Warren Buffet says that he pays less income taxes by percentage of income than his secretary. He wants an income tax surcharge of about 5% created for persons earning over $1 million in a year, and he wants to apply it to earnings and investment income such as qualified dividends and long term capital gains currently taxed at just 15% regardless of the taxpayer's modified adjusted gross income (MAGI - this is the actual bottomline upon which the tax table is applied, after all deductions and credits).
Pundits and politicians have been going bonkers over this.
Let's make sure this is in proper perspective. If a nuerosurgeon's MAGI is $1,000,000 a year, all from her medical practice, she pays 35% on all of this income above about $380,000. So she pays $320,00 in federal tax. That is an actual tax rate of 32%.
Oh, and if she lives in Kentucky, she pays 6% state tax and about 2.5% local taxes, another $95,000. Oh, and she pays social security and medicare tax, another 10.4% for SSA (she's self employed) up to $106,800 and 2.9% for Medicare, total $25,600.
So, altogether she pays $440,600 is taxes, not counting property taxes, sales taxes, auto taxes, insurance taxes, airline taxes, alcohol taxes, cigarette taxes, gas taxes, and various other taxes, some voluntary and some not.
Now, our neurosurgeon earning $1 million this year, pays 44% in taxes. Her income is definitely among the very highest in the country.
Let's say that she also earned another $500,000 in dividend and long term capital gains. The proposal is that this money be taxed at 15%, plus Buffett's extra 5%, or 20% total. The same rate that applied to everyone before the Bush tax cuts in 2003. Big deal!
My point is that high earners do pay a great deal in taxes. But Buffett's proposal doesn't even return the tax code the rates that applied in 2002. This is not the big deal people are making it out to be.
Guess what the highest tax rate was in 1980? 70% for all earnings over $215,000. Sounds high? In 1960, it was 91% on all earnings over $400,000.