How does Warren Buffet pay such a low tax rate, and are the people who've told me so far correct?


M

micky

How does Warren Buffet pay such a low tax rate, and are the people
who've told me so far correct?

Warren Buffet made the news in October saying he paid a lower rate on
his taxes than did the other 14 people in his office, including his
secretary. (He doesn't have his own office, it seems, but part of a
big room with 14 other people. I wonder if there are cubicles?)

I brought this up and someone tells me that Buffet is including
unrealized capital gains, Is he?

Another person says he donates his shares rather than sells them, so
maybe his taxable income is low, but the NYTimes says** his taxable
income last year was 39.8 million dollars. Shares donated before
being sold wouldn't be part of taxable income, would they? They would
be a dediuction from gross income iiuc.

Who is telling me the truth? How does he pay a lower rate than his
secretary?

Is that because REALIZED capital gains are taxed at 15% and salaries
at 30 or 32 percent?

What is the rate for interest? And dividends? ( I wish I had
interest, dividends, and capital gains. Then I might know!) Are
they also lower than the tax rate for salaries?

Thanks a lot.


**
http://www.nytimes.com/2011/10/13/b...ms-17-4-tax-rate.html?_r=4&ref=warrenebuffett

In Response to Lawmaker, Buffett Claims 17.4% Tax Rate
By REUTERS
Published: October 12, 2011

Adding fuel to the debate over his proposal for higher taxes on the
rich, Warren E. Buffett said in a letter to a Kansas congressman that
he paid $6.9 million in federal income taxes in 2010.

The figure represent 17.4 percent of his $39.8 million in taxable
income, a percentage he has repeatedly said is too low compared to
what his own staff members pay.
 
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M

Mark Bole

How does Warren Buffet pay such a low tax rate, and are the people
who've told me so far correct?

Warren Buffet made the news in October saying he paid a lower rate on
his taxes than did the other 14 people in his office, including his
secretary. (He doesn't have his own office, it seems, but part of a
big room with 14 other people. I wonder if there are cubicles?)

I brought this up and someone tells me that Buffet is including
unrealized capital gains, Is he?

Another person says he donates his shares rather than sells them, so
maybe his taxable income is low, but the NYTimes says** his taxable
income last year was 39.8 million dollars. Shares donated before
being sold wouldn't be part of taxable income, would they? They would
be a dediuction from gross income iiuc.

Who is telling me the truth? How does he pay a lower rate than his
secretary?

Is that because REALIZED capital gains are taxed at 15% and salaries
at 30 or 32 percent?

What is the rate for interest? And dividends? ( I wish I had
interest, dividends, and capital gains. Then I might know!) Are
they also lower than the tax rate for salaries?
I think it would be almost impossible to know for sure without seeing
his tax return. I also wonder why his staff members would share the
details of their personal income tax returns with him.

But, it's almost certain the long-term capital gains tax rates have a
lot to do with it. Here's one scenario:

Assume MFJ with no dependents, and standard deduction. If his ordinary
income (wages plus interest plus non-qualified dividends) was $350K, and
he had $38,900K of qualified dividends or long-term capital gains, then
his taxable income would be $39,229K, his regular tax would be $5,921K,
and added AMT would be $8K. Tax bracket would be 35% but effective tax
rate would be 15%. Since he probably pays his staff far above the US
average wage, that is almost certainly less than their rate, even
without knowing all of their individual details.
 
K

Kurt Ullman

t
I think it would be almost impossible to know for sure without seeing
his tax return. I also wonder why his staff members would share the
details of their personal income tax returns with him.
This also can't be just income taxes (where most of the hooha resides).
He has a person paying 41% which (if I understand this ) is 6% more than
the top bracket which is impossible for many reasons (not the least of
which is that everybody pays the same on their first so much money, more
on the next bracket, etc). The average is around 1% more than the top
bracket. His facts can't match up with the possibilities if he is
really only talking about fed income taxes. Am I missing something?
 
R

Reggie

micky said:
How does Warren Buffet pay such a low tax rate, and are the people
who've told me so far correct?

Warren Buffet made the news in October saying he paid a lower rate on
his taxes than did the other 14 people in his office, including his
secretary. (He doesn't have his own office, it seems, but part of a
big room with 14 other people. I wonder if there are cubicles?)

I brought this up and someone tells me that Buffet is including
unrealized capital gains, Is he?

Another person says he donates his shares rather than sells them, so
maybe his taxable income is low, but the NYTimes says** his taxable
income last year was 39.8 million dollars. Shares donated before
being sold wouldn't be part of taxable income, would they? They would
be a dediuction from gross income iiuc.

Who is telling me the truth? How does he pay a lower rate than his
secretary?

Is that because REALIZED capital gains are taxed at 15% and salaries
at 30 or 32 percent?

What is the rate for interest? And dividends? ( I wish I had
interest, dividends, and capital gains. Then I might know!) Are
they also lower than the tax rate for salaries?

Thanks a lot.

Keep in mind that his share of the corporate taxes paid by corporations he
is a shareholder of have paid millions if not billions annually. Yes, that
is not his personal income tax, but he is still paying it.
 
A

Alan

t

This also can't be just income taxes (where most of the hooha resides).
He has a person paying 41% which (if I understand this ) is 6% more than
the top bracket which is impossible for many reasons (not the least of
which is that everybody pays the same on their first so much money, more
on the next bracket, etc). The average is around 1% more than the top
bracket. His facts can't match up with the possibilities if he is
really only talking about fed income taxes. Am I missing something?
Based on press reports and interviews, his statement includes payroll taxes.
 
M

micky

I think it would be almost impossible to know for sure without seeing
his tax return. I also wonder why his staff members would share the
details of their personal income tax returns with him.

But, it's almost certain the long-term capital gains tax rates have a
lot to do with it. Here's one scenario:

Assume MFJ with no dependents, and standard deduction. If his ordinary
income (wages plus interest plus non-qualified dividends) was $350K, and
he had $38,900K of qualified dividends or long-term capital gains, then
his taxable income would be $39,229K, his regular tax would be $5,921K,
and added AMT would be $8K. Tax bracket would be 35% but effective tax
rate would be 15%. Since he probably pays his staff far above the US
average wage, that is almost certainly less than their rate, even
without knowing all of their individual details.
Thanks for replying.

So you figure the reason his effective tax rate is so low is that most
of his income is dividentds or long term capital gains, both taxed at
15%?

The rate for long term capital gains about 10? (15?) years ago was cut
in half from 30% iirc, right?

Isn't the rate for dividends about the same as for ordinary income, or
maybe that changed too?
 
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H

Hank Youngerman

How does Warren Buffet pay such a low tax rate, and are the people
who've told me so far correct?

Warren Buffet made the news in October saying he paid a lower rate on
his taxes than did the other 14 people in his office, including his
secretary. (He doesn't have his own office, it seems, but part of a
big room with 14 other people.  I wonder if there are cubicles?)

I brought this up and someone tells me that Buffet is including
unrealized capital gains,   Is he?

Another person says he donates his shares rather than sells them, so
maybe his taxable income is low, but the NYTimes says** his taxable
income last year was 39.8 million dollars.   Shares donated before
being sold wouldn't be part of taxable income, would they?  They would
be a dediuction from gross income iiuc.  

Who is telling me the truth?   How does he pay a lower rate than his
secretary?

Is that because REALIZED capital gains are taxed at 15% and salaries
at 30 or 32 percent?

What is the rate for interest?   And dividends?  ( I wish I had
interest, dividends, and capital gains.  Then I might know!)   Are
they also lower than the tax rate for salaries?

Thanks a lot.

**http://www.nytimes.com/2011/10/13/business/in-letter-to-congressman-b...

In Response to Lawmaker, Buffett Claims 17.4% Tax Rate
By REUTERS
Published: October 12, 2011

Adding fuel to the debate over his proposal for higher taxes on the
rich, Warren E. Buffett said in a letter to a Kansas congressman that
he paid $6.9 million in federal income taxes in 2010.

The figure represent 17.4 percent of his $39.8 million in taxable
income, a percentage he has repeatedly said is too low compared to
what his own staff members pay.

I suspect that most of his income is capital gains, taxed at 15%.
It's fairly well-known that his salary at Berkshire Hathaway is
$100,000, and he included $15,300 in payroll taxes, that being the sum
of the employer and employee share.

For some reason I think his income was about $40 million and his taxes
were $7 million. Let's do a really crude calculation:

Capital Gains: $39 million @ 15% = $5.85 million
Salary and other income: $1 million @ 35% = 0.35million
Payroll taxes = 0.02 million
Total taxes = 6.22 million
tax / income =15.6%

According to Turbo Tax, last year I paid something like 20-22% of my
income in federal taxes, and my income is a bit north of Buffett's
Berkshire Hathaway salary, but not that much higher. My payroll taxes
(including employer share) were maybe 10%. So this would be 30-32%.
Of course, TurboTax does not include in my income items like salary
deferrals to my 401(k) or my employer's matching and profit-sharing
contributions, which were substantial. So allowing for these, my
total taxes might have been in the 25-27% range.

By a huge margin, the factor driving Buffett's tax situation is the
15% rate on capital gains. (Probably not on dividends, since his
Berkshire Hathaway stock doesn't pay dividends.)

There's no tax on unrealized capital gains.

The "Buffet Rule" could be easily implmented by simply providing that
capital gains and dividends should be taxed as ordinary income.

I am reminded that in the early 1980's, the Wall Street Journal
regularly lamented on their editorial page that tax differentials
between ordinary income and capital gains led to attempts to
reclassify earned income as capital gains, and therefore the rate
between the two should be levelled (by, of course, reducing the rate
on ordinary income.) Following the Tax Reform Act of 1986, which did
just that, they then switched their position to saying that rates on
capital gains should be lowered, to provide extra incentive for
investing and risk-taking.

It has long been a conservative goal that once a person "earns" their
income, it should not be taxed again in the form of taxing
accumulations on that wealth in the form of dividends or capital
gains. By a succession of steps including creation of the Roth IRA,
expansion of the Roth IRA to include 401(k)'s, higher income limits on
Roth IRA contributions, abolition of income limits on Roth
Conversions, and now the ability to contribute to a non-deductible IRA
and immediately convert to a Roth with no taxes paid, they've taken
quite a few steps toward that goal, at least in regard to upper-middle-
income people. Those in the middle class and below usually don't have
enough money to take advantage of these machinations, and for those
making several hundred thousand and up, the contribution limits do
restrict how much use they can make of these accounts.
 
A

Alan

So you figure the reason his effective tax rate is so low is that most
of his income is dividentds or long term capital gains, both taxed at
15%?
Qualified Dividends (dividends paid out of profits) & long-term cap.
gains taxed at 15% and municipal bond interest taxed at zero.
 
R

removeps-groups

Qualified Dividends (dividends paid out of profits) & long-term cap.
gains taxed at 15% and municipal bond interest taxed at zero.
Muni bonds may have private activity bond interest which makes them
taxable for AMT.
 
K

Kurt Ullman

By a huge margin, the factor driving Buffett's tax situation is the
15% rate on capital gains. (Probably not on dividends, since his
Berkshire Hathaway stock doesn't pay dividends.)
But how much of what is driving the employee's pay comparison is the
relatively higher %age of income that goes in payroll taxes because of
the cap on salary those are paid on.
Also, it is my understanding that the salary cap on SS taxes is
based on where the cap is for getting benefits. In other words, I can
earn $16 gazillion and still only get SS benefits based only on whatever
the cap is.
 
R

removeps-groups

But how much of what is driving the employee's pay comparison is the
relatively higher %age of income that goes in payroll taxes because of
the cap on salary those are paid on.
I'm not sure I agree that social security is a tax. In theory you get
the money you put in, plus interest, back at retirement. If I
contribute the maximum $16,500 to my 401(k) and a rich person does the
same, their contribution is of course a smaller percentage of their
income. Now if you call their contribution a tax, then it looks like
the rich are not paying their fair share of social security tax.

Social security is more of a tax for those who make close to the wage
limit as per the benefit formula they get back more, but at a smaller
rate than someone making less (90% of first $749, 32% above that up
till $4517, 15% above that to the max possible value). Using the
social security benefit estimate at http://www.ssa.gov/pubs/10070.html#estimate,
I found if someone was making the maximum taxable cap for social
security for the last 35 years they would get $2519 per month. If
someone makes one-fifth as much, they contribute one-fifth or 0.20 as
much into the system as the high earner; but they get back $942 or
0.37 of the high earner. If they implement full means-testing,
someone making a lot (say more than $1M or some huge number) won't get
anything back, and for these people all of the "social security
contribution" would be a tax.
     Also, it is my understanding that the salary cap on SS taxes is
based on where the cap is for getting benefits. In other words, I can
earn $16 gazillion and still only get SS benefits based only on whatever
the cap is.
That is true. The estimator is at http://www.ssa.gov/pubs/10070.html#estimate.
Column B is the maximum taxable security, column C is a factor to
adjust for inflation (to convert dollars in those days to today),
Column D is the product of these and will thus be based on the maximum
social security limit. You then find the highest 35 years in the last
50 or so, and add up column D and divide by 420 (the number of months
in 35 years). I found the maximum social security for someone working
only for the last 35 years is $2519.
 
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S

Seth

I'm not sure I agree that social security is a tax. In theory you get
the money you put in, plus interest, back at retirement.
It's a tax. What if you die?
If I
contribute the maximum $16,500 to my 401(k) and a rich person does the
same, their contribution is of course a smaller percentage of their
income. Now if you call their contribution a tax, then it looks like
the rich are not paying their fair share of social security tax.
If you choose not to contribute anything to your 401(k) then you don't
get people with guns (at the end point) taking your stuff away and
throwing you in jail. Therefore it isn't a tax.

Seth
 
J

John Levine

I'm not sure I agree that social security is a tax. In theory you get
the money you put in, plus interest, back at retirement. ...
That's a common misconception, but it's completely wrong. Social
Security has always paid current benefits out of current revenue,
other than a quickly repealed death benefit in the 1930s. The first
recipient of SS retirement, Ida Mae Fuller, paid in $24.75 from 1937
to 1939, got her first check in January 1940, and died in 1975 at the
age of 100, having received almost $23,000 in benefits.

http://www.ssa.gov/history/briefhistory3.html#idamay

For the past several decades, FICA revenue has exceeded SS outlays,
with the excess transferred to the general fund to pay general
expenses of the US government. In the near future, it'll flip the
other way (maybe already has), with the SS deficit made up from
general revenues. The transfer from SS to the general fund has been
accounted as a loan from SS to the general fund via a special series
of treasury bonds, and the transfer the other way will be accounted
for by redeeming those bonds. In 30 years or so the bonds will be all
gone, which will be a major opportunity for political posturing,
although it'll be economically meaningless since we can continue to
pay SS benefits at any plausible level by minor adjustments to FICA
and/or income taxes. (Medicare is a much more difficult issue, but
it's the same issue as the rest of our bloated, inefficient medical
care industry.)

R's,
John
 
D

D. Stussy

I'm not sure I agree that social security is a tax. In theory you get
the money you put in, plus interest, back at retirement. If I
contribute the maximum $16,500 to my 401(k) and a rich person does the
same, their contribution is of course a smaller percentage of their
income. Now if you call their contribution a tax, then it looks like
the rich are not paying their fair share of social security tax.
What theory is that? Someone who pays in the maximum each of his highest
35 years and lives to the average live expectancy born in the 1970's or
later will NOT even see the return of his contributions. Anyone who dies
before retirement age and is never disabled will see zero. Unlike a
pension (or IRA, etc....) where one has a vested interest, NO ONE has a
vested interest in social security benefits.
 
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S

Salmon Egg

[QUOTE="John Levine said:
I'm not sure I agree that social security is a tax. In theory you get
the money you put in, plus interest, back at retirement. ...
That's a common misconception, but it's completely wrong. Social
Security has always paid current benefits out of current revenue,
other than a quickly repealed death benefit in the 1930s. The first
recipient of SS retirement, Ida Mae Fuller, paid in $24.75 from 1937
to 1939, got her first check in January 1940, and died in 1975 at the
age of 100, having received almost $23,000 in benefits.

http://www.ssa.gov/history/briefhistory3.html#idamay[/QUOTE]

SS seems to be a combination of a mandatory Ponzi scheme and a tontine.
"Investors," including employees and employers are required to invest.
It is not the usual Ponzi scheme because it is not set up primarily to
benefit the operator. Nevertheless, a relatively benign Congress does
get to use the excess money collected. As people die off, their shares
are divided amongst those remaining alive (tontinr component).

--

Sam

Conservatives are against Darwinism but for natural selection.
Liberals are for Darwinism but totally against any selection.
 
M

Mark Bole

SS seems to be a combination of a mandatory Ponzi scheme and a tontine.

As people die off, their shares
are divided amongst those remaining alive (tontinr component).
But the remaining shares don't increase if more people die off, so it's
not like a tontine.
 
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J

John Levine

SS seems to be a combination of a mandatory Ponzi scheme and a tontine.

It's insurance, or perhaps an annuity. You pay in on a fixed
schedule, and then you get the payout on a different fixed schedule.
The point of SS is to keep old people from being destitute, which
it does quite well, and which was a serious problem until SS started
in 1940.

It's worth reemphasizing that despite disinformation from the right,
SS revenue will cover its expenses for at least decades and (depending
on how the economy does) quite possibly forever. The financial problems
are in Medicare, but those are the same problems as the rest of our
medical non-system and can't be fixed without fixing the system as a
whole.

R's,
John

PS: Well, unless by "fix" you mean pushing ever more costs onto people
who can't pay them, so they die.
 

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