Warren Buffett is the world's third richest man with a fortune estimated at $71 billion, yet he is able to exploit a loophole and pay a ridiculously small amount in federal taxes.
This week’s Barron’s sheds light on why Buffett has evaded the IRS’ snare for so long.
Buffett, chairman and CEO of the Berkshire Hathaway conglomerate, does not publicize his tax returns. But for the tax year 2010, he reportedly paid $6.9 million on taxable income of $39.8 million.
For many years, he boasted his tax rate was lower than his secretary’s, largely due to the fact he took so little income from Berkshire.
"What is astounding about those numbers is not the 17.3 percent tax rate, but that Buffett's $39.8 million of taxable income is only about 0.05 percent of his reported net worth," Morris Propp observes in an article for Barron's.
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How does he do it? Buffett's principal holding is about a 20 percent interest in Berkshire Hathaway, and Berkshire hasn't paid any cash dividends since 1967. It instead uses its after-tax income — $19.9 billion in 2014 — to buy companies.
"The Berkshire model is to buy companies rich in cash flow with histories of paying dividends, then cancel those dividends and retain the cash flow going forward for future acquisitions," Propp explains.
In 2009, Burlington Northern Santa Fe paid $546 million in dividends. After Berkshire acquired the railroad in 2010, the dividends stopped.
In 2010, the chemicals firm Lubrizol paid $90 million in dividends. The dividends ended after Berkshire's acquisition, and so did the tax revenue from the dividends.
In 2012, H.J. Heinz paid more than $600 million in dividends. The following year Berkshire and a Brazilian partner bought the company, and the dividends stopped.
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Propp estimates that if Berkshire followed the average of the S&P 500 companies, it would have paid out about $6 billion in dividends in 2014. Buffett's share would have been about $1.2 billion, for a tax bill of $280 million — about 40 times what he actually paid in 2010.
"It seems that Buffett and his businesses are serial deprivers of tax revenue to the U.S. Treasury," Propp notes. "Yet that does not deter him from loudly advocating higher income tax rates for others."
Buffett's public call for a new minimum tax rate for millionaires and billionaires became a key feature of Obama's deficit-reduction plan. The president named the provision the "Buffett Rule."
Buffett's close relationship with Obama dates back years. When Sen. Obama visited Omaha, Berkshire's headquarters, in 2005, Buffett said Obama "has as much potential as anyone I've seen."
When Obama was seeking the Democratic presidential nomination in 2007, Buffett stood next to him at a fundraiser in Omaha and said: "Barack is here to increase the abundance, but to spread it around a little more so that it is inclusive prosperity."
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And Obama said: "Warren Buffett is one of those people that I listen to."
Buffett has headlined several Obama fundraisers over the years, and in 2010 Obama awarded him with the Presidential Medal of Freedom, the nation's highest civilian honor.
Propp writes in Barron's that the IRS "chooses not to see anything" regarding what he calls "The Buffett Loophole."
He concludes: "The relationship between the Wizard of Wall Street and our president is symbiotic. The two scratch each other's back at the expense of the commonweal. How nice for our president, who is so eager to spread the wealth around, to have one of our richest citizens militating for higher taxes on the rich. How nice for Buffett to play to an adoring crowd of wealth-spreaders. How strange that it's not his wealth that they are spreading around."
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