Warren Buffett’s much-discussed op-ed arguing that high-income earners aren’t paying enough 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. es makes the following claim:
Last year my federal tax bill — the income tax I paid, as well as payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
The effective rates he claims for other workers in his office are extraordinary. To me, they seem too high to be realistic, and I can’t figure out how he calculated them, even if you include all payroll (employee and employer side) taxes. Even if you assume the scenario that leads to the highest possible tax burden (single filer, no deductions), a taxpayer would have to make at least $285,388 (in 2010) before his or her effective rate reaches 33 percent. 41 percent is impossible, as far as I can tell – the limit of total taxes over total income, as income approaches infinity, is 37.358% – that’s the highest possible effective rate that anyone could have paid in 2010, if you include income and all payroll taxes.
To demonstrate this, I’ve made a small little calculator below, which shows the maximum possible effective rate for any income amount. Try it out!
To be clear, this is the maximum possible effective rate that anyone could have possibly paid for a given income level last year. It assumes a single filer, no children, no deductions, no credits – nothing. This is, of course, widely unrealistic, and most people’s effective rates will be lower. But this calculator shows rates as high as they can possibly go, and the point here is that there’s no way anyone could possibly have paid an effective rate of 41%.
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