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Warren Buffett frequently complains that he pays less tax as a percentage of his income than his secretary.

I was wondering, with my modest knowledge of U.S. tax system, how is this possible?

I could come up with one scenario, but not sure if it is likely. Maybe he pays his secretary (not an average secretary...) a lot of money so he/she hits higher tax brackets, while most of Buffett's income is capital gains or some other income type where tax rate is lower.

Any other ideas/thoughts on this topic?

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The scenario you mention regarding capital gains is pretty much the core of the issue. Here's a run-down from PolitiFact.com that explains it a bit. It's important to focus on it being the tax rate, not the tax amount (which I think you get, but I want to reinforce that for other readers).

Basically, most of Buffett's income comes from capital gains and dividends, income from investments he makes with the money he already has. Income earned by buying and selling stocks or from stock dividends is generally taxed at 15 percent, the rate for long-term capital gains and qualified dividends.

Buffett also mentioned that some of the "mega-rich" are hedge fund managers "who earn billions from our daily labors but are allowed to classify our income as 'carried interest,' thereby getting a bargain 15 percent tax rate."

We don't know the taxes paid by Buffett's secretary, who was mentioned by Obama but not by Buffett. Buffet's secretary would have to make a high salary, or else typical deductions (such as the child tax credit) would offset taxes owed. Let's say the secretary is a particularly well-compensated executive assistant, making adjusted income more than $83,600 in income. (Yes, that sounds like a lot to us, too, but remember: We're talking about the secretary to one of the richest people in the world.) In that case, marginal tax rates of 28 percent would apply. Then, there would be payroll taxes of 6.25 percent on the first $106,800, money that goes to Social Security, and another 1.45 percent on all income, which goes to Medicare. The secretary’s overall tax rate would be lower than 28 percent, since not all the income would be taxed at that rate, only the income above $83,600.

Buffett, meanwhile, would pay very little, if anything, in payroll taxes. In the New York Times op-ed, Buffett said he paid 17.4 percent in taxes. Thinking of the secretary, it gets a little complicated, given how the tax brackets work, but basically, people who make between $100,000 and $200,000 are paying around 20 percent in federal taxes, including payroll and income taxes, according to an analysis from the nonpartisan Tax Policy Center.

So in this case, the secretary's rate is higher because so much of Buffett's income comes from investments and is taxed at the lower capital gains rate.

Here's Buffet's original Op-Ed in the NYT for those of you that aren't familiar.

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    The lack of mention of corporate income tax on capital gains and dividends is conspicuous. – chrylis Nov 22 '16 at 4:32
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    Buffet's claim is a good example of lying by telling selective truths. Suppose Buffet and his secretary both have earned income (his salary from Berkshire Hathaway) and capital gains. Buffet probably pays somewhere between 25-39.6% on his income, his secretary maybe 15%. Then he pays 20% on his capital gains, but the secretary probably pays 0%. For both classes of income, the secretary pays a lower rate. It's just that the secretary probably doesn't have nearly as much GG income as Buffet does. – jamesqf Nov 22 '16 at 4:37
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    @jamesqf But the fact that he earns so much more proportionately from capital gains- which is taxed lower overall- is pretty much his point. I don't think anyone interprets his claim to mean "I have a bizarrely low income tax rate" – Ben Aaronson Nov 22 '16 at 9:07
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    @jamesqf So here's the thing - Buffet's entire point is that the very rich tend to earn most of their money by capital gains. The not so rich, well they tend to get their money through earned income. Given that what people care about at the end of the day is their total amount of tax and total amount of income, Buffet's is the right comparison. Yours is not. – Joel Nov 22 '16 at 10:26
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    @jamesqf: No offense, but your comment seems more an example of lying by telling selective truths. The claim being made is about the overall tax rate on all income. The fact that you can split it up into two pairs of rates doesn't change the fact that the overall rate is lower. – BrenBarn Nov 22 '16 at 19:54

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