It’s all a matter of perspective. The majority of Americans, it seems, complain that the U.S. tax system is unfair. The belief is that low- and middle-income taxpayers have to fork over a greater share of their income than billionaires like Warren Buffett.
Even Warren Buffett once acknowledged that it is unfair that the U.S. tax code allows him to pay a lower tax rate than his secretary. Buffet’s tremendous income is taxed on capital gains and dividends where investors pay rates well below those applied to ordinary income—salaries, wages, and interest. High rollers like Buffett pay a 20% long-term capital gains tax. As the saying goes, a small percentage of a lot of money is a lot of money.
But Buffett’s concern about his secretary notwithstanding, he is somewhat of a classic example of how the wealthy don’t pay the same effective tax rate as middle earners. On the other hand, he still contributes millions to the Treasury, and he uses the money he doesn’t have to pay in taxes in ways the system encourages and allows. Yes, Buffett has the resources to hire top tax accountants who stay within the law and reduce his effective tax rate.
Warren Buffett pays himself a relatively modest annual salary of $100,000. Again, the majority of his income is from stock market investments. He also takes advantage of tax deductions to reduce his taxable salary. For example, he makes major contributions to charity. In fact, his goal is to give away as much of his wealth as possible and not leave anything to his heirs.
Buffett’s company, the real estate conglomerate Berkshire Hathaway, pulls its weight in generating taxes to run the federal behemoth. Last year the company’s net worth increased to $63 billion—including nearly $30 billion because of the Trump Administration changes in the tax law. The company is a major job generator employing 360,000 at its 25 headquarters offices and subsidiaries.
So, with the super-rich gaming the tax system to pay a lower rate than most middle-income earners, is the system unfair? It depends who you ask. Socialists like Bernie Sanders and Elizabeth Warren want to go after millionaires with even higher taxes using populist buzz-words like “fair share.”
The National Taxpayers Union Foundation points out that arguing that the tax system is rigged to benefit the rich overlooks one stark feature of the U.S. income tax code: it is progressive, and has relentlessly shifted a greater share of the tax burden to top earners. In 2018, for example, the bottom 50% of tax payers paid a paltry 2.94% share of federal personal income taxes collected. The top 50% paid over 97%, with the top 10%, 5%, and 1% footing the bill for 71.37% of taxes collected. Drilling up to the top 1%, while their adjusted gross income share was only 20.93%, they still paid a little over 40% of the income taxes collected.
So, the fairness question comes down to this: Would we rather have billionaires like Warren Buffett avoid high taxation and generate jobs that create prosperity and income taxes, or have big government confiscate that wealth and be more responsible for our economy? That same government gave us the IRS, which has been unsuccessful in collecting billions of unpaid taxes.