What is the tax rate for the average American?

Great Debates
1

The recent bitchfest about Romney, combined with Warren Buffett’s famous, “I pay a lower rate than my secretary,” has me wondering this.

My wife and I are in the 28% tax bracket. Seems like I should be outraged that Romney and Buffett pay a lower rate than me. Well, turns out our federal income tax rate was actually only 11%. Why? Because we own a house, contribute to 401(k)s, and make charitable donations. If we had kids, tuition, or student loans it would be even lower.

When I went back and looked at older returns, what’s funny is that our income increased significantly, but our tax rate has fallen. Again, because we bought a house, which meant we get to itemize our deductions. Had we been a bit more typical and bought a bigger house, our tax rate could be even lower. And on a personal note, if we donated more cash to charities instead of time our rate would be even lower still.

Meanwhile, my wife gets extremely nice bonuses that are taxed way up around 48%. And although we make a lot off capital gains, I have a hard time holding investments for more than 2 years, so I rarely get to use the 15% rate.

With this in mind, I find it hard to believe that anyone* in the US is actually paying the listed income tax rates. When you consider that median household income is now around $50k a year, that’s a tax rate of only 15% if the household is taxed on 100% of their income.

According to Wiki, Buffett paid 19% in Federal taxes in 2006. How many Americans are actually paying more than that rate? How many are paying more than Romney’s 14%?

*I’m sure there is at least one guy some where, but is that statistically relevant?

2

I don’t have the answers, but I’m pretty sure the people that do will need you to clarify what you mean by ‘tax rate.’

There are lots of different ways to dice up the problem.

Do you only mean federal income tax as a ratio of AGI?
Do you want to include other federal taxes based on income (payroll taxes)?
If including payroll taxes, do you want to include the employer’s share (in both AGI and tax paid)?

Buffett’s assertion is based on taxable income, not AGI, and also includes payroll taxes on both sides.

3

The Tax Policy Center has multiple pages with tables that describe the average rate for all federal taxes at the quintiles and various upper percentiles. For example, here. Tables of this sort have also appeared in some CBO reports, e.g., page 6 of this one from 2007. According to the data, the median household payed a federal tax rate of about 12.4%.

4

I read that Buffet’s secretary would have to be making between $200k and $500k (all of it ordinary - i.e., assuming $0 in capital gains) in order to pay a higher tax rate than Buffet. Not saying she doesn’t deserve that kind of pay, but it does make me question the logic of flying her in for use as a symbolic figure during the SOTU.

5

Gregory’s salary estimate is speculation fed by a misunderstanding of what Buffett said. Read through the comments on that article by Janet Novack (the Forbes link I posted also calls Gregory’s methods into question).

6

It looks like you don’t understand how income tax works in the US. You say you’re in the 28% tax bracket, but remember that only your taxable income above $142,700 is taxed at 28%. If we grossly oversimplify, a jointly-filing couple with a taxable income of $217,450 (top of the 28% tax bracket) pays $1740 + $7995 + $18000 + $20930 = $48665, which is a 22.4% tax rate. Those numbers are for the income that is taxed at 10%, 15%, 25%, and 28%.
Someone making a taxable $142,701 (bottom of 28% tax bracket) pays a 19.4% tax rate.

Remember that your taxable income is usually quite a bit less than your gross income.

So no, nobody is paying “the listed income tax rates”, even if you only look at taxable income (and ignore credits).

7

Because you’re looking at the total rate? If the marginal rate were 100% I’d not expect anyone to pay 100%. You’d have to make quite a bit, all salary and nothing else, to have your total rate be anywhere near the marginal rate.

8

That’s my point. The real tax rates end up being much less than Buffett would have us believe.

Which is the question I’ve posed: what is the typical tax rate for the average American. More than or less than Buffett and Romney? Where Buffett reports in the 19% range, and Romney just under 15%.

9

Did you look at Dr. Love’s cites? The answers are right there.

10

Also remember that Romney and Buffet may not have been reporting the same combination of taxes.

I do wonder, is it appropriate to include the employer-paid payroll taxes for non self employed people?