Why World’s 3rd Richest Person Is In A Lower Tax Bracket Than You
June 28, 2007
Warren Buffett in the Washington Post confirms what I’ve suspected for quite some time: he is in a lower tax bracket than me.
Warren E. Buffett was his usual folksy self Tuesday night at a fundraiser for Sen. Hillary Rodham Clinton (D-N.Y.) as he slammed a system that allows the very rich to pay taxes at a lower rate than the middle class.
Buffett cited himself, the third-richest person in the world, as an example. Last year, Buffett said, he was taxed at 17.7 percent on his taxable income of more than $46 million. His receptionist was taxed at about 30 percent."
But how could he be? My income was significantly less than Buffet’s last year (and every other year for that matter).
The answer is because while all men may be created equal, all income is not. Relatively recent changes to the tax code have created even more favorable classes of income.
A dollar earned is taxed as income – at the local, state, and federal level. Income tax rates go up with higher level of incomes because we have progressive taxes – meaning you pay a higher rate the more you earn. Worse, social security and other payroll taxes are a huge percentage of your total taxable income if you earn a normal wage, but because they are largely capped these taxes become a very small percentage of your taxes if you earn $9 million.
But that only explains why many people are in such a high tax bracket. Why is Buffett in such a low bracket? A dollar passively earned is rarely taxed as income. Start a company and sell it for a billion dollars, and that billion dollars is long term capital gains, not income. Stock dividends are now taxed at lower rates than a clock watcher’s salary. And of course, social security and other payroll taxes don’t apply to passive income. Income from your checking account (0.50% interest rate…) is still taxed as income. As is CD, savings account, and bond income.
Unfortunately the money in our 401ks and IRAs will be taxed as income someday, not long-term capital gains or dividends. Hopefully our country’s financial situation won’t be so screwy that Congress will have to raise income taxes right when we need our retirement income.
While low taxes on passive investment income is good, most non-billionaires and those not partners in private equity outfits and venture capital firms would probably prefer a lower tax rate on income and a higher tax rate on investments – a simpler tax where income is income and there are no favorable ways to earn it.
Perhaps no tax on the first $25,000 and a 25% tax bracket on all income over $25,000 – no matter how it comes in. That way Buffett wouldn’t be in a lower tax bracket than his Secretary.
Warren Buffett in the Washington Post confirms what I’ve suspected for quite some time: he is in a lower tax bracket than me.
Warren E. Buffett was his usual folksy self Tuesday night at a fundraiser for Sen. Hillary Rodham Clinton (D-N.Y.) as he slammed a system that allows the very rich to pay taxes at a lower rate than the middle class.
Buffett cited himself, the third-richest person in the world, as an example. Last year, Buffett said, he was taxed at 17.7 percent on his taxable income of more than $46 million. His receptionist was taxed at about 30 percent."
But how could he be? My income was significantly less than Buffet’s last year (and every other year for that matter).
The answer is because while all men may be created equal, all income is not. Relatively recent changes to the tax code have created even more favorable classes of income.
A dollar earned is taxed as income – at the local, state, and federal level. Income tax rates go up with higher level of incomes because we have progressive taxes – meaning you pay a higher rate the more you earn. Worse, social security and other payroll taxes are a huge percentage of your total taxable income if you earn a normal wage, but because they are largely capped these taxes become a very small percentage of your taxes if you earn $9 million.
But that only explains why many people are in such a high tax bracket. Why is Buffett in such a low bracket? A dollar passively earned is rarely taxed as income. Start a company and sell it for a billion dollars, and that billion dollars is long term capital gains, not income. Stock dividends are now taxed at lower rates than a clock watcher’s salary. And of course, social security and other payroll taxes don’t apply to passive income. Income from your checking account (0.50% interest rate…) is still taxed as income. As is CD, savings account, and bond income.
Unfortunately the money in our 401ks and IRAs will be taxed as income someday, not long-term capital gains or dividends. Hopefully our country’s financial situation won’t be so screwy that Congress will have to raise income taxes right when we need our retirement income.
While low taxes on passive investment income is good, most non-billionaires and those not partners in private equity outfits and venture capital firms would probably prefer a lower tax rate on income and a higher tax rate on investments – a simpler tax where income is income and there are no favorable ways to earn it.
Perhaps no tax on the first $25,000 and a 25% tax bracket on all income over $25,000 – no matter how it comes in. That way Buffett wouldn’t be in a lower tax bracket than his Secretary.
LINK