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Tuesday, August 30, 2011

More on Warren Buffett’s Tax Hypocrisy

Buffett Following up on Friday's post, Warren Buffett’s Tax Hypocrisy:

For a guy who spends a lot of time advocating for higher taxes, Warren Buffett does a remarkably good job of minimizing his own corporate tax bill. This is all to the good for Mr. Buffett and his fellow Berkshire Hathaway shareholders, who no doubt can invest the money more wisely than the federal government is likely to do.

Mr. Buffett's recent decision to invest in Bank of America represents another tax-avoidance triumph for the Berkshire chief executive. U.S. corporations are subject to a top federal income tax rate of 35%, the second highest in the world. But the Journal's Erik Holm notes that Mr. Buffett and the Berkshire bunch won't pay anything close to that on their investment in BofA preferred shares.

That's because corporations can exclude from taxation 70% of the dividends they receive from an investment in another corporation. This exclusion is intended to prevent double- or even triple-taxation as money is earned by one company, paid to another company and then ultimately paid out to shareholders. The policy makes sense; we only wonder why the exclusion isn't 100%.

With the 70% exclusion for Mr. Buffett and his fellow shareholders, Berkshire will enjoy an effective tax rate of 10.5% on the $300 million in dividends it will receive each year from Bank of America.

We're tempted to suggest that Mr. Buffett should do what he might call the patriotic thing and volunteer Berkshire to pay the full 35% rate as a good corporate citizen. But even if Mr. Buffett won't say it, most Americans know that more jobs will be created if the money is deployed by the Berkshire bunch than by the Beltway boys.

An editorial in today’s Wall Street Journal says that “Berkshire Hathaway will enjoy an effective tax rate of 10.5% on the $300 million in dividends it will receive each year from Bank of America.” That statement is incorrect.

Virtually all of the stocks that Berkshire owns are held in its property-casualty subsidiaries, and that will be the case with the Bank of America preferred.

The tax treatment for dividends paid by U.S. corporations to property-casualty insurance companies was materially changed by a law passed in 1986. The changes were described in detail in the chairman’s letter included in Berkshire’s 1986 annual report.

A minor change in rate was made in 1993. Since that time dividends that insurers receive from U.S. companies incur an effective tax rate of 14.175%. For Berkshire, that rate will apply to dividends it receives from Bank of America.

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Comments

my recollection was that buffet was advocating for higher marginal rates on upper income individuals, not corporations, though i may have missed something. also, higher marginal rates does not in itself imply not taking available deductions. and also also, of course, we are talking here about a corporation in which individuals other than buffet himself are also shareholders, and to whom he has a responsibility. so there is actually zero substance to this argument.

Posted by: r. willis | Aug 30, 2011 12:52:02 PM

These are some of the worst arguments for attacking his belief that wealthy individuals should pay more taxes.

Posted by: the real anon | Aug 30, 2011 1:34:23 PM

Clarifying that Berkshire Hathaway's property-casualty subsidiaries will pay a whopping 14.175% tax on dividends from Bank of America, as opposed to the teensy 10.5% asserted by the WSJ editorial, is the sort of tit-for-tat that illustrates the wisdom of keeping your mouth shut when you have a superior technical argument that misses the real point.

Posted by: Jake | Aug 30, 2011 2:36:47 PM

The WSJ once again demonstrates that its editorial pages are an excellent source of misinformation on factual tax matters. Way to go WSJ!

Posted by: Bill | Aug 30, 2011 7:14:38 PM

For those of us in the peanut gallery, Berkshire Hathaway proves that they are not paying the 10.5% by demonstrating that they are, in fact, paying the 14.75% tax. But isn't 14.75% tax still considerably below that aforementioned 35%? "See, I'm not a big liar, I'm just a little liar. But I am a liar."

Posted by: Milwaukee | Aug 31, 2011 5:25:53 AM

"These are some of the worst arguments for attacking his belief that wealthy individuals should pay more taxes."

That's because he does NOT believe ALL wealthy individuals should pay more taxes. He believes OTHER wealthy individuals should pay more taxes, unless they buy his estate-tax-dodging insurance and other products.

Posted by: John | Aug 31, 2011 5:50:21 AM

Paul, I am sure as a lawyer you know how lucrative "estate planning" insurance policies can be. Buffett also advocates more aggressive taxation of estates. Whether the exemption is for $5 million dollar estates or $1 million dollar estates matters little to YOUR estate when you're worth $44 billion, but remind me again.. what does Berkshire do? And what does Berkshire own? Oh, that's right. Berkshire is an insurance company that owns OTHER insurance companies.

So, this is just ol' Warren picking the "lesser rich folks'" pockets, pure and simple.

Posted by: Fox | Aug 31, 2011 6:00:06 AM

You guys need to actually read Buffett's arguments and examine his income sources. Buffett is saying that it's unfair that he pay only 15% tax but the entire reason he pays 15% and not the top rate of 37.9% of income (plus 2.9% FICA) is that the vast majority of his income comes from capital gains and dividends, not income. Which is exactly the kind of income to BH that the article is discussing. This has nothing to do with loopholes or available deductions and everything to do with the fact that investment income is taxed differently than earned income.

Of course, if I was cynical, I'd think that he just wanted to hike taxes on investments to reduce the real value of equity investment return, thus pushing equity prices down and making it cheaper to conduct buyouts of struggling companies and pull them into massive conglomerates. You know, if anybody was into that sort of thing.

Posted by: Dave | Aug 31, 2011 6:00:29 AM

So a big business guy is advocating tax hikes on small business sole proprietorships that pay taxes at an individual rate? Color me surprised.

BTW, every company Warren Buffet touches becomes a customer service nightmare.

Posted by: Some Guy | Aug 31, 2011 6:11:44 AM

Before you all slam the WSJ for not distinguishing between Buffet's personal income taxes and Bershire-Hathaway's tax bill, please remember--corporations are people, too!

Posted by: Mike | Aug 31, 2011 7:58:25 AM

Warren Buffett is for Warren Buffett. Obama is for Obama. Why are people surprised by their actions?

Posted by: PTL | Aug 31, 2011 8:31:20 AM

Once again -the reason I stopped subscribing to the Wall Street Journal. It is not Buffets decision to "donate" to the U.S. government funds owned by others- Berkshire. It is amazing how people on this blog miss this distinction. (I assume they did not go to law school). It would be nice if a "fair tax" was imposed which would be a "net worth tax". Once again Wall Street Journal= good for lining my trash can. ( but there are other more cost efficient ways so I just stopped subscribing).

Posted by: Nick | Aug 31, 2011 9:10:22 AM

Buffet could easily pay himself a 100 million dollar salary ... he chooses not to thus reducing his "personal" income tax ...

It would be nice if Berkshire managed to pay all of its outstanding tax liablities before Warren took to the op-ed pages to whine.

Posted by: Jeff | Aug 31, 2011 9:22:59 AM

I'm not surprised that the knives are out, even though the article makes Buffet's point that high income taxpayers generally receive dividends and capital gains instead of ordinary income.

Fox News even asked the question "is Warren Buffet a complete socialist?" I don't think Fox News even knows what that word means.

Posted by: ry | Aug 31, 2011 10:56:29 AM

Buffet is not talking about himself. He's talking about what others should be forced to pay. He and Bill Clinton can pay much more than they do now and the country will be grateful. In fact, they should put their money where their mouths are and pay a lot more. If they believe this malarky they should lead by example and maybe they'd be heroes and motivate a lot of other people to follow their lead. But it's none of their business what other people should be forced to pay.

Posted by: jr | Aug 31, 2011 11:40:10 AM

Repeat Liberal Dogma like a mantra: "Do as I say, not as I do." "Do as I say, not as I do." "Do as I say, not as I do." "Do as I say, not as I do." "Do as I say, not as I do." "Do as I say, not as I do."...

Posted by: Constitution First | Aug 31, 2011 11:49:42 AM

Mr Buffett draws a fairly low "salary" taxed at income Tax Rates.
"Most" of his "taxable" income is at Dividend and CVap Gains rates...
He takes junkets all over the world "on" his company's dime.
He lives like the Billionaire he is, but it is on the "Corporate" dime, and thus it is all expensed.His big spending is "expensed". All his Cherry cokes, and NetJet flights and so forth..
All expensed and not recorded as "income".
I think he is feeling guilty that he has become so unbelievably wealthy and so many folks are not, and this is his (and Bill Gates') way of assuaging their guilt.
We have terrible povery in the US. Because we have destroyed blue collar and manufacturing jobs, and outsourced decnet white collar jobs in call and Service centers to India, for one location.
Our Middle class in metro areas makes 250k and is paycheck to paycheck with food,property tax, FICA, Medicare , Full freight for College etc...
The after tax take home pay of $250k is darn close to $125k.
You can easily blow thru 12.5k per month in Boston, San Fran, Chicago, NYC etc...
These guys are out of touch with the real world and the real finances of real working Americans.
if they want to do some real good...Figure out a way to bring manufacturing BACK to the U.S. so we can have people working, and not "collecting".
Empower people with opportunities, not federal transfer payments.
Geez..is this that hard to get?

Posted by: bobsledd | Aug 31, 2011 1:26:01 PM

If Buffett really meant to be taxed more as he voiced so vocally in the wall street, he can start living $1B or $2B in his wills to the government after his death and stipulated the spending either to pay off national debts or fund toward education.

Posted by: audit & compliance --SUT | Aug 31, 2011 4:58:39 PM

It appears many people are misled by the loose description of the expiration of the Bush tax cuts and of proposals to raise rates on high-income individuals as applying to individuals "making more than [$250,000/$1,000,000/you fill in the number]. This phrasing gets misunderstood by liberals, conservatives and the press as meaning that taxes would go up based on one's gross income. But the higher tax rates actually would apply based on taxable income, not gross income, so that taxpayers would get to deduct, and would benefit from, state income and property taxes, mortgage interest, and other itemized deductions. In addition, self-employed taxpayers would get to deduct their business expenses. A third element that gets overlooked is that the higher rates would apply only to a portion of a taxpayer's taxable income, not to all taxable income. As a consequence, the impact on people with upper middle class gross incomes is often significantly overstated.

Posted by: Mike | Sep 1, 2011 10:51:31 AM

The writer is such a toad, suggesting WEB "volunteer Berkshire to pay the full 35% rate."

Mr. B. was talking about his PERSONAL tax rate, not the CORPORATE tax rate!

But of course the corrupt scribblers at Mr. Murdoch's WSJ have their orders to cynically trash forthright honesty...

Posted by: Howard Stevens | Sep 1, 2011 5:44:38 PM