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Lincoln Institute


A Reply to Warren Buffet

by Frank Ryan
 

In an opinion editorial on August 14, 2011 in the New York Times, Warren Buffett exclaimed that politicians were coddling the super rich.

The research Mr. Buffett did on the tax code was clearly superior in some respects and yet clearly defective in most.

It is not certain if Mr. Buffett had a point to prove when he wrote the op-ed and deliberately structured his analysis to support his position but his analysis defies logic nonetheless. Perhaps Mr. Buffet 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.

From the flawed analysis, it appears that Buffet's op-ed is politically motivated and not policy driven. Perhaps Mr. Buffett should add another principle that "An analysis should not be structured to fit the solution you desire".

Mr. Buffett's op-ed is flawed in so many ways.

First, he asserts that the top 400 paid taxes of 29.2% of their income of $16.9 Billion in income in 1992. Buffett then claims in 2008, after the "Bush Tax Cuts" the top 400 paid only 21.4% on $90.9 Billion of income. If Buffett's analysis is accurate, Mr. Buffett is concerned that more was paid in taxes in 2008 ($19.45 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% (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% than the 36% 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 should also 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% on the corporate income which would increase his actual tax burden to substantially higher than the 17.4 % he reported. .

By deliberately structuring income through capital gains and other income such as dividends, Mr. Buffett is structuring income so as to avoid taxes and then complains about the tax code that permits it. Using rules based tax code to pay taxes, Buffett structures income for favorable tax purposes and then complains in his op-ed using a principles based analysis that the tax code has the effect that it does.

Buffett's 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.

Mr. Buffett also indicates that taxes are not a major issue for the super rich and investments are not affected by tax considerations yet his 6th 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 may not care about taxes, the seller certainly does.

What is also interesting in Mr. Buffett's op-ed is what he did not mention. Buffett's 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 any taxes on the appreciation in the stock (in this case over 490,409%). 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% 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 op-ed seems to feel that the super rich should pay more taxes yet Mr. Buffett seems very willing to benefit from the very tax code he abhors.

Finally, for Mr. Buffett, if you do not feel you are paying enough taxes, please note that contributions to the IRS and Social Security are accepted.
Mr. Buffett, I have a great deal of respect for you and admire you for what you have done but you are better than the sloppy work done in your op-ed piece. We expect more from you than this.

Frank Ryan, CPA, a retired Colonel in the Marine Corps Reserves, specializes in corporate restructuring and lectures on ethics for the state CPA societies. He is on numerous humanitarian boards and corporate boards of directors.


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