From the President down to the water cooler, we hear that Warren Buffet pays a lower tax rate than his secretary. That is simply untrue.
The fallacious statement is based on the assumption that his secretary pays about 25% of her income in FICA and income taxes while Buffet pays a 15% rate on capital gains and qualified dividends. It sounds terribly unfair, but it ignores the double taxation of investment income.
The claim that investors are taxed at lower rates than wage earners is built on the fiction that a corporation exists independently from its investors. It does not, a corporation is just a group of people acting together to conduct a business. This artificial division between the corporation as an entity and its shareholders allows government to take two bites at the same profit apple.
What Buffet really pays, as a part owner of those businesses, is his share of the corporate tax rate of up to 35% plus 15% of what’s left. Shareholders in a business are partial owners and receive a share of the profits.
If Buffet’s share of the profits of a business in which he is a shareholder is $100, 35% of that $100 goes to corporate taxes before he gets his dividend of $65. He then pays 15% tax on that $65, or $9.75, leaving him with $55.25 of his original $100 share in the profits. In some cases, ‘Green energy’ tax credits and such reduce the corporate tax rate but the principle still applies. Dividends are what’s left after corporate taxes are taken.
If secretaries were paying that kind of tax rate, we would have riots in the streets.