Last month, billionaire investor Warren Buffett complained that he didn't pay enough taxes. President Obama responded by proposing the "Buffett Rule." He wants to put a tax rate floor on Americans who earn more than one million dollars. "Warren Buffett's secretary shouldn't pay a higher tax rate than Warren Buffett," said the President. Of course, this assumes that Buffett is the rule and not the exception. What are the effective tax rates for different income groups? Do the wealthy really pay taxes at a relatively lower rate?
We can answer this question easily enough by looking at the numbers. Here's a chart I constructed from IRS data from 2009. It shows the average effective tax rate for various income ranges, which is easily derived by dividing the amount of taxes paid by each group by the adjusted gross income they earned:*
This is a pretty interesting chart for a few reasons. For starters, it dismisses the theory that wealthier Americans generally pay a lower tax rate than middle- or lower-class Americans. The rate increases pretty consistently all the way up through those who earned up to $5 million per year. Then, it bends back a little, presumably because the ultra-wealthy do have more capital gains income, like Mr. Buffett.
But this chart shows something else: the groups who earn $500,000 per year or more pay much higher effective tax rates than those who have lower incomes. The groups below $200,000 per year all average less than 18% effective tax rates. The groups above $500,000 all average at least 27%.
Of course, the data above shows groups -- not individuals. Within those groups there are some people who pay more or less taxes than others. So there are certainly some millionaires who pay little to nothing in taxes and others that pay something closer to their marginal rate. Likewise, in the lower-income segments, some pay less and other pay more.
But the chart above provides a pretty good idea of what the groups, as a whole, pay. From the chart, the U.S. tax system does look progressive. That isn't to say that it shouldn't be more progressive, but that's a question of political preference.
* Update: Some people have complained about my using Adjusted Gross Income instead of Gross Income. That's a valid criticism. I actually would have preferred to use Gross Income, but that data was not available for 2009 -- and 2008 was just a weird year. I also like 2009 because it should include relatively plentiful capital gains, which was the major tax code criticism levied by Buffett in his original op-ed. This chart is not meant to be exact, but an approximation. Actual effective tax rates might be a little bit lower, but I find it hard to believe that using gross income would change the picture dramatically, where the rich fall below the low- and middle-classes. AGI still accounts for the vast majority of the picture, so the point remains the same, particularly if it's lower capital gains taxes that we're worried about.