Lies, Damn Lies and the Liars that tell them!

There are so many ways that politicians lie.  The latest one is so blatant that once again I feel the need to write an article showing the real numbers behind the lies.  This time, it is President Obama that is going to seek a new alternative minimum tax rate to make sure that millionaires pay a tax rate that is higher than the tax rate that the middle-class pays.  The initial problem is that it is a tremendous lie that people making an income greater than $1 million dollars do not pay a higher tax rate than the middle class.

Now to prove it.  I will start by using the latest tax data from the IRS.  Since 2009 is the latest data available, that is what I will use to prove that President Obama and his friend Warren Buffett are in fact lying about the tax rates.  This is so easy to disprove, that it is a waste of time to bother throwing the lie out there, but is seems that they will do it anyway.  This is not to say that there are not some millionaires that do manage to avoid taxes, but on average, people making more than $1 million pay a much higher rate of taxes.

I will start by showing the numbers of just how many people we are talking about.  The number of people making more than $1 million is tiny.

The Inconvenient Skeptic

Filings by income.

As I will show shortly, it doesn’t even depend on what you define as middle-class for this article.  The numbers are so overwhelming that once a person or family makes more than $100,000 per year, the tax rate goes up dramatically.  It is also important to note that the number of people that make more than $1 million a year is vanishingly small.  In 2009, only 228,609 people in the United States made more than $1 million dollars.  That is 0.163% of the population.  This is one reason why he might feel it is safe to single them out.

Now it is easy enough to compare the the total taxes paid and the percentage of income paid as federal income taxes.

The Inconvenient Skeptic

(Green) % of income paid as taxes, (Red) Total $'s paid as taxes

What is obvious from the numbers is that once a person/family exceeds $200,000 in income, the percentage of that income that goes to taxes doubles.  People that earn less than $100k, paid 8.5% of their income to federal taxes.  People that earned more than $200k, paid 19.6% of their income in taxes.  Every group that earned over $500k paid at least 22.6% of their income in taxes.  That is about double the percentage of even the group that earned between $100-200k.

If I combine all the different ranges of AGI (Adjusted Gross Income) to show a more compressed form, it is also very clear that those that make more than $200k already pay a much higher percentage of their income in Federal Income Tax.  Do not forget that most states also tax them at a higher rate so they get hit twice with a higher rate of taxes.

The Inconvenient Skeptic

Middle-class and below already pay a much lower rate of taxes.

So what exactly is Obama talking about when he says he is going to make the rich pay their fair share and make sure that millionaires are going to pay the same percentage as the middle class?  That is a fascinating question, because on average, the people making more than $200k already pay double the percentage of their income and they are still being targeted for more money.

There is one strange group that shows up in the numbers and that is those that have an AGI of less than $0.  This is where it gets interesting.  There are ~2.5 million filings that have an AGI in that range and their average AGI is -$79,206.  So these people are losing money, but they still pay an average federal tax bill of $22,350.  I was baffled by a group of millions of people that pay a tax equivalent to an income of ~$150k, but end up losing money each year.

So I spoke to a CPA to figure it out.  There is a very limited number of ways to get into that situation and both of them involve owning a business with the most common one being farmers.  According to the EPA there are currently 2.1 million farms in the USA.  That is a very good fit for the number of filings that meet the criteria of negative AGI, but still need to pay taxes.  I will have to assume that most farmers (95%) have a negative AGI.  If there is one business model that should have a negative AGI, it is farmers.  With that assumption farmers account for 80% of the filings that have a negative AGI.  While farms can bring in a vast amount of money, they also have significant expenses and risks associated.  Just ask any farmer in Texas right now.

That leaves about 20% of the negative AGI folk, or about 500,000 families.  That is a relatively small percentage of non-farm businesses and I would expect that non-farm businesses that have a negative AGI don’t last very long.  So failing businesses probably make up a good chunk of that portion.  Here is a Businessweek article on failing small businesses.

Looking at the data shows that whatever President Obama is trying to accomplish, the majority of it is a lie.  The millionaires that he is targeting, already pay a significantly higher percentage of their income than the middle-class.  The only group that might not be paying a higher percentage than the middle-class is farmers.  If he proposes a income only based alternative minimum tax on millionaires, then the main group that he will be hitting is farmers.  President Obama fully appears to be going after the farmers to get them to pay an extra $1.5 Trillion in taxes over the next 10 years.

The Inconvenient Skeptic

Combine at harvest. Courtesy of Indiana Grain.

———–  Update Sep 19th  ——————————————————-

I would like to contrast the average percentages above to the numbers that Warren Buffett uses in his article.  He states that he paid 17.4% federal income taxes on his income.  He starkly contrasts this to the people that work in his office that he claims paid a federal tax rate between 33-41% with an average of 36%.  This is a fascinating claim because that is in stark contrast to what the IRS says people in the middle-class pay in taxes.

If the people in his office are in the $50k-$200k range, then they on average should have paid only ~10% of their income in federal income tax.  So the numbers that Warren Buffett are using simply do not add up.  There has been a lot of discussion in the news about capital gains rates, but they don’t matter to my analysis because I only look at the end results.

It would appear that Warren Buffett is comparing his final rate to the initial rate paid by his workers, that is the amount that they owe before deductions.  I doubt that the people that work for Warren Buffett would fail to take any deductions as that would be stupid.  It is possible that he is also comparing the total taxes that they pay in state, federal, local and perhaps even sales tax and comparing that to his federal rate.  Either way Warren Buffett is lying with the numbers.

The simple truth is that the tax rate goes up substantially for high income earners.  Deductions phase out as income increases and that makes a huge difference on the amount of taxes that people pay.  Warren Buffett is ignoring the facts and has fully engaged in propaganda.

—-Update #2  —-

I read the Economists take on the tax plan and I had to laugh.  🙂

On taxes, Mr Obama’s plan is even more of a disappointment. Legislators and economists of all political persuasions agree America needs to lower or hold constant marginal tax rates while eliminating or curbing deductions, exemptions and credits that now cost roughly $1 trillion per year. Such an overhaul could make the tax system both more efficient by removing distortions and disincentives to work, and more progressive, since the affluent make more use of such loopholes than the poor.

Mr Obama seems to care greatly about progressivity and not at all about efficiency.

Posted in Politics by inconvenientskeptic on September 19th, 2011 at 2:08 am.


This post has 6 comments

  1. Didn’t he specifically call out high investment earners for only paying 15% (capital gains) and not contributing to payroll taxes (which fund SS & Medicare/Medicade)?

    Any way to see what these “high earners” would pay if they did pay “normal” income taxes instead of only capital gains?

    (BTW, I think this is total BS as well. I’m upper-middle class, but I save my money and invest it for the future with the “contract” we have in place with the gov.’t today. Now he wants to change that…)

  2. inconvenientskeptic Sep 19th 2011

    What is said and what is actually proposed are often different. The impact of what he is proposing is a new alternative minimum tax that will apply to ‘millionaires.’

    The numbers I am seeing is that Warren Buffett pays 17.4% in taxes. That would put him on the low end for people earning over $1 million, but that federal tax rate is much higher than the average paid by people less than $100,000.

    He is not making a specific proposal either (go figure), just saying that any new tax code needs to take this into account.

    It should be no surprise that Buffett pays on the low end, but I also wonder how much he spends to minimize his tax bill.

  3. Good point about Buffet. I actually had a debate with my father-in-law (he is more liberal than I) about rich people avoiding income tax. I pointed out to him that by doing so (legally), they are helping to stimulate the economy by paying for services. 🙂 But he wants the gov.’t to have the tax revenue instead b/c he’s comfortable with central planning – it’s a short sighted mindset IMHO.

  4. Eric Anderson Sep 19th 2011

    Yes, but didn’t Obama also say that a significant portion of the tax revenue increase would come from taxes on corporations? That way no individual has to feel the pain, right? I mean, we know that corporation’s can absorb the tax and not pass anything along to actual individuals, right?


  5. inconvenientskeptic Sep 19th 2011

    I added a little update that discusses the numbers used by Warren Buffett. He is flat out lying about this. The data from the IRS is in stark contrast to the rates he spouts off.

    Warren Buffett is a liar and he knows it. I might have to give him the Trenberth Award.

  6. Don’t forget that many people making more than $200 K are business owners so pay “self employment tax” which adds a lot more to your tax bill.

    As usual discussions of this issue are very simplistic in the media. It sounds good to say “millionaires and billionaires” should “pay a little more” but what would the impact be of raising the tax rate on capital gains? Would it discourage investment? Would people move their money from stocks to bonds? Making it more expensive (via taxation) to invest in business activity doesn’t sound reasonable when the economy is stagnant.

    Personally, I think we should be encouraging people to invest in job creation and the stock market instead of penalizing them. We don’t need higher taxes in this economy.

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