HEADLINE: “Warren Buffett’s Secretary Pays More Taxes than He Does”
The story has been making the rounds for the past couple of months and seems to be the determining data point for Barack Obama’s tax plan (e.g. “Bush’s tax cuts for the wealthy who didn’t even wamt them”).
Surprisingly (to me), everybody seems to just nod and to take the story at face value without interrogation. Not me.
According to Buffett, he pays taxes at a lower tax rate than does his $60,000-a-year secretary, 17.7 percent and 30 percent, respectively.
Let’s start with the secretary: $60,000 @ at a 30% tax rate. We’ll take her $60,000 salary at face value (but wonder why a generous guy like Buffett would only pay her that piddling amount).
What about the 30% rate? To be conservative and simple, let’s assume that the secretary has no dependents and takes the standard deduction. That would give her taxable income of $50,250 ($60,000 less 1 exemption @ $3,400 and a standard deduction of $5,360) and a federal income tax liability of $8,986.25 — $4,386.25 + 25% of the excess over $31,850. So, the secretary’s effective Federal income tax rate is only 15% ($8,986.25 / $60,000). Hmmmm.
Well, maybe Buffet is throwing in payroll taxes for Social Security and Medicare. OK, add on 7.65% — 6.2% for Social Security and .1.45% for Medicare. That gets the secretary up to 22.65%.
Still short, so add on $2,750 for Nebraska state income taxes and the secretary is up to 27%. OK, throw in everything including the kitchen sink, give the number a hard round, and we’re up to 30%. Not the way most people think about tax rates, but let’s not quibble.
Let’s see, $60,000 times 30% — the secretary pays $18,000 to the Federal and Nebraska coffers.
Buffett says he earned $46 million in 2006. Even at a measly 17.7%, that’s over $8 million. Hmmm. I’d say that the usual headline “Warren Buffett Pays Less Taxes than His Secretary” is, perhaps. just a bit deceiving. What do you think?
More interesting (to me) is Buffett’s 17.7% tax rate. How does he get it that low. After all, the the 35% marginal tax bracket starts around $100,000, so you’d expect that most of his $46 billion would fall into that category, right?
Well, he’s probably got clever accountants and claims some pretty staggering (but legal) deductions. How many would he need to claim to get down to 17.7%? Easy math: his deductions would have to be about $23 million to get his taxable income down to (coincidentally) $23 million and give him a tax bill of $8 million at a 35% rate. That’s a lot of business dinners and cab rides — especially for self-proclaimed cheapskate.
Well, maybe Buffett doesn’t pay the 35% rate. Hmmmm. Isn’t there an Alternative Minimum Tax (AMT)?
How could he do it? That is, pay a rate way below his bracket’s 35%?
My bet: He is a huge beneficiary of the cut in dividend and capital gains rates. It’s my recollection that Buffett takes a modest cash comp package from Berkshire Hathaway — around .$100,000. Since BH doesn’t pay material dividends, most of his income probably comes via capital gains — distributions and stock sales. Tax those at a 15% rate and maybe — just maybe — he really does pay 17.7%.. But, it’s not courtesy of Bush cutting the top marginal rate to 35%. It’s because the capital gains rate was cut to 15%.
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Observations
1. $8 million in taxes paid strikes me as a statistically significant number — and certainly greater than $18,000.
2, Resetting the high bracket marginal tax rate to 39% doesn’t fix the “Buffet Problem”
3. What’s up with the AMT if it doesn’t “catch” a uber-earner like Buffett?
4. As many others have suggested, if Mr. Buffett feels so guilty why doesn’t he just write a voluntary check to the US Treasury, and keep the Feds out of our pockets.
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