If Warren Buffet Said It, It Must Be True, Right?

Warren Buffet caused quite a stir yesterday with his op-ed piece in the New York Times when he said it was time to tax himself and his other super-rich friends.  In his op-ed he said, " Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent." 

Ending his op-ed he also stated, " But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.
My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice."

Many of my liberal friends are almost wetting their pants over this article.  Blogs, posts, and comments at the water cooler make them look like laughing hyenas going in for the kill.  But they are drunk from drinking their "lefty lib Kool-aid" and aren't sober enough to listen, analyze, and dig deeper to find out why or how Buffet can make such claims.  They hear him say that he should be taxed more, and they run to the hilltops and shout at the top of their lungs, "I told you so, and it is true because super-rich Warren Buffet said so." 

Well, I was influenced by a man that attended college down the road from where I grew up and once said, "Trust but verify".  So I have taken Ronald Reagan's advice and looked a little deeper into why Buffet would say such things.

Buffett is not sharing the real reason that he doesn’t pay much in the way of income tax relative to his great fortune.  The secret is hidden in plain sight.  Berkshire Hathaway does not in fact pay dividends.  Mr. Buffett’s secret which you can find blasted all over the Internet is one of his famous quotations:

"Our favorite holding period is forever"

You only pay income taxes at any rate on realized appreciation.  An investment with a holding period of forever incurs a capital gains tax of 0%, while all along the holder can be getting wealthy from appreciation. I am not a CPA.  I do not invest with Berkshire Hathaway and even I know that there are no taxes on unrealized capital gains.

What Buffet has been doing for decades is investing and growing the businesses he invests in. He is so ridiculously rich that he could have retired decades ago.  However, Buffet has continued to invest as pure entertainment.  So if he doesn’t sell, he enjoys a tax free "hobby". And Buffet's hobby just happens not to be taxed by Congress. But if Congress had chosen to tax his (ie Berkshire’s) unrealized gains every year, Berkshire would be a tenth of its current size.

You don’t see Buffet calling for the current taxation of unrealized gains do you ? Why should he care what rate of tax is applied to the tiny proportion of his real income that the IRS can tax as taxable income. Even if he paid 200% tax it would be completely irrelevant to him, as his taxable income is tiny compared to his real income. 

He’s a complete phoney.

Now you know the real reason Mr. Buffett does not pay a lot of income taxes.  Sorry to ruin your party my liberal friends!