How Buffett's Plan Cuts Taxes for Some of the Wealthy

Over the past few months, as President Obama and congressional Republicans have battled over taxes, spending cuts and the deficit, billionaire Warren Buffett has repeatedly been cited -- both as a prime example of the country's unbalanced tax code and as the author of one of its most progressive tax proposals. Among tax reduction proponents, his name has become somewhat anathema, but Buffett's plan -- which he discussed on CNBC's Squawk Box last week -- is hardly radical.

In fact, it could potentially cut taxes for many high-income households.

Under Buffett's plan, households that make $1 million or more per year would pay an overall tax rate of 30%, and families that make $10 million or more would pay 35%. These tax rates are significantly lower than the current levels: In the 2011 tax schedule, the 33% tax rate kicks in at $174,401 and the 35% bracket starts at $379,151. In other words, people who bring home $1 million or more per year are already supposed to pay 35%, so Buffett's proposed 30% rate would be a 5% cut.

But actually, the cuts are even deeper: On Squawk Box, Buffett claimed that the tax rates he was proposing would include payroll taxes. Normally, these taxes -- which are about 1.4% of income for the wealthiest earners -- are added to regular income taxes, so an executive with a $1 million salary pays 36.4% of his salary in taxes. Under Buffett's plan, however, that executive would pay just 30% -- a tax cut of 6.4%, or $64,000.

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So why is Buffett's plan so widely criticized by Republican policymakers? According to Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, the problem is that there are actually two very different types of high-income people -- those who are salaried, and those who make their money through investments. The first group already pays the full 35% income tax rate. The second group, on the other hand, pays most of their taxes at the steeply discounted 15% rate now charged on dividends and capital gains.

Buffett himself fits into the second group: In 2010, he made most of his money through investments, and paid income taxes of just 17.4%. By comparison, the 20 employees in his office -- who derived most of their income from their salaries -- paid taxes at rates ranging from 33% and 41%. Under his proposal, Buffett's rate would increase to 35%, more than doubling his taxes and putting his payout to the IRS more in line with those of his employees.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.