OK, today should about do it.
After a recap, I’ll drop my conclusion on you … my very surprising conclusion
First. a recap to get everybody on the same page.
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.
In Part 4, we showed that Buffett’s tax rate as a percentage of AGI is only 11% …. about half of the estimated rate for our hypothetical secretary surrogates.
Now, my first reaction when I stared at the taxes to AGI rate was “Wow, Buffett’s right – he’s nothing but a coddled piker.”
But now, I’m not so sure.
On one hand, his paying a rate (to taxable income) that’s 5 points less than his secretary doesn’t seem fair. Especially since he gets to the rate by exploiting some dreaded tax loopholes, aka. “deductions”.
The situation seems even worse when you consider his taxes to AGI rate – a mere 11% – less than half of his secretary’s rate (I suspect).
Gotta jack up taxes, right?
Not so fast.
Let’s construct another measure: the GBSR™ — “Give Back to Society Rate”
Since I’m coining the measure, I’ll define the GBSR™ as the sum of taxes paid plus charitable contributions – since those are all money that’s supposed to be going to the common good, albeit administered by different organizations – divided by AGI.
OK, so what’s Buffett’s GBSR?
Well, based on my estimates, Buffett pays about $7 million in Federal taxes, about $3 million in state taxes, and about $20 million to charities. ,,, for a total of $30 million … which dived by his $63 million AGI … gives a GBSR™ rate of almost 50% (47.6% to be precise).
Now, let’s pretend that Buffett’s secretary profiles like our $100,000 ordinary earner above. Her charitable deductions would be at most $5,700. Otherwise she wouldn’t be taking the standard deduction, she’d itemize.
So, her GBSR™ @ $100,000 AGI is 27.5% ($5,700 + $21,709 = 27,409 / $100,0000 = 27.5%).
That means that Buffett’s GBSR™ is almost twice his secretary’s.
Hmmm.
Maybe he’s not such a bad guy and I should stop ranting about him.
And, maybe he should stop causing trouble for other folks by constantly whining about the tax code.
It just may be that the tax code is leading to the right answer.
Just have to look around the trees to see the forest.
AMEN
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