent of all federal income taxes. In 2009, they paid 1.90 percent of all federal income taxes – an increase of 83 percent.
Looking at the data for the Top 1 percent of taxpayers is even more informative. As Chart 1 shows, there is clearly an inverse relationship between the average tax rate paid by the Top 1 percent and their share of the federal income tax burden.
In 1980, the Top 1 had an average tax rate of 34 percent (as Buffett now suggests), but paid 19 percent of all federal income taxes. In 2010, the Top 1 had an average tax rate of 23 percent, but paid over 37 percent of all income taxes. Indeed, the Top 1 paid a greater share of the federal income tax burden than the bottom 90 percent combined.
So what about Buffett’s insinuation that the tax code is not progressive enough? Well, according to the Congressional Budget Office, the income tax system is nearly twice as progressive as it was when Jimmy Carter was in the White House.
Chart 2, shows CBO’s tax progressivity index (Tab 9) based on the concentration of tax payments. This measure of progressivity reflects a CBO’s comparison of the shares of federal taxes paid by households at different income levels against their share of all income. In 1979, the index reflected a relatively low level of progressivity (0.257), meaning everyone’s share of the income tax burden was about equal to their share of the nation’s income.
By 2009, the progressivity index had nearly doubled to 0.486, no doubt reflecting the large number of taxpayers who have been knocked off the tax rolls over the past two decades. The rich’s share of the income tax burden is now roughly double their share of the nation’s income.
The bottom line is that if Buffett believes that a super-minimum tax on the rich will either make them pay a greater share of the tax burden or make the tax code more progressive, he is wrong on both accounts.Share