-- President Obama's claim that he pays a lower tax rate than a teacher making $50,000 a year isn't true. A single taxpayer with $50,000 of income would have paid 11.9% in federal income taxes for 2010, while the Obamas paid more than twice that rate — 25.3% (and higher rates than that in 2009 and 2008). And if the $50,000-a-year teacher were in Obama's tax situation — supporting a spouse and two children — he or she would have paid no federal income taxes at all.
The outcome is the same whether we count payroll taxes or not, and even if we look at what the $50,000 earner will pay on 2011 income. Whatever the assumption, the rates Obama paid were higher — and usually much higher.
The president was on safer ground when he stuck to talking about billionaire investor Warren Buffett, who wrote in a much-quoted Aug. 14 New York Times opinion piece — headlined "Stop Coddling the Super-Rich" - that he paid a lower effective tax rate than any of the 20 other people who work in his office. That may well be true, though we have no access to Buffett's tax returns or those of his employees.
But the president went too far when he started using his own tax rate to make the argument that "millionaires and billionaires" should pay higher taxes.
On Sept. 26, Obama said at a Democratic National Committee event in West Hollywood, Calif.:
Obama, Sept. 26: "I shouldn't be paying a lower effective rate than a teacher, or a firefighter, or a construction worker. And they sure shouldn't be paying a higher tax rate than somebody pulling in $50 million a year. It's not fair, and it's not right. And it's got to change."
And earlier, at a town hall meeting in Mountain View, Calif., Obama said:
Obama, Sept. 26: "Somebody who's making $50,000 a year as a teacher shouldn't be paying a higher effective tax rate than somebody like myself or Jeff (Weiner, CEO of LinkedIn), who've been incredibly blessed."
When we asked the White House about this, spokesman Matthew Vogel said: "The president was not offering a literal comparison of his personal tax rate. … He doesn't say, 'I pay a lower tax rate than my secretary' or anyone else."
We disagree. The president said: "Somebody who's making $50,000 a year as a teacher shouldn't be paying a higher effective tax rate than somebody like myself." And in our judgment, that's as "literal" as any comparison gets. Readers may interpret the president's words as they please. The fact is, Obama pays higher rates than the $50,000-a-year teacher he mentioned.
Obama has released his returns for 2008, 2009 and 2010. What they show is that he made millions, mostly from the sale of two best-selling books, and he paid millions in federal income taxes. His federal income tax rates for those years were 31.3%, 31.9% and 25.3%, respectively. And those are all higher than rates paid by anybody making $50,000 a year, whether they are a teacher or "a firefighter, or a construction worker."
A family like the Obamas — with two children under age 17 — would actually have received a $37 tax refund in 2010 on income of $50,000, thanks largely to the $1,000 per child tax credit and Obama's $800 "Making Work Pay" tax credit. Those are our calculations, which we confirmed with Nick Kasprak, an analyst at the Tax Foundation.
A childless couple making $50,000 would have paid more — but still only a rate of 6.1%, assuming only the standard exemptions and deductions. And a single taxpayer would have paid 11.9%, still far short of the Obama's effective federal income tax rate.
It's the same even if we include federal payroll taxes. We calculated that Obama's overall rates — including payroll taxes — would be 31.8% in 2008, 32.2% in 2009 and 26.5% in 2010. For Obama's $50,000-a-year teacher, the equivalent rate in 2010 would have been 25.3% if single and without children, 19.9% if married without children, and 14.1% if married with two children under age 17.
Any way we figure it, the $50,000-a-year teacher (or firefighter, or construction worker) paid a lower rate than Obama last year. What's more, the teacher will pay an even lower overall rate on this year's income. The "Making Work Pay" credit has expired, which will push up the effective income tax rate a bit (though still nothing close to Obama's). But that loss is more than offset by this year's "payroll tax holiday," which has cut the worker portion of Social Security taxes by 2 percentage points — which is worth $1,000 to workers (including teachers) making $50,000.
We don't deny that there's some truth in the general point Obama and Buffett make about "millionaires and billionaires" sometimes paying lower tax rates than ordinary, middle-income workers. But stress the word "sometimes." Very wealthy people often take some or all of their income in the form of dividends and profits on capital gains, which are taxed at lower rates than ordinary income. It's also the case that Social Security taxes fall only on wage and salary income, and only up to a limit that is currently $106,800. So our $50,000 teacher pays Social Security taxes on every dollar of income, while those same payroll taxes fall only on a relatively small portion of the earnings of somebody making $1 million.
Nevertheless, the president pursued his applause line well beyond the boundaries of truth when he started claiming (or if you prefer, insinuating) that he himself pays a lower rate than a middle-income teacher. He doesn't.
Memo to tax wonks: Our methodology is as follows:
• We calculated Obama's federal income tax rate for each year by dividing the amount on line 60 of his form 1040 ("total tax") by the amount on line 22 ("total income").
• We calculated Obama's Social Security taxes on the assumption that he and his employer (the U.S. government) each paid the required 6.2% on his Senate and White House pay up to the maximum for taxable wages, which was $102,000 in 2008 and $106,800 for 2009 and 2010.
• Since there is no limit on the amount of taxable wages for Medicare taxes, we assumed that both Obama and his employer each paid the 1.45% rate on every dollar he reported on line 7 of his Form 1040 ("Wages, salaries, tips" from Form W-2).
• In all cases, when calculating combined payroll and income tax rates, we have followed the same method used by Buffett in his New York Times piece (and in general by economists and tax analysts as well). That is, we have counted the employer-paid portion of both Social Security and Medicare taxes as though they were paid by the worker, and we have also added those amounts to the worker's income when calculating the overall rate. This is based on the economic theory that employers see the taxes as a part of total compensation, and that they would pay it as salary if the worker paid that half of the tax instead. (Although this also happens to be the method most favorable to Obama, the results still disprove his claim.)
• For our hypothetical $50,000 earner, we calculated 2010 federal income tax liabilities using the 2010 "Tax Calculator" on the H&R Block website. Those calculations agree with the independent calculations of analyst Kasprak at the Tax Foundation. We used the Tax Foundation's "2011 Marginal Rates Calculator" for 2011 figures.