Paul L. Caron

Monday, November 21, 2011

Warren Buffett Overstated Billionaires' Tax Rate Due to Unrealized Appreciation

Bloomberg, U.S. Billionaires Avoid Reporting Cash to IRS, by Jesse Drucker:

[I]n the debate over tax rates paid by the nation’s wealthiest, ... [b]illionaires -- from [Billy Joe “Red”] McCombs to Philip Anschutz to Ronald S. Lauder -- who derive the bulk of their wealth from stock appreciation are using strategies that reap hundreds of millions of dollars from those valuable shares in ways the IRS often doesn’t classify as taxable income, securities filings and tax court records show.

“The 800-pound gorilla is unrealized appreciation,” said Edward J. McCaffery, a professor of law, economics and political science at the USC.

 While Warren Buffett has generated attention with his complaints that he and his fellow billionaires pay federal income taxes at a lower rate than his secretary -- about 17% -- the real figure is often smaller, said David S. Miller, former chair of the tax section of the New York State Bar Association and a partner at Cadwalader, Wickersham & Taft LLP in New York. “The problem is not that people like Warren Buffett pay tax at a 17% rate, it’s that they can use complex transactions not available to most Americans to get cash from their appreciated stock without paying any taxes at all,” Miller said.

The rate at which the 400 U.S. taxpayers with the highest adjusted gross income actually paid federal income taxes --their so-called effective tax rate -- fell to about 18% in 2008 from almost 30% in 1995, IRS data show. That’s the tip of the iceberg, since much of their wealth never converts into income on a tax return, McCaffery said.

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The techniques described in the article provide short-term deferral of tax liability. That's not the real loophole. The real loophole is holding assets until you die, when the appreciation typically escapes taxation entirely if the estate planning is good. Donating appreciated assets to a foundation gives you all the ego boost of spending the money but none of the tax liability.

I've said it before: When Buffett calls for mark to market taxation of large holdings, I'll stop believing that his advocacy of higher taxes on the rich is hypocritical.

McCaffery is absolutely correct.

Posted by: AMTbuff | Nov 22, 2011 10:36:37 AM