Posts Tagged ‘Buffett’

Buffett: Giving to the Gates Foundation because it’s run more efficiently than the gov’t … no (bleep), Warren.

March 8, 2012

Interesting interview with Warren Buffett on CNBC last week.

The dialogue that caught my attention had to do, of course, with Buffett’s whining that his taxes are too low … paired with the hypocrisy that he’s sheltering his estate from taxes by dishing his end-of-life dough to the Gates Foundation.

CNBC’s Joe Kiernan observed to Buffett:

I’ve gotten you to admit in the past that one of the reasons you think the Gates Foundation will do a lot better with your 50 or 60 billion is because charities have a better — a much better reputation for watching how money is spend and for doing more good.

Buffetts retort:

Anytime an organization is as big as the US government or any other government, they are not going to be as efficient, obviously, as smaller organizations.

Kiernan followed up:

So with all that in mind, can you at least see how someone might, on an intellectual basis, be opposed to just giving a blank check to such a profligate entity?

Buffett’s answer:

On the other hand, we have successfully defended the country, we’ve built the greatest industrial machine the world’s ever seen, we’ve built the richest population the world’s ever seen.

The truth is, we can have a country that works wonderfully with 19 percent or so of revenues going to Washington and spending 21 percent.

Say, what?

Kiernan politely went in for the kill:

If the government was a business and Berkshire was looking at it, there’s no way Berkshire would even take a 1 percent stake in the government with their track record of investments. Right?

All Buffett could do was stammer …

Full transcript

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How does GM’s tax rate compare to Buffett’s secretary’s?

March 2, 2012

Interesting editorial in the WSJ re: the GM bailout.

Everybody knows the GM’s stock holders were wiped out, that secured debt holders were subordinated to the unsecured UAW claims and  haircut to about 50 cents on the dollar, and that “New GM” stock is trading about 25% below its IPO price — leaving taxpayers with a $15 billion book loss on Treasury holdings.

What most folks don’t know is that GM got a special deal that rolls old GM’s $45 billion in accumulated tax losses into new GM.  That’s usually not allowed when restructuring companies — as a means of stopping companies from just acquiring losses from other companies as a tax dodge.

Bottom line:

In a 2011 working paper, J. Mark Ramseyer of Harvard and Eric Rasmusen of Indiana University argue that by manipulating corporate tax rules by fiat, “Treasury gave the firm (and its owners, including the UAW) $18 billion more in assets.”

The WSJ observed:

Mr. Obama crowed yesterday about GM’s “highest profits in its 100-year history.”

We’d be interested to hear how its effective tax rate compares with Warren Buffett’s secretary’s.

Hmmm ….

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Buffett, Romney & the Give Back to Society Rate

January 30, 2012

The cameo by Buffett’s secretary at last night’s SOTU address, and Mitt’s released tax returns have re-elevated the issue “coddling the rich” with low tax rates (compared to their secretaries).

Last fall, when we dissected Buffett’s taxes, we coined a  measure: the GBSR™ – “Give Back to Society Rate

We defined 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.

We crunched the numbers and concluded that 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™ of almost 50% (47.6% to be precise).

We concluded that Buffett may not be the piker that he claims to be.  And, maybe he should stop causing trouble for other folks by constantly whining about the tax code.

In Romney’s case, his release says that he made $21 million … paid $3 million in taxes … and donated $3.7 million to charities.  So, his tax rate may sound meager @ 14%, but his GBSR™ is almost 32% – and that’s not counting state & local income taxes.  My bet: add S&L taxes in and Mitt ‘s GBSR™ is way over 40%, too.

So, it just may be that the tax code is leading fat cats to do the right thing – it’s just that they’re giving much of their dough to private charities instead of the Feds.

Do you blame them?

* * * * *
Here’s the original HomaFIles post:

Squeezing Buffett’s numbers … Part 5 (and done !)
Homa Files 10/21/2011

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.

image

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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Tech point re: charitable contributions …

October 24, 2011

I know that I said that Part 5 of my Buffett tax analysis would be my last. but …

First, I got input from a loyal reader that my analysis was wrong because “only 5% of charitable contributions can be deducted in 1040s”

That sent me back to the tax code.  Specifically to Publication 526 : Charitable Donations.

Keeping in mind that HomaFiles doesn’t offer tax or investing advice, here’s the law:

The amount of your deduction for charitable contributions is limited to 50% of your adjusted gross income, and may be limited to 30% or 20% of your adjusted gross income depending on the type of property you give and the type of organization you give it to.

Here’s the English translation.

In general, for all typical charities,e.g. churches, schools, hospitals, disease-causes, a taxpayer can deduct 100% of his charitable … but there’s a ceiling …. the total amount of charitable deductions is limited to 50% of the taxpayer’s AGI.

So, if a taxpayer had $100,000 AGI, he can write $50,000 in  checks to qualified charities and deduct all $50,000.  If he writes checks for $60,000 … he can deduct only $50,000.

The major exception: donating appreciated assets (think “stocks).  A taxpayer can claim a charitable deduction for the fair market value of the asset, pay no capital gains, and deduct up to 30% of his AGI.

Things get a bit trickier if there are both cash donations and appreciated assets in the mix.

The general  takeaway: up to a total of 50% AGI, all charitable contributions can be deducted ,,, slightly less if the donations are stock not cash.

That said, the Buffett analysis survives intact.

We estimated charitable contributions at $20 million …about 1/3 of Buffett’s $63 million AGI … so, based on our anlysis, he can deduct all of his charitable deductions, sheltering all or most of his ordinary income.

Whew.

* * * * *

Separately, I got a few emails and replies commenting on the HomaFiles-coined GBSR™ – “Give Back to Society Rate” … the sum of fed & state taxes, and charitable contributions divided by AGI.

Some of the emails said “you’re on to something”, so I’ve trademarked the metric by adding the legal “TM” super-script.

Gotta protect your intellectual property, right?

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Squeezing Buffett’s numbers … Part 5 (and done !)

October 21, 2011

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.

image

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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Squeezing Buffett’s numbers … Part 4

October 20, 2011

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.

image

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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Squeezing Buffett’s numbers … Part 3

October 19, 2011

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?

Today, let’s look at the popular headline: “Buffett’s Tax Rate Lower than His Secretary’s”

Since we don’t know his secretary’s specifics, we looked at 3 hypotheticals: a single taxpayer (i.e. not married), all ordinary income,  no dependents, standard deduction (i.e. doesn’t itemize).

The bottom line: The headline seems reasonable.  In each of 3 income scenarios ($50k, $75k and $100k) the rate to taxable income is in the lower 20s – about 5 points higher than Buffett’s rate.

But, keep reading …

image

First, these are scenarios the get to the highest possible tax rates – a joint-married filer with dependents and itemized deductions would pay less.

Nonetheless, it’s hard to imagine an ordinary person closing the gap to Warren’s rate unless they had a big mortgage deduction and played the charity angle: giving a lot to charity to shelter income down to the 15% rate.

For example, if our 50K single taxpayer had no mortgage interest and paid about 5% in state & local taxes, he could make a charitable contribution of about $10,000 and land in the 15% tax bracket (which is capped at $34,000)

Here’s the arithmetic: $50,000 less $3,650 in exemptions, less about $2,500 in state and local taxes, less $10,000 in charitable deductions is less than$34,000 – which is the top of the 15% bracket.

The charitable deduction would be 20% of AGI … which is lower than Buffett’s apparent 30% donations’ rate ($20 million / $63 million = 31.4%) … but probably not practical at that income level.

And, using the same logic, getting our $75k and $100k ordinary income earners into the 15% bracket would require a  charitable giving rate approaching 50% of AGI.

That certainly doesn’t seem practical.

What’s the point?

Buffett’s case illustrates how a completely discretionary itemized deduction – charitable contributions – can be used by folks – especially rich folks – to shelter ordinary income from taxes … and get them to a low effective tax rate.

That’s not a shot at charitable deductions – more on that in subsequent posts – just raises the point that closing the gap between Buffett and his secretary may be less a matter of raising tax rates (on capital gains) and more a matter of how deductions are allowed and applied.

More to come ..

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Squeezing Buffett’s numbers … Part 1

October 17, 2011

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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Why not Occupy Omaha ?

October 12, 2011

Well, Tuesday was the day that, according to CNN Money

Community groups and progressive organizations that have been working with the broader Occupy Wall Street movement marched on the homes of JP Morgan Chase CEO Jamie Dimon, billionaire David Koch, hedge fund honcho John Paulson, and News Corp  CEO Rupert Murdoch.

The millionaires and billionaires are being targeted for what event organizers called a “willingness to hoard wealth at the expense of the 99%.”

Why not stake out Warren’s place until he agrees to forego all of his tax loop holes (e.g. deductible contributions to his buddy Gates)?

Or, better yet, Washington … picket the millionaire who has been pushing hard for class warfare.

Hope Barry & Warren are proud … mission accomplished.

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Millionaires pay a lower tax rate than $50K teachers … not!

September 21, 2011

The press were abuzz yesterday debunking O’s key premise that millionaires pay taxes at a lower rate than teachers making $50,000.

Yesterday, we showed that a married  teacher with 2 kids who earns $50,000 pays at a 5.5% rate.  Even if you add 7.65 in payroll taxes to that, the resulting  13.15% is still less than a millionaire who pays only capital gains taxes at 15%.

That was a micro analysis.

The WSJ presented the macro analysis:

In 2008, the last year for which such data are available, the IRS reports that those who made more than $1 million in adjusted gross income paid an average income tax rate of 23.3%.

That’s slightly lower than the 24.1% rate paid by those making between $500,000 and $1 million, probably because the richest are like Mr. Buffett and earn more from capital gains and dividends.

The rate for a relative handful of the rich — 400 people — fell to 18%.

But nearly all millionaires still paid a rate that is more than twice the 8.9% average rate paid by those earning between $50,000 and $100,000, and more than three times the 7.2% average rate paid by those earning less than $50,000.

The larger point is that the claim that CEOs are routinely paying lower tax rates than their secretaries is Omaha hokum.

image

I think the President should modify his Buffett Rule to read: anybody who earns more than $1 million … and who has accumulated wealth greater than $25 billion  … and who plans to bequeath practically all of his estate to a pal’s “foundation” shall pay an effective income tax rate of 90% … unless he /she whines that they’re being  coddled, in which case the tax rate escalates to 100%.

My real recommendation: limit the charitable estate exemption to $1 million so that Buffet has to fork about half of his estate over to the government … that’ll keep him from bring coddled in the grave.

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