The Catholic University of America
Sep 26 2011

Millionaires and Taxes: A Reality Check

Posted by Ernest Zampelli at 9:18 AM
- Categories: Economy

President Obama has recently proposed to levy a minimum tax on millionaires as part of his deficit reduction proposal.  The goal is twofold—to increase revenues while eliminating tax inequities which result in billionaires like Warren Buffett paying lower average tax rates than their secretaries.  The implication of course is that those who are members of the millionaire’s club do not pay their “fair” share of federal income taxes.  Though I’m unsure about the precise definition of fair, I would argue that the “Buffett and his secretary” story regarding the average tax rates of millionaires, though true for Buffett and his secretary, is not really consistent with the facts. 

To provide some support for my thesis, I went to the IRS website and looked at individual income tax return data for 2009.  In the chart below, I’ve graphed the average tax rate (ATR) for each of the Adjusted Gross Income (AGI) classes, measured as total income tax paid as a percentage of AGI.  Note that members of the millionaire’s club pay the highest average tax rates of about 25 to 26 percent.  Interestingly, the ATR for those with an AGI of $10M or more, 22.6 percent, is lower than that but still above the ATR for those with AGIs less than $1M.  I would also note that the ATRs for AGI classes under $200K are substantially lower than those for the millionaire’s club.

Another illuminating exercise is to look at the percentage distribution of total federal income taxes paid by AGI class.  I show this in the chart below.  Together, the millionaire’s club pays about 20.4 percent of all federal income taxes.  This compares to 25.2 percent for those with AGIs of less than $100K and about 54 percent for those with AGIs of $100K to under $1M.  Now, can this be viewed as unfair?     


Well, let’s look at one more chart.  This shows the percentage distribution of AGI by AGI class.  Collectively, the less than $100K classes accounted for 51.9 percent of total AGI.  For the $100K up to $1M class, the percentage was 38.8 percent, and for the millionaire’s club it was 9.3 percent.  So, for the lowest income group, the share of total federal income taxes was a bit less than half its share of total AGI.  For the AGI class of $100K to under $1M, the tax share was 139 percent of its AGI share.  And finally, the tax share for the millionaire’s club was more than twice its share of aggregate AGI.  Frankly, these results seem like they are quite consistent with a general notion of fairness.

Please note that I am not denying that higher income groups have been the major beneficiaries of the Bush tax cuts.  I am also not disagreeing with the principle of shared sacrifice espoused by President Obama in setting forth his proposal.  Nor do I disagree with his insistence that a credible and equitable deficit reduction plan should include both revenue increases and spending cuts.  And, by the way, I do not necessarily disagree with the specific minimum tax proposal.  But what I think should be recognized as a matter of fairness is that the (true) story of “Buffett’s and his secretary’s taxes” should not be used to indict individuals and households whose federal income tax contributions are quite substantial in both an absolute and relative sense.  


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