An Explanation as to Why the Wealthy May Pay Tax at Lower Rates

Michael Mundaca

Michael Mundaca

As co-leader of the National Tax Department at Ernst & Young in Washington, DC, Michael Mundaca builds on experience gained as assistant secretary for tax policy at the U.S. Treasury Department. On the Freakonomics blog in 2010, when Mr. Mundaca was the tax policy assistant secretary, as part of an article titled “Your Tax Questions, Asked and Answered,” he responded to a query as to whether Warren Buffett could pay “a lower tax rate than his secretary.”

Noting that he was not aware of the specific tax circumstances of Warren Buffett or his secretary, Mr. Mundaca posited that this was certainly possible under the (then current) tax law. Although wages may be subject to a 35 percent maximum marginal tax rate, long-term capital gains as well as dividends were at that time subject to a maximum 15 percent marginal tax rate.

That can lead to situations in which an individual with long-term capital gains could have paid 15 percent or less on that income; at the same time, an wage earner with significantly lower income might have paid taxes at a rate well in excess of 15 percent. Another factor in play was the exemption of investment income from payroll taxes, which can additionally decrease the tax burden on those with significant income from investments.