I Wish Warren Buffett Would Stop (Effectively) Lying About His Tax Rate

So, when all of those levels of taxation are combined (federal, state, sometimes city, fees, sales, etc), is the US's effective tax rate really that much better than the European countries that boast high tax rates? Sometimes it seems like not only do we pay competitively high rates, but the average person doesn't get as much back (universal healthcare, vacation time).

Bingo. The fact that we get relatively little value for our taxes is one of the main reasons you see the screaming about further tax increases. The same effective rates of taxation in places like the Nordic countries results in very cheap college education and practically free health care.

Effective rates can be lowered, but it takes so much brain power and planning it's a waste for the civilization. Human happiness is not increased because I find a loophole that allows me to defer capital gains or collect another stream of tax-free earnings. It would be far more tolerable to just say, "Anything over $50,000, you pay x%". Even the poor are getting slaughtered, which I've talked about way too much in the past. The payroll taxes have grown from 2% in the 1950's to 15.3% today. That is as regressive as it gets.

I wouldn't mind, as much, the enormous stake the government takes from me - it is absolutely the single biggest line item on my family's personal income statement - if we lived in a world where colleges were affordable, basic health care was cheap, and the budget was balanced. We're so horribly inefficient - witness the fact we spend almost 2x per person on health care yet we have the most pathetic health care system in the world among 1st world countries in terms of how it delivers goods and services to the average citizen.

The biggest problem that I have with taxes is that the military charges $500 each for $5 hammers and no one questions them. These damn unregulated secret contracts! I can't even think about it without my blood boiling. They over-charge by exponents!

No accountability is the biggest problem we have. There is no one regulating these people, since it's done in secret. We can't vote for things we can't see! A lot of things that go on are hidden from congress even! And even the fisa court doesn't know what's going on half the time! It's madness!

They are LITERALLY stealing our money.
I'm paying them to spy on me and my children.
I'm paying them to take me and my children's rights away.

Does that make me nuts for letting this happen?

Sorry for the rant. This can't be real life.

"The same effective rates of taxation in places like the Nordic countries results in very cheap college..."

In Sweden college isnt very cheap. Its free. No not really. When i studied i got paid 400 dollars just for going and got a cheap loan (about 800 dollars) with low interest, so low infact that inflation took care of the interest and the loan back then. Unfortunately you are now obligated to pay back the dept unlike in the past.
And for Healthcare its only administration fees. 30 dollars if you have to go to the ER, Then everything is free. 15 dollars for a medclinic, then everything is free. All this with 29% in taxes (In my tax bracket). Capital gains in tax shelter=1,67% in taxes. VAT is high though, 25 % except food, books, culture and transportation. That is taxed between 6 and 12%.
I wondered a lot lately about why you seem to get so little for your relative high tax rate. And i think we get quite a lot for the taxes we pay in Sweden.
Thank you for a great blog by the way.

Yea but your employer pays half your income to the state in the form of Social Security taxes ( many countries don't show it on your pay stub but that is what is happening)... and then you pay more taxes on top of that, ie your "income" taxes and then another 20% in vat... its a wonder they have any money to spend... Sounds like a great deal to me!!!

"The entire thing is a mess; a patchwork of stupid policies that punish effort and labor" Yep.

Speaking of lobbyists... I found another reason I want to move to Australia today.

http://www.buzzfeed.com/rachelysanders/big-food-spending-millions-to-prevent-gmo-labeling

http://justlabelit.org/right-to-know/labeling-around-the-world/

And for those unaware theres a free $45-75 for filling out a form if you ever drank a Naked juice GMO smoothie.

http://www.nakedjuiceclass.com/FileClaim/UnknownClaim

"The top 10 donors were: PepsiCo, Nestlé, Coca-Cola, General Mills, ConAgra Foods, Campbell Soup, The Hershey Co., J.M. Smucker, Kellogg Co., and Mondelez Global."

How does it feel to invest in a company that is actively using your money to deceive you with false labels on their products? So they have to be honest in other countries, but apparently not the greatest country in the world?? I personally will be avoiding these brands.

Thats the thing I love about those Aussies. They saw that bullshit about putting a McDs next to their park and they stood up to it. They did something about it. Here people just accept this bullshit and watch tv.

Your article makes me glad i'm not working right now. So glad I quit. 3 job offers last week. 0 fucks were given. The only way we get change is if it crashes. Otherwise we just continue to prop up the broken system.

This issue also gets me very upset. I was reading Joseph Stiglitz the other day about his views on inequality and every time he mentioned that the tax system is unfair because the rich get preferential tax treatment on capital gains, dividends, etc., it makes me very angry. I don't have any idea how we can stop people from trumpeting such views. Of course it is much easier to stir up public sentiment if you point out this "preferential treatment". Its somewhat ridiculous how influential people can use intellectually dishonest arguments to push their view just because they're influential and it works.

I also keep daydreaming at the notion that we could eliminate all of the tax accountants and lawyers and free up all this time and energy for more productive uses yet our tax system doesn't allow that. Sadly since the benefits of tax loopholes are large, visible, and concentrated in a relatively small group of people while the costs are small, less visible, and paid by everyone else as a whole, special interests will not face much resistance by the general public. I'd gladly trade away the mortgage interest deduction in favor of a more simplified, sane, tax code. I always have mixed feelings on finding ways to lower my tax burden. On one hand it feels good, on the other hand, thinking about all the stupidity and time we waste on this, it makes me angry.

I'm curious as to how you'd end the corporate tax entirely though. The two ways I'd think you could get around it is to make dividend tax deductible at the corporate level and then taxed at the individual level (a corporate tax would still be needed to prevent rich people from turning themselves into a corporation to avoid taxation). The second option to make all corporate income pass through to the owners would face the problem of how you compute your share of income if you have owned shares for only part of the year (though this would be less problematic if we stopped the high frequency trading lunacy). In this case you'd still have a problem with people owing large tax liabilities on income that was never distributed to them anyway though.

The tax rate lie is no different from the lie in my comment. IT'S WORSE EVEN. Because not only do they KNOW that what they're putting on the labels is wrong, but they are also lobbying to prevent people from knowing. That goes beyond using someone's ignorance against them.

Joshua,

Warren seems to be hung up on difference between your average American Dream chaser Joe, who's adjusted earnings from job market have gone nowhere to Forbes 400 crowd over the same time who have increased theirs substantially. Numbers are fuzzy and not precise, but the general theme is supported even with generous adjustments.

Apart from Nuclear War and catastrophic climate change one thing that could derail this country would be a social rift so substantial, that occupy type of movement gets 50% of supporters of that 99% that fall out of so hated top 1%. I have lived through one and observed one or two developments of this sort from very close distance and you yourself undoubtedly have read about it in books to know that in best case scenario you get is a complete whack job in leadership, without an initial bloodshed, but some sort of sicko spiral sure to follow.

I do not know what is in Warren's head, but from the interviews I have listen that he and Charlie have given and some of the answers they gave at the annual meeting, I think they are worried about something like this playing out. Their whole pledge drive also serves this purpose, to show ultimately social consciousness of wealthy folks, and Bill and he have been a lot more successful than I could have imagined.

Also, I do get what you are saying, man who pointed out that because of accounting presentation WFC earnings were actually 10% or thereabout higher, knows that he is presenting only a part of true tax situation. To overhaul the tax system, we will need the crises that is larger than what we had 2008/2009. Also, getting rid of legalized bribery we call lobbying. I like what Robbin Williams suggested, have our politicians wear logos of companies and special interest groups on their suits, much like NASCAR drivers do of their sponsors. It would make things open and clear:)

As part of that flock, I find term "respectable economist" sufficiently optimistic. There are respectable people in every profession, but I am not aware of any "respectable economists".:)

Hahaha a guy I used to work with suggested the nascar idea and I LOVED it. Dear god display my comment as it is all too fitting related to what this guy is saying.

I like Buffett without the politics. Is it just because I disagree with his politics? No. If Buffett buying $10 billion worth of IBM can't even meaningfully adjust the price of IBM for an extended period of time, then it is unlikely that his political rhetoric is going to be vastly more effective at modifying behavior.

My dad pointed out to me a long time ago that when otherwise upstanding men enter politics, something changes--and they become caricatures of themselves, to varying degrees.

The problem is that there is a tension between popular rhetoric and intelligent/rational discourse, and when people that deal in the latter have to transform their language into the former, the result is a ripe environment for moments that diminish one's forthrightness in particular and character in general.

http://www.scientificamerican.com/article.cfm?id=rat-study-sparks-furor-over-genetically-modified-foods

How did mitt move 100million into a Roth IRA?

It's not precisely known. First, I think Joshua mis-typed when he wrote "Roth IRA". Second, when he disclosed this figure it was a wide estimate, something like $20mil to $105mil, but the $100,000,000+ looks best in print. Third, it's most likely he had an employer funded SEP-IRA while at Bain for 15 years. That maximum contribution level is $30k per year. Last, he was probably able to snap up some exclusive, depressed stocks not available to John Q Public to hold in his IRA. That or he had a remarkable string of 20%+ returns for 15 years to hit that even lower threshold number.

Thank you for taking care of this for me; we had an impromptu birthday party for one of my nieces / nephews tonight and I wasn’t around to answer or respond to the blog. You’re right - it’s actually a Traditional IRA, I wrote Roth out of habit from my About.com work. I fixed it up above in the body of the text.

The reason Romney was capable of getting so much into the tax shelters was eventually covered by The Wall Street Journal. It involved the use of special share classes that received huge payouts in the event a buyout deal went well, resulting in average returns of 50% to 80% per annum. The article is a very interesting read.

Is the WSJ link clickable? To be honest, I kind of lost track of that after the election. My recollection may have come from this or another financial blog where the mechanics were deduced to be too difficult/risky for the average individual to pull off. It definitely got me to thinking about possibilities. Similar to your trust posts.

I even once looked up to see if an IRA can invest in a "S" corporation opportunity I had. It can't although that company did later change to a "C" corp which is possible to invest in with an IRA.

It is now. I'm not sure exactly what was wrong but editing it and resubmitting it seemed to have fixed the problem. Let me know if you're still having trouble.

Thanks, lunch hour reading!

Ah,thanks, if only all that cleverness could of been redirected to cure diseases.

See the other response in this thread; the exact amount is unknown, but it is somewhere between $20 million and $100 million or more, involving a series of special class shares in leverage buyout deals that effectively by-passed the contribution limits. I included a link to the Wall Street Journal article in my other response so you can read about the mechanics. It was quite brilliant, insofar as it can be deduced, but a sad testament to the fact such actions are even necessary.

Like this.

Joshua,

Why do you keep using the 15% rate for dividends and capital gains? Last I checked, it was 23.8% now...

Qualified dividends are still 15% (below $400,000 for a single filer) and 20% above that limit. Ordinary dividends are at ordinary income tax rates. Source bogleheads.org- http://www.bogleheads.org/wiki/Qualified_dividend

Habit from About.com, where I write in a way that will apply to most people’s situation. Given the scenario parameters, I decided it would be better to re-write it using what would actually be owed in this exact case, applied the 20% top rate + the new 3.8% Obamacare surcharge, recalculating the numbers. You’re right; it’s a better way to do it. I just flushed the cache, the update should reflect it. It makes the numbers even worse.

Yes and no - under $200k is 15%; $200-400k is 18.8% thanks to the
Obamacare surcharge. But Joshua's example was for $15.3 Billion, which
would (easily) trigger the top effective rate of 23.8% (including the
Obamacare surcharge).

Also, due to the Obamacare surcharge,
ordinary dividends are actually taxed at a higher rate than ordinary
income above $200k (up to 43.4%, according to your own link).

I have always been puzzled by Buffet's comments about his tax rate. Truth is, he could just write a check to the government for whatever he believes he should be paying. I'm pretty sure the Treasury Department would be happy to cash that check!

Thanks for the thought provoking article. The political rhetoric surrounding "fair" vs. "unfair" tax policies is often nauseating. I'm a retired community banker from a small rural town. It was amazing to me the number of small business primarily engaged in "cash" businesses not fully reporting their taxable income. For example, I had a family owned grocery business apply for a $500 thousand dollar loan to build a restaurant. His tax returns (I believe S-corp) showed $15 thousand AGI. When I proceeded to inform him that his reported cash flow wouldn't service the new debt he told me that wasn't all of his income, at which point he pulled out another set of records indicating he made closer to $150 thousand of AGI. I can't tell the number of times over the last 20 years I encountered this type of situation, again in a small community. Little did he know that I had to file a federal Suspicious Activity Report (SAR) for possible tax evasion.
Secondly, dealing with property values (as assessed by local appraisal district) and comparing to independent appraisals for loan purposes. The variance in valuations was staggering. Even for comparable properties along the same stretch of roads the variances were ridiculous. Sure there is a protest process available to the property owner. But numerous times property owners were forced to pay for a third-party appraisal to have ammunition to contest the appraisal district.
Finally, several years ago, Money magazine used to publish the results of a tax preparation test. Several CPA firms and the IRS were given the same information to prepare the return. Guess What? You would get multiple results for tax liability. Money magazine conducted this test annually for a number of years and the results to my recollection were always the same...varying results among preparers.
Bottom Line...disgusting inequity embedded in our various tax systems along with so many evading paying taxes.

Joshua, somewhere in the math it seems like you would need to account for the discounting of asset prices due to taxes.

Let's say that company XYZ pays earns a pre-tax profit of $1 billion. Companies in XYZ's industry sell for 10x earnings. Consider an investor who buys company under one of the following two scenarios:

a) In a 0% corporate tax world, XYZ would have $1B in after-tax earnings and have a market capitalization of $10 billion.

b) In a 30% corporate tax world, XYZ would have $700M in after-tax earnings, and have a market capitalization of $7 billion.

In the second scenario you could correctly say that the investor is already paying taxes through XYZ, but that statement fails to account for the fact that purchase price of the company was significantly discounted because of those taxes.

So Berkshire might be paying taxes on dividends it receives from IBM, but it also got a discount on the IBM shares because of the expectation of those taxes.

I'm not certain how all the math works out, but I feel like it has to be a factor.

Why is Bershire's effective tax rate so high? Isn't the effective rate <20% for average US corporation? Maybe his businesses are not capital intensive so few deductions?

Here is a list of the effective tax rates paid by corporations in the S&P 500. Most - not all, but most - of the companies with effective rates lower than 20%, or in some cases even negative, were able to do so as a result of extremely large past losses which were harvested to shelter future income; cold consolation to the owners who may never really recapture the wealth that was destroyed.

I'd have to check but off the top of my head, I think the effective tax rate for most global companies is around 25%, with practically every other advanced nation not taxing dividends twice when they go to the owner (either by giving the owner a tax credit or by allowing the corporation to deduct the dividend payments). The United States stands alone in this idiotic policy.

Plus, it's often the case that a company that pays little or no taxes to the United States still pays very high effective tax rates since they do business in multiple countries. This rundown of Apple's tax situation does a decent job explaining the very basics.

Joshua,
You are correct that the actual tax percentage that Warren Buffett pays via his investment holdings is definitely not less than that of his secretary. However, you are not really comparing apple to apple. Warren Buffett is discussing 1040's tax codes and you are bringing in the whole enchiladas. I believe Warren Buffett's original statement said personal income tax (I take it as 1040's) but later just said "tax" for simplification.

I agree with you, and I understand that. My problem is that is a meaningless distinction because could essentially convert his entire empire to a pass-through election overnight, and suddenly it would all hit his 1040.

Has anything changed? Is economic reality much different? Of course not. It's a shell game. It draws what looks to be an important distinction using a technicality that has no practical meaning.

Imagine that you made $1,000,000 a year. Of this, $900,000 came from dividends and rent in a tax shelter and $100,000 came from self-employment income.

You end up paying your Federal and State governments, say, $25,000 for your income, self-employment, and other taxes, leaving you with $75,000.

Can you really say your tax rate is 25%? Sure, you could, but it's a lie. Your 1040 really shows only $100,000 in income and $25,000 in taxes owed. The truth is, your tax rate was $25,000 out of $1,000,000, or 2.5%. The only reason you can complain about a tax burden of 25% is because of a technicality on how the 1040 is calculated and the way the information is presented.

In other words: It's a meaningless distinction and there's no way he doesn't know that. That's my problem. It seems important to the layperson but the economic reality is very different than the picture he is painting. If he wants tax rates to rise, I think he should just encourage tax rates to rise. I don't like lying about it, which I feel like he's doing.

But, again, I agree with you. I just think it's subpar behavior in an attempt to manipulate the public into a policy change that he thinks is for the best. I don't like the tactic.

I'd like to see Mr. Buffett's individual tax returns. If he's itemizing deductions he is really being a hypocrite. He could easily pay more taxes but chooses not to. No one forced him into certain tax structures. His tax payments (or lack thereof) are a result from many decades of very deliberate decisions, and trying to place blame on IRS policies is a ludicrous position.

He is not a hyprocrite, he is giving away all his money.
He wants changes that would increase tax revenue from all wealthy citizens, not just him.

Making charitable contributions is in no way the same as paying taxes. Not even close! Not in the same universe. Charitable contributions are a 100% voluntary choice. Paying taxes is not charity!

Mr. Buffett has chosen to pay less taxes and make more charitable contributions (thanks Warren). He could have easily done the opposite, but chose not to. Shame on him for trying to blame the system for his own choices.

In order to make the effective corporate tax rate more comparable to individual tax rates, I think the tax rate should be calculated on gross revenue and not operating income as stated above.

I only say this because individuals effectively pay tax on their gross income and not "operating income" as we have less deductions/write-offs available to us compared to corporations. As individuals, we can't write off our food and living expenses while corporations can write off their business expenses.

I would argue that the effective tax rate would be 4.25% (6.92B/162.5B) for Berkshire Hathaway rather than 31.14%.

I do agree though that the tax system is highly regressive in America compared to Canada. For fun, I compared my Canadian tax return to what I would have paid if I were an American citizen. The difference was astounding! I would pay approximately $5K more a year in taxes in America than in Canada and this calculation assumes that I live in a state with no income tax!

The main reason is that the Canadian tax system offers a lot more personal deductions for its citizens. Canadians can add up their itemized and standard deductions together when doing their tax returns unlike Americans who can only choose one list of deductions or the other.

Payroll taxes are also lower in Canada (Canadian SS = 4.95% versus 6.2% in America) and cap out at $50,000 income per year versus $100,000 per year in the States.

I love your posts as always. They're always so well-written, thoughtful, and engaging!

I understand what you're trying to say but that analysis wouldn't work under GAAP accounting rules used in the United States as demanded by the Securities and Exchange Commission because the gross profit figure doesn't include a significant portion of the expenses that are necessary to conduct business. For example, Wal-Mart's gross profit doesn't include the cost of the building, the cash registers, the shelving, the salaries and wages paid to sales associates, etc. Unless you think people are going to show up to work and agree to get paid nothing, and product can be sold in an empty field laying on dirt, it makes no sense.

To do an apples-to-apples comparison insofar as it would be possible, you would need to modify the household accounting records to mimic GAAP. I actually do this for my own family, which I explained in answer to a question once. The gross profit figure reflects all effective forms of income, as for a family, revenue and gross profit are roughly comparable under all but the most extraordinary of circumstances.

Again, I understand why you could think that at first glance, but it cannot work. It's wrong. Scrub it from your mind. It would lead to bizarre outcomes when comparing firms that require a lot of distribution to get the product to the end consumer and those that have a business model where people and salaries are the most important cost component. In other words, were we to use this standard, Sysco (the restaurant supply giant) would appear to have an insanely high tax rate due to razor thin gross margins, while Altria would appear to have a very low tax rate, due to obscenely fat gross margins, when in reality, Altria has a much higher effective tax rate than Sysco.

In that case, I'd be curious to know how you would break down household expenses into cost of sales and operating expenses.

I am guessing expenses that are tied to basic needs such as food, rent, and basic utilities would be considered operating expenses because those are basic expenses that a person needs to be a "going concern" while all other non-essential expenses (like travelling, cable, entertainment, and eating out) would be reported below the profit line.

I've always calculated my effective tax rate by taking my taking my total tax expense and dividing it over my gross income.

I would be curious to know how I would go about figuring a comparable earnings before tax figure that would mimic the earnings before tax figure corporations use.

It would be interesting to see if my effective tax rate (based on household "net profit") is lower or higher than the corporate tax rate.

Thank you, thank you, thank you times a billion. Buffett has lied his way through the last ten years. I don't care how upright he was before. In the last 10 years, he's turned into a lying shill and enabler of TPTB. #38atoms