Time to take “The Oracle” to task.
CNBC has an interview today in which Buffett describes the taxes on his office. He pays 17.5% tax “on average” on his income and that the rest of his office pays 32%. This is the “unfairness” in the tax system he alludes to.
Here is the flaw, the higher taxes those people pay? It is social security taxes, a “tax” for a program those people will need far more than Buffett ever will. After $85,000 in income you no longer need to pay the 7% tax on your income. Buffett takes a $100,000 income from Berkshire plus the thousands he makes from board seats and dividends in stocks he owns privately. It also does not take into account any tax free income Buffett may receive from Federal or Municipal bonds he owns which would dramatically lower his “percentage”.
Now, Buffett has said 90% of his net worth is in Berkshire stock which means he has some $5 billion in other investments which could generate $10 million in income taxable at 15% if invested in dividend paying stocks that have an average 2% yield.
I do not know what the secretary in the office makes but lets say she is paid a fortune in Omaha, $85,000. Her “average” tax will average the 32%. Now Warren, will pay the same percentage of his first $85,000 and then pay only 25% on the next $15,000 since no SS tax is paid. Now, if we add the dividend stocks scenario, we lower his “average” tax rate to 15.5%.
I have no idea what Warren has the $5 billion invested in but the exercise is meant to show not that the “income” tax rates are “unfair” or tilted to the rich (although they all should be lowered) but that Warren’s wealth allows him to invest vast sums in investments that lower his “average” rate easily. It is important to note that these investments are perfectly legal and available to all people and everyone can lower their average rate by using them.
The bottom line is that the only way for Warren’s argument to have any real legitimacy is for him to detail his income sources. Without the details, the whole argument has no merit.
Another note: The last time congress tried to “sock it to” the fat cats, we got the AMT which is systematically now killing the middle class.. be careful what you wish for…
Just lower all the rates and we all win…
10 replies on “Warren Buffett’s Tax Math Fuzzy at Best”
Couple nitpicky points…Social security tax is only 6.2%, the other 1.45% tax is for Medicare, which is deducted from all of your wages, not just the first $85,000. You also forgot that the employer has to match that tax, so it’s effectively a 15.3% tax on wages (if there was no SS tax, all employees could receive a 7.65% raise without affecting the employer).
Second, Buffett has stated that 99% of his wealth is in Berkshire…I believe Munger has 90%.
Interest received on federal bonds is only exempt from state and local taxes, NOT federal taxes.
You say that Buffett’s tax rate is so much lower than his secretary’s because his wealth lets him make investments that lower his tax rate. I believe that is exactly Buffett’s point. Those investments should be taxed higher than wages because only the wealthy can afford to make those investments. His secretary doesn’t make enough money to be able to invest.
Assume that Warren makes only 200k a year, and his secretary 85k. Also asume that 85k (pre-tax) is needed just to meet all day-to-day expenses. Warren’s point is that the 85k, which is needed just to survive, is taxed at 35%, whereas the extra 115k he gets is not only free of the SS tax, but it can also be used to invest in other assets that also have a lower tax rate. It just snowballs from there…the more you make, the more you can invest at tax-advantaged rates, which makes you richer, etc., etc.
BTW, I’m not saying that I agree with Buffett’s stance, but I think you missed his point.
i did not include the employer match because Warren does not pay it..
i think it is 90%, but i will double check. Even at 99%, the ratio still holds
Now, i disagree with Warren. payroll taxes are what they are an if anyone deserves a lower rate, it is the secretary.
bottom line, the US gov’t does not need any more $$. they need less spending
This is as poor an article as your Six Flags article on how stock picks should be made based upon what insiders with less than 5% of the stock are doing. Todd, please start researching before you post blogs.
If you’re assuming that the secretary is making $85,000 how can her “average” tax rate be 32%??? If this lady was single, in 2007, she would owe $17,910.75 in taxes plus $5950 (7% for SS) based upon your numbers. That is a 28.07% tax rate. Not even close to 32%. If she were married and filing separately it would be a 28.50% tax rate.
Last time I knew, the US had a progressive tax system.
ken,
ask warren… he threw out the number…
that is part of my problem with his opinion…too many unknown variables
maybe he included Nebraska state tax?
you see six flags stock price recently?
Todd,
Yes, I have seen the price, nothing has changed since your article. Nov. 9th, we will see, currently; however, you’re simply blindly following the lemmings.
Yes, Warren through out the number, no problem. However, your article goes into detail about how he came up with that number. In addition, every number you use to rationalize it doesn’t make any sense.
You explicitly state, “I do not know what the secretary makes … lets say she is paid a fortune in Omaha, $85,000. Her “average” tax will average teh 32%.”
Wrong. It will average about 28%. Warren never said she made $85,000. None of these are Warren’s numbers – they are yours – and they are wrong.
Secondly – Warren will pay only 25% on the next $15,000 since no SS is paid. Well, over $97,925 (married filing separately) he would be paying 33%. The amount between $85,000 to $97,925 he would be paying 28%.
Thirdly – the 7% SS tax is not included in the Federal Tax Rate! You can’t say Warren will only pay 25% on his next $15,000 since no SS tax is paid! Warren will pay the above amounts and not have to pay an ADDITIONAL 7%.
In effect, everything in your article, not stated by Warren Buffett, is completely wrong. If you were to calculate the math correctly, in “your example” Warren would be significantly over your 15.5% calculated “average” tax rate. (Hint: It would equal 28.55% = ($22,600 in income tax + $5950 in SS tax (85K * .07)) / $100,000.
However, I must say, that at least now I understand why you are basing your stock recommendations off of a) Other people’s actions and b) A one-time visit / experience
It is because you clearly can not perform any type of rational quantitative analysis using numbers and facts.
since you’re making up the numbers you use maybe you should just answer this question which i believe is buffett’s point: should buffett pay taxes at a lower effective rate than his secretary?
another “anon” insulter.. love it
on payroll he does, on his other income sources he does not and she has the ability to do the same
she has the ability to place her savings into income tax advantaged investments just as he does. whether or not she does should not affect the taxes other pay.
the argument he makes is disingenuous without knowing any details
his true tax payments are multiples of hers… isn’t that what matters?
The bottom line is Buffett if full of hot air. I love these clowns that use every tax loophole to avoid tax then complain about not paying enough tax. It is the fox in the hen house trying to prevent others from getting wealthy.
America is about getting rich but that doesn’t mean that people who do get rich have to run their mouths and find a forum. Many of the richest Ameicans participate in hedge funds. Buffett does. These unregulated sharks have run up the oil futures, leveraged mortgage bonds and caused nothing but problems for the middle class. Of all Americans these wealthy should care about what is good for America not just what is good for them. Sure Buffett gave a lot of his money away along with Gates to Africa, money that could have been deployed in America to encoursge business development or the search for new oil or funding algae oil farms. Instead it was pissed away on Africa, a stone aged culture that has shown no signs of growth since the dawn of man.
Lord Robot
“The bottom line is Buffett if full of hot air. I love these clowns that use every tax loophole to avoid tax then complain about not paying enough tax. It is the fox in the hen house trying to prevent others from getting wealthy.”
You’re the clown. Buffett doesn’t use any tax loopholes; he doesn’t even hire an accountant to do his taxes. He made $46 million in 2006, which was almost all capital gains taxed at 15%.
If Buffett’s full of hot air, then we’ve found the source of global warming. This is one of the most honest, straightforward men you could ever meet. Please go to berkshire-hathaway.com and start reading his letters.
.BS Detector
i agree,
Buffett is the single best steward of ones money and his honesty cannot be questioned when it comes to that..
his tax arguments though strike me as disingenuous though….
maybe some guilt there? I do not know but he never spoke up before and he ought not to….