A lot of misinformation in this thread, but this statement stands out. It is completely untrue. The rate of taxes varies based on your filing status and how much you make.
I think you misunderstand what he is saying. Read his next sentence also and what he is saying is that wages etc. are taxed at one rate, and investment returns at another. It does not mean that the “one rate” is always the same; it simply means that wages and investment returns are taxed at different rates.
Doesn’t the alternative minimum tax (AMT) provisions already do this, at an even lower threshold? What’s the motivation to earn more money if you’re just having to give an even higher % to Uncle Sam?
Although the Buffet Rule has virtually no chance of getting through the House, if it were passed I would hope it would be done as part of a sweeping reform of the AMT. Yes, the AMT is supposed to achieve a similar thing, but fails.
The AMT was designed to ensure that a small number of very wealthy people could not avoid paying at least a certain amount of tax. However, Congress screwed it up by not taking into account inflation, and so now it affects millions of people. Ironically, the way it is calculated means that most people with very high incomes do not pay AMT, so it is a tax that falls squarely on the shoulders of the upper middle classes. We can go into that in detail if anyone wants.
There are two significant differences between the Buffet Rule and the AMT. One is the income level - AMT hits you at much less than $1m per year (I paid AMT last year and my AGI was right on the boundary of the “rich” definition). The second, and here is the big change, is that for AMT calculations capital gains and qualified dividends are still taxed at 15% The Buffet Rule is all about eliminating or reducing the favorable taxation on investment returns for $1m+ earners.
The “motivation” question you ask is better answered in a different forum.
I’ve always taken the position that being a citizen of the US afforded you more opportunity to earn that money - so if it is taxed (even at a higher rate than it is now), you are simply paying for the chance to make that high(er) income.
He may be referring to Social Security tax, which is often called “payroll tax” in popular articles.
For most Americans, Social Security tax is completely separate from income tax. It is deducted from your salary or wages before you get your paycheck, and you don’t do anything about it at income tax time.
It is one of the most regressive taxes in the US. The rate is the same for everyone (you can google for the exact rate — IIRC it was a bit over 6% before this year, but was lowered slightly by the latest tax compromise) on their first $100K (or probably a bit more, since the figure increases each year) of salary.
So (using my round numbers) a person who makes so little money that he doesn’t have to pay any income tax still pays that 6% SS tax. Middle class workers who make up to $100K also pay 6%. But any salary over $100K is exempt.
So the effective SS tax rate for someone making $200K a year is 3%, for someone making a $600K a year it’s 1%, and for some CEO making $60 million a year, it’s 0.01%.
Just incidentally, all the politicians who say SS is broken, or a Ponzi scheme, or whatever, and needs drastic changes and cuts in benefits, are lying, and they know they are lying. All it would take to make SS fully funded for the next century or more is to extend the SS tax to incomes up to a million. If they did away with the cap altogether, it would be fine as long as the rivers flow and the winds blow.
And yet they are the same ones who don’t take payroll taxes into account when they wail about how little the poor and middle class pay in taxes. If it’s as broken as they say it is, it’s not going to be there for me when I retire, so you better damn believe that it’s a tax to me since I’m not getting any benefit out of it!
First of all, you are only taxed at the higher rate on the money over the previous level. So if there is one rate for income below $1 million, and a different rate for income over $1 million, you will be taxed at the first rate on your first million, and the second rate on your income over that. You may not get to keep as much of your additional income, but you will still have additional income.
Second, we are talking here primarily about investment income that is subject to capital gains tax. To quote Mr. Buffet:
Yes, perhaps you are right. My apologies.
While there is truth to that, keep in mind that “sensible investment” means “after-tax return on investment.” For example, you have a choice between: 6% return taxed at 40% or 5% return taxed at 15%. The after-tax returns are 3.6% and 4.25%. So the sensible investment is the one paying 5%.
How would you ever have that choice? Higher return always means higher return.
Different types of investment have different returns and different tax treatment. Lets consider three types:
[ol]
[li]stocks[/li][li]Treasury bonds[/li][li]Municipal bonds[/li][/ol]
If not held in a tax-advantage account, the federal tax treatments are:
stocks: 15% on capital gains and dividends (assuming US stock)
Treasury bonds: income tax rate, so let’s say 35% for our high earner
Municipal bonds: 0%
So when our hypothetical high earner looks at likely returns, he might see:
Stocks: 6% return, less 15% tax leaves 5.1%
Treasurys: 3.2% return, less 35% = 2.08%
Munis: 2.4% return, tax free.
You can see from this why high-rate tax payers tend to prefer Municipal Bonds over Treasurys. The tax rate has caused them to choose the apparently lower-returning investment because after taxes, it is higher. This only works for higher-rate taxpayers; a 15% taxpayer does better in Treasurys, keeping 2.72% after tax in my example. It is also why Obama is looking at limiting tax breaks on Municipal bonds.
If taxes on dividends and capital gains went up to 35%, then a 6% return in equities leaves the investor with 3.9% This is now a smaller premium over the returns on (much safer) bonds. Hence investors are likely to move from stocks to bonds, to some extent. This would drive stock prices lower, and bond prices up (resulting in lower bond yields) until a new equilibrium is reached.
Shit, son, I should’ve turned down my first promotion from $32k System Administrator to $50k Senior System Administrator. I paid a whole 10% more on income over $35k! Hell, I pay even more now that I’m Director of Information Technology. Jesus, I must be a complete moron.
The motivation is that there’s still more money in your pocket, and none of our tax rates are even in the same universe as “punitive”.
Wow, that seems like a staggeringly bad idea; the whole idea of the favorable tax structure for municipal bonds is to intentionally make them attractive investments, so municipalities can fund various things via those bonds.
Removing that tax incentive really does seem like robbing Peter (the municipalities) to pay Paul (the Federal goverment) to me.
From the article:
It also appears that the proposed change is to limit the tax break on Munis to 28% (the second-highest bracket) rather than 35%. So the effective rate for high-earners would be 7% on Muni bonds.
Since you want facts, not a debate, this piece by MSNBC will set you straight.
The bumper sticker: Basically, Obama and Warren got it wrong. In general, there are very few millionaires who pay lower tax rates than those below them. As cited by the (left leaning) MSNBC:
So much for the math.
That piece certainly has some facts. Including the fact that “In 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax, according to the Internal Revenue Service.”
So the factual answer to the OP’s questions are “Yes, it does happen”.
If everyone with a taxable income over 10 million paid at 41% which is the highest current rate the government would raise 30 billion which could cut the deficit by 2%. Every little bit helps, but the tiny amount of money raised suggests it is not a huge issue.
This is slightly off topic but Mr Buffett is wrong about his tax rates. According to most tax incidence rate theories, Mr Buffett probably has one of the highest tax rates in the history of the world.
Cite?
Buffet doesn’t know his own tax rate? You’re just making stuff up now. I want a cite that his tax rate is the highest in the history of the world. That’s ridiculous, since tax rates were higher during the Clinton administration.
Mind telling me what happens if we make it 41% on capital gains, and “above 1 million” rather than 10 million? I bet it makes a fair chunk more than 2%.