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In last week's campaign speech disguised as an address to Congress, President Obama said, "Warren Buffett pays a lower tax rate than his secretary — an outrage he has asked us to fix."
Writing recently in The New York Times, the famed chairman of Berkshire Hathaway complained that his federal income tax last year was "only 17.4% of my taxable income" — less than $7 million on a taxable income of about $40 million.
Buffett claimed that, like himself, other "mega-rich pay income taxes at a rate of 15% on most of their earnings," but that is not at all common. The average income-tax rate of those earning between $1 million and $10 million was 29.5% in 2009.
Obama used Buffett's uniquely low 17.4% tax as proof that "a few of the most affluent citizens and most profitable corporations enjoy tax breaks and loopholes that nobody else gets." That is not true.
Anyone whose income is almost entirely composed of realized capital gains or dividends would "pay income taxes at a rate of 15% on most of their earning." Investors with modest incomes also pay a tax rate of 15% on dividends and capital gains, although that rate is scheduled to rise to 18.8% under the Obama health law (and much higher if Congress enacted the "reforms" Obama will propose next Monday).
Before 2003, when the tax on dividends was made the same as the tax on capital gains, Berkshire Hathaway was a handy tax dodge — a way to own dividend-paying stocks without paying taxes on the dividends. Buffett is famous for collecting stocks with a generous dividend yield without Berkshire itself paying any dividend.
The dividends Berkshire receives are reinvested in buying more stocks, so the holding company ends up with more assets per share which results in capital gains that would be taxable only if the shares are sold.
Warren Buffett is the second wealthiest person in America, but he reports surprisingly little taxable income for someone who owns more than $50 billion of Berkshire shares. Increasing the tax rate on salaries and interest income would barely affect him.
He pays himself a salary of just $100,000, which explains how he pays less than his employees do in payroll taxes. He dodged the estate tax by donating his wealth to the Bill and Melinda Gates Foundation. He doubtless reduces his taxable income with other donations to charity, which explains why he repeatedly refers to taxable income rather than adjusted gross income.
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Posted By: Uffa(225) on 9/13/2011 | 4:42 AM ET
Finally! I begin to understand the wrinkle. And isn't it interesting that Berkshire Hathaway would benefit from this tax maneuver because BH doesn't pay dividends--so more people would buy into Berkshire-Hathaway . . . aha! escamotage! So this is altruism? (Shame on you, Warren, you old slyboots.)
Posted By: Claudius(280) on 9/13/2011 | 4:20 AM ET
If Republicans wanted Buffett and other rich individuals to pay more taxes, you can bet that they would find a way. Alan Reynolds knows very well how to do it, but that is not his agenda. Just ask Buffett how to do it without discouraging investment. He knows better than anyone else how to make it happen.
Posted By: laramid(35) on 9/13/2011 | 12:16 AM ET
i really wish this topic would be re branded. the democrats have sold us that we should be arguing over what rate is fair, not that the entire system is unfair. this bleeds cronie capitalism and give the socialists a foot hold in our economy.
Posted By: Old Enough to Know Better(1380) on 9/12/2011 | 10:59 PM ET
The tax increases are just a way to punish successful individuals. Obama has shown this in public statements and speeches. It's "all about being fair." I think that is a direct quote. And the Democrats wonder why the economy hasn't improved.
Posted By: broberto(110) on 9/12/2011 | 8:28 PM ET
I sold my Berkshire shares. This could be a mistake but Buffet has just turned me off by his rhetoric.
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