Thursday, June 28, 2007

Mr Buffett's Tax Bill

Warren Buffett says he does not pay enough in taxes:

Warren E. Buffett was his usual folksy self Tuesday night at a fundraiser for Sen. Hillary Rodham Clinton (D-N.Y.) as he slammed a system that allows cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 very rich to pay taxes at a lower rate than cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 middle class.

Buffett cited himself, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 third-richest person in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 world, as an example. Last year, Buffett said, he was taxed at 17.7 percent on his taxable income of more than $46 million. His receptionist was taxed at about 30 percent.

You might wonder how Mr Buffett managed such a low tax rate. Most likely, it arose because corporate dividends and capital gains are taxed at only 15 percent. But cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 corporate income that funded those returns was already taxed at cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 corporate level, where cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 tax rate is 35 percent. Mr Buffett seems to be ignoring cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 first round of taxation. Is it possible that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 world's most successful has failed to pierce cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 corporate veil? (If you want to more reliable data on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 progressivity of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 tax code, see this old post for numbers from cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 CBO.)

Even more striking to me is a fact that Mr Buffett did not emphasize: how low his taxable income is. His income of $46 million represents a mere 0.1 percent of his reported net worth of over $50 billion. That is not an impressive rate of return!

Why is it so low? I can think of at least four possible ways investors like Mr Buffet can keep cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir taxable income, as opposed to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir true income, low:
  1. They hold stocks that pay minimal dividends.
  2. They avoid realizing capital gains.
  3. They hold some of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir portfolios in tax-free municipal bonds.
  4. They give appreciated assets to charity, getting a deduction for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 current market value without ever having to realize and pay tax on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 capital gain.

Notice that raising tax rates, as Mr Buffett seems to want to do, would not much affect any of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se tax avoidance strategies. Even if tax rates were raised substantially, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 tax savvy Mr Buffet probably wouldn't be paying much in taxes as a proportion of his wealth or as a proportion of his true income.