Obama Buffett Rule Comments: Are Rich Actually Taxed At Higher Rate Than Middle Class?

Today, Stephen Ohlemacher from the AP, wrote and article with the title of this post

(ACS: This article from Ohlemacher is terribly misleading)

I have been asked to comment. Enjoy a decently long post.

Here is the link to is over at HuffPo.

This article is somewhat misleading. First, he claims:

“On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data. They pay at a higher rate, and as a group, they contribute a much larger share of the overall taxes collected by the federal government.”

This is true, but very misleading (he leaves out important statistics.) He does not explain that the top 20% control 84% of the nations wealth. Nor does he mention that the bottom 40% own the massive amount of 0.3% of the wealth. Wouldn’t you expect the people who control 84% of America to pay a larger sum of taxes? How can you expect to get a decent amount of revenue from someone that can barely feed their family?

Now for the tax rate:

Many of the wealthy own businesses. This means that they are able to write off many deductions on their taxes. The poor don’t have much to write off except for children, they just can’t afford things.

Here is what the article mentions with regards to this:

“People who are doing quite well and worry about low-income people not paying any taxes bemoan the fact that they get so many tax breaks that they are zeroed out,” said Roberton Williams, a senior fellow at the Tax Policy Center. “People at the bottom of the distribution say, `But all of those rich guys are getting bigger tax breaks than we’re getting,’ which is also the case.”

This looks good.

Now for the kicker, the capital gains tax. This is a tax paid almost exclusively by the rich. The top 5% pay 90% of the capital gains. This is because the bottom 95% cannot afford to invest in stocks, bonds, etc.; they need the money now. The author does mention that the highest tax rate is 15%.

Obama’s claim hinges on the fact that, for high-income families and individuals, investment income is often taxed at a lower rate than wages. The top tax rate for dividends and capital gains is 15 percent. The top marginal tax rate for wages is 35 percent, though that is reserved for taxable income above $379,150.

This is where Ohlemacher’s complaint lies.

This is the rate that the ultra-rich pay (15%); a large portion of their income is from capital gains. Now, this tax in theory would help the poor and make the rich pay a little more, but in reality we see that is not the case as it is a measly 15%. Instead, this helps the rich, they don’t have to pay the 35% as they are only taxed at 15% for a large part of their income. This is why they pay such low rates. They can make $200,000, get more deductibles than the $200,000 and then get $50 million from capital gains. They will end up paying at a lower rate than their secretaries (15% for capital gains and no federal income tax since they had so many deductibles). The author of the article does mention this. But, he riddled his article with many misleading statistics showing how much percent each bracket on average pays.

Households making between $50,000 and $75,000 will pay an average of 15 percent of their income in federal taxes.

Lower-income households will pay less. For example, households making between $40,000 and $50,000 will pay an average of 12.5 percent of their income in federal taxes. Households making between $20,000 and $30,000 will pay 5.7 percent.

The latest IRS figures are a few years older – and limited to federal income taxes – but show much the same thing. In 2009, taxpayers who made $1 million or more paid on average 24.4 percent of their income in federal income taxes, according to the IRS.

Those making $100,000 to $125,000 paid on average 9.9 percent in federal income taxes. Those making $50,000 to $60,000 paid an average of 6.3 percent.

Obviously the higher bracket pays a larger percent with regards to federal income tax (by definition it has to!) Although if you look at the rates in other developed countries you will see that we have a much larger wealth inequality. This means that the rich are not taxed at an appropriate level, be it capital gains or the federal income tax. You can also look at historical tax rates in the US and see how the economy did at certain levels. See here.

You’ll find that generally when we wall into a recession, the higher the rich are taxed, the better our economy does, as we collect more revenue to spend. It should be noted that we are in a liquidity trap too.  If you look at what happened from 1931 to 1932 you can see how taxes went from 25% to 63% and we started pulling out of the Great Depression (we cut back in 1937 and the economy started tanking again, then WWII helped us out.)  And yes, our current crises resembles that of the Great Depression

Overall, I find the first half of the article utterly confusing. The second half, that’s fine. He says it is a fact check, but he never even gave a final thought. He ended it with multiple quotes. But, I suspect that Obama is saying that the rich are paying at a lower rate because he is factoring in capital gains. It is not necessary to say he is including both taxes when speaking for two reasons. One, they both are taxes that go to revenue (who cares what you call them; I guess, for statistical purposes, you can separate them) and two, the majority of people do not have a clue how our tax system works. They think people are taxed at the bracket rate that they fall in. This is far from the case as people are taxed marginally, get deductions, etc.. If you don’t believe me, go up to anyone and ask them how much someone who earns $1 million a year pays in taxes when he falls in the highest tax bracket ($379,150) taxed at 35%. I am willing to bet nearly everyone will say $350,000. This is utterly incorrect. See here to see how the federal income tax is paid.

So, the question is, is this fact check correct? No. Obama never specified which tax(es) he was referring to. And to say this is a lie, is just another way to help millionaires avoid taxes and confuse the public. If the public had a firm knowledge on taxes, I would say there is a lot more reason for Obama to mention what specific taxes he is referring to (but even that is not necessary as the point is the ultra-rich sometimes pay at a lower rate.) But again, the public, even highly educated people, tend to be clueless on this issue. Very few people do their own taxes.

I should note that people making over $1 million dollars a year are in the top 0.3%. This is who this article seems to be trying to protect.

I am obviously not sure if Ohlemacher intended to make the article confusing or not. But it’s always disheartening when someone throws statistics around that are heavily misleading.

Anyone who is interested in wealth inequality as well as who pays what taxes should certainly read this (or either of the authors blog posts on the subject) article by Michael Norton (Harvard) and Dan Ariely (one of the leading behavioral economists, Duke.) http://www.people.hbs.edu/mnorton/norton%20ariely%20in%20press.pdf

Or at the very least, head over and take a look at the graphs.

Also, I just browsed through the comments on this over at the HuffPo and the second one I looked at thought pretty much the same thing as me. (I’m sorry I forgot the commenter, if it was you just email me, which can be found on the side of this page, and I will put your name in.)

“Stop making this confusing. Capital gains are taxed at 15%. Income is taxed much higher. People who use money to make money often pay 15%, while their salaried workers pay 25-35%. Tax capital gains at the same rate as income.”

I never said what rate to tax it at, all I said was higher. But, yeah, at the income level is much better.

One last note, it is important to also realize that corporations pay the second lowest taxes in the developed world. This needs to end. Oh, and just for fun, Iceland pays the lowest, and we all know they had a GREAT economy in this recession. Why don’t we follow their policies that so elegantly made them “not” collapse? Oh, wait. /sarcasm


Edit: I forgot to add the effect of payroll taxes. Payroll taxes benefit the rich as they are capped at income of a little above $100,000.  For more detail on this, Paul Krugman has elegantly explained it in this post on his blog today.

One is that you have to beware of the old trick of saying “taxes”, then slipping into “income taxes”. Most Americans pay more payroll than income taxes, but the reverse is true at high incomes. So focusing only on income taxes makes it seem as if the rich pay much more of the burden than they really do.

See here. The entire article is worth reading as it explains several tricks that the Right plays on Americans.

One thought on “Obama Buffett Rule Comments: Are Rich Actually Taxed At Higher Rate Than Middle Class?

  1. Pingback: Class Warfare! | teachingthecontroversy

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