Why Warren Buffett Wants To Pay Higher Taxes

Filed Under (The HELL You Say!) by Zooty Carlisle on 15-08-2011

Unless you’ve had your head buried in the sand, your all but too familiar with billionaire Warren Buffett’s quotes about him wanting to pay much more in taxes. Well, Mr. Buffett wrote a small piece in the New York Times today, where he bragged  “Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf – was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income – and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

What he says is basically true. But it’s incredibly misleading, because he’s leaving out the effect of the corporate income tax. There’s basically two primary ways in which corporate dividends are taxed. First, they can be taxed as the income of the people who get them. Second, you can tax the profits at the corporate level, and then the dividends are tax-free to the recipients.

Corporate profits are subject to corporate profits tax, which comes out to an average of roughly 35%. Then the dividends are taxed again once they get into the hands of the recipients at a rate of about 15%. What this means, is that the effective tax rate on Buffett’s dividends from his company Berkshire Hathaway, was not the 17.4% that he’s using in the calculation he stated in the New York Times.

Mr. Buffett isn’t being exactly forthcoming in the real reason that he doesn’t pay much income tax compared to the huge fortune he has amassed. And oddly enough his dirty little secret is hiding in plain sight. And is hiding in plain sight, because Mr. Buffett has actually told us what it is.

And that secret can be found in one of his most favorite quotes “Our favorite holding period is forever.” What exactly does that mean? Simply this; you only pay income tax at a rate on actual and realized appreciation. Basically, if you never sell it, technically you have no profit!  Any type of investment with a holding period of “forever” incurs a capital gains tax of 0%.  And all this time, those assets (and the person who owns them) continues to appreciate, while all along making the holder of those assets more and more wealthy.

That’s the real reason Warren Buffett does not pay a lot of income taxes. So, for Mr. Buffett to appear to be so gallant and magnanimous by volunteering to pay more taxes, the way the tax code is presently structured, he never will.

Isn’t it wonderful to be seen as so very philanthropic and giving, when you really have nothing to risk?

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