Warren Buffett, Taxes, FICA and Social Security
By Edward Zelinsky
Warren Buffett has again called on Congress to raise federal taxes on affluent taxpayers. In an opinion piece in the New York Times, Mr. Buffett urged Congress to increase federal taxes on taxpayers with annual incomes greater than $1,000,000. As he has in the past, Mr. Buffett contrasted his effective tax rate with the taxes paid by the other employees in Berkshire Hathaway’s Omaha headquarters.
Unsurprisingly, Mr. Buffett’s most recent comments have provoked much commentary. President Obama endorsed Mr. Buffett’s call for higher taxes on more prosperous Americans. Critics disagreeing with Mr. Buffett argued that higher tax rates, if implemented, would in practice increase taxes for many persons earning substantially less than $1,000,000 annually. Others argued that Mr. Buffett, if he feels he is undertaxed, can always make a voluntary payment to the US Treasury.
So far, both those supporting and those opposing Mr. Buffett’s call for higher federal taxes have ignored the role played by FICA taxes in Mr. Buffett’s calculations. The key passage of Mr. Buffett’s editorial reads as follows:
Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
Thus, FICA taxes play a critical role in Mr. Buffett’s calculations. Mr. Buffett did not compare his effective federal income tax rate with his employees’ federal income tax rates. Rather, he compared relative tax burdens by combining federal income, Social Security and Medicare taxes, including the Social Security and Medicare taxes paid by Berkshire Hathaway as the employer for each employee.
As they say, the answer you get depends upon the question you ask. Suppose that Mr. Buffett had contrasted his income taxes with the income taxes paid by everyone else at the Berkshire-Hathaway headquarters in 2010. The resulting numbers tell a different story.
Consider, for example, an unmarried administrative assistant who, in 2010, earned $50,000 working for Berkshire Hathaway. For ease of calculation, let us assume that this individual had no dependents and no itemized deductions. After deducting the personal exemption and the standard deduction, this individual paid federal income taxes of $6,344 on taxable income of $40,650 for an effective income tax burden of 16%.
Mr. Buffett’s calculations show a much higher tax burden on this employee because Mr. Buffett added to the employee’s federal income taxes the FICA taxes paid both by Berkshire Hathaway and by this employee. Those employer/employee FICA taxes in 2010 came to an additional $7,650, far more than the federal income tax this individual paid.
FICA taxes, which are a nuisance for Mr. Buffett, are a serious burden for this administrative assistant. For this individual, the combined federal tax burden including employer and employee FICA payments came to almost $14,000, 34% of his taxable income.
At this point in the discussion, many supporters of the Social Security system would say that Mr. Buffett, by aggregating FICA and income taxes, lumped together apples and oranges. Income taxes and FICA taxes, the argument goes, are not the same and should not be combined because FICA taxes purchase retirement, death, disability and health care benefits. The characterization of FICA taxes as purchasing Social Security and Medicare benefits bolsters the argument that these entitlement programs should remain untouched as we confront other federal expenditures.
A famous story about Franklin Roosevelt illustrates this point: A supporter of the New Deal complained to FDR that the FICA tax is imposed at a flat rate on the worker’s first dollar earned. FDR defended the design of the FICA tax since no “damn politician” could in the future tamper with Social Security benefits because the FICA tax makes wage earners feel that they have, by their tax contribution, earned promised benefits.
Ironically, today’s conservatives implicitly embrace FDR’s logic when they decry that half of all Americans pay no income taxes. For these conservatives, it is no answer that many of these Americans pay FICA taxes on their first dollar earned. FICA taxes and income taxes, they suggest, are different.
As a transplanted Omahan, I am a Warren Buffett fan. Through his activity for the Giving Pledge and his personal contributions to the Gates Foundation, he has supported his principles with his money. I welcome Mr. Buffett’s contribution to our pressing national debate about the federal fisc. As part of that contribution, I urge Mr. Buffett to publish a comparison of his federal income taxes (sans FICA payroll taxes) with his employees’ federal income taxes and to clarify where he stands on the question of entitlement spending.
At the end of the day, I think that Mr. Buffett has done the country a service by his remarks and is correct to include the FICA tax burden of his employees in making his comparison of different effective tax rates. Liberals and conservatives alike need to be more forthcoming about the FICA burden on lower income individuals. It will be necessary to make politically painful changes to Social Security and Medicare to control federal spending. As part of a package which includes reductions to entitlement and defense spending, higher income Americans should pay higher taxes, hopefully in a fashion designed to minimize the economic inefficiencies inevitably caused by higher tax rates. However, additional taxes from affluent Americans, by themselves, will not solve the nation’s deficit problem.
As the joint select committee on deficit reduction begins its work, the Oracle of Omaha should weigh in further on these issues.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears here.