Posts Tagged ‘Warren Buffett’

Taxes Matter

In Corporate Taxes, Income Tax Rates on December 18, 2012 at 1:17 am

Taxes matter. When Warren Buffett says otherwise, we have to assume he’s lying to advance his partisan agenda. Famous investor Clifford Asness of AQR says of Buffett’s bizarre claim taxes are irrelevant, “In the field of economics and finance you’d be hard pressed to find something more patently wrong.” [1]

Municipal bonds are tax-free .  They’re at a lower yield than taxable bonds.  This is Finance 101.  The very reason they’re tax-free is to give municipalities a break when they borrow. Investors accept a lower rate on an AA-rated municipality’s bond than from an AA-rated corporation’s bond purely based on the tax benefit. If taxes didn’t matter, they’d be priced the same.

You can find the mathematical equation how tax benefits cause the municipal bond to be lower at Wikipedia. [3]

Asness mentions the fact companies are speeding up sales, share repurchases, regular and special dividend payments
(e.g. see Costco). Buffett helped someone with an unusual Berkshire Hathaway $1.2 billion share buyback in December 2012. [5]. If taxes didn’t matter, why would hundreds of companies bother to speed up January 2013 payments into December 2012? Marketwatch reports, “Companies are largely motivated by a likely upcoming change in the tax rates on dividends.” [2]

Warren Buffett’s claim, “Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered,” may or may not be true to his personal experience but it is dead wrong for the economy in general. Asness points out, too, that Buffett himself has carefully orchestrated his own income and estate to minimize taxes. It is very much Buffett’s freedom to pay as little tax as he legally can yet the fact he bothers shows taxes do matter. Smart, rich people do structure their economic lives to minimize tax. The higher the tax on investments, the lower the net return. As tax rates go up, some investments become unfeasible. Asness says:

Consider how every business-school student, investment banker and investment analyst on Earth has been taught to choose whether to invest in a specific project or company. You make a spreadsheet (a napkin will do sometimes). You put in your best guess of the future cash flows, and you discount those cash flows back to the present at some required rate of return you believe reflects the risk entailed. Of course, opinions about the future cash flows and the proper discount rate can vary widely, but the essential methodology is ubiquitous.

Now here’s the kicker: Nobody who pays taxes and has ever done this exercise has failed (while sober) to use after-tax cash flows in this calculation. Somewhere in the spreadsheet there is a number, say 20%, or 28%, or a Gallic 75%, representing the taxes you’ll pay on the assumed cash flow—and you only count the amount you’ll get after paying this tax. If you turn the tax rate up high enough, projects or companies that looked like good investments become much less attractive and vice versa. Mr. Buffett is undoubtedly right that rich people will continue to invest some amount in something regardless of the tax rate (except for a 100% rate!). He’s also undoubtedly right that an investment that easily clears all hurdles will likely still be attractive after a small tax increase. But life, and the investment decision, occurs at the margin. Fewer and smaller investments will be made if the after-tax prospects are worse. It’s just math and logic, unassailable and commonly accepted regardless of one’s political persuasion.

I’m a Manager of Financial Planing & Analysis.  Taxes absolutely are part of the investment equation. If taxes are higher, the marginal projects – the ones where you’re on the fence about whether or not to invest – become less attractive and eventually, don’t make sense. Perhaps you invest in Brazil or Turkey, instead.

My insight is rich people have a choice what to do with their money.  If you earned a half million and received a special $50,000 year-end bonus, what do you do?  Do you spend it on a luxury imported car?  Do you take a long, expensive trip to Asia?  Or do you invest in new but somewhat risky business venture of an acquaintance?

Savings means forgoing current enjoyment. People, naturally, like to spend money on themselves and their loved ones right now. In order to ask them to defer that spending pleasure, they want an economic return, especially if their investment is a risky one where they might end up with a total loss. Every percent increase in taxes on investments tunrs that save versus spend decision a little more heavily toward spend now. This is especially true of those who are well-to-do, earning several hundred thousand dollars but not Buffett rich (Warren being one of the world’s richest men).


[3], retrieved 12/17/2012.

Picture from Wikipedia Commons.

Warren Buffett’s Firm Regularly Requests SEC Disclosure Exemptions

In Political Rhetoric, Regulation, Warren Buffett on January 31, 2012 at 9:23 pm


Back on December 8, 2011, the Wall Street Journal disclosed something interesting in light of recent political news, namely, billionaire investor Warren Buffett’s Berkshire Hathaway conglomerate recently obtained an exception from a SEC disclosure rule.  It turns out Buffett has sought SEC confidentiality exemptions in no less than 10 of the past 20 quarters, according to the WSJ article below.

Given Mr. Buffett’s recent political activism, it is interesting he has opted to keep Berkshire investments in the dark.  It is also interesting because of Mr. Buffett’s advocacy of higher tax rates, though he personally carefully structures his own income to minimize his own taxes.  Perfectly legal, but an example of “do as I say, not as I do”.

The rationale for the SEC exemption is certain high-profile investors, like Mr. Buffett’s firm, could be harmed if people know about their investing activities.   Presumably, though, any firm is at a competitive disadvantage to have to disclose their holdings to their competitors.  The WSJ reports:

“Fifty money managers have used Securities and Exchange Commission rules to keep confidential their stakes in certain companies so far this year, an analysis of securities filings shows.  The longstanding practice got a new burst of attention last month when billionaire Warren Buffett’s Berkshire Hathaway Inc. disclosed a $10.7 billion bet on International Business Machines Corp.  The Omaha, Neb., conglomerate had been secretly accumulating the shares since March, twice receiving an exemption from the SEC on a 36-year-old law that requires investment firms owning more than $100 million in publicly traded stocks to disclose their holdings quarterly.”

Full article at:

Disclosure: at the time of this writing, the author was a long-term owner of Berkshire Hathaway stock.  SEC building picture from Wikipedia Commons.

Warren Buffett’s Secretary Earns Hundreds of Thousands of Dollars

In Buffett Rule, Income Tax Rates, Obama Administration, Warren Buffett on January 25, 2012 at 11:42 pm

As I said last August, it is literally impossible for Warren Buffett’s secretary to be “middle class” and pay a higher income tax rate than Buffett.  She is either married and filing jointly with someone who earns hundreds of thousands of dollars or is earning over $200,000 a year herself.

Forbes picked up on this in a post today: 

“I have nothing against Debbie Bosanke earning a half million or even more. Buffet is a major player in the world economy. His secretary deserves good compensation. At her income, however, she is scarcely the symbol of injustice that Obama wishes her to project.” See

My original posts on this topic are here: 

and see what people actually pay, according to the IRS:

Who Pays What Average Income Tax Rates

In Income Tax Rates, Political Rhetoric, President Obama, Warren Buffett on October 9, 2011 at 2:23 am

Average Tax Rate by Share of Income, Source: IRS 2008 Data

There is an awful lot of misinformation floating around about what average tax rates are paid at different income levels.  It is actually very simple, which is why I put together this graph. 
Some would have you believe the richest of the rich pay a lower average rate than “a secretary”.  On average, that is simply not the case.  The Bottom 50% of taxpayers paid an average of 2.59% of their Adjusted Gross Income (“AGI”) as income tax.  The Top 1% paid 23.27% of their AGI as income tax.

Share of Income Average Tax Rate
Bottom 50% 2.59%
25-50% 6.75%
10-25% 9.29%
5-10% 12.44%
1-5% 17.21%
Top 1% 23.27%
The bottom 50% of taxpayers paid 2.7% of all income taxes paid, and the top 5% paid more than half of the total.

Share of Income Group’s Share of Income Taxes
Bottom 50% 2.70%
25-50% 10.96%
10-25% 16.40%
5-10% 11.22%


Top 1% 38.02%
Data source: 2008 IRS data from

Taxes Already Going Up On Warren Buffett

In Buffett Rule, Income Tax Rates, Obama Administration, Warren Buffett on September 20, 2011 at 1:46 am

Warren Buffett does not have to worry: his income tax rate will be rising about 3.8% on January 1, 2013.   He does not even need a new “Buffett Rule” tax:  it is a part of the health care reform bill of 2010 (“ObamaCare”) that “unearned income” (meaning interest, dividends and capital gains like those enjoyed by Mr. Buffett) will pay an additional surtax of 3.8% on amounts over $200,000 for individual taxpayers. [1]  

This means Mr. Buffett’s average income tax rate, which he says was 17.7% in 2010, will be approximately 21.5% under the 2013 tax rates.  The new rate is already enacted as law.  This fact is certainly relevant for any discussions of a “Buffett Rule” or higher tax rates on the affluent, yet it seems to be almost completely ignored in the media.

For more on Mr. Buffett’s misleading opinion piece, see and

 Berkshire Hathaway.svg


Pictures from Wikipedia Commons.  Disclosure: the author owned common stock in Berkshire Hathaway as of this writing.

Is Warren Buffett’s $924,725 Employee Middle Class or ‘Super-Rich’?

In Income Tax Rates, Political Rhetoric, Warren Buffett on August 29, 2011 at 8:32 pm


Mr. Buffett’s “Stop Coddling the Super-Rich” opinion piece juxtaposes “while the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet” with a few sentences later, “and that’s actually a lower percentage than was paid by any of the other 20 people in our office.  Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.” [1] 

The implication seems to be Buffett’s 20 co-workers are middle class. 

Berkshire has 260,519 employees [2], which begs the question which 20 are in his office?  We can be sure the 20 does NOT include a janitor from subsidiary Benjamin Moore paints, an engineer from his BNSF Railroad subsidiary nor even the GEICO gekko, though I’d love to have that little green Australian as a cubicle neighbor myself.

In a typical large corporation, the inner sanctum at headquarters includes the CEO (e.g. Mr. Buffett), the Chief Financial Officer (“CFO”), Corporate Controller, Chief Information Officer, Chief Counsel (top lawyer), head of Human Resources, head of Mergers and Acquisitions, a few other high ranking executives from sales, marketing, legal and finance, and perhaps an executive secretary or two.  They are not middle class workers.  Quite possibly all 20 in Mr. Buffett’s office would be six-figure earners, which explains why they would be paying average federal tax rates in the mid 30%’s (see my post

We know what Berkshire Hathaway’s CFO, Marc D. Hamburg, earns from the company’s 2011 proxy statement.  Mr. Hamburg took in $924,725. [3]  Are Mr. Hamburg and the other 19 workers in Mr. Buffett’s corporate office “middle-class” or are they “rich”, even ‘super-rich’?  As I posted before, the IRS reports the bottom half of all taxpayers paid only 2.9% of taxable income in federal income tax.  Even adding on Social Security and Medicare keeps the percentage below what Mr. Buffett pays.  Mr. Buffett’s comparison of his own tax rates to the 20 in his office is essentially meaningless because his co-workers are neither poor nor middle class.  They most certainly are nowhere near the bottom half of earners.




Disclosure: at the time of this writing, the author owned common stock in Berkshire Hathaway, Inc.

Buffett picture from Wikipedia Commons.

Trust A CPA: Warren Buffett is Wrong About Tax Rates

In Federal Deficit, Income Tax Rates on August 19, 2011 at 1:33 am

Legendary investor Warren Buffett penned a New York Times opinion piece about tax rates.   Surprisingly, he presents some very misleading information.  Fortunately, anyone can easily obtain actual average tax data from the helpful IRS website.  Yes, I said “helpful IRS”. 

Mr. Buffett says he calculated his personal average tax rate, including Social Security and Medicare payroll taxes, and came up with 17.7%.  Other people in his office paid more, anywhere “from 33 percent to 41 percent and averaged 36 percent”. [1]    I assume his co-workers’ calculations are accurate.  But Buffett is an aberration among the rich and his staff is not middle class, as we know from comparing them to the IRS’s own tax tables.

The chart below shows the actual average federal income tax paid by 2008 income cohort.  The top 1% paid an average 21.0% of income, the top 50 percent paid an average 13.2% and the bottom 50% paid a mere 2.6%.

FIG.1 [2] Item, tax year             Total
Average tax rate (percentage):  * Top
1 percent
5 percent
10 percent
25 percent
50 percent
Bottom 50 percent All Taxpayers
2008 21 18.84 17.33 14.92 13.23 2.59 11.91
* The average tax rate was computed by dividing total income tax (see footnote 3) by (positive) adjusted gross income.
Source: IRS, Statistics of Income Division, July 2010    

Mr. Buffett includes payroll taxes in his numbers.  In fact, he includes the portion of payroll taxes paid by his employer on his behalf.  This is interesting because liberals usually ignore the payroll taxes your employer pays on your behalf, in order to show Americans paying lower-income tax rates.  Still, let’s use his numbers.  Social Security and Medicare taxes were set up to loosely match a person’s contributions with the expected benefits.  As a result, both the benefit and tax are capped.  In 2010, the Social Security (6.2%) tax is accessed on the first $106,800 of income and Medicare (1.45%) taxes have no limit.  Your employer pays a matching tax. [3] 

Consider the income tax tables:

FIG. 2 [4] If your filing status is Married filing jointly:
If your taxable income is:  
Over- But not over- The tax is: of the amount over-
 $             –  $  16,750 10%  $                        –
     16,750       68,000 $1,675 + 15%                 16,750
     68,000    137,300 $9,362.50 + 25%                 68,000
   137,300    209,250 $26,687.50 + 28%               137,300
   209,250    373,650 $46,833.50 + 33%               209,250
   373,650   $101,085.50 + 35%               373,650

I won’t bore you with technicalities, but the term “income” refers to Adjusted Gross Income (“AGI”), which takes out exemptions for individual and dependents and credits such as student loans, 401(k) deductions and pre-tax expenses for health insurance.  Mr. Buffett is misleading by ignoring these credits (he uses “taxable income” which ignores the non-taxable income received by lower and middle-income taxpayers). [5]

Mr. Buffett’s other 20 people in his office are said to pay an average 36% in income taxes.  His office mates cannot be middle class as he portrays them.  The top marginal income tax rate is 35% and the average rate actually paid is always lower because tax rates work like a step-ladder.  The first $16,750 we earn is at a 10% income tax rate, then we pay 15% up to $68,000 and so on.   Taxpayers also take deductions for mortgage interest, state and property taxes, and charitable contributions, which reduces the average income tax rate paid.  We can say conclusively that none of Mr. Buffett’s office workers earn less than $68,000 AGI and appear to be well into the six-figures. 

Here’s the math.  Let’s assume Mr. Buffett’s co-worker has an AGI of $373,650 (actual income would be more because AGI is lowered by 401(k) and pre-tax deductions).  The income tax is $101,085 (27.1%). 

The maximum Social Security tax, including what your employer pays on your behalf, is $13,243.  The Medicare tax on $373,650 is $10,836.  When we add these three taxes together, the average tax rate is 33.5% of AGI.  Do the math on an earner at $209,250 and obtain an average tax rate of 31.6%.  AGI of $137,243 yields 31.9%.  AGI of $68,000 works to 30.8%.

All taxpayers take deductions which reduce “AGI”.  There are itemized deductions for state income taxes, property taxes, mortgage interest, childcare and charitable deductions.  Or you receive a standard deduction if you do not itemize.  These deductions lower the income tax percentages shown above.

Another way of checking Mr. Buffett’s high numbers for his employee tax rates is to use the IRS data above.  A taxpayer in the middle (50th percentile) is paying 13.2% of income in taxes.  Even adding Social Security and Medicare taxes paid by the employee and employer, the percentage is below 30%.

The figures Buffett provides for his 20 office mates are questionable; they do not mesh well with actual IRS data as I just showed above.  Certainly a Buffett employee who is earning $400,000 AGI and paying about 35% in taxes hardly counts as “middle class”.  The IRS data show the middle class is paying much lower rates.

Mr. Buffett is only tracking taxes, but it is worth noting the poor and middle class receive the greatest government benefits as a percentage of their salary.  School lunches, food stamps, financial aid for college and the like logically go primarily to those at the bottom of the tax scale.  The rich pay for private schools while the poor and middle class generally attend public schools. 

What about Warren Buffett himself?

Because of the wage cap on Social Security, Mr.  Buffett’s payroll tax drops as a proportion of his income grows.  The maximum social security and Medicare tax on $373,650 works out to 6.4% of income.  For Mr. Buffett to pay 17.7%, we may safely assume most of his income is in the form of capital gains and that income is very substantial.

Mr. Buffett’s company, Berkshire Hathaway, must file annual proxy statements with the SEC.  We learn Warren Buffett was awarded total compensation of about $519,490 in 2009 to run Berkshire Hathaway.  His salary was “just” $100,000, he received $75,000 in fees for serving as a director of Berkshire investment Washington Post Co., and he received taxable wages in the form of free personal security provided by the company. [6]  His average tax rate on that income would be about 34.9%.  Mr. Buffett tells us the bulk of his income comes from capital gains, which are taxed at a 15% rate. 

A capital gain is derived from the increase in value in a qualified investment (e.g. a stock or business) over time.  An important fact that Mr. Buffett and many liberals ignore is that capital gains are not indexed for inflation.  If your investment only grows at the rate of inflation, you actually pay income taxes on income that is not “real”.

Capital gains enjoy preferred taxation because you are using your own money to make an investment and the money was already taxed before as income.  Secondly, it serves a societal purpose of encouraging people who can to save and invest rather than spending it on caviar and yachts. 

It would seem reasonable to assume Mr.  Buffett maximizes his eligible charitable contributions since  he is a noted philanthropist.  Charitable tax deductions exist to encourage a societal goal.

It is worth noting a “C” corporation already paid high corporate income tax rates on its income before you, I or Mr. Buffett take any capital gains on that income.  The capital gains rate is lower partly in recognition of this fact.

Mr. Buffett is highly unusual in that his personal investment in Berkshire Hathaway has been stunningly successful; he may be the most successful investor of all time.  Most of us who buy a stock or invest “angel” capital in a friend’s start-up are happy if we might double our money in 5 years (unadjusted for inflation).  Only a precious few are able to parlay a modest investment into massive riches the way Mr. Buffet or Bill Gates have.  They are amongst the world’s richest people and biggest philanthropists.  Personally, I bet their charitable contributions are more cost-effective than funneling the same money through Washington D.C.

According to the IRS, the top 1% of earners accounted for 20% of all income but paid 38% of total income taxes. [7]  Mr. Buffett believes the top earners are not paying enough.  That is a matter of opinion and my purpose here is not to debate the proper tax structure or rate [8].  I have instead shown Mr. Buffett’s statistics for his office staff’s average tax rates are misleading and quite possibly wrong.



[2] Tax Chart by author, source:,,id=129270,00.html

[3] and pg. 19 of   Note the individual rate was lowered by 2.0% to 5.65% for 2011 as a temporary stimulative measure.  

[4] IRS tax table chart by author, source:


[6]  Mr. Buffett runs Berkshire; since he believes his taxes are too low, he could adjust his compensation mix to more salary.  


[8] One option that would accomplish what Mr. Buffett wants (and some liberals have advocated) is uncapping Social Security.  Ironically, though, uncapping would crimp people earning $106,800 and above.  While $106,800 is hardly pauper territory, President Obama has exempted people under $250,000  from his proposed income tax hikes as “middle class”.  If liberals were unsuccessful in uncapping Social Security, it will be hitting many people earning $125,000 and $175,000 – people who see themselves as upper “middle class” as does Mr. Obama. 

Social Security payroll taxes were not intended to be used to fund defense, NASA or the TSA, which is what would happen if it were uncapped and the new revenues from the rich were used to fund general government operations.

Pictures from Wikipedia Commons.

Dislosure: the author owns stock in Berkshire Hathaway.