A new document prepared by the Congressional Joint Committee on Taxation provides an excellent primer on the federal taxes paid by individuals, including the impact of different taxes on individuals at different income levels. Data cited in the report provide the facts behind billionaire investor Warren Buffett’s often-repeated statement that his federal tax rate is lower than that of his secretary. When all federal taxes – income, employment (Medicare and Social Security), and excise – are considered, millionaires pay an average tax rate of 23.6 percent. This rate is lower than that paid by households earning $200,000 to $500,000 (24.1 percent) or $500,000 to $1,000,000 (26.8 percent).
How can this be true? In brief, the preferential treatment of income from capital gains, which accounts for a larger fraction of millionaires’ incomes than do wages. Millionaires pay an average tax rate of 14.7 percent on income from capital gains – less than the average combined income and payroll tax rate paid by wage earners with incomes over $20,000. The same data show that the poorest individuals – those with incomes under $10,000 – actually pay a larger average tax rate than do those with somewhat higher incomes, due to the impact of employment taxes paid as a percentage of their modest earnings. These data vividly illustrate the importance of looking at all taxes, not just the income tax, when evaluating tax policies, especially since three-quarters (75.4 percent) of all taxpayers, but just 1.5 percent of millionaires, pay more in employment taxes than they do in income taxes.
One strength of California’s personal income tax is that it treats wage earners and investors equally, imposing the same tax rate on income regardless of how it is earned. The importance of this policy and the values behind it is one reason why we opposed the Governor’s end-of-session tax deal, which would have created a new tax preference for individuals with business income.
— Jean Ross