The "Buffett Rule" Is Based On Flawed, Anecdotal Evidence; National Data Show That "Super-Rich" Pay Avg. Tax Rates 2-3X Higher Than a Secretary

Adjusted Gross Income, 2009	Average Federal   Income Tax Rate (%)
$10,000 to $15,000	6.8%
$15,000 to $20,000	6.6%
$20,000 to $25,000	8.7%
$25,000 to $30,000	9.7%
$30,000 to $40,000	10.0%
$40,000 to $50,000	10.6%
$50,000 to $75,000	11.6%
$75,000 to $100,000	12.3%
$100,000 to $200,000	16.3%
$200,000 to $500,000	24.6%
$500,000 to $1,000,000	28.8%
$1,000,000 to $1,500,000	29.4%
$1,500,000 to $2,000,000	29.6%
$2,000,000 to $5,000,000	29.7%
$5,000,000 to $10,000,000	29.1%
$10,000,000 or more	26.3%
Average	17.8%

Source: IRS Publication 1304 for 2009, Table 1.1

Warren Buffett started it by saying this in the NY Times:

"...Blessings are showered upon [the super-rich] by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places. 

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.

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice."

That inspired Obama's proposal today for a tax hike called the "Buffett Rule":

“Middle class families shouldn’t pay higher taxes than millionaires and billionaires. That’s pretty straightforward. It’s hard to argue against that. Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett. There’s no justification for it.”

MP: The chart above displays average federal income tax rates (as a share of taxable income) paid in 2009 by various income groups from $10,000, to $10,000,000 and above, (IRS data here), showing the following:

1. The U.S. federal income tax system is highly progressive (as it's intended to be, and not regressive as Buffett wants us to believe from his "analysis" of his and his employees' tax rates) and higher income groups pay taxes at a higher rate on average, as a share of their taxable income, from a low of 6.8% on incomes between $10,000-$15,000 to a high of 29.7% for incomes between $2,000,000-$5,000,000.  

2. For federal income taxes, most secretaries would probably be paying an average federal tax rate of 9-12%, and most of the "super-rich" bosses with incomes of $200,000 or more would be paying average federal income tax rates about three times higher than their secretarial staff members, i.e. 25% or higher. 

3. Even if we account for payroll taxes (which the chart below does for 2007 using CBO data), Buffett's tax analysis still doesn't make sense.  Most "super-rich" taxpayers are paying federal taxes (income, payroll, corporate and excise) at a rate of 25-30% of their income (much higher than Buffett's 17.4%), and the middle-quintile and second-highest quintile groups are paying average tax rates of only 14%-17% (about half of the 33-41% Buffett's employees are paying, assuming they fall in those income groups). 

Bottom Line: We now have a proposal for a tax policy - the "Buffett Rule" - based on Warren Buffett's anecdotal "evidence" of his and his employees' tax burdens.  But that "evidence" seems pretty far-fetched and not consistent with: a) average federal income tax rates available from the IRS, nor b) average tax rates for all federal taxes paid, from the CBO.  Buffett's anecdote has to be an outlier and certainly not typical (his low tax rate on $40 million of income is likely due to receiving much of his income in the form of capital gains and dividends), because under the current federal income tax system, the average "super-rich" taxpayer pays federal taxes at a rate 2-3 times higher than the average secretary.  

Update: Steve Moore on The Kudlow Report tonight said in reference to the myth that secretaries pay taxes at higher rates than the "super-rich," (and citing some of the same tax data that appear above) "It's almost as if Barack Obama and Warren Buffett made those numbers up."