Warren Buffett is the Greatest Tax Dodger of All Time

Warren Buffett is the greatest tax dodger of all timeWarren Buffett is one of the most brilliant investors of all time. I personally admire him, so when someone as nasty as Donald Trump attacks him as he did in the second presidential debate, I want to come to the defense of the Oracle of Omaha. After all, Trump loves to make outrageously inaccurate accusations. However, one charge Trump leveled in the debate Sunday actually holds some water. He accused Warren Buffett among others of dodging taxes just like he does. Buffett responded that he had paid taxes since 1944 when he was a young teenager. THE TRUTH: Warren Buffett is the greatest tax dodger of all time. 

Buffett Pays a lot of Taxes, on an Extremely Small Income

Warren Buffett earned $11.6 million in 2015 and paid taxes of $1.8 million. However, his net worth is $64.7 billion. That means in 2015, the world’s greatest investor only produced income of 0.018% of his assets. Is he slipping? How was his income so small compared to his many billions of dollars?

Let’s compare Warren Buffett to a retired doctor with a net worth of $3 million. Imagine if that doctor had an investment portfolio with index funds that he used to retire to Florida. He had a CPA that limited his income to 0.018% of his assets. That doctors taxable income would then be only $534.

Let’s be honest. That doctor might be viewed as having committed tax fraud. The doctor might be audited, and his CPA would be under investigation. However, that is exactly the same situation with Buffett, except he pretends that his nominally large tax bill is the same thing as a relatively large tax bill.

Why and How Does Buffett Limit His Taxable Income to Almost Nothing?

Warren Buffett does something that many wealthy people are good at, which is minimize his taxable income. His goal is to take all the income growth in his assets and put it in the form of price appreciation of Berkshire Hathaway stock.

Obviously, Buffett did not earn $11.6 million last year. He earned many billions of dollars in “phantom income.” We have a huge loophole available to investors who invest in the stock market. Any gains in the price of a stock do not count as income until that stock is sold. If you buy stock as Buffett has for decades, he has enormous capital gains that have never been taxed.

In fact, I have a fun little sound bite about Buffett that’s may be even better than Trump’s admission that he used carry-forward losses to dodge taxes for 20 years. I would wager that Buffett’s TOTAL taxes paid over the past 50 years amounts to less than 1% of his current net worth.

So Buffett does everything he can to make all his income come in the form of stock price appreciation. He uses the unrealized income tax loophole to achieve an effective tax rate on his income of something like 0.1% a year. That makes Trump’s 5% rate or whatever he pays look generous by comparison.

Why Berkshire Hathaway Has Never Paid a Dividend

Do you think it’s fishy that Buffett loves cash flow but doesn’t distribute any dividends to his shareholders in Berkshire Hathaway? There’s a very good reason Buffett chooses to not pay dividends.

One can see that Warren Buffett is the greatest tax dodger of all time in the way he treats dividends. He set up Berkshire Hathaway because corporations get more favorable tax treatment for dividends that individuals. Buffett issued stock in Berkshire Hathaway so that he could control the company that’s effectively wrapping paper for the huge stock and business holdings he owns.

He retains corporate income from the various holdings in his massive conglomerate. In fact, Buffett likes to buy companies that are currently paying a dividend to their investors. Warren Buffett then stops it, removing the millions of dollars in taxes that were going to the IRS. That income then goes to purchasing still more companies with large dividend payments, which he often halts. In fact, Berkshire Hathaway is horrible for the IRS as it regularly stops flows of hundreds of millions of dollars in taxes to the government.

By purchasing businesses with good cash flow and reinvesting the money into Berkshire Hathaway, Buffett has increased the price of his stock tremendously. When he started Berkshire Hathaway, the stock price was $19 a share. Today, that price is $215,920. Buffett has paid taxes on almost none of these gains.

The Buffett Rule Would Not Even Affect Its Namesake

Secretary Clinton and President Obama are big fans of the ‘Buffett Rule’ that would raise the minimum tax rate on million dollar+ incomes to 30%. However, notice that in the above example that Buffett would only pay a couple million more in taxes if that rule were enacted. His vast fortune would essentially be immune from the rule because he never realized income from selling stock by design.

In fact, the Buffett rule would favor billionaires by bypassing taxation of their phantom income. Imagine a middle class family who got really lucky with a good property investment. Both the mom and dad work and have a combined income of $150,000 a year. Their property sale results in a $850,000 gain, which they hope to use in retirement. The government then steps in with the Buffett rule and takes 30% of their gains no matter what. All while Buffett’s almost $65 billion goes untaxed. I love the Oracle of Omaha as much as anybody but this is hypocrisy.

Buffett Even Plans to Dodge the Death Tax

A core reason for the estate tax is supposed to be that it prevents dynasties of wealth in America. Another reason is that the government is supposed to be a fairer social decision maker for how to distribute assets. Buffett is depriving our elected representatives of that opportunity.

He has graciously pledged his fortune to the Bill and Melinda Gates foundation. That means he will donate Berkshire Hathaway stock to the foundation for years to come. This will allow him to avoid the 40% death tax. Think about how the government’s finances could benefit from a one time $25 billion contribution. Instead, he wants to direct the entire sum to private decision makers at the Gates foundation. That’s because they will be better stewards than politicians.

Warren Buffett is the Greatest Tax Dodger of All Time, and He Wants an Even Bigger Advantage

Buffett will continue using every loophole in the book to keep his taxable income lower than a Vanguard expense ratio. Unless you think a wealthy retired physician should be able to hold his income down at $500 a year, Buffett shouldn’t be able to get away with what he does if you have a problem with billionaires not paying their fair share.

I have strong ideological beliefs about this. Capital is better used by its owners and creators than government. I celebrate loopholes and ways to minimize tax revenue because I do not believe our government manages finances well. In that regard, Buffett is a wonderful example and teacher to look up to.

However, the next time he stands alongside a Democratic politician to call for higher taxes, know that he wants to stack the deck further in his favor. With the ‘Buffett rule,’ Berkshire Hathaway’s structure would become even more valuable from a tax perspective. One of the few things that Trump didn’t lie about is that all these ultra rich donors to the Democratic party want to keep their loopholes in place at all costs, and will bait and switch to get what they want.

   Questions for You

  1. Do you think it’s ok for Buffett to keep his taxable income down to only 0.018% of his assets?

  2. What rule would you use to tax high wealth individuals to ensure maximum compliance and minimal avoidance?

 

24 thoughts on “Warren Buffett is the Greatest Tax Dodger of All Time”

  1. I wouldn’t bother suggesting new tax rules. Instead, I’d suggest all the savers and investors out there (i.e. readers of this blog) buy shares of Berkshire Hathaway and other tax-efficient corporations to maximize you after-tax net worth in the future. Warren Buffet’s tax efficiency can be yours too 🙂

    1. That’s very true. You can get direct access to Buffett’s thinking by purchasing shares in his company. Unfortunately, due to his age, you have to have a lot of confidence in the people around him.

  2. I would rephrase your article a different way. I’d say he is the greatest income dodger of all time. What tiny portion of his $65 billion does he actually have access to to go out and spend today? What irks me isn’t someone who has a lot of money on paper and pays a smaller than normal income tax rate, it’s someone who has a lot of money in the bank and pays no income tax. The moment Buffet decides he wants to be a stereotypical billionaire and realize his gains he’d be slapped with a huge tax bill; then if he dodged it I’d be upset. Maybe it’s just me, but if a guy lives a modest life and never has to realize 99% of his paper wealth, I’m fine with the 16% tax rate he pays (or better yet, the proposed minimum of 30% that would apply). Loopholes that get money in the bank without paying any federal income tax is what drives me crazy. That type of person is the greatest tax dodger of all time to me.

    1. The thing is he earns a gigantic amount of income every year. We are supposed to have an INCOME tax, and under that standard shouldn’t all income be taxed once it’s earned, regardless of whether its in the form of higher stock prices or dividends? If we want to move to a fair tax system where everyone pays a national sales tax I’m all for that. But a personal income tax to me should mean if you earn income, you should pay a tax. “Realizing income” is a fake thing that we have to create a loophole on which to not pay taxes.

      1. I would disagree that you do not pay taxes on it, that money can’t be in limbo forever and tax will be levied eventually (unless it is donated to charity, but I’m also completely fine with that), but it definitely is delaying it and in all fairness should be paid at the time earned as you suggest. What I vehemently disagree with is that you’re saying someone who has delayed the majority of their taxes is the better tax dodger than someone who wiped away all current and future tax liabilities.

        1. Buffett isn’t just delaying them, he’s avoiding paying them completely. He is stating that more social good can be done if he directs his fortune rather than putting it in the hands of elected representatives of the people. Why should other billionaires not as good at tax avoidance pay for our aircraft carriers and roads but Buffett gets to dodge paying for this completely so he can further run up the score as one of the richest men to ever live? It seems like there should be some limit on the tax deductibility of charitable giving for fairness purposes if that’s what someone believes the point of the tax code truly is

          1. If W.B. never realizes the income, and never benefits from it, how is this a liability he should pay? This situation isn’t a loophole, it’s an accounting determination – otherwise you and I should be charged when our house increases in value, even though we haven’t sold it, or when that vintage ‘vette in the garage that Uncle Fred gave to you suddenly spikes in value. I have trouble seeing that one flying.

      2. I do not think the government should tax people on unrealised gains in stock prices. They simply have to wait until the holder sells their shares to tax them. By taxing unrealised gains, the holder would in effect be forced to pay out cash for income he or she has not received. Imagine a mum/dad investor who buys $1,000 worth of shares which double in value. They decide to hold on to the shares, no reason why they shouldn’t, but oh hey you have to pay $300 tax. Sound like a good idea?

      3. The income that the corporation earns is taxed at the corporate rate. He put’s the money to use buying other corporations and building up the company, creating wealth. That’s the purpose of not taxing Capital Gains. Good Lord, ya’ll a bunch of retardz in here.

      4. Oh great, lets say I start a startup, raise money (10 million for 1% of my company making revenues of 50 million ARR but breaking even) & now my startup is nominally valued at 1 billion dollars, since I own half of it and ill be taxes by your logic ill owe a couple hundred million I certainly dont have cause 2 years ago I was a broke college student…

    1. From Barron’s writer Morris Prop:

      “In 2012, the year before it was acquired for $28 billion by Berkshire (and a Brazilian partner), H.J. Heinz paid more than $600 million in dividends. Those dividends were taxed and provided revenue to the U.S. Treasury. After the acquisition, the dividends stopped. Tax revenue from those dividends stopped.

      In 2010, the year before it was acquired by Berkshire for $9 billion, Lubrizol paid $90 million in dividends. After the acquisition, the dividends stopped, as did tax revenue on the dividends.

      In 2009, the year before it was acquired by Berkshire for $44 billion, Burlington Northern Santa Fe paid $546 million in dividends. After the acquisition, the dividends stopped, as did tax revenue on the dividends.”

      I think this summarizes my point very well about his serial tax avoidance.

      1. thanks for the info

        i read some where ,
        a country has a law that X % of the profits or income
        [ been a while so i do not remember country or required distribution of P or I ]
        has to be distributed as dividends
        this also stops shell companies since they will actually have to make money and distibute it
        NOW that is fair !!

  3. Wow this is really enlightening. I remember reading his quote a few days ago and thinking his taxable income seemed quite low.

    And it’s really low when you compare it to a normal person.

    Not sure what to think about this from a political perspective. I will say that it does seem like the wealthy will always find ways to shelter their income. Whether that’s right or not, I can’t really say here.

    1. Not only do they try to shelter it, but they want to try and play bait and switch to make sure their wealth never gets taxed

  4. This is a really smart and well-written article and I agree with many of your points.

    With that said, the tax code is a big stimulus plan that incentivizes people to take risks, create businesses, create jobs, provide housing, utilize clean energy, provide food, etc. So would you favor continuing the current system of tax incentives (or “loopholes” as you call them) or do you favor a flat tax?

    1. I absolutely favor a flat tax, or even better a consumption based tax so we stop distorting incentives that keep thousands of accountants in business

  5. I had read Buffets rebuttal and did wonder why his income seemed so low. Now it makes sense. I am so ready for this election to be over. Beings 50% of the population will be certain that the end of our county is near the day after election (no matter who wins), I am saving a little bit of cash to buy some stock then. =)

    1. Great point about buying stocks. I’ll say that I think Trump is right about one thing, we are in a bubble of some sorts right now. When it pops, I’m not so sure the Fed will have all the same tools available to handle it well

  6. No. You don’t know anything about taxes. Berkshire Hathaway is C-Corp. The business it holds pays taxes twice.
    For example if Coca Cola makes 5 Billion dollars it pays it’s taxes . Berkshire Hathaway also pays taxes in profit made by Coca Cola again as it is C-Corp not LLC. Don’t mislead people. It’s clearly double taxation.

    1. I would read some of his letters to shareholders more carefully on how he avoids taxes on dividends and why Berkshire will never distribute one.

  7. What are you suggesting? Paying taxes on unrealized capital gains? That’s just nonsense, because, that’s what they are, unrealized capital gains.

    For instance, you pay taxes on the income this website generates, not on its value. If I offer you 10,000,000 USD for your website, do you immediately report that to the IRS and pay 3,000,000 USD in taxes before selling it to me? I’m pretty sure you won’t do that.

  8. All this talk about WB and his tax dodging ways (both personally and professionally), yet not one mention of his politics?

    THEE reason “no one” – these ‘no ones’ who don’t know better about WB are my similarly young but politically left-leaning voters – is because he occasionally comes out and gives the media/left, which fawns over and praises his “social awareness”, what they want: The rich should pay more in taxes! Their fair share!

    You cannot have this conversation without mentioning his political rhetoric, as few people would treat a Rush Limbaugh as nicely and with kid gloves as they do WB. WB has made tax avoidance an art form and he’s praised, but if a Koch brother didn’t pay tax on a candy bar the media and left would attack him like they do a serial killer.

    I imagine those who have a problem with my injecting politics in this conversation are the very ones who don’t understand the bias and the inherent political nature of this conversation. When I read about WB’s brilliant tax schemes, which are no news to me, I don’t fault him for doing it. If anything, I applaud him for illustrating how much leftists and liberals are kept in the dark by the very media they feel is informing them.

    The truth is, most people my age on the left don’t care what is being done so much as who’s doing it. It’s one of the worst problems I see in my generation, all this relativistic judgment. The mark of a weak mind and the contemporary left.

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