Friday, September 30, 2011

More Fact-Checking of Warren Buffett

Warren Buffett famously claimed in the New York Times that he paid only 17.4% of his 2010 income in taxes, which was a lower rate than the other 20 people in his office, whose tax rates ranged from 33% to 41%, and averaged 36%.  It's been well-documented by now that Buffett's low rate was extremely atypical for the "super-rich" and his tax rate can only be that low because he received almost all of his taxable income as capital gains and dividends, which are taxed at only 15%.  

Nick Kasprak at The Tax Foundation now does some fact-checking and finds that:

"The effective rates Buffett claims for other workers in his office are extraordinary. To me, they seem too high to be realistic, and I can't figure out how he calculated them, even if you include all payroll (employee and employer side) taxes. Even if you assume the scenario that leads to the highest possible tax burden (single filer, no deductions), a taxpayer would have to make at least $285,388 (in 2010) before his or her effective rate reaches 33 percent. 41 percent is impossible."

Nick Kasprak provides the handy calculator below that shows the highest possible tax rate for any amount of income, assuming a single filer with no deductions or credits (enter any income amount in wages below and click somewhere outside of the calculator area): 



Bottom Line: An effective tax rate of 41% is impossible.

21 Comments:

At 10/01/2011 12:56 AM, Blogger arbitrage789 said...

I assume that Buffet’s objective here is to get people to vote for those politicians who favor a higher capital gains tax rate. The following URL provides historical data which shows the futility of raising the capital gains rate to a level much higher than where it currently is:

http://adamsmith.org/files/capital-gains-tax.pdf

The following is also relevant here:

http://bit.ly/9LFcVF

 
At 10/01/2011 2:41 AM, Blogger Ron H. said...

"I assume that Buffet’s objective here is to get people to vote for those politicians who favor a higher capital gains tax rate. "

Buffett isn't interested in higher tax collections. As a major investor in insurance companies, he is interested in selling life insurance to very wealthy people as a tax avoidance tool. Higher taxes equals higher insurance sales. He isn't a multi-billionaire because he's stupid.

 
At 10/01/2011 6:20 AM, Blogger Expected Optimism said...

This comment has been removed by the author.

 
At 10/01/2011 9:33 AM, Blogger Expected Optimism said...

Hmm, my previous comment seems to have gotten lost somewhere in the series of tubes. It included a link so perhaps it got flagged as spam.

Anyway, is it possible that Buffett was including state and local taxes for the other people in his office? The top marginal rate for Nebraska is 6.84%, and for Omaha is 1.5%. Adopting the assumptions in this entry for the federal tax burden, the combined federal, state and local effective income tax rate would be 41% at an income slightly higher than $90,000. The claimed average of 36% would be reached with an income slightly lower than $55,000.

I have no idea if those are reasonable salaries for the other people in his office, but they're at least possible. Since Buffett's op-ed specifically refers to his 17.4% "federal tax bill" but only the "tax burdens" of the others in his office, that would mean he was just extremely misleading rather than outright lying. I guess you can take your pick.

 
At 10/01/2011 10:59 AM, Blogger arbitrage789 said...

Ron H.,

Interesting take. I hadn't considered that angle.

 
At 10/01/2011 1:42 PM, Blogger T J Sawyer said...

Maybe he was just looking at the payroll statistics. It is not uncommon for a secretary to have additional withholding requested via their W-4 because their spouse is high income and so the secretary is having to deal with the family's marginal rate as her effective rate.

More likely, the secretary is requesting extra withholding to cover dividends being paid on her accumulation of B-H stock. It is advantageous to do this via payroll withholding instead of making quarterly deposits. See your tax expert for the reason.

Either case is reasonable and makes the withholding looks large in comparison with salary. I doubt that even Warren Buffett is nosy enough to actually look at his employee actual tax returns.

 
At 10/01/2011 6:19 PM, Blogger Itchy said...

The whole debate is misguided, an intentional smoke screen by both parties in my personal opinion.

The real problem with the tax code is that two people in Mr. Buffet's office making $90,000/year could pay vastly different tax rates because the federal government uses the tax code to subsidize, reward, and penalize lifestyle choices.

For all the prattling about fairness from the left, you would think they would pick up on that point ... No?

 
At 10/01/2011 7:03 PM, Blogger Craig said...

he was just extremely misleading rather than outright lying

A subtle distinction.

 
At 10/01/2011 7:53 PM, Blogger Ron H. said...

T J Sawyer: "Maybe he was just looking at the payroll statistics..."

Buffett knows how much he pays his employees, and their marginal tax rates based on that figure.

He compares tax *rates* not withholding rates. He isn't so stupid as to to compare his tax rate with their withholding rate, and if that were actually the case, his entire claim would be meaningless.

"More likely, the secretary is requesting extra withholding to cover dividends being paid on her accumulation of B-H stock."

You are guessing that Buffett confuses his secretary's withholding rate with their tax rate, that their withholding rate is higher than it needs to be, that the secretary has large holdings in BH, and last but not least, that the secretary is a woman.

This is a fascinating story, but I doubt that it has much bearing on Buffett's claim.

"It is advantageous to do this via payroll withholding instead of making quarterly deposits. See your tax expert for the reason."

My tax expert isn't available today. I got voicemail when I called him. Can you explain it to me please?

"I doubt that even Warren Buffett is nosy enough to actually look at his employee actual tax returns."

Buffet has no more access to his employee's tax returns than you do.

 
At 10/01/2011 7:58 PM, Blogger Ron H. said...

Craig: "A subtle distinction."

The difference is that he isn't lying if he crosses his fingers behind his back as he speaks. :)

 
At 10/01/2011 8:10 PM, Blogger Itchy said...

At 10/01/2011 7:03 PM, Craig said...
he was just extremely misleading rather than outright lying

A subtle distinction.


It's entirely possible that Warren pays a lower effective tax rate than his secretary. The problem is the tax code not that the "rich" as a monolithic bloc are not taxed enough. Warren and Obama (and most members of Congress) do not want to discuss that.

 
At 10/02/2011 1:37 AM, Blogger T J Sawyer said...

Ron H.

You say, "He compares tax *rates*"

How does Buffett know his employees tax rates? You proved my point!

Knowing what you pay your employees tells you nothing about their tax rates! For instance, if they have lots of deductions, their tax rate is zero.

The point of the original post was, how in the hell does anyone get to a 41% tax rate! Do you have a plausible explanation of how it can be done?

Outside of calculating it in some bogus fashion you just can't get there from here.

(And keep calling that tax expert. You might be missing out on a good cash management / tax planning strategy!)

 
At 10/02/2011 2:17 AM, Blogger T J Sawyer said...

Ron H:

"You are guessing ... last but not least, that the secretary is a woman."

No Ron, I am not guessing. Her name is Debbie. I know this is true because Rush Limbaugh reported it this past week.

Assuming, however, that you may not trust Rush, here is a link to a SLATE article that furnishes a bit more information:

http://www.slate.com/articles/business/moneybox/2011/09/who_is_warren_buffetts_secretary.html

There we learn that according to public records and press reports, Debbie Bosanek is 55 years old, lives outside of Omaha, and has short-cropped red hair. (Why is it that liberals always want to categorize people by physical characteristics like that?)

I hope that before congress passes any laws based on Buffet/Bosanek ratios we will see both of their tax returns for the previous five years.

 
At 10/02/2011 2:34 AM, Blogger Ron H. said...

T J S: "You say, "He compares tax *rates*"

How does Buffett know his employees tax rates? You proved my point!

Knowing what you pay your employees tells you nothing about their tax rates! For instance, if they have lots of deductions, their tax rate is zero.
"

In the NYT article referenced, he talks about taxes paid:

"Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — 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."

In this CNN interview, at 0:53 Buffett compares tax rates.

While we agree that he can't actually know his employees' effective tax rates, he can know what a person's marginal tax rate is, based on their income.

Your point seemed to be that he might be talking about withholding rates, although that could only be speculation.

That he is making a bogus claim, there can be no doubt.

In any case, he seems to be addressing the wrong end of the problem when he talks of increasing tax revenue, rather than reducing spending.

 
At 10/02/2011 2:39 AM, Blogger Ron H. said...

T J Sawyer: "No Ron, I am not guessing. Her name is Debbie. I know this is true because Rush Limbaugh reported it this past week."

I stand corrected. :)

I'll bet she wishes her boss had kept his mouth shut.

 
At 10/02/2011 2:41 AM, Blogger Itchy said...

I cut+pasted this from an arguement that I had with someone about both Warren's (Warren Buffett and Elizabeth Warren):

The Warren Buffets in this country are a red herring. Yes the tax code allows the very wealthy to pay a lower effective tax rate, but most of the "rich" pay a much higher rate than their secretaries.

We are talking about these people: http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=566&Topic2id=48

So yes ,a large chunk of the top 400 income tax filers use the tax code and all the provisions that they paid for through lobbyists. The reason Warren Buffett can claim that he is paying a lower rate than his secretary is because he pays himself a relatively low salary by executive standards, and takes the rest of his income as long term capital gains. On top of that, he is very generous. He gives money in the form of stocks which have appreciated greatly in value. He gets to deduct the appreciated value without paying any tax on the capital gains (i.e. if he bought something for $100 and donated it at $300 he would get to deduct $300 w/o no tax on the $200 he made)

Why are we even considering basing tax policy on a tiny minority of the total income tax filers? It is even a tiny minority of the very rich. 400 out of 139,960,580 (total) and 140,000 (top 0.1%).

It should be noted that some of the very rich pay an effective tax in the 30% range. What Warren Buffett wants is a tax on rich people like him (although I don't know how someone worth $40B can think that others in the $1M+/year club are in the same boat).

What Elizabeth Warren advocates is a "new" AMT (the last one targeting the richest few hundred tax returns has worked out out really well), and what Obama wants is to tax anyone who probably won't vote for him.

 
At 10/02/2011 3:02 AM, Blogger Itchy said...

Ron H.,

"Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — 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."

It's possible that that he is close enough with many of his employees that they told him what their effective tax rates were. Although it appears that the Berkshire employees are horrendously bad at math and cannot calculate simple ratios (hopefully these employees were not the one's handling the investing)

It is also possible that Warren is only using Federal income tax for his number and including income tax and every other tax (state, sales, property, gas, cigarette, etc...) in the number for his employees.

At best Warren is comparing apples to oranges. Most likely he is flat out lying.

While we agree that he can't actually know his employees' effective tax rates, he can know what a person's marginal tax rate is, based on their income.

Even if he were using the top marginal tax rate, he would have to be vastly overpaying them for their effective rate to even approach 35%

$1,000,000 of taxable regular income would be 32.73% (very simple calculator: http://www.moneychimp.com/features/tax_brackets.htm)

 
At 10/02/2011 9:07 PM, Blogger VangelV said...

Bottom Line: An effective tax rate of 41% is impossible.

Truth was never the point. Buffett is trying to score political points. As I have written on many occasions he is not half the man his father was.

 
At 10/02/2011 10:22 PM, OpenID David Clayton said...

Bottom Line: An effective tax rate of 41% is impossible.

I know I'm late to this party, but enough is enough, Mr. Perry. I'll bet you're wrong. How much is enough to make it worth your while?

 
At 10/03/2011 9:53 AM, Blogger morganovich said...

if buffet wants higher taxes, he should move to california.

he can get 11.7% tacked on to his cap gains right there.

heck, if it's a good idea for individuals, all the corporations in which he invests should do it too.

this is such a transparently self serving attempt to promote the use of life insurance as a wealth management tool. the only reason that has not been made plain in the media, is the reporters are too financially illiterate to understand how it works.

if cain becomes the republican candidate, watch for buffet to go ballistic in opposition.

virtually all life insurance (by dollars) is used to pay inheritance taxes.

if that goes away under 9-9-9 then berkshire will take a BIG hit.

as my old poly sci professor used to say "where you stand depends on where you sit".

i have no problem with people talking their book if they do it honestly and directly, but buffet is trying to disguise his self interest as public spirit.

dirtbag.

 
At 10/03/2011 10:12 AM, Blogger DrSandman said...

I am surprised that more people don't pick up on the inheritance tax-avoidance nature of Buffet's main business: insurance.

We aren't "rich" by most measures (two gov't professionals with good savings habits...), but use Variable-Universal Life insurance policies to eventually pass substantial sums to our kids and Ye Olde Alma Mater tax-free -- entirely BECAUSE of the federal income tax (VUL earns tax-free now) and estate tax (VUL passes tax-free after our demise).

 

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