Winston Churchill Quote

"It has been said that democracy is the worst form of government except all the others that have been tried"
- Winston Churchill

Our American experiment in political economy is not perfect. Nor will it ever become perfect. No matter your views, your participation in this system is irrelevant if you don't do so through one of the two major political parties. If you feel disenfranchised and cynical towards modern day politics the only way to change that feeling will be to engage yourself within one of the parties and advocate for candidates you respect and the platform you believe in. Thanks for checking out the blog, I hope it makes you think.

Monday, August 29, 2011

Warren Buffett's remarkably low tax rate

Can you believe that Warren Buffett, one of America’s richest men, pays personal income tax at a rate of only 17.4%?  His rate is lower than his secretary’s!  The federal government must be “coddling the super-rich”, as Buffett claims in a recent op-ed in the New York Times and this preferential treatment for the nation’s wealthiest taxpayers is obviously bankrupting America.

But hold on a just a minute, Warren

I’ve had friends cite this article a few different times in the past week, and Buffett has been begging congress to tax him and his well-to-do friends at a higher rate for years.  At the surface, the fact that Buffett and his peers pay federal income tax at lower rates than the country’s struggling middle class is disgusting.  But a closer examination of Buffett’s specific tax situation seems to beg the question of why he left some very pertinent facts out of his Gray Lady editorial.  Buffett explains that his tax rate is lower than many income earners because his primary sources of income are dividends and capital gains from his stock holdings.  These are taxed at a maximum rate of 15% as opposed to a top rate of 35% for ordinary income.  Buffet’s immense wealth is a result of his extraordinarily successful value investing strategy via the vehicle of Berkshire Hathaway, the holding company that he took control of circa 1962 and which he has built into a $170 billion conglomerate.  The primary omission in Buffett’s op-ed is that his income comes after the IRS has already collected corporate taxes from the companies he owns.

A more realistic estimate of his taxes?

According to his most recent filing with the SEC, Buffett owns a 22.27% share of the economic interests of Berkshire.  In 2010, the company made very respectable before tax profits of $19.051 billion and paid $5.607 billion in taxes, an average rate of 29.43%.  Attributing 22.27% of the tax bill to Buffett leaves him with a hefty contribution to Uncle Sam of approximately $1.25 billion.  In his editorial, Buffett states that he paid $6,938,744 in income and payroll taxes which means his taxable income was just under $40 million given his 17.4% tax rate.  That number pales in comparison with the taxes paid to the IRS by Berkshire on his behalf (again, $1.25 Billion!).  It would not be correct to use the Berkshire tax dollar amount to create a better estimate of Buffett’s tax rate since the vast majority of his capital gains from holding Berkshire are unrealized and not yet taxable.  But using the tax rate Berkshire paid on Buffett’s share of the profits and combining it with his personal tax rate, I estimate his personal tax rate at 41.71%[1].  This is a much more accurate estimate of the rate Buffett actually paid in taxes than the paltry 17.4% he claims in his op-ed.

Get that wool outta my face, Oracle

Warren Buffett is without a doubt one of the savviest investors ever and is unquestionably brilliant.  This may leave you stumped as to why he makes no mention of his significant share of corporate taxes in his NYT editorial.  The optimistic answer is that he believes that corporate taxes paid on behalf of the shares he owns are irrelevant in the discussion of his personal tax bill and don’t need to be included in the discussion.  The pessimistic and frankly much more realistic choice is that his stance on the issue is purely demagogic and serves his personal political agenda.  He is using his position as a respected investor and true American success story to pull one over on the American people.  From what I’ve observed it’s a strategy that’s working quite effectively on the intelligentsia that worships at the shrine of the New York Times’ editorial pages. 
But why would such a pleasant old man want to trick us?

Buffett has built his immense wealth over a 50+ year career of smart investing and sound business decisions.  He has more money than he will ever need and has pledged to give the overwhelming majority of it to charity (an action that should absolutely be applauded and which has become an American tradition which has stretched from Carnegie, Mellon, and Rockefeller to Gates and Buffet among many others).  He has no need for more money and no incentive to work except for work itself – again this should not be confused as a negative).  Personally I’m not sure why Buffett has chosen not to give the whole truth in his argument for higher taxes, but it could be that it just makes him feel better.  I don’t think he’s a socialist, but maybe those crazies on Fox News aren’t quite as wrong as Jon Stuart would like them to be.

A moral to the story

If Warren Buffett truly believes that a higher portion of wealthy American’s money ought to be allocated to balancing the federal budget, he should put his money where his mouth is.  Instead of pledging his $30 billion fortune to private charity, he should pledge it to the federal government in the name of deficit reduction.  That sum would reduce the deficit by ten times more than the change in the depreciation schedule for corporate jets that President Obama has been relentlessly advocating recently.  Alas, Buffett must recognize that private charity will do more good with his fortune than the government will.  It’s unfortunate and slightly disconcerting to hear such a contradictory and misleading argument from one of the smartest and most successful investors ever.

[1] Note that this is not calculated via simple addition of the rates.  The calculation is 100% - (100% - 29.43%) * (100% - 17.4%) = 41.71%.