The Real Reason Warren Buffett's Taxes are Low

Yahoo News ^ | 08/17/11 | Peter J. Reilly

[MissesBush]

Warren Buffett was in the New York Times today bragging about his low effective tax rate and saying how he would like to be paying more. Fellow Forbes contributor Tim Worstall weighed in quibbling about Mr. Buffet not factoring in the corporate taxes on Berkshire Hathaway's earnings. I'm just a simple CPA, whose firm won't even let him sign audit reports anymore. (That's true of all tax partners here by the way. I don't take it personally). I don't want to quibble with a quibble but apparently economists have a hard time figuring out the incidence of the corporate income tax (i.e. who is really paying it), so I think we can let go of that piece of the analysis.

Still Mr. Buffet 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. Mr. Worstall alludes to it when he mentions that Berkshire Hathaway does not in fact pay dividends. Mr. Buffet'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. That's the real reason Mr. Buffet does not pay a lot of income taxes.

[PieterCasparzen]

Berksire-Hathaway has been in the Life Insurance business for decades.

BH sells various life insurance and annuity products - and the very purpose of those products -

LOWERING ONE’S TAX LIABILITY IF ONE HAS SIGNIFICANT WEALTH AND INCOME THAT WOULD BE SUBJECT TO HIGH TAXES DURING ONE’S LIFE AND AFTER ONE’S DEATH WHEN ONE’S HEIRS INHERIT THE WEALTH.

So of course Mr. Buffett wants tax rates to go up like crazy - that will drive TONS OF NEW CUSTOMERS to look for products that Berkshire-Hathaway sells.

Just in case you have some wealth that you want to pass on to your heirs and need to lower your tax liability, here’s a link to brkdirect...

http://www.brkdirect.com/

MY SINCERE THANKS to everyone in the SCP (so-called press) for pointing out the fat, stinking, hairy elephant of a conflict of interest on Mr. Buffetts’ populism.

[Para-Ord.45]

bm

[William Tell]

Vermont Lt said: "The people who save taxes based on these regulations are just following the law. "

You're exactly right.

Not only that, but people who save taxes based on these regulations are doing EXACTLY what Congress and the President who signed the law want them to do.

The government decides to encourage people to buy homes by providing a tax deduction for home interest. Nobody deserves blame for doing exactly what the government intended.

The government decides to encourage investment in corporations by providing a lower tax rate on capital gains. Nobody deserves blame for doing exactly what the government intended.

If the government eliminated these two laws, I would sell stocks the day before the rates were to rise and pay off my home mortgage. Though this is what ought to be happening, if everybody did this on the same day it would be quite exciting. We are so constrained by these kinds of laws that there is no simple way to get back to the small-government that our Founders intended. It's going to be very painful.

[Vermont Lt]

Quite honestly, for the first two years I was in business I paid no taxes on pretty decent EBIDA. I took accelerated depreciation for small businesses during those two years. One year we got back everything I would have paid, and what my wife paid into the system.

Not so lucky in the past couple of years. Although this year has been a capital upgrade year.