Warren Buffett has recently called on congress to raise the taxes of people earning more than $1,00,000.  He argues that since most of his income is derived from dividends rather than wages he pays a lower rate of about 15% vs ordinary americans who he says pay between 15 to 25% plus heavy payroll taxes to boot.

Since that time I have heard many argue that Mr. Buffett is unique since there are many people earning $1,000,000 + who derive their income through wages or self-employment income.  I wondered if Mr. Buffet's assertions about himself and ordinary americans is really true so I did some quick math and found the results to be quite interesting.

One first must realize that wages or dividends must come from corporate earnings.  What does it look like as money flows from these corporate earnings to a hypothetical secretary or to a hypothetical billionaire?

For my secretary, I assumed that she earns $50,000, is single, and does not itemize her tax return.  This keeps the math simple and maximizes the tax that she would owe.

Benjamin Franklin

On the Price of Corn and Management of the Poor, 1776

To Messiuers the Public and Co.

I am one of that class of people that feeds you all, and at present is abus’d by you all; in short I am a Farmer.

By your News-papers we are told, that God had sent a very short harvest to some other countries of Europe. I thought this might be in favour to Old England; and that now we should get a good price for our grain, which would bring in millions among us, and make us flow in money, that to be sure is scarce enough.

But the wisdom of Government forbad the exportation.