Buffett Tax

This week President Obama announced the Buffet Tax. The Buffet Tax would tax people making people who earn more than $1 million. In Buffett’s article in the New York Times entitled “Stop Coddling the Super Rich” Buffett makes the case that he pays lower taxes than his secretary. This of course is true since Warren Buffett’s income is taxed at a much lower since Buffett earns all his income on capital gains which is much lower than ordinary income (income from working). However, what I find interesting is that Buffett leaves out the taxes that his company pays in order for him to receive that income. Buffett runs Berkshire Hathaway which is a large conglomerate of companies. When Berkshire Hathaway earns income that income is taxed at a corporate rate. In 2010, Berkshire Hathaway paid 29.4% in corporate income taxes. Generally companies pay 35% in taxes but companies can lower this rate through their tax department. Berkshire Hathaway then passes their income to shareholders which Warren Buffett is. The income is first taxed at the corporate rate then Warren Buffett pays individual taxes. So in essence this income is taxed twice. Warren Buffett claims his income tax rate is 17.4%. However, the true tax rate Warren Buffett pays is 46.8%. People don’t really look at the tax rate corporations pay because people assume corporations are paying the taxes not people. People pay taxes not corporations. If corporations pay taxes its less money they have to operate which lowers their return which lowers the return of millions of shareholders. If Warren Buffett really is claiming his tax rate is 17.4% then he is essentially saying that Berkshire Hathaway pays no income taxes. Clearly, this is nonsense. Buffett would have more money if his company didn’t pay taxes. It is frequently brought up that although corporations are in a 35% bracket they don’t really pay it. This point is valid although I would point out lowering the tax a company pays comes at a cost. Hiring accountants and creating tax departments are not cheap. This cost is never talked about though. A company can’t magically lower their taxes without a cost. It would be interesting to see someone study the cost of taxes if you included how much time, energy, and money it took for corporations to lower their tax rate.

I myself am a fan of a progressive flat tax. This would free up corporate accountants and individuals from calculating their tax rate. Tax revenue would no doubt increase because it would be very hard if not impossible to shelter income if people paid one flat rate. Right now there are many legal ways to reduce taxes although billions of revenue is never collected because the tax system is so complex that very few people even understand it. The only problem I worry about is that if we raised more revenue it would lead politicians to want to spend more. It would be as if politicians went to a buffet and realized there was even more food than they thought.

I myself am a fan of Warren Buffett when it comes to his investing advice. However, his political views leave much to be desired. If Buffett really felt he was paying to little in taxes he could always voluntarily pay more. No one is stopping him from giving more money to the government. His actions show he is okay with paying the existing tax or else he would voluntary give more. You can’t say you are for raising taxes if you comply to pay lower rates than you otherwise would.