Taxes, Warren Buffett, and Paying My Fair Share

This week many of you will receive tax rebate checks from the I.R.S. Yes, that $600 you are receiving is meant to help kick start the economy.

The government tried the same thing in 2001, sending out $300 checks. But this time, there’s a difference — not all of us are getting a check. In fact, those earning six figures or more won’t be seeing any check this week.

So that got me to thinking about how fair the tax system really is. Do the well-off pay their fair share, or do they also deserve a tax break?

Well, let’s start with the ultra-rich. Bajillionaire Warren Buffett has argued that he isn’t being asked to pay his share. He went around his office, asking people what share of their income they pay in income taxes. Buffett’s 17.7 percent tax rate compared a bit too favorably with the 30 percent tax rate paid by his secretary.

So it appears that the tax system favors the super-rich over working stiffs.

And Buffett went a step further, putting his money where his mouth is. Last November he issued a challenge to his fellow billionaires:

I’ll bet a million dollars against any member of the Forbes 400 who challenges me that the average (federal tax rate including income and payroll taxes) for the Forbes 400 will be less than the average of their receptionists.

So far, no-one has taken him up on this bet.

What about those of us who are merely among the well-off, and not in the Buffett-stratosphere?

Now, I’m no Warren Buffett (believe me!), but I’ve just finished figuring out my federal taxes for the year. I live comfortably (one of the virtues of teaching in a business school), but was dismayed to learn that my federal taxes for 2007 amount to only 16 percent of my income.

This strikes me as astonishingly low. And it’s not like I have a fancy approach to tax minimization; I just write off a bunch of business-related expenses, and benefit enormously from deductions for mortgage interest and charitable giving. Obviously city and state taxes drive my total tax bill up a bit further, as do payroll taxes, although I plan on getting some of that back as social security in my old age.

But the point remains: I had never quite realized that the Warren Buffett problem extends far enough down the income distribution that even folks like myself aren’t paying their fair share.

So I repeated Warren Buffett’s experiment here at Wharton. And it appears that I’m paying lower taxes than the administrative staff in my department. And if it is true here, I suspect the same goes equally for most folks in the top 10 percent of income earners. (Incidentally, according to Piketty and Saez, around half of all income in the U.S. goes to those of us in the top decile — roughly anyone with a family income of six figures or more.)

Warren Buffett’s approach to casual empiricism is quite instructive. He just took a survey around the office of people’s average tax rates, finding that he paid the lowest share. Here’s a thought:

Why not run a similar survey in your own office, or among your circle of friends? It will be interesting to learn the extent to which Warren Buffett’s findings generalize.

Please post your findings in the comments.


My wife and I make about $400K per year. Our effective federal income tax rate is in the high 20 percents.

In previous years when we made less, our effective federal income tax rate was less.

Our marginal federal + state tax rate is well over 40%, and this serves as a severe disincentive to work.


I live in Japan, and there's a tax deduction here for mortgage interest, too, so it's not just in the US.

And BTW, my tax rate was probably over 40% last year.

Tristan Cooke

I have a couple question for those people saying that Buffet is ok with paying 17% because he earns more than his secretary paying 30% because he will still contribute more in total and lots of it is in capital gains.

Why should it be ok for Buffet to pay a lower percentage? Is his dollar worth more at starbucks?


I find it quite interesting that most people look to the % of income that goes to taxes as the method of determining fairness. If we look at the absolute amount of tax dollars, it paints a completely different picture; Buffett probably pays 10,000 times the amount of tax dollars that his receptionist does, yet is eligible for the same services and only has access to the same infastructure. This is somehow unfair to Buffett?


regarding comment #38: there was not a loss in revenue when the capital gains tax rate was lowered. A lot of people have a hard time grapsing this concept, but lower tax rates often results in increased revenues. So while lower capital gains taxes primarily help the richest people, it also helps the general population as well. Trying to stick it to the rich will decrease revenues and we all lose.


to stephanie: "Is it fair to tax those who work hard to get wealthy, just because they chose to work hard instead of being content to stay with a $50,000/yr job? Of the well-off people I know, most of them spent years working 70-80 hour weeks to get where they are today, being more productive for the economy and giving a lot of personal things up in the process."

Wow, you need to see how most people live. Anyone making $50,000 a year IS making a LOT compared to most people and families. And many, many, many families work 70-80 hour weeks and never get ahead. They are the working poor and are often working multiple jobs. They may not be well-educated or savvy, but they are certainly not working less hard than anyone else. I used to work in a professional capacity advising these families and was stunned with the grace most people handled their situations, though they would be stuck in the same place their whole lives. They were just doing what they needed to do to survive. Why should they be taxed at a higher percentage?

Doogle, that just means you make a lot of money. And the annual income is not that high. Relax and count your blessings.



Peter (86) "I own a business and have to pay double the social security tax because of being self-employed, up to $100,000."

Too funny... Form 1040:

Line 27. One-half of self-employment tax. Attach Schedule SE.

In other words, you may be paying double SE tax at first glance. HOWEVER, you get 1/2 back in the form of an above-the-line deduction, which in turn lowers your AGI. There's more, but I'll leave it at that for now.

--Some other guy named Peter


Why are we so concerned about percentages? If Buffet's secretary is paying 30%, she makes around 100k. Since the rate is so high i assume she is single and does not own a home. That comes to roughly $30,000 in taxes. I believe that Buffet only draws 100k in actual salary from his company (Steve Jobs get $1 from Apple). Since investments are taxed at a lower rate than salary, it's no surprise that his total rate is lower. 100k in salary and probably 100m in investment income, no surprise!. If Buffet pulled in an honest 50-100 million dollar CEO salary, his rate nay be closer to his secretary's.

So the fact that he is working the system and his secretary is not has nothing to do with this? Please!


@Lloyd and Sara,

"Your" wealth, towards which you have such a proprietary attitude, would not exist if it weren't for the society that your taxes support. So I see no reason to believe that it's really yours. You may have worked hard to get the money, or maybe you didn't; the tax system draws no value judgements about the moral quality of your possessions. It's really a simple equation - if you want to live in a country that protects your way of life, you have to pay for it.
As for what is fair, it's obvious to me that those who are more privileged should pay for their privileges, again without regard to how much they suffered to gain them. After all, hard work is not sufficient to gain wealth - ask our policemen, soldiers, and nurses if they work hard.


I am surorised that as an economist you thow around a term "fair share" that has no agreed definiton and then use it as though it does. Fair share is like beauty, "it's in the eye of the beholder". There are many good and valid comments above, some even discuss "fair" but you cannot really discuss the "fair share" concept without some parameters of an agreed defintion. This has been tried in the past to no avail.
Still might be worht further discussion. There is a good story about this I will try and send in.


I'm not quite sure why so many people are making the argument that "fair" is arbitrary. I'm going to argue that "fair" is not arbitrary at all. And while Warren Buffet might be paying more net taxes than his secretary, he's paying a much much smaller ratio when compared to his personal income.

What you end up with is people who make less carrying a larger burden than those in the top decile. Basically the message we are sending is that the Quality Of Life of the lower brackets is a non issue to the American government when it comes to taxation. Warren Buffet paying 5-15% more in taxes is not going to reduce his QOL significantly. On the other hand, his secretary going from paying 20% to 30% is going to have a enormous impact on her QOL.

And this is where the "fairness" argument comes in. Why should the workers with incomes between 50-90k be forced to sacrifice a good deal of their quality of life, while the business owners, investors and other ultra high income earners are essentially not asked to sacrifice anything.

And while it's a neat argument to say that "business owners are more important so they should not have to pay as much in taxes" it doesn't actually mean anything. Why should one's economic contribution be directly related to the portion of your income that is taxed? Unfortunately not everyone can be a business owner. Why do business owners need more incentives to own businesses beyond earning much more gross income? Why must we disincentivize people for doing jobs that aren't related to investing or owning a business? The economy simply wouldn't work without either of them.



To put it a different way, imagine a country with 5 citizens:
A) $3k income, $1k taxes = 33% of income
B) $10k income, $3k taxes = 30% of income
C) $20k income, $5k taxes = 25% of income
D) $50k income, $10k taxes = 20% of income
E) $300k income, $45k taxes = 15% of income

Total taxes collected: $64k
Total contributed by income classes:
Bottom 20%: 1.6% of total taxes
Second 20%: 4.7% of total taxes
Third 20%: 7.8% of total taxes
Fourth 20%: 15.6% of total taxes
Top 20%: 70.3% of total taxes

I purposefully made the tax brackets backwards, so that richer people would pay smaller percentages of their personal income. In reality, our tax brackets are the "normal" way, so that higher adjusted growth income means higher percentage of personal income paid in taxes, which means an _even higher_ percentage of TOTAL federal taxes paid. What's unfair about this???



To those that are suggesting the flat rate tax: it'll never ever happen.

Congress likes to legislate and make policy through the tax code. Common examples of this include the capital gains (which encourage investing) and the mortgage deduction (which encourages home ownership instead of renting).

This policy making through the tax code is even more popular lately. Look at the response to sub-prime crisis. The proposals and policies implemented largely consist of deductions and credits for construction companies and homeowners.

As far as this article, and whether the wealthy pay enough taxes, I'm less sure. As other posters have pointed out, Mr. Buffet ignores the effects of double taxation on investments in corporations. However, even this can be circumvented with the help of a smart lawyer. Instead of a standard C-Corp, a S-Corp, limited partnership, or limited liability corporation eliminates the double tax by allowing any gains or losses to "pass-through" to the investor.

So, it appears the wealthy are once again more equipped to "game" the system. On the other hand, raising the taxes on the wealthy may not help raise any more revenue. Raise taxes too much, and the wealthy, being more mobile, will simply move. Or, they'll try even more complex schemes to minimize their bill. The end result, in terms of revenue, may be the same or even less.

To raise taxes for the wealthy, regardless of the effects, simply so their tax bill appears more" fair" when compared to everyone else, seems like a bad idea.



If it makes Justin feel any better, me and many fellow engineers in Silicon Valley earn salaries that easily put us in the top 10% of income earners, but housing is so expensive many under the mid-40's in age rent. That's because they got here after the prices jumped.

And Chris (post 66) sounds like one of those "don't bother me with the facts" types. Warren Buffets salary, as anyone can easily confirm with a web search, is $100K per year. As to "who cares", lets think about that a minute. Suppose the government decided to set a tax rate of 90% on those in the bottom 1/2 of income. Chris would still be arguing that's fair, because the rich would still be paying more in taxes. Wealth in this country is tilted towards the rich, and the gains the past 10-20 years have almost all gone to the wealthiest. Yet some people still don't understand why that isn't fair. Amazing!!!


At 67,024+ pages long, defining who-knows-how-many special exemptions and deductions and credits that taxpayers can use to legally avoid paying taxes on portions of their income, the U.S. tax code gives taxpayers a break on being taxed on as much as 31.7% of the total aggregate income that they collectively earn. At least, if the U.S. government taxed purely by its published income tax rates.

That's the same as exempting the first $16,750 of household income for every tax filer in 2005.

Also, where Mr. Buffett is concerned, like so many people with high incomes, he has the ability to choose how and when he takes money out of his business (earnings/income, dividends, capital gains, etc.). He also has the ability to shield his earnings from income and/or estate taxes through establishing charitable foundations and trusts. Perhaps he should take some time to explain exactly why it is that he has gone to such lengths to legally avoid paying more in taxes?



Re: #73, Ironman
Completely agreed about wondering why Buffet would go to such lengths. My boss constantly complains that the tax code is unfair because he is allowed to deduct mortgage interest on his yacht. My question to all the wealthy that are saying such things is: WHY DO YOU DEDUCT IT? If it's so unfair, and you agree that it is, then you could _easily_ make an extra donation to the IRS. Don't take deductions, don't take any credits, and voluntarily pay more! Let's see some of the wealthy putting their money where their mouths are.


I haven't read all these comments thoroughly, but I am SHOCKED at the apparent lack of mention of what percentage of the total federal tax share Buffet is making. In other words, as someone pointed out, 17% of his salary is still MILLIONS. Even if the top 10% earners are paying a smaller percentage of their own income, they are still paying a disproportionately LARGE share of all taxes collected. Who cares what percentage of their _own_ money they are paying - shouldn't we care how much winds up in the federal pocket at the end of the day? The rich pay a huge percentage of that end result.


Indeed, it is interesting an, and probably quite pervasive, phenomenon. Let's pile on some more anecdotal evidence:

As a graduate student (in genetics), my income is taxed at a higher rate than that of my parents (who make well into six figures), despite the fact that I live in a state with no income tax (and they don't). This situation holds even if I consider only their salaried income (i.e. no capital gains).

In sum, while I am investing my rebate in more ramen, my parents will using their tax returns (not rebate) to spend a month in China. Of course, because they are my parents, I have no problems with this.


Why are we including payroll taxes in this calculation? Those are funding so-called "insurance programs" so there are possible benefits from these payments down the road (and as SS is capped, so are SS benefits).

In any case, the tax system does not "favor" the super-rich over working stiffs. It favors income produced from investment over labor. It just happens that the super-rich don't spend all their income and have money to put into investments.


Tax rates strike me as a rather arbitrary part of one's financial burden. I think it would be more meaningful to compare percentages of disposable income.

It doesn't much matter if my money is going to the government, the landlord, the grocery store, the utility company, or the doctor. It's money I have no choice but to spend.