Tax Problems With The Buffet Rule

Barack and Michelle Obama's 2011 federal tax returns have now been released, and, not surprisingly, the event has been utilized by the White House to put forth illogical and disingenuous positions regarding the "unfairness" of the federal income tax system.  One item that garnered much press was a statement from White House spokeswoman Amy Brundage, who told ABC News that President Obama's secretary, Anita Decker Breckenridge, "pays a slightly higher rate [than the Obamas' rate] this year on her substantially lower income, which is exactly why we need to reform our tax code and ask the wealthiest to pay their fair share."

What is truly unfair is that Ms. Brundage, in verbalizing her (and the Obama administration's) desire to "reform our tax code and ask the wealthiest to pay their fair share," totally ignores the fact that nearly 50% of all federal tax return filers pay no federal income tax whatsoever.  Liberals will respond that many more filers pay "payroll taxes", but in actuality "payroll taxes" is a euphemism for Social Security and Medicare taxes.  These are not federal income taxes, but rather are taxing mechanisms used to fund specific entitlement programs.  So, in the name of "fairness," the Obama administration wants taxpayers who already pay the vast majority of federal income taxes to pay more, while nothing is being sought from those who currently pay no federal income taxes at all.  Incredible.   

But it gets worse.  A closer look at the Obamas' income tax return reveals that Brundage's comment is stunningly and deliberately misleading.
What has been reported (and relied upon by Ms. Brundage in making her statement) is that the First Couple's effective federal income tax rate in 2011 was 20.5% of their adjusted gross income of $789,674.  No further information on Ms. Breckenridge's tax situation is available, other than the fact that she is paid $95,000 per year and that her effective federal income tax rate is slightly higher than that of the First Couple.  If it is assumed that her "slightly higher" tax rate is 21%, then she paid under $20,000 in federal income taxes in 2011.  The Obamas paid over $162,000 in federal income taxes, or over eight times as much as Ms. Breckenridge paid.  Yet the White House is spinning the fact that somehow the Obamas did not pay their "fair share."  You can't make this stuff up.
As is well-known, federal income tax rates are progressive.  The higher the taxable income, the higher the percentage of taxable income paid in federal income taxes.  With this in mind, what sticks in the craw of Ms. Brundage and her ilk is the fact that the "wealthy" Obamas have nearly the same effective federal income tax rate as President Obama's much lower-paid secretary (notwithstanding the fact that, as noted above, the Obamas paid eight times more in federal income taxes in 2011 than Ms. Breckenridge paid).
How is it, then, in light of our progressive federal tax system, that the Obamas and Ms. Breckenridge have nearly the same effective federal income tax rate (as a percent of adjusted gross income)?  There are a number of reasons for this, but by far the single biggest reason has to do with the deductibility of qualified charitable donations from federal taxable income.  To their credit, the Obamas contributed over $172,000 to qualified charities in 2011.  While this is an entirely positive and worthwhile act on the part of the Obamas, the deduction of this amount for federal income tax purposes lowered their federal income taxes by roughly $60,000 (or 7.6% of adjusted gross income).
Apparently, in the mind of Ms. Brundage, we would all be better off if the Obamas kept the $172,000 in their pockets and paid $60,000 more in federal income taxes, because then their effective federal income tax rate would be 28.1% of adjusted gross income, and hence it would be more "fair."  But I wonder if the Fisher House Foundation would agree with Ms. Brundage.  This foundation received an $117,130 donation from the Obamas in 2011.  According to its website, "Fisher House Foundation donates 'comfort homes,' built on the grounds of major military and VA medical centers. These homes enable family members to be close to a loved one at the most stressful times - during the hospitalization for an unexpected illness, disease, or injury."  Evidently, Ms. Brundage believes that it is better social policy to put the Obamas' $60,000 into the coffers of the federal government (universally known for its effectiveness and efficiency) rather than allow the First Couple to contribute $172,000 to the Fisher House Foundation.  Ms. Brundage and the White House are breathtakingly wrong.     
Moreover, if Ms. Brundage and the Obama administration get their wish and some sort of "Buffett Rule" is enacted (providing for a 30% minimum federal income tax), "wealthy" taxpayers will lose their ability to deduct charitable contributions from taxable income for federal tax purposes.  This could drive their effective federal income tax rate below 30%!  The horror!   In actuality, the imposition of a "Buffett Rule" will have a devastating impact on the charitable organizations that provide so many services to poor and disabled Americans.
The level of ignorance and demagoguery emanating out of the Obama White House relating to federal income tax issues is staggering and appalling.