Many Millionaires Do Enjoy Lower Tax Rates- Fact Checking the Fact Checkers at AP

This material was published by the Center for American Progress.

By Seth Hanlon

The Associated Press today published a strange “fact check” of the “Buffett rule,” the principle articulated yesterday by President Barack Obama that no household making more than $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. The AP’s fact check faults President Obama for “mak[ing] it sound as if there are millionaires all over America paying taxes at lower rates than their secretaries,” and states that “[t]he data tell a different story.”

In fact, tons of data—including data cited in the AP article itself—confirm the compelling need for a Buffett rule because large numbers of super-rich individuals are indeed paying lower taxes than middle-class families. Consider:

• 1,470 households reported income of more than $1 million in 2009 but paid zero federal income tax on it.
• The average federal income tax rate of the richest 400 people in the country in 2008 was 18.11 percent. In 2007 it was 16.62 percent. That is only a little more than just the payroll tax on wages—normally 15.3 percent on a worker’s first $106,800 in wages, counting both the share that workers pay directly and the share their employers pay, which comes out of their wages—let alone the federal income tax on those wages. The tax rates paid by the “Fortunate 400” have plummeted since the mid-1990s, when their average effective rates were about 30 percent.

According to the Congressional Budget Office, the richest 0.01 percent (those with incomes of $8.6 million and above) paid a combined 17.5 percent in individual income and payroll taxes in 2005, the last year for which such data are available. The group of households with incomes ranging from $45,200–$92,400 paid only a little less on average, at 15.7 percent. The group of households with incomes ranging from $30,500–$45,200 paid 12.5 percent. Of course, there are wide variations within those income ranges, meaning that many middle-class families paid much more than the 17.5 percent average paid by the very rich, while many in the top 0.01 percent paid less than that.

Due to the so-called carried interest loophole, managers of hedge funds and private equity funds pay 15 percent capital gains rates, and no payroll taxes, on their profits from managing other people’s money. That’s less than what middle-class families pay just in payroll taxes on their wages—let alone what they pay in income taxes. An important part of President Obama’s deficit reduction plan unveiled yesterday is closing the carried interest loophole.

The upshot: AP’s “fact check” misses the point of the Buffett rule. The point is not to ensure that rich people on average pay higher taxes than middle-class people on average. Of course they do, and of course they should! The point is to ensure that all households with incomes above $1 million pay at least what middle-class families are paying.

How many millionaires would be subject to the Buffett rule? An exact estimate isn’t publicly available. But judging by the complaining from certain quarters, it might be a lot.

Seth Hanlon is Director of Fiscal Reform at the Doing What Works project at the Center for American Progress.