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The New Economy

Warren Buffett to Congress: Tax me more than $7 million(VIDEO)

Warren Buffett says he pays less in federal taxes than lesser paid Americans. Where do Warren Buffett's numbers come from?

By Jackson BuckleyContributor / August 15, 2011

Warren Buffett, shown here attending the Most Powerful Women Summit in Washington last year, wrote an op-ed Aug. 14, 2011, telling Congress that the rich should pay more in taxes than they do.

Jason Reed/Reuters/File

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The mega-rich have been "coddled long enough by a billionaire-friendly Congress."

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No, that's not some tax-the-rich liberal speaking. It's mega-investor Warren Buffett, who sits at the top of the mega-rich pyramid, writing an op-ed piece in The New York Times Aug. 14. He argues that the tax breaks for the wealthy must be removed.

It's compelling stuff: "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," Mr. Buffett wrote. "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."

That's shocking. But is it really true that the wealthiest Americans pay less than the middle class?

No. Skewed as it is by tax breaks that help the wealthy, the federal tax system remains progressive, which means that the poor pay a smaller percentage of their income than the rich pay on theirs. In 2007, the bottom fifth of households in the income distribution paid about 4 percent of their income in federal taxes, according to the director of the Congressional Budget Office (CBO), Douglas Elmendorf, in testimony to Congress this past December. By contrast, the middle fifth of households paid 14 percent, and the highest fifth paid 25 percent.

Also in 2007 (the latest data available), that highest fifth of households earned 55 percent of before-tax income but paid almost 70 percent of federal taxes, according to the CBO.

Whether this is fair or not depends on your politics. In 1980, the marginal tax rate paid by the wealthy (not what they actually paid, only the highest tax rate applied to some of their earnings) was 70 percent and has fluctuated since then between 28 and 39.6 percent.

But these numbers raise a question: If the wealthy 20 percent of households pay an average 25 percent of their income in federal taxes, how come Buffett pays only 17.4 percent?

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This isn't the first time Buffett, CEO of Berkshire Hathaway, has suggested that he and other wealthy Americans should pay more taxes. He said it in a 2007 fundraiser for Hillary Clinton. He said it last year in an ABC interview.

In the past, some have speculated that Buffett's tax rate is so low because a large portion of his income comes from dividends, which are only taxed at a 15 percent rate.

That's the line contributor Tim Worstall took in a Forbes commentary Monday criticizing Buffett's latest "tax me more" salvo. Only one problem, as Mr. Worstall himself pointed out: Buffett's Berkshire Hathaway doesn't pay a dividend.

So, if indeed much of his income is taxed at 15 percent, he writes, Buffett "needs to be doing one of three things. Declaring much of his income as carried interest, which is unlikely, or having dividend or capital gains income from other investments."

And that dividend has already been reduced by corporate taxes, something Buffett's not counting.

On Twitter Buffet is being largely hailed as a selfless hero, but a Politico report suggests that elsewhere reaction has been sarcastic and dismissive.

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