Squeezing Buffett’s numbers … Part 1

Last week Warren “Don’t Coddle Me” Buffett released some of his tax info.

Just some highlights, but enough to give fodder to some analyses.

I think I have some interesting unreported angles on the nums that I’ll be dribbling out in this and subsequent posts.

First, the facts:

  • Buffett’s adjusted gross income (AGI) was $62,855,038  last year
  • His taxable income was $39,814,784
  • His federal income tax bill came to $6,923,494, or 17.4% of his taxable income.
  • He said The roughly $23 million difference between his AGI and taxable income was due largely to deductions he took for charitable giving and local taxes
  • He paid $15,300 in payroll taxes … but, so what?

You may remember, the buzz us about how Buffett’s 17.4% is lower than his secretary’s mid-20s tax rate.

Conventional wisdom is saying that the issue stems from so much of Buffett’s income comes from capital gains and dividend (taxed at 15%) rather than ordinary earned income (taxed at 35% at the margin).

A simple analysis suggests that for Buffett to have an overall 17.4% tax rate, his $40 million in taxable  income must be split roughly $35 million from capital gains & dividends (taxed at 15%) and $5 million in ordinary income (virtually all taxed at 35%).

image

But, not so fast …

I’m not a tax adviser but …here’s something that I think is right and that I bet you didn’t know:

Mechanics for applying the tax code work to the tax payer’s advantage in at least one very import way … deductions against income aren’t applied pro-rata across tax categories – ordinary income and capital gains … rather they get applied to the highest taxed category of income first.

Said differently, deductions are first applied to ordinary income, then to capital gains (if there are any left).

That’s a big deal … for Buffett and for us ordinary folks.

What it could mean for Buffett is that the could pay his 17.4% rate with an almost 50 / 50 mix or ordinary income and capital gains.

Here are the nums:

image

So what?

Well, if I’m right then maybe Buffett’s right … he is being coddled.

But, the problem isn’t the tax rate (sorry, Chuckie Shumer) it’s those devilish loopholes.

It’s that he can generate tax deductions by giving mucho  $$$ to his buddy Gates’ foundation … and, in effect, can shelter almost all of his ordinary income from any taxes.

Now, that’s a big deal!

More in subsequent posts.  Trust me, I’m not done with this one.

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5 Responses to “Squeezing Buffett’s numbers … Part 1”

  1. Squeezing Buffett’s numbers … Part 2 « The Homa Files Says:

    […] Part 1, we looked hard at Buffett’s effective income tax rate […]

  2. Squeezing Buffett’s numbers … Part 3 « The Homa Files Says:

    […] Part 1, we looked hard at Buffett’s effective income tax rate (17.4%), and showed how he could get to […]

  3. Squeezing Buffett’s numbers … Part 4 « The Homa Files Says:

    […] Part 1, we looked hard at Buffett’s effective income tax rate (17.4%), and showed how he could get to […]

  4. Squeezing Buffett’s numbers … Part 5 (and done !) « The Homa Files Says:

    […] Part 1, we looked hard at Buffett’s effective income tax rate (17.4%), and showed how he could get to […]

  5. Buffett, Romney & the Give Back to Society Rate « The Homa Files Says:

    […] Part 1, we looked hard at Buffett’s effective income tax rate (17.4%), and showed how he could get to […]

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