How Warren Buffett’s Tax Rate is Lower Than His Secretary’s.
Posted: September 12th, 2011 | Author: Joe | Filed under: Taxes | Tags: Taxes, Warren Buffet | 1 Comment »America’s favorite billionaire has been getting a lot of press of late with his calls on congress to raise taxes on the rich. Of course, that’s the point of his PR stunt – generate positive press about himself. He likes to be characterized as “brave” and “caring”, rather than greedy. Who wouldn’t really, but where that car falls off the tracks however is that anyone can make a donation to the U.S. Treasury any time they want – and for any amount. So Mr. Buffett and his pals who would love to “share the sacrifice” if only those Republican lovers of the rich would hike the tax rate already can write a big, fat check to the government anytime they want, and stop hiding behind congress for not doing so. In fact, some suckers out there have already donated $3 million to the treasury! I doubt Buffett was one of them.
Here’s an interview with Buffett in which he compares his income tax rate to the average employee in his office. In this interview he states that
He is taxed at about 17% on his $46 million in income “without trying to avoid paying higher taxes” while his secretary was taxed at 32%.
The devil is in the details.
While Buffett states he has “no tax shelters” and just follows “what congress tells (him) to do.”
The details here are that While Buffett may not have “tax shelter” he certainly makes full use of the deductions available to him. One such deduction is the charitable donation deduction. This one alone is enough to offset his entire ordinary income!
After that, he is taxed at the long term capital gains rate (currently 15%).
Some say that’s unfair to the office worker making $60,000 who is paying taxes at a rate of 30%, but I have a feeling that those workers are more or less clueless about the tax code and are not taking advantage of the deductions available to them.
For evidence of this, watch the interview with Buffett again. At about 3 minutes in, Brokaw interviews his secretary who has “no idea what kind of rate they pay in taxes, until Buffett told them.”
This is insane!
Oh course they’re going to pay more if they have no idea how much they’re paying! They obviously haven’t looked into it and don’t know the rules of the game, so to speak. It’s like comparing 2 shoppers, 1 who’s an avid coupon user and sales junkie to someone who just meanders through the store with no regard to sales and no shopping list. Which do you think is going to spend more money?
Warren Buffett pays a lower tax rate because he knows the system. He knows the rules and how the game is played. He’s right about one thing though – you don’t need to cheat the system to lower your tax bill. You can do it legally, you just need to know how and plan for it.
For example:
- Learn the difference between tax deductions and tax credits
- Pay yourself first and contribute to an IRA or 401K. This reduces your taxable income (which is what Buffett does) and saves for retirement!
- Claim the Mortgage interest deduction
- Be aware of changes to the tax code
- Avoid common tax mistakes
- Make smart use of your withholding
The bottom line: Educate yourself on the basics of the tax code. Or hire an accountant if you can’t be bothered, but realize that no one – not even uncle Warren – is really watching out for you and your money. That is up to the individual.
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