Warren Buffett, one of the wealthiest men in the world, usually fluctuating between top one and top three. He has been on record numerous times about how he pays a lower rate of tax than his secretary Debbie Bosanek. One of the last times this was brought to the public was during an ABC network interview in January of 2012. In this interview it is claimed that Buffett paid a tax rate of 17.4% while his secretary paid a rate of 35.8%.
Now I am no tax expert, but this does seem very suspect to me for several reasons. I also believe that Buffett is being very selective in what he declares as his income and taxes, and it is my intention to highlight these things in this article.
Debbie Bosanek's Tax Rate
Ms. Bosanek has been Buffett's secretary since 1993, so he obviously values her services quite highly. Now the claim is that she pays tax at a rate of 35.8%, which would have to include all deductions at Federal and State level, including FICA and social security related deductions, as the highest Federal income tax rate is 35%. This raises the question of how much she actually earns to attract such a high level of tax.
The insinuation is that one of the wealthiest men in the world pays a lower tax rate than an average Jane Public who works as a secretary, a profession not known for particularly high incomes by any stretch of the imagination. But to end up paying 35.8% in taxes on her income she actually has to be earning a substantial amount of money, or the calculations brought forward are highly selective.
According to this article, you would need an income of $110,000 to reach that kind of tax rate, but that of course would mean that she is far from being an average secretary. The article does however provide an update stating that Ms Bosanek's income is apparently $60,000. The only way you could get to the 35.8% tax rate on that kind of income is by including the employer side of payroll taxes, which is in no way a bad thing to do, as the employer related payroll taxes are still a tax on the income itself.
How exactly Buffett's tax rate is computed is still very much a mystery. As far as I can tell Berkshire Hathaway, the company he runs and is a 30% shareholder in, pays him $100,000 a year. He does though have "income" from any Berkshire shares he sells on which he would be paying capital gains tax only and not income tax.
But this is not comparing like with like and is more importantly leaving out some very important factors relating to his share ownership.
Warren Buffett's Share Of Berkshire Profits and Taxes
Buffett always talks about his income from the sale of shares and the relatively small wage he receives. Apparently over 95% of his wealth is tied up in the share of the company he runs with the remainder being a mixture of bonds. However, he very conveniently leaves out his share of income of Berkshire Hathaway. As a 30% shareholder of the company he owns 30% of the company's profits. If the company paid out all profits as a dividend then his personally declared income would be much higher; actually it would be in the billions, but more about that below. But just because the corporate profit is not paid out in dividends does not mean that it is not his income.
The same goes for the corporate income taxes that Berkshire pays. His share of these taxes is 30%, and just to highlight more of Buffett's hypocrisy, there are mounting news reports of Berkshire owing about $1 billion in taxes. If he is such a believer in paying higher taxes, why does his company not pay what it actually owes?
Let's take a look at the numbers then. According to Berkshire's annual report, in 2011 the company made a pre tax profit of $15.3 billion. As a 30% shareholder that means that Buffett's share of the gross profit is $4.6 billion.
The same report states that the company paid corporate income taxes to the tune of $4.6 billion. Buffett's share of this would amount to $1.4 billion. So, what kind of tax rate does that amount to then? The simple calculation would be $1.4 billion divided by $4.6 billion which brings up pretty much a rate of 30%.
Of course these kinds of numbers do not grab as much headlines and essentially negate the whole idea that rich people like Buffett pay far less tax than their secretaries.
Why Does Buffett Receive Such A "Low" Salary?
Of course for most people, and me included, $100,000 is a lot of money, but for a Chief Executive of an extremely large corporation this is peanuts. But the question does arise: why such a low salary?
According to Buffett it is all down to making a statement about excessive income at the top levels and that his lifestyle simply doesn't require more money than that. However, I believe that he is being very disingenuous here as well.
The reason for this has to do with the valuation of Berkshire Hathaway. At current earnings and share valuation the company trades at a price to earnings ratio of 18. What that means is that the company is valued at 18 times it's annual earnings, or put another way, if you bought the entire company it would take 18 years to make your money back.
I'm sure Buffett would have no problem convincing shareholders and the board of director to give him a $1 million pay rise, but would this make him better off? If Berkshire paid him $1 million more then the companies earnings would be $1 million less. Given the price to earnings ration it would also mean that the company would be valued at $18 million less. And since Buffett owns 30% of the company, his stake would be worth $5.4 million less. In a nutshell, he would actually be financially worse off with every extra Dollar he earned.