Home > Fiscal Policy, Taxation > The Buffett Tax Rate

The Buffett Tax Rate

Barack Obama has frequently used the tax rate paid by billionaire Warren Buffett to argue for an increase in the personal income tax rates of the rich.  As a matter of fact, it is grossly inaccurate to use Warren Buffet‘s personal income tax rate alone to measure the tax on the incomes of the rich. This is so for the following reasons.

Warren Buffett’s tax rate is that applied to his dividend income, income paid out to him by the firms in which he is a stockholder.  A tax rate of fifteen percent is applied to dividend income by the individual federal income tax.  As pointed out in the Wall Street Journal on more than one occasion, dividend income is taxed at the corporate level before the individual income tax is applied. For this reason, it is frequently said that dividends suffer from double taxation.  Since dividend payments cannot be deducted from the taxable incomes of corporations, they are taxed once at the corporate level and then taxed again on the personal federal income tax returns of the corporation’s stockholders.

Individuals who own stocks are the owners of the firms in which they own shares even though it is left to the firm’s management to decide how much stockholders receive in the form of dividends. Thus stockholders ultimately are paying the corporate income tax on the dividends that they receive at the corporate tax level as well as the tax on dividends they report on their personal tax returns. It would be more accurate to say that the tax rate on dividends may as high as fifty percent depending upon the corporate tax rate paid by a corporation. And all of this ignores any state and local income taxes paid by firms. Including these taxes would only increase the tax rates paid by firms.

Barack Obama has knowingly mislead the public about dividend taxation. It is hard to believe that neither he nor anyone on his staff is unaware of the double taxation of dividends. Thus it is hard to reach any conclusion other than that the President has willfully mislead those members of the public who are unaware of these tax issues. After all, how effective would it be to get people to believe that we should raise the tax rates on the rich by telling the public that the rich are paying as much as a fifty percent tax rate on their dividend income? It is much more effective to say that the rich “only” pay fifteen percent even if that is a gross distortion of the truth. Half-truths and outright distortions unfortunately make up a sizable fraction of what the public hears in election season.

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Economics One

A blog by John B. Taylor

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One economist's views on economic policy.

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