Monday, August 22, 2011

Tax Tip for Warren Buffett, and Wouldn't His 2010 Taxable Income Be only $100k To Pay 17.4% Rate?

Just a thought: If Warren Buffett is really serious about paying higher taxes, couldn't he simply take the standard deduction voluntarily ($11,400 for married taxpayers filing jointly in 2010) instead of itemizing his deductions?  That wouldn't require any change in tax policy, so he doesn't have to wait.  

After all, it must be all of his itemized deductions (e.g. charitable, etc.)  that reduce Buffett's income tax rate to only 17.4% on about $40 million income last year.  Except for about the first 1% of his income ($373,650) that would be taxed at lower rates, he should be paying a marginal tax rate of 35% on the other 99%.  Using the tax brackets below for 2010, how could Buffett claim that he paid an effective tax rate of only 17.4% unless his taxable income was only about $100,000?

Married Filing Jointly 2010 Tax Brackets

  Taxable Income
  Marginal Tax Rates 
$0-$16,750 10%
$16,751-$68,000 15%
$68,001-$137,300 25%
$137,301-$209,250 28%
$209,251-$373,650 33%
$373,651+ 35%

36 Comments:

At 8/22/2011 2:07 PM, Blogger Benjamin said...

When I think of the life-sapping taxes the very rich pay, I cry a Niagara, until I fall asleep.

But FICA and sales taxes? Not so much.

 
At 8/22/2011 2:16 PM, Blogger Marko said...

I will say it again - I assume Mr. Buffett gives generously to charities, but minimizes his taxes. Doesn't that show that whatever he says, he thinks that private charities are less wasteful than the government?

 
At 8/22/2011 2:17 PM, Blogger Mark Cancellieri said...

He likely earns a significant amount of dividend income (and capital gains) at 15%. Although Berkshire Hathaway makes up the vast majority of his assets, he still has substantial other holdings.

 
At 8/22/2011 2:19 PM, Blogger Don said...

That sounds like the basis of a good idea. Eliminate charitable deductions. If a person feels good about himself for contributing to charity, how much the feeling must be enhanced if he doesn't get a reward for doing so.

Anyway, wouldn't you normally expect that investments in profit and loss driven businesses would be of more benefit to society than the majority of non-profit charities?

Regards, Don

 
At 8/22/2011 2:32 PM, Blogger hkoliner said...

Most his income is taxed at the cap gains rate

 
At 8/22/2011 2:40 PM, Blogger morganovich said...

as methinks mentioned earlier, buffet is just rent seeking.

this is not about taxes, it's about selling life insurance.

life insurance is sold predominantly as a wealth management tool. you buy it to cover inheritance taxes and as a way to compound tax free. the business has been shrinking and rates are very unattractive to life insurance companies.

yields right now are double digits (to the policyholder).

if he can get the feds to eliminate the cap gains tax treatment, it makes life insurance look comparatively better and berkshire can sell more.

this whole pitch has zero to do with taxes and everyhting to do with buffet acting like a euro-statist and trying to get the government to prop up his business.

 
At 8/22/2011 2:46 PM, Blogger Mike said...

Don,
I'd propose a compromise. I know I wouldn't be able to afford to give as much to charities as I do without the deduction...and, when you consider the category of the two I give the most money to, (St. Judes and Wounded Warriors) without the exemption, you could expect the tax grabbers to be out in even greater numbers, wanting our money to filter through government for health care and military.

How about making it much harder to achieve tax exempt status and an open book policy showing that a high percentage goes to help those in need (instead of sponsoring fun runs)?
Personally, I have a problem with many church exemptions. If the church is funding a soup kitchen, fine....but paying for a new stage for the rock band and coffee bar seems like a scam to me.

I do feel good about giving to the charities, but not because I'm 'a great guy'...I feel good that I can choose where my would-be tax dollars go without penalty.

 
At 8/22/2011 2:53 PM, Blogger Larry G said...

One way to given Buffet his wish is to put a tax on trading - the transactions - eh?

what would be the pros and cons of that?

 
At 8/22/2011 3:14 PM, Blogger arbitrage789 said...

I would say that if someone were to put up a highly specific and highly credible plan to achieve a balanced budget, it would be worth considering, even if it included an increase in the top marginal rate.

Subject to the proviso that all underlying assumptions were clearly laid out (something the CBO is loathe to do).

 
At 8/22/2011 3:20 PM, Blogger Mike said...

Morganovich,

As with most things, you seem to have the numbers at the ready....is there any chance you could explain to a dummy like me how this wouldn't be a zero sum game within his own holdings?

 
At 8/22/2011 3:31 PM, Blogger Methinks said...

what would be the pros and cons of that?

When you are imposing costs with no benefits there only cons.

A transactions tax will immediately reflect in the bid/ask spread. The bid/ask spread is what you pay to to transact in a security.

If the cost of transacting rises, return on investment declines.

Since transactions costs will rise, fewer people will want to trade, reducing liquidity.

The less liquid the security, the violent the price moves as small upticks in trading volume have huge effects on price.

The higher the price volatility, the higher the market risk premium of the security and the higher the cost of capital for enterprises seeking funding - both in the private and public market. The higher the cost of capital, the fewer projects are economic and the less economic growth there is due to lack of investment.

Sophisticated traders will trade entirely in derivatives. The propensity to create more (and more poorly constructed) derivatives will worsen beyond what it is now (the ultrashort and ultralong ETFs, for instance, are an example of poorly constructed derivatives with terrible consequences for the market. For the owner, they are short gamma when you most need gamma and long gamma when you don't need it at all. The rest of the market front runs them all day long, contributing to volatility).

So, you will end up with a more thinly traded, volatile market that will cost you an arm and a leg to transact your portfolio. There will be less economic activity because the cost of capital will rise and you still won't raise nearly as much money as you think you will (which wouldn't be enough to make a debt in the congresswhore's spending habits) because there will be less trading.

Why would you want to do this? You're not asking your online broker to raise his commissions, why would you beg for government to raise them for you?

 
At 8/22/2011 3:35 PM, Blogger Methinks said...

Mike,

He's stumping for a tax hike on individuals.

The tax he's begging for will not affect his other companies. They are all either C-corps or disregarded entities for the purposes of taxation.

Neither the C-corps nor the disregarded entities will be affected by the tax hikes on individuals. Only their individual owners will be affected.

 
At 8/22/2011 3:42 PM, Blogger Methinks said...

Arbitrage,

The problem with raising the top marginal tax rate is it doesn't work.

These are the people who have the most flexibility both in how much they work and how they take their compensation.

What does work better is raising taxes on the sainted middle class. These people's income is almost entirely a wage and they don't make enough or have enough flexibility as an employee to meaningfully effect the way in which they take their compensation (although, over the long run, I bet fringe benefits will become a bigger portion of comp).

What'll really work is cutting spending on bullshit like the department of education, firing our 101 Czars, cutting military spending, reducing regulation and their associated agencies, ending the idiotic war on drugs and foreign wars, reducing or eliminating NATO subsidies, cutting duplicate programs, reworking welfare to a negative income tax so that large bureaucracies are not needed. Facing up to the bankruptcy of SS and Medicare and Medicaid and killing Obamacare The list goes on and mine aren't even the best ideas.

Finally, I hate to tell you this, but there are plenty of tax increases in Obamacare that go into effect after the election he will (I pray) lose. I'm sure those won't encourage anyone to take it easy and not work so hard so that we get all that economic growth taxes are supposed to bring, eh?

 
At 8/22/2011 3:45 PM, Blogger Larry G said...

basically including stock/bond trading in the sales taxes on many other items?

it does not need to be an arm/leg - just the same percent that we put on other items....

you know.. like the tax on fuel and starbucks coffee that the traders have to pay on their way to work....

:-)

and the BIG benefit is you give Warren Buffet his wish...

win-win... :-)

 
At 8/22/2011 4:00 PM, Blogger Methinks said...

Oh, shit, I didn't realize I was answering Larry.

Lar, I've long ago realized you can't figure out up from down. Nevermind.

 
At 8/22/2011 4:08 PM, Blogger Mike said...

Methinks,

I think that is one incredibly brilliant observation.

I didn't notice that Morganovich had already given you credit for it from a previous post and I just went back and found it.

 
At 8/22/2011 4:11 PM, Blogger Benjamin said...

LA JOLLA — GOP presidential contender Mitt Romney, scheduled to attend a series of fundraisers this weekend in San Diego, is also working on plans to nearly quadruple the size of his $12 million oceanfront manse in La Jolla.

Romney has filed an application with the city to bulldoze his 3,009-square-foot, single-story home at 311 Dunemere Dr. and replace it with a two-story, 11,062-square-foot structure. No date has been set to consider the proposed coastal development and site development permits, which must be approved by the city.

--30--

And without taxes, he could build an even larger home.

 
At 8/22/2011 4:19 PM, Blogger Larry G said...

is that one of them thar energy efficient homes? I sure hope so cuz if not.. he's surely going to get the Al Gore "treatment", eh?

 
At 8/22/2011 4:21 PM, Blogger Methinks said...

Mike,

That's very sweet of you. But, it wasn't brilliant observation on my part. It was obvious.

Warren has always engaged in Rent Seeking - and always blatantly and with contempt for what he considers the unwashed masses.

In 2008, he agreed to buy Goldman preferred stock which contained and in the money option. It was a guaranteed, risk free mega win for Warren IF Goldman got a bailout. As soon as he closed the deal, he became a very vocal advocate of TARP - a transfer of wealth to him from you.

And he has the gall to complain about a "billionaire friendly congress".

 
At 8/22/2011 4:43 PM, Blogger Paul said...

Larry,

"I sure hope so cuz if not.. he's surely going to get the Al Gore "treatment", eh?"

Why would he? He hasn't made a billion dollars pestering everyone else to "..change the way you live."

 
At 8/22/2011 4:47 PM, Blogger VangelV said...

That sounds like the basis of a good idea. Eliminate charitable deductions. If a person feels good about himself for contributing to charity, how much the feeling must be enhanced if he doesn't get a reward for doing so.

Why not? Charities get in the way of government and make it look bad by doing so much more with less. If we want to destroy society pushing aside voluntary associations in favour of government institutions is a good step.

 
At 8/22/2011 4:52 PM, Blogger Methinks said...

Why not? Charities get in the way of government and make it look bad by doing so much more with less.

Totally. Why not just go whole hog Soviet and make it illegal to help yourself or anyone else in any way? Let's drop this silly charade.

Make it illegal to hire or innovate. Bourgeoisie activity (upon which this country was built) will be illegal. The only form of compensation you can have is what the state gives you and the state will decide how much that is.

Worked so well in Eastern Europe. Neither Obama nor Soros nor Buffoon can figure out why people don't want it here.

 
At 8/22/2011 4:58 PM, Blogger Mike said...

Methinks,

Not obvious to all of us who can't or don't pay enough attention to things like this.

I've always known he had an angle to everything he does politically, but I never figured it out....so, please, let me call it a brilliant observation so I won't have to call myself lazy or stupid :)

 
At 8/22/2011 5:38 PM, Blogger arbitrage789 said...

Methinks @ 3:42

I was making a political point, not an economic one.

 
At 8/22/2011 6:33 PM, Blogger VangelV said...

Totally. Why not just go whole hog Soviet and make it illegal to help yourself or anyone else in any way? Let's drop this silly charade.

Now we are getting somewhere; honesty in politics.

Make it illegal to hire or innovate. Bourgeoisie activity (upon which this country was built) will be illegal. The only form of compensation you can have is what the state gives you and the state will decide how much that is.

Works for me. By cutting down their consumption Americans will help the rest of the world bid up the price of scarce resources. Imagine how much faster the developing world nations will increase their standard of living as they liberalize their economies as the US moves towards voluntary central planning. They will write songs and build monuments to the American self-sacrifice. And they may even hire your sons and daughters to mow their lawns, cook their food, or act as nannies for their children.

Worked so well in Eastern Europe. Neither Obama nor Soros nor Buffoon can figure out why people don't want it here.

Do not forget Western Europe. It followed the Eastern European prescription and look how well that worked out.

 
At 8/22/2011 7:52 PM, Blogger Methinks said...

Mike,

You mean you're spending your time engaged in productive activity instead of decoding Warren Buffoon's disgusting activity? You fool!!

:)

Thanks.

 
At 8/22/2011 9:14 PM, Blogger B Mickey said...

this blog seems to have some sort of obsession with warren buffett's recent comments. By this point, we're all well aware that Mr. Buffett can pay higher taxes if he would like. We're also aware that the America tax code is progressive by design and that the rich pay a higher share. Neither of these points repudiate buffett's central point, which is that, as a billionaire, he feels his income is less attributable to his self-worth than to his overall luck.

 
At 8/23/2011 7:19 AM, Blogger Methinks said...

B Mickey,

That's something Warren needs to discuss with his psychologist. Falls under "TMI". I don't care about Warren's guilt complex.

What Warren is saying is that he feels OTHER people's wealth is attributable to luck and he'd like to confiscate it. I know how hard I work and I know what sacrifices I made. I know my wealth has very little to do with luck. So, Warren can go eff himself.

 
At 8/23/2011 7:21 AM, Blogger Methinks said...

By the way, B Mickey, that's not actually what Warren is saying.

The Buffoon is actually saying "Give me more taxpayer money". Listen closely. It's wrapped up in his trademark folksiness, but it's the thieving just the same.

 
At 8/23/2011 7:34 AM, Blogger VangelV said...

What Warren is saying is that he feels OTHER people's wealth is attributable to luck and he'd like to confiscate it. I know how hard I work and I know what sacrifices I made. I know my wealth has very little to do with luck. So, Warren can go eff himself.

The Buffoon is actually saying "Give me more taxpayer money". Listen closely. It's wrapped up in his trademark folksiness, but it's the thieving just the same.


Warren has been a great investor over the past few decades. One of the way that he has profited has been by looking at businesses that are protected from competition and can increase their prices. Some of this protection comes from a business having spent decades on advertising (think Coke, Gillette , Wrigley) to build a brand that resonates with people. But his preferred protection comes from government barriers or subsidies. (Think Freddie Mac or even BNSF.)

Higher regulations and more taxes will change the game and will divert more money towards Buffett's businesses, particularly insurance, as people try to use trusts and other means to protect themselves from confiscatory actions on the part of the government. The irony is that over the long run the principled father, Howard Buffett, will prove to be both the better man and the better investor than the unprincipled son, Warren.

 
At 8/23/2011 8:42 AM, Blogger morganovich said...

mike-

it's not about his holdings, it's about his capital inflows.

berkshire hathaway is an insurance company.

with life insurance, they take your premium and invest it while you are alive to fund the payout when you die.

you get X rate of return on that depending on how long you live. berkshire needs to make X+n to make any money.

they are screwed right now as the effective returns on life insurance are 10%. making that up in the equity markets is very difficult.

if they could find a way to make the product more attractive (by taxing your stock transactions) price would rise, yields would fall, and more money flows into BH.

they do big buyouts with long buy and holds so they are not heavily affected by the new taxes, but the average mutual fund/hedge fund would be.

he's just talking his book to get more money in and better rates of return.

 
At 8/23/2011 8:52 AM, Blogger morganovich said...

"it does not need to be an arm/leg - just the same percent that we put on other items...."

are you kidding larry? your ignorance astounds me.

you buy google at $500. you sell at $525. hey, nice little 5% trade, right?

oops, nope, you lost money. there's a 7% sales tax. you paid $36.75 in sales tax.

if every trade starts 5-7% in the hole, the whole broker dealer model fails. there will be no liquidity in anything. trading in the US will end.

hell, the minute we passed this, i'd be in panama opening a new market to list US companies and get away from this. trading in the US would be extinct in a year.

nothing shifts faster than trading when a better way is found.

the ECN's took the market by storm and took huge business away from the brokers and drove commissions from 12.5c to 1c. the dark pools have taken volume even more rapidly.

your tax would net ZERO on this. it would all go offshore. if you tried to tax the entities anyway, they would go offshore too.

 
At 8/23/2011 11:32 AM, Blogger Methinks said...

hell, the minute we passed this, i'd be in panama opening a new market to list US companies and get away from this. trading in the US would be extinct in a year.

Precisely why there will be a proposal to close the borders and limit capital flows.

 
At 8/23/2011 1:24 PM, Blogger Larry G said...

the tax would not be 7% why did you assume that?

 
At 8/26/2011 3:47 AM, Blogger Ron H. said...

"the tax would not be 7% why did you assume that?"

As usual, Larry forgets his previous comments on a thread.

 
At 8/26/2011 4:26 AM, Blogger Larry G said...

nope... where did the 7% number come from?

why not 2%

and the whole concept of it turning off trades is bogus anyhow...

put a small transaction fee on the trades...

make it .1% or make it .5%.

devote it to paying down the debt....

eh?

 

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