Warren Buffett: American business man, investor, philanthropist, CEO of Berkshire Hathaway, and 3rd wealthiest person in the world. The man is an expert at making money, but now it seems he wants the American government to take its share.
Over the past few months, Buffett has made claims that the United States government is coddling the “mega-rich”, allowing them to pay taxes at far lower rates than their lower-income fellow citizens. After conducting a study in his own office at Berkshire, he found that he was paying taxes at roughly 17.4%, while the 17 employees he interviewed were paying between 33 and 41% of their annual incomes in taxes.
How is it possible that someone so rich living in a country with a progressive tax rate system – one in which higher income earners are taxed at higher rates – can achieve such a low average tax rate? The answer, in short, is capital gains. Capital gains occur when a capital asset (anything from a building to a mutual fund security) is sold for more than the price at which it was purchased. So how do capital gains provide a tax break? In both the United States and Canada, they are taxed at a preferential rate: a max of 15%, and 50% respectively. In addition to these rates, capital gains are only taxed when the gains are realized. So while an asset can increase in value over time, businesses need only pay tax on these gains at the time the asset is sold.
The result is that tax breaks, initially intended to encourage capital investment, have allowed business owners to increase after-tax gains in unusual ways. The problem is that the difference between ordinary business income and a capital gain is often unclear, and also very costly for the government to investigate. While jurisprudence plays an extensive role in this matter, the reality is that many forms of income that should be taxed at an ordinary progressive rate are in fact being taxed at far lower rates as a capital gain.
While this all seems fine and dandy, Buffett has been somewhat misleading in his claims. For one, Buffett has ignored the effect of corporate income tax – the tax paid on dividends at the corporate level – which would increase his supposed 17.4% tax rate. Furthermore, Buffett’s income structure is extraordinarily unusual, even among his wealth category. Buffett takes only $100,000 in salary, and earns about $40,000,000 of annual income in dividends and capital gains – taxed at lower rates. If Buffett was serious about the government collecting its fair share of income, he could merely readjust his income structure: take a drastically larger salary (as most CEOs would), and pay income taxes on those rather than at the preferential rates he receives otherwise. But let’s face it: being rich must be difficult. Let’s give the poor guy a break.
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