Time out: Buffett paid the equivalent of $20 in federal taxes last year. Why he, and Trump, and most owners, are laughing about the tax bill

Maybe he's similar because he pays so little in federal taxes.  (berkshirehathaway.com)
Maybe he’s similar because he pays so little in federal taxes. (berkshirehathaway.com)

I just can’t let this go by without comment. Warren Buffett seemed heroic this week when he released his federal tax bill after Donald Trump called him out in the Sunday night presidential debate.

“No Donald, I’m not like you,” he was saying,  “I pay federal taxes.”

In fact, Buffett wrote in his statement, he paid $1.8 million in federal taxes last year.

The Internet roared its approval. But could we all take a deep breath? Because Buffett, like Trump, in fact represents everything that is wrong with the U.S. tax code and our efforts to make people pay their fair share for things.

Warren Buffett is worth $65 billion or so, give or a take a few billion based on that day’s stock market activity. And he paid a little less that $2 million in federal taxes. That, my friends, is a rounding error.

Let’s compare Buffett’s situation to yours. Say your life’s assets — the equity in your home, your bank account, your car — totaled $650,000.  If you had Buffett’s bill, you’d pay $20 in federal taxes.

So basically, the Oracle of Omaha didn’t pay any taxes, either. And hasn’t, for years.  How? It’s straight out of Marx: Owners pay pennies in federal taxes. Workers pay the taxes in America.  More on that in a moment.

If you are paying attention, and I hope you are, you’ll realize that I am playing a little fast and loose with the difference between income and assets.  Unfortunately, I believe, America’s federal tax system takes its cut from income generated, not by stuff owned.  While Buffett owns a whole lot of stuff worth billions of dollars, his paper income was only $11.5 million last year. After a bunch of charitable deductions (and admittedly not taking all the deductions he could) Buffett makes sure to pay the 15-20% tax rate he’s engineered to avoid looking like a bad guy.

But when Warren Buffett pays the equivalent of $20 in federal taxes, something is terribly wrong with our system.  He has said as much, and is a leading voice in raising taxes on people with higher incomes.

Of course he is, because that wouldn’t impact him, or most Wall Street wheeler-dealers.  Owning things is still really cheap in America.  Working and making income, however, is very expensive.

But don’t companies pay income tax, too?  Sometimes. But only when their accountants don’t do things to avoid generating income. Buffett’s companies are exceedingly good at this.  It’s well known that Buffett buys companies which pay dividends (income) and cancels the dividends to “reinvest” that money (not income).  This is great for shareholder value. Straight off, it dramatically lowers the firm’s tax bill.

And what about investments that generate a lot of growth? Aren’t they taxed eventually?  Sort of.  If you bought a stock at $10 and sold it at $100, you’d have to declare $90 of income (or capital gains, depending).  We all know this painful fact. But, if the stock sale proceeds are instead turned into more stock, there’s no income. And no tax bill. Buffett did just that when he sold his shares in the Washington Post, which he bought for $11 million and sold for about $1 billion. Buffett didn’t walk away from the sale with cash; he walked away with shares in a new company. TheStreet.com reported he might avoid a $400 million tax bill that way.

It’s simple. He uses all the cash his companies accumulate to buy more companies rather than pay taxes on it as income. Those kinds of swaps are perfectly legal.  In fact, his accountants would be remiss if they didn’t take advantage of the way U.S. tax code is structured today. Now, is it moral?  I’ll let you mull that over.

It is good that Buffett is a leading voice among the wealthy calling for higher taxes on the group.   Hopefully, that can lead to a broader discussion about these issues.  There are those who will say that the current tax structure is necessary to promote investment.  OK, that’s a claim worth examining.

But what’s not worth discussing: A man worth $65 billion who pays $1.8 million in federal taxes holds no high moral ground on the issue.

One solution to this problem is to move away from the concept of an income tax — which really does penalize people who are working hard and generating economic activity — to an asset tax.  An asset tax would, theoretically, force people who are simply sitting on large piles of cash (and companies) to pay a lot more, and it would give a break to the aspirational among us who are working to earn more money and create new things right now. This path is fraught with peril. Of course there would be terrific problems distinguishing between income and assets (as we have now – is a stock option income or asset?) And Heaven help any politician who tries to move on a tax code that so deeply benefits owners over workers.

But it’s worth talking about.  That’s why my hope is that talk of Trump’s 20 years of federal income tax-free living (and Buffett’s nearly federal-tax-free life himself )  finally wake the country up to how messed up our tax code is.  Trust me, accountants and rich folks are laughing at the dialog we’re having today.

The next time you see someone barely getting by who defends Trump’s tax evasion (or Buffett’s clever accounting), please think about that.

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About Bob Sullivan 1215 Articles
BOB SULLIVAN is a veteran journalist and the author of four books, including the 2008 New York Times Best-Seller, Gotcha Capitalism, and the 2010 New York Times Best Seller, Stop Getting Ripped Off! His latest, The Plateau Effect, was published in 2013, and as a paperback, called Getting Unstuck in 2014. He has won the Society of Professional Journalists prestigious Public Service award, a Peabody award, and The Consumer Federation of America Betty Furness award, and been given Consumer Action’s Consumer Excellence Award.

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