Warren Buffett's secretary does NOT have to make $30,000 to pay a higher effective average federal tax rate than he does!

My very distinguished former colleague, Professor Paul Gregory of the University of Houston, believes that  Warren Buffett's secretary probably makes $200,000 to $500,000 in salary in order for Warren Buffett's claim to be true that she pays a higher average effective federal tax rate than he does.

More unadulterated nonsense!

VITA sites serve taxpayers with incomes under $50,000 and we see many taxpayers who pay more than 20% of their incomes in federal income and payroll taxes.

$20,000 in pay would make Buffett correct!

Yes, taxpayers with young children often pay much less than that and retired taxpayers pay much less than that, but working taxpayers who do not have young children living with them pay much higher rates.   With all due respect, Warren Buffett's secretary looks like she is past the age where she is likely to have young children living at home.

Warren Buffett clearly stated that his claim was about the total amount of federal income and payroll taxes paid on his income compared to that paid on his employees' income.

Warren Buffett has stated that his Adjusted Gross Income was $62,855,038 in 2010, producing an income tax liability of $6,923,494 and a payroll tax bill of $15,300.  That adds up to an effective average combined tax rate 11% of his adjusted gross income.

Of course, privacy rules do not allow me to discuss the tax situations of the particular individual real life individual taxpayers who use our VITA site.  But I can say that VITA sites like ours see many taxpayers with incomes in the $20,000 to $50,000 range who pay more than 11% in combined federal income and payroll taxes.

Let's take the very first case study in the VITA workbook, Rose Hudson.  (The picture below comes from the IRS website.)  Rose is hypothetical but very representative of the single most common type of taxpayer we see at a VITA site, a single taxpayer with no dependents, with income primarily from wages reported on a W-2.

Rose Hudson:  AGI $32,000 combined effective federal tax rate 24% of AGI

Rose is a waitress, with wages and tips of $31,915 last year.  She also earned $36 in savings accounting interest.  Using standard Congressional Budget Office (CBO) assumptions about the incidence of payroll taxation, which assumes that both portions of the Social Security tax burden fall on the employee, the payroll tax bill was $4,873.  Rose's income tax liability was $2,946.  Adding those two figures together gives us an average effective federal combined tax rate of 24% of AGI.

Of course, we could quibble about the denominators.  When Warren Buffett originally stated his effective tax rate, he quoted 17% for his own tax rate, which used taxable income as the denominator rather than AGI.   If we use the same denominator of taxable income for Rose's effective average tax rate, we get 35% for her!

Ideally, we would actually use a much broader measure of income than either AGI or taxable income, the Haig-Simons definition of income.  For Rose, her Haig-Simons income might include some tax-free fringe benefits.  Warren probably gets some of those as well, but he likely has an even bigger component of Haig-Simons income which is missing from his AGI, namely his UNrealized capital gains.

Anyway you slice it, a secretary or waitress earning a modest amount of income ($30,000 or so), pays a much larger combined effective federal tax rate than Warren Buffett does, unless she lives with "qualifying children".