Coddling Misinformation About Taxation

By Chris Banescu

Warren Buffett and President Obama claim that the rich do not pay enough taxes.  They both accuse the American tax code of being unfair and coddling the rich.  Both have been pushing the same class warfare narrative for years, using current U.S. capital gains and dividends taxation rates as evidence for their big-government progressive agenda.  Both are spreading misinformation about all the taxes corporations and individuals actually pay.

As far back in 2007, Mr. Buffett, the third-richest man in the world, began criticizing the U.S. tax code for its low tax rates on dividends and capital gains from long-term investments.  One of his most infamous statements, one often repeated by the left to support its punish-the-rich schemes, was made in a speech at a $4,600-a-seat fundraiser for Senator Hillary Clinton in New York:

The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you're in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.

In that same speech, Buffett also said that he was taxed at 17.7% on the $46 million he made the previous year, "without trying to avoid paying higher taxes," while his own secretary, who earned $60,000 per year, was taxed at 30%.

A similar comment was made by Mr. Buffett in his "Stop Coddling the Super-Rich" article published on August 14, 2011 in The New York Times.

Last year my federal tax bill -- the income tax I paid, as well as payroll taxes 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 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.

Perpetuating the same "the rich are not being taxed enough" storyline, President Obama picked up Buffett's talking points and included then in his own address to Congress.  In his September 8, 2011 "jobs" speech, Mr. Obama said:

Right now, Warren Buffett pays a lower tax rate than his secretary -- an outrage he has asked us to fix.  We need a tax code where everyone gets a fair shake, and everybody pays their fair share. And I believe the vast majority of wealthy Americans and CEOs are willing to do just that, if it helps the economy grow and gets our fiscal house in order.

Yet things are not as they appear to be.  In fact, the full level of taxation of U.S. corporations and taxpayers is much higher than these men keep saying it is.

Dividends Taxation -- Double-Taxation

While it is true that the federal income tax on dividends from investments held for one year or more (and capital gains from sales of stock held for at least one year) is only 15%, this is not the whole story.  Mr. Buffett and President Obama completely ignore the double-taxation aspect of corporate earnings, a key aspect of our income tax system.  They purposely fail to mention that dividend income streams reach the taxpayers and the rich only after they have been already taxed once (35% to 41.6%) at the corporate level (with some exceptions with regards to REITs and certain trusts, etc.) before being distributed to their shareholders.  Then the same income streams get taxed a second time (15%) when individuals actually receive the money from the corporations they own.  The true and full federal tax rate on those earnings is not 15%, but anywhere from 50% to 56.6%. 

Fair or Unfair?

Is it really "unfair" that shareholders are taxed only 15% the second time around, after the companies they own have already been taxed once at 35% to 41.6% on average?

Stocks grant investors part-ownership of companies.  The money invested buying those stocks is 100% at risk.  Share purchasers are the actual owners of those businesses, and the earnings they produce are lawfully and ethically theirs.  Once those corporations pay their federal and state income taxes -- averaging from the lowest (35%) in Nevada, Wyoming, and South Dakota to the highest (41.6%) in Pennsylvania and Iowa, as reported by the nonpartisan Tax Foundation -- the remaining earnings belong to the shareholders.  That income is now their income. 

However, once companies have made a profit and paid their taxes, the owners -- the investors who risked their money on purchasing these stocks -- have not yet seen a dime from the earnings of their corporations.  In order for money to actually reach the shareholders, a company must pay out dividends.  When those dividends are paid out, then the IRS taxes them at rate of 15% (for long-term investments held for one year or more; the regular federal rates are applied for stocks held for less than one year) for each individual who receives them.  By the time stockholders get to keep any money from the earnings of the corporations they own, the government has taxed it twice and confiscated at least half of it (50% to 56.6% approximate rates).  That's not enough of a "fair share" to pay?

Top 10% of Taxpayers Pay 70% of All Taxes

The latest research on U.S. income taxes data (conducted by several nonpartisan and independent organizations) shows that, on average, the top 10% of taxpayers pay approximately 70% of all federal taxes in America.  Does "fair" mean they should be paying 80%, 90%, or 100% of all taxes instead?  Is that the definition of "fair share" that both Obama and Buffett would be more comfortable and happy with?  I think Karl Marx and Friedrich Engels would definitely have approved.