Warren Buffett wrote a folksy little op-ed yesterday in the New York Times bemoaning the fact that he didn’t pay enough in taxes. President Obama agreed with and widely quoted Buffett at his town hall meeting to justify wanting to raise taxes to fund his orgy of Federal Government spending, which has risen to an estimated 25% of GDP, http://www.ritholtz.com/blog/2011/07/government-spending-as-a-percentage-of-gdp-2/, the highest ever except for the 3 year period from 1943-1945 to pay for World War II.
According to Warren, he pays a lower percentage of tax at 17.4% of his income than any of the other 20 people in his office, whose tax burdens ranged from 33 percent to 41 percent. This surely implies that the rich are getting richer on the backs of the middle class. Unfortunately, Warren forgot to mention a few of the taxes he actually pays and included so called “taxes” of those in his office to distort their tax percentages,.
Warren said that his federal tax bill last year was $6,938,744. However, Mr. Buffett’s primarily source of wealth comes from his ownership in Berkshire Hathaway, which he has an economic ownership of around 23% and grows to over 26% if you include the shares he has donated to the Gates Foundation. Last year, Berkshire had Current Taxes of $3.668 billion, of which as much as $2.944 billion was domestic. This means that Warren’s tax bill on his personal tax return plus his proportionate amount of taxes he paid through Berkshire was about $772 million, not $7 million.
This $772 million of taxes does not include his proportionate ownership of any of the corporate taxes paid by his portfolio companies such as American Express (12.7% ownership), Coca Cola (8.7%), Conoco Phillips (2.1%), Kraft (5.6%), Johnson & Johnson (1.5%), Procter & Gamble (2.8%), U.S. Bancorp (3.6%), Wal-Mart (1.1%), and Wells Fargo (6.7%). Including his proportion of the Current Federal Tax that these companies paid, and his ownership in Berkshire, this adds another $110 million to his overall tax payments. Mr. Buffett thinks he is being “coddled” when he paid, either directly or through his ownership in corporations, at least $872 million in taxes last year alone!
It is also not reasonable to compare his 17.4% effective tax rate to those in his office of 33% to 41%. In coming up with the 33% - 41% tax rate, he includes all payroll taxes including social security and medicare (and he may be assuming the employer contribution as well). However, these so-called taxes are merely pre-payments for benefits those people expect to receive from the government in the future, so it is disingenuous to include them as a tax burden. Those forced payments are only called “taxes” because the government had no constitutional authority to implement a mandated retirement plan and retiree medical insurance plan on the population, but they had the ability to tax. Problem solved, call it a tax and force your mandates on the people.
My colleague and I have calculated the return on his Social Security payments to his expected benefit at retirement. Those individuals that reach the income limit for maximum Social Security payments will actually earn a negative return of approximately 5% over their current expected lifespan. Therefore, it has actually become a tax for those high earners that will have a negative return on their government sponsored retirement plan, but for the majority of average workers it is a pre-payment for those future promised government benefits. Without the benefits of a forced government retirement and retiree medical insurance plans, those taxes would not exist and therefore should not be included in any comparison of tax rates.
Buffett’s op-ed begs the question, which was asked by CNBC’s Becky Quick in a 2007 interview: If he thinks he should be taxed more, why doesn’t he just send his money voluntarily to the government instead of giving it to charity? Buffett replied, “I think that on balance the Gates Foundation, my daughter’s foundation, my two sons’ foundations, will do a better job with lower administrative costs and better selection of beneficiaries than the government.”
And there is the hypocrisy of his entire argument. He believes that the wealthy should turn over more of the income that they earn as individuals and allow the Government to prioritize how their money is spent, even though he is unwilling to do that himself. Shame on you Warren Buffett for becoming the economic shill for the Obama administration.