Friday, August 26, 2011
Geez this is fun. There is really a whole new thread that could be opened up from the simple question posted in the comment, "What's the effective tax rate for Berkshire Hathaway?" There are a few different ways to calculate it and I've produced a little illumination in the attached spreadsheet. All the basic numbers used in the calculations in the spreadsheet are derived from Berkshire Hathaway's 2010 Annual Report.
A very straightforward approach is "income tax expense over earnings before taxes." This produces an intermediate term or multi-year expense rate of 29.1% or roughly 6 percentage points below the statutory rate of 35%.
A more nuanced but also probably more accurate "cash on cash" approach produces an effective rate of either 23.8% or 23.9% or a little more than 11 percentage points below the federal statutory rate.
We can get into a long, drawn-out discussion full of nuanced technicalities as to why the "cash on cash" approach is not appropriate, ignoring deferrals and all of that nonsense, or we can go to the relatively simple fact that this is what the financial statements actually disclose as the cash paid on income earned in the respective years on which the financial statements purport to report. I would say Berkshire's multi-year effective tax rate is 23.9%.
What is represented by the 6% or 11% statutory rate v. "paid" differential? "Loopholes", aka the normal operation of the tax code. The taxes are not legally payable yet as a function of the tax code and may never be actually paid if the changes in asset values are not "recognized" for tax purposes. However it's important to note that the 11% or 6% differences are not exactly chump change either. 5.9% of the pre-tax earnings total of $38.2 billion reported over those three years represents $2.2 billion in arguably "underpaid" tax and the 11.1% differential would represent $4.25 billion "underpaid" tax. If Berkshire were an "evil" oil company these figures would likely be spun this way.
- Tax Lawyer's Blog, Buffett’s Berkshire Hathaway Disputes IRS Tax Assessment