Skip to comments.How Warren Buffet pays no taxes (virtually no taxes)
Posted on 11/01/2009 4:57:59 PM PST by dennisw
Arthur Laffer said--
"You can't raise taxes on the rich. These people know how to get around taxes," says Laffer. "Warren Buffett pays no taxes because all of his wealth is in unrealized capital gains. There's no tax on unrealized capital gains, so how do you get it? You have to tax poor people." LINK
Warren Buffet sure talks about taxes a lot for someone who essentially doesn't pay any since the vast bulk of his wealth consists of unrealized capital gains. Appreciation of Berkshire Hathaway stock that he just sits on and never sells any
Warren Buffet lives modestly for someone who is worth 50 billion dollars.
He has publicly stated that when he dies his children will divide up a billion or so
While the rest will go into the Bill Gates Foundation since they do such a bang up job (squandering it)
Lets say Warren leaves Gates Foundation 50 billion dollars and all of it is unrealized capital gains
Then it will enter into the Gates Foundation untaxed (?)
When Gates Foundation needs to spend some of Buffet's dough then it will liquidate some Berkshire Hathaway and spend it. I wonder if taxes will paid at this point
So what? If you don’t sell something, there’s no profit to tax. Nor should there be.
If you talk to Warren [Buffett], he'll tell you his preference is not to meddle in the economy at all -- let the market work, however way it's going to work, and then just tax the heck out of people at the end and just redistribute it.
What frauds they both are.
“There’s no tax on unrealized capital gains, so how do you get it?”
One way is by levying a tax on net wealth. Such taxes tend to be very unpopular.
Re your post 3: Exactly.
To tell the truth, I would rather see the government get it ans piss it away than for liberals to get a hold of it.
Wealth taxes have normally been used to prevent or to eliminate concentrations of resources outside of control by the ruler. A wealth tax in the US would remove private wealth and wealthy persons to locations offshore and reduce the effective tax base further.
No, the Bill and Melinda Gates Foundation is a 501(c)3 - tax exempt - entity. They can sell the shares tax-free.
How about if you set up a tax free foundation with the untaxed funds. Then you hire your kids to run the foundation at exorbitant salaries. You then essentially transfer the funds to your children, while avoiding the inheritance tax.
Berkshire Hathaway in 2007 earned $20,161,000,000 in pre-tax operating profit. It paid $6,594,000,000 in taxes to the Government. Buffett, as many know, is giving away his entire fortune a little bit at a time by transferring shares to the Gates foundation each summer. Nevertheless, he still owns 350,000 Class A shares at roughly $100,000 each and 2,564,355 Class B shares at roughly $3,300 each for a total of just shy of 30% of the company's total equity.
If Berkshire were to convert to an S-Corp or a privately held LLC with pass through taxation right now, Buffett's personal income tax statement would show, on his K-1 form, personal business sales of $6,048,300,000 and personal income tax of $1,978,200,000.
In other words, he is paying nearly $2 billion in taxes per year on his pro-rata share of Berkshire Hathaway's operating earnings. If Berkshire were a private partnership, that would go on his personal taxes. Because it is not, however, they are filed on the corporate taxes.
The point is that economic reality hasn't changed at all. Regardless of what his "personal" tax rate is, the man is indirectly paying $2+ billion in taxes every year. If you conduct all of your operations through a holding company or through trust funds or through private family corporations, you can have virtually no income but still make, and pay, huge amounts in taxes each year. You can be worth billions and show virtually no personal reported income taxes because the entities in which you have an equity stake are reporting those earnings for you.
Besides, if he wanted to avoid capital gains taxes, anyone with money knows one of the most effective ways is to simply transfer a decent amount of stock into a fully marginable account and arrange a loan backed by the securities. In effect, you could live off the money and only your estate would pay taxes after you died. Another way would be to contribute huge quantities to special types of charitable remainder trusts or charitable annuities with payouts listing him as the beneficiary. It's easy. The same way a smart real estate owner can place his properties in a self-directed IRA and pay only a small UBIT tax on his rentals, keeping nearly every dime tax-free in the retirement account.
My point is: For anyone with any knowledge whatsoever of tax rules, this is a very poor article. It is probably written by someone who has no business experience whatsoever or who, at the very, least, has never owned shares in a decently sized company.
Oh! I’m impressed. That is actually a technique used by a lot of people. Most people wouldn’t know about that. =)
One of my personal favorites is to create a limited partnership with family members, contribute shares of the stock, borrow a large amount from a bank, use the dividends from the stock to cover the interest payments, and then pay out the *loan proceeds* to the individual partners, effectively liquidating the shares without any tax. There are some complicating factors but if you know what you’re doing, it’s effortless.
A few years ago, you could also shop for the highest life insurance premiums possible because return on premiums often aren’t taxed in an estate. By paying, say, $2,000,000 in life insurance premiums, when you died this money was returned to your estate without a penny going to the government. This ticked a lot of people off, though, so it was targeted.
The point is, it’s so easy to manage your taxes well there is no need to cheat. I never understood people who did that.
Sorry about that idea of “no tax on unrealized capital gains” thing. Does your city/county taxing entity “reappraise” the value of your home on a yearly basis and tax you on it? Mine certainly does. So in reality no one really “owns” their home or land, we’re just renting it. WE CAN NEVER OWN IT OUTRIGHT FREE AND CLEAR. We haven’t realized any of those gains, but the city/county tax assessor certainly does. And by the way, those taxes are UNCONSTITUTIONAL.
This starts off with a quotation by Arthur Laffer. Maybe he has it wrong about Buffett but he also speaking generally about “the rich”
Below the Laffer excerpt was written by me and I raise questions, do not speak definitively. My point is Buffett pays very little taxes but likes to talk about taxation policy. You say he does pay a hefty tax bill
Thanks much..... I kinda doubted taxes would be paid since prior to that point Warren Buffett’s money became Gates Foundation money witch is 501c3 as you say
daughter Susie lives in Omaha and does charitable work through the Susan A. Buffett Foundation (another tax shelter)
The bulk of the estate of his wife, valued at $2.6 billion, went to that foundation when she died in 2004
Buffett backed Obama for president, and intimated that John McCain’s views on social justice were so far from his own that McCain would need a “lobotomy” for Buffett to change his endorsement
Buffett was also finance advisor to California Republican Governor Arnold Schwarzenegger during his 2003 election campaign
The Billionaire’s Black Sheep
What’s it like when your grandpa is the richest man in the world? For Nicole Buffett, it means forgoing cable TV and health insurance and making do on $40,000 a year. Here, she dishes on her upbringing and why her grandfather Warren Buffett disowned her.
Joe Schmoe who holds $900,000 in Berkshire Hathaway is also paying those same taxes. Indirectly, the same way Buffett is.
Difference being those are the last taxes Buffet will pay and Gates Foundation will get Buffett's shares tax free
Joe Schmoe cannot afford to fund a foundation. Those are not Joe Schmoe's last taxes on BH. At some point he will liquidate for retirement expenses and be taxed or his heirs (his estate) will pay inheritance taxes on the boodle
I remember reading about that. A granddaughter talked too much about Warren Buffet so he disowned her. Vindictive same as our thin skinned jug eared president
Warren Buffett’s daughter, Susie, is in her thirties and could pass for 25, ‘but she struggled with a few extra pounds. Her father made a deal in which, for losing a certain amount of weight, she could shop for clothes for a month, no limit. ‘The only catch was that she had to pay him back if she regained the weight in a year.’
Susie shed the pounds and her mother, also called Susie, posted credit cards to her with a note: ‘Have fun!’ The daughter duly went out and spent $47,000 in 30 days. Buffett paid up but then moaned like mad to his friends.
With his son, Howie, he did something similar. Howie ran a farm belonging to his father. Buffett determined that his son should weigh 182.5 pounds precisely. If he was over that figure he had to pay his father 26% of the farm’s earnings; under, and the tithe dropped to 22%.
How do I apply for a grant from the Bill Gates Foundation?
1.) He can set up a limited partnership, gift the maximum allowable equity stake in it to his children each year, and not pay taxes on it until they need the money later in life and then sell the shares.
2.) He can also donate the shares he needs to live on to a non-profit, church, or university, avoid all of the capital gains taxes, and get a check for the rest of his life as part of a charitable gift annuity, supporting a cause that is important to him at the same time earning guaranteed income for life. The money that would have gone to capital gains taxes instead goes to his favorite church or non-profit. (The mechanics work like this: You donate $900,000 to Acme University and they agree to pay you 5.6% per year for the rest of your life; when you die, the $900,000 gets donated to their endowment or whatever cause you specifically request, so no capital gains taxes are paid. They get the full amount of your stock and you get to earn 5.6% on the full amount, even the part that would have been gone due to taxes.)
3.) He can deposit all of the stock into a regular brokerage account at a firm such as U.S. Trust or Northern Trust and apply for margin borrowing capabilities. He could then take a draw of $1,000 per month ($12,000 per year). Statistically, even if we went into the next Great Depression, he'd never get a margin call, nor would he pay taxes on the shares because he hasn't sold them. This withdrawal rate is 1.333% of assets so if Berkshire grows at 10% on average and inflation is 3%, the account value will actually grow in real terms by 5.667% each year despite the withdrawals and not a penny in taxes. The rate of growth in the margin balance would become a smaller and smaller percentage of the total portfolio
4.) He can find an old, bankrupt company that still exists and had lost a lot of money in investments, buy it for a few thousand dollars, and contribute his shares of Berkshire to the company as contributed capital. He can then sell them in the company, using the tax-losses from the "shell" to shelter his income, paying no capital gains. (This can be complicated because there are a lot of archaic rules, but it can be done by a good accountant that knows the tax regulations like the back of his hand.)
The point is, after the first few hundred thousand dollars in portfolio value, most, if not all, of the options that are available to billionaires are available to the average guy. The thing is, most people don't learn them on their own, whereas the billionaires have people show up to their office saying, "You need to do this." It's all available to Joe Schmoe. He just needs to read or find a great accountant and attorney. They'll pay for themselves in tax savings alone. Or, he can pick up books on the subject matter if he likes that type of reading.
P.S. What I think is great is that 100% of the money has to be given away by the Gates foundation within so many months or years according to the gift document. That means that all of the money that would have gone to Washington is instead going to programs to solve the problems that plague society like poverty, education, etc. I would much rather have the money go there than to Nancy Pelosi's budget. That foundation does amazing work and has probably done more to alleviate human suffering than almost any group in history.
The general point of the article is correct, then. The rich don't pay nearly the tax rate as the working class and middle class for one simple reason: We're rich because we like dealing with money or businesses. This means that, in time, we're likely to have a far better knowledge of accounting rules and tax regulations (or if we don't, have access to world-class advisers that do).
A few seconds ago, I gave a list of four things someone could do to avoid paying capital gains taxes legally and effortless on their investments - and I'm sitting at my desk, drinking coffee, trying to think of what I'd do off the top of my head. In that regard, the article is absolutely correct: Tax increases will always be paid by the middle class because, by definition, the wealthier you are, the better you understand how to structure your holdings for maximum taxable income or asset growth.
You could be a successful business owner making $150,000 per year and it's highly likely that your tax rate is going to be between 40% and 55% depending upon where you live once you've factored in social security, medicare, Federal, state, local, and sales tax. Yet, I could make $150 MILLION running a hedge fund or private equity group and pay a capped rate of 15% due to a special tax provision known as "carried interest". The average guy has absolutely no idea what that is, but the net effect is you're paying 3x more tax on your $150k than I am on my $150 million.
That's one of the problems with the existing tax structure. It was not this way in the 1950s, 1960s, and 1970s. Slowly, Congress has increased the taxes on the middle class to a punishing degree, making upward mobility much more difficult to attain. The problem they have is that if they make the top tax brackets really unattractive, people like me will just move to places like Lyford Cay in the Bahamas and move money around the world like John Templeton. If it becomes too hard to build the kind of life I want in the United States, I'll go to Canada, or Hong Kong, or wherever allows it. This is known as flight of capital (or in the case of knowledge capital, brain drain).
I think you're missing the point of the gripe. The gripe is that Warren has enough holdings to work the system in a way that he pays minimal taxes, but at the same time goes around using his fame to get free camera time pushing higher taxation on the rest of us. He's a douche.
Thanks for all that interesting information. I have read and re-read it a few times. Much appreciated. I don’t have much to say in argument. It must be nice to have mega-bucks and reduce your taxes to the minimum then lecture middle class Americans how good 0bama is. Yeah, 0bama ain’t so bad when he minimally impacts you
I worry that in twenty years, the next batch of young people coming up won't be able to start a company like I did if he permanently alters the nation's tax system. I want to find a way to stop it. I was also posting back in forth in another thread on a religious topic so if I didn't make that clear, I'm really, really sorry.
The whole speech he gave one year at the Berkshire meeting, which most of this was based upon, was about how the total tax rates need to be lowered on the middle class. He gave an example of how he could avoid paying taxes entirely if he wanted to do so yet a small business owner can't and that's a problem. He explained until the burden is lowered on the middle class to the same rate it was back in the 1980's, we're screwed.
If I remember right (it was more than a year ago), he held up a copy of his secretary Debbie Bosnak's tax filings along with a copy of his own and showed that she was paying nearly 2x the percentage of her income in taxes because Congress has slowly taxed the middle class out of existence. He wasn't arguing for higher taxes at all, he was arguing that the increased payroll taxes, alternative minimum tax, and other levies had become a huge chunk of the average person's paycheck or earnings. Find the whole speech online - it's worth watching. Surely someone recorded it.
I was referring to Warren Buffett as “lecturing the middle class”
My fault. I was not clear
Once again....that post was for Warren Buffett and Obama not you vis avis Obama
*whew!* okay. Thanks for clearing that up!