Warren Buffett and Taxes

Today, Republicans in the in the House passed the Buffett Rule Act of 2012, a bill that would allow an individuals the option to pay more in taxes “exclusively for the purpose of paying down the national debt.”  While the bill will do absolutely nothing to actually help alleviate the problems posed by our national debt, mockingly naming the bill after Warren Buffett preempts the renewed called for wealthy individuals to “pay their fair share” that are certain to come as the election approaches.

As the Buffett storyline reemerges it is important to remember that the notorious story that the Oracle from Omaha pays a lower tax rate than his secretary is simply not true.  While his effective personal income tax may be the 17.7% that he claims (after hiring tax accountants to ensure that he can take advantage of every tax loophole that exists), this number is meaningless.  

What must be kept in mind is that as Chairman and CEO, Buffett is the largest shareholder of his company Berkshire Hathaway which makes billions of dollars in profits every year.  As a corporation, the revenue made by Berkshire Hathaway is subject to the 35% Corporate Income Tax before the owners (the principle shareholders) even see it.  That is money that as a person who owns a corporation he would have had, and thus the taxes levied against it are taxes ultimately paid by Buffett.  From the money that is remaining after the initial 35% tax levied against his profits, Buffett and all other shareholders pay a variety of capital gains and dividend distribution taxes before finally putting the money into their own pockets.  Furthermore, Buffett chooses to take a salary of only $100,000 for his role as CEO, and instead receives considerable stock benefits whose tax liabilities can be more easily written off or deferred.  

The Warren Buffett controversy that erupted last year is nothing more than propaganda in its attempt to spark outrage at the wealthy and lead a charge for higher income tax rates.   It is important for people to understand that “effective” personal tax rates greatly understate the amount of money every person is actually losing to the government because it is being taxed in multiple ways on multiple levels.  

A basic understanding of the way the way the tax system works makes it easy to see that Buffett’s income is reduced by hundreds of millions, if not billions, of dollars because of the taxes he pays to the government through various taxes.  This is the message that needs to be learned, not whether the tax rate should be 35% or 36.5%.

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