Nick Bilotto – 11/2/07

This page was last updated on November 4, 2007.

Look at income, not just taxes; Nick Bilotto; Beaver County Times; November 2, 2007.

Below is a detailed critique of the subject letter.

“Letter writer Jennifer Chinchilla (‘Don’t overtax the rich,’ Tuesday) quoted some very accurate but very misleading statistics.

· One percent pays 39 percent. True, but they get more than 50 percent of income.

· Five percent pays 60 percent, but they get more than 75 percent of income.”

[RWC] I’m not sure where Mr. Bilotto got his data, but it appears to be at odds with IRS data as reported by the Tax Foundation (TF) at http://www.taxfoundation.org/taxdata/show/250.html. The TF reports the top 1% and 5% account for 21.2% and 35.75% of income (AGI), respectively. Therefore, as reported before, these groups pay more than their fair share of federal income taxes.

· Additionally, the statistics are only for 1040 IRS income filings; they do not include Social Security wage taxes where 70 percent of the wage earners who earn less than half of all income pay the bulk of the FICA tax.”

[RWC] Though I’m not sure exactly what stat Mr. Bilotto is trying to quote, it’s safe to say he’s asserting most of Socialist Security taxes are paid by the bottom 50% of income earners. Given the accuracy of the other “facts” cited by Mr. Bilotto, I have no reason to believe this statistic is any better. In any case, the income and Socialist Security taxes aren’t directly comparable. Income taxes go into the general fund and can be spent on anything. Socialist Security taxes are supposed to be spent only on predefined SS benefits based on how much an individual taxpayer paid during his working life. In other words, up to a point, the more SS taxes you pay, the more benefits you should receive when you retire. In practice, though, that’s not exactly how it works. Here’s a quote from the SS Administration website with respect to benefits: “The formula results in benefits that replace about 42 percent of earnings for people who had average earnings during their working years. The percentage is lower for people in the upper income brackets and higher for people with low incomes. That’s because the Social Security benefits formula is weighted in favor of low-income workers who have less opportunity to save and invest during their working years.” Therefore, despite Mr. Bilotto’s “fact,” the SSA concedes high-income workers subsidize benefits for low-income workers.

“I look to people like Bill Gates and Warren Buffet [sic] for my guidance on taxing the rich.

“Both are against the repeal of the estate taxes.”

[RWC] While it’s true the Buffetts and Gates are “believers” in the death tax, Mr. Bilotto failed to note the Buffetts and Gates are doing everything they can to make sure they leave as little as possible subject to the death tax. As they’ve stated repeatedly, the amount of their wealth they plan to bequeath to their heirs – and thus subject to the death tax – is very small or nonexistent. As a result, they are placing the vast majority of their fortunes into charitable trusts immune from the death tax. In reality, the Buffetts and Gates support a tax that will have minimal impact on their heirs.

“The other night, Warren Buffet [sic], the third richest man in the world, was on TV saying how little he was taxed. He ran a survey with employees at the company he heads. He said without any tax shelters or accountants and lawyers to figure his taxes, he paid 17.1 percent of his income in taxes. Receptionists and secretaries who participated in the survey were paying more than 25 percent of their income.”

[RWC] Assuming Mr. Bilotto reported the correct figure (25%), it appears Mr. Buffett is changing his numbers. Earlier this year at a Hillary Clinton fundraiser, Mr. Buffett asserted the average income tax paid by this group was 33% and went as high as 39.7%. As I wrote in a comment in a previous thread, the claim made no sense for at least two reasons. First, to reach the marginal tax rate of 33%, depending on your filing status you have to have taxable income of at least $97,925 to $195,850 for the 2007 tax year, and that rate’s only on the portion of income above $97,925 to $195,850. Income below that is taxed at lower rates. Does Mr. Buffett pay “secretaries and other office personnel” on average in excess of $97,925 to $195,850/year? Second, the top marginal rate is 35% (in excess of $174,850 to $347,900 depending on filing status), so where did the 39.7% come from?

However, even the 25% tax rate figure for Mr. Buffett’s “receptionists and secretaries” is doubtful according to the IRS/TF data. As reported by the TF, the average tax rate of the top 1%, 5%, 10%, 25%, and 50% income earners is 23%, 21%, 19%, 16%, and 14%, respectively. The average tax rate for the bottom 50% is only 3%. If the max average tax rate for any income group is “only” 23% and that’s at the high end of the income scale, it seems unlikely the rate for Mr. Buffett’s “receptionists and secretaries” is more than 25%.

“He has offered $1 million to anyone on the Forbes 100 richest Americans who can prove their total tax rate is higher than their secretaries.

“So far, no takers.

“I, too, do not want to overtax the rich. However, let’s put all the facts on the table before making decisions.”

[RWC] I agree with putting the facts on the table, but they need to be correct, Mr. Bilotto.