Warren Buffett complains about tax code, but uses it to his benefit

By Frank Ryan

In a much-talked about Aug. 14 op-ed in the New York Times, Warren Buffett exclaimed that politicians were coddling the super rich.

From the flawed analysis, it appears that Buffett’s op-ed is politically motivated and not policy driven. Perhaps Mr. Buffett should reread his 12th principle in his 13 owner-related business principles in his “Annual Report.” The 12th principle suggests that candor be a major principle in all his dealings.


First, he asserts that the top 400 earners in America paid effective tax rates of 29.2 percent on their income of $16.9 billion in 1992. Buffett then claims in 2008, after the Bush tax cuts, the top 400 earners paid only a 21.4 percent tax rate on $90.9 billion of income.

If Buffett’s analysis is accurate, he is concerned that more was paid in taxes in 2008 ($19.5 billion) than those 400 taxpayers earned in income in all of 1992. His analysis seems to imply that tax cuts do have the desired effect of increasing government revenue.

Additionally, Buffett is including Social Security contributions from his company in his analysis of average tax rates. Including such contributions is deceptive because the tax is not assessed after slightly more than $100,000 in income (except for Medicare taxes). The contribution rate on employer and employee is a combined rate of 12.4 percent (excluding Medicare).

Buffett includes the Social Security tax to make it appear that the other 20 people in our office pay substantially more in taxes than he does, when in fact their actual income tax burden is closer to 23 percent than the 36 percent Buffett claims they pay.

Should Buffett wish to include the Social Security taxes that the company pays when analyzing the individuals’ tax burdens, then perhaps he also should include in Buffett’s tax burden the income taxes paid by the companies he owns.

Buffett receives dividends after the company has paid taxes of 35 percent on the corporate income which would increase his actual tax burden to substantially higher than the 17.4 percent he reported.

By deliberately structuring income through capital gains and other income such as dividends, Buffett is structuring income so as to avoid taxes and then complains about the tax code that permits it.

Buffett structures income for favorable tax purposes and then complains in his op-ed that the tax code has the effect that it does. His Bank of America transaction and the dividend deduction he receives is clearly the case of structuring a transaction for tax purposes. If the dividend deduction were not available, the investment of $5 billion into Bank of America would most likely not have been made.

Buffett also indicates that taxes are not a major issue for the super rich and investments are not affected by tax considerations yet his sixth principle in his annual report discusses net income as a basis for buying companies.

Net income is an after-tax calculation and, as such, the higher the tax rates paid, the lower the price Berkshire Hathaway will pay to the shareholders of the companies that Berkshire buys. While the buyer of the company might not care about taxes, the seller certainly does.

What also is interesting in Mr. Buffett’s op-ed is what he did not mention. His analysis failed to include his largest tax benefit of all, his charitable deductions.

By contributing corporate stock he benefits in two ways: First, he avoids paying taxes on the appreciation in the stock (in this case more than 490,409 percent). Second, he receives a tax deduction equal to the fair market value of the appreciated securities. To be fair to Mr. Buffett, he is limited to 50 percent deduction against his income.

It is equally interesting to note that his gift is conditioned and “must continue to satisfy legal requirements qualifying my gifts as charitable and not subject to gift or other taxes.” His seems to feel that the super rich should pay more taxes yet Buffett seems willing to benefit from the tax code he abhors.

I have a great deal of respect for Buffett and admire him for what he has done, but I expected more from him than a politically motivated op-ed.

Frank Ryan is a CPA and retired colonel in the Marine Corps Reserves. He lectures on ethics for the state CPA societies.