Why Warren Buffett doesn't pay less in taxes than his secretary

Last night, for the seemingly millionth time, President Obama said that Warren Buffett's secretary paid more in taxes last year than Buffett, himself. Obama is comparing apples and oranges, and it's not a fair comparison. I was going to write my own comparison, but I found one that explains it perfectly:

Buffett is comparing two different taxes. One is a tax on income, one is a tax on investments. They are two different taxes on two different things. Warren Buffett has already been taxed on that money. Here’s an oversimplification to explain what I mean.

You earn $100 in salary.

TAX #1: Uncle Sam takes $35, leaving you with $65.

You then invest that $65, and that investment earns 10% or $6.50.

TAX #2: Of that new $6.50, Uncle Sam takes another $1.

Now, add up the earnings: the original $100 + $6.50 = $106.50.

And, add up the taxes: $35 + $1 = $36.

On $106.50 in earnings, you were taxed $36, or 33.8%,– about double the rate Warren Buffet claims he’s paying.  This gets more complicated with margin, outside investment, and a million other variables, but this how it works in general.  (Dividends are worse: you get taxed on initial income, the company gets taxed on their profits, then when they give you a slice, it gets taxed again.)

So, how does Buffett justify his low tax numbers? He acts as if TAX #1 never occurred. Then he tells you that the rate of TAX #2 is too low. It’s a completely disingenuous shell game.


There are also other variables involved, like how Buffett's secretary likely paid a much lower tax rate for her income bracket after deductions and other factors.

I was shocked to see Obama try to use this example to his advantage last night. The article I quoted was written over 3 months ago. This is an old argument that's been disproven over and over again, and yet he still gets away with it because most people simply haven't looked up the facts for themselves.