The Homa Files

In Part 1, we looked hard at Buffett’s effective income tax rate (17.4%), and showed how he could get to that low rate by offsetting practically all of his ordinary income with $23 million in deductions.

This conclusion debunks the popular pundit point that he gets to the rate by having practically all of his income in capital gains and dividends.

In Part 2, we showed that about $20 million of the deductions are probably charitable contributions – a device that rich folks use to (1) do good things and (2) to manage down their tax liabilities.

Better to give to a cause that you believe in, right? Why give it to the government and have it waste the money?

In Part 3, we agreed that Buffett’s tax rate as a percentage of his taxable income is probably less than his secretary’s – partially due to his capital gains being taxed at a comparatively low rate, but mostly because he shelters his ordinary income with charitable deductions.

And, we showed how ordinary earners can get to a rate lower than Warren’s … just by donating a huge chunk of their income to charity.  Not realistic, but mathematically possible.

Whew.

Now let’s start pulling things together.

The chart below makes the obvious clear … at least to me to me.

Note that Buffett’s tax rate as a percentage of AGI is only 11% …. about half of the estimated rate for our secretary surrogates.

Now that’s a gap!

But, I haven’t seen anybody in the mainstream media even notice.  They, and Chuckie Shumer, just focus on the rate to taxable income.

What’s going on?

Same story as before: Buffett shelters over a third of his AGI – and practically all of his ordinary income with charitable deductions.

Simply stated, because he gives money away to charities (e.g. the Bill Gates Foundation) he only has to give a pittance to the Feds.

Is that a good thing or a bad thing?

We’ll save that for a subsequent post.

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Tags: Buffett, Taxes

This entry was posted on October 20, 2011 at 6:42 am and is filed under Buffett, Warren, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.