October 12, 2011
by Andy Zajac
About 25 percent of millionaires in the U.S. pay federal taxes at lower effective rates than a significant portion of middle-income taxpayers, according to a legislative analysis.
Preferential treatment of investment income and the reduced impact of payroll taxes on high earners lets about 94,500 millionaires pay taxes at a lower rate than 10.4 million “moderate-income taxpayers,” representing about 10 percent of those making less than $100,000 a year, according to the report by the non-partisan Congressional Research Service dated Oct. 7.
The findings put the U.S. tax system in conflict with the so-called Buffett Rule, which says households making more than $1 million annually shouldn’t pay a smaller share of their income in taxes than middle class families, says the report, which analyzed 2006 Internal Revenue Service data.
The Buffett principle was proposed by President Barack Obama in September after billionaire Warren Buffett, the 81- year-old chairman and chief executive officer of Berkshire Hathaway Inc., said it was wrong that he paid taxes at a lower rate than 20 other people who worked in his office.
Obama has said the Buffett Rule should be a guiding principle of efforts to reform the U.S. tax code.
The Buffett maxim and broader proposals by Obama and Democrats to raise taxes on the rich have been criticized as “class warfare” by some congressional Republicans.
Voluntary Tax Payments
On Oct. 5, Louisiana Republican Representative Steve Scalise introduced H.R. 3099, the Buffett Rule Act of 2011, which would authorize the IRS to print a box on tax returns that filers may check if they want to voluntarily pay more tax.
Earlier this month, Senate Democrats proposed paying for Obama’s $447 billion jobs package with a 5.6 percent surtax on individual incomes exceeding $1 million. The jobs plan was sidetracked by the Senate yesterday after falling short of the 60 votes it needed to advance.
Yesterday, Buffett declined the request of a Republican congressman to swap tax returns and reiterated his pledge to publish the form if other billionaires would do the same.
The Congressional Research Service report found that, on average, millionaires paid federal tax at a 30 percent rate, while moderate-income taxpayers, defined as those earning less than $100,000, were taxed at 19 percent.
The overall average, though, “obscures a great deal of variation,” including the finding that 25 percent of millionaires pay lower rates than 10 percent of moderate earners, the report found.
The findings “would be considered a violation of the Buffett Rule, but not to the extent alluded to by Mr. Buffett,” the report says.
The report says moderate-income taxpayers bear the brunt of the Social Security payroll tax because it applies only to the first $106,800 in wages.
The tax is set at 12.4 percent, split equally between workers and employers. The portion of the tax that employees pay was temporarily cut to 4.2 percent in last December’s tax bill. Obama’s jobs plan proposes another temporary measure that would reduce the employee share to 3.1 percent and cut an employer’s share to 3.1 percent on the first $5 million of payroll. An additional 2.9 percent tax for Medicare is levied on all wages.
In addition, the report says, a significant portion of millionaires derive income from dividends, capital gains or carried interest, all taxed at 15 percent. Ordinary income is taxed at rates ranging from 10 percent for low earners to a top marginal rate of 35 percent.
The report found that a relatively small proportion of business owners are millionaires and played down the impact of higher tax rates on job creation.
“The small share of taxpayers with small-business income in the millionaire category suggests that tax reform policies designed to ensure adherence to the Buffett Rule will affect few small businesses,” the report says.
The findings of the CRS study are similar to an analysis last month by the non-profit Citizens for Tax Justice, a labor- funded research group based in Washington.