As the third richest person in the world, Warren Buffett is estimated to be worth $71 billion, yet he has the ability to exploit a loophole that allows him to pay an incredibly low amount in federal taxes.
In Barron’s this week they shed light on why Buffett has been able to evade the snare of the IRS for such a long time.
Warren Buffett, CEO and chairman of Berkshire Hathaway, does not publicize his personal tax returns. But in 2010, he reportedly paid $6.9 million on a taxable income of $39.8 million.
Warren Buffett has even boasted for many years that he pays a lower tax rate than his secretary, and this is in large part due to the fact that he takes relatively little income from Berkshire Hathaway.
“What is astounding about those numbers is not the 17.3% tax rate, but that Buffett’s $39.8 million of taxable income is only about 0.05% of his reported net worth,” said Morris Propp in a Barron’s article.
How does Warren Buffett pull this off? His principal holding is roughly 20% interest in Berkshire Hathaway, and Berkshire doesn’t even pay a cash dividend and hasn’t since 1967. Instead, the company uses its after-tax income – in 2014 it was $19.9 billion – to purchase more 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,” explains Propp.
Back in 2009, Burlington Northern Santa Fe railroad had paid out $546 million in dividends. The dividends stopped once Berkshire Hathaway purchased the railroad in 2010.
Lubrizol, the chemical company, paid $90 million in dividends in 2010. When Berkshire Hathaway acquired the company, the dividend came to an end as well as the tax revenue that the dividend created.
H.J. Heinz paid over $600 million in dividends in 2012. Berkshire Hathaway purchased the company the following year with a Brazilian partner and they stopped the dividend altogether.
Morris Propp has estimated that if Berkshire Hathaway followed the average of the existing S&P 500 companies, it would have paid out about $6 billion worth of dividends in 2014 alone. Buffett would have earned about $1.2 billion of those dividends, and would have paid a hefty tax bill of $280 million, which is about 40 times the amount that he paid back in 2010.
“It seems that Buffett and his businesses are serial deprivers of tax revenue to the U.S. Treasury,” notes Propp. “Yet that does not deter him from loudly advocating higher income tax rates for others.”
The public call that Buffett made for a new minimum tax rate for millionaires and billionaires became a large feature in the deficit reduction plan put forth by Pres. Obama. The provision was named the “Buffett rule” by Obama himself.
Warren Buffett has a close relationship with Pres. Obama that dates back many years. When Obama was still a senator, he visited the Berkshire Hathaway headquarters in 2005 in Omaha and Buffett said Obama “has as much potential as anyone I’ve seen.”
Back in 2007 when Barack Obama was seeking the Democratic presidential nomination, in Omaha, Buffett stood next to him at a fundraiser and said: “Barack is here to increase the abundance, but to spread it around a little more so that it is inclusive prosperity.”
And then Obama said: “Warren Buffett is one of those people that I listen to.”
Warren Buffett has also headlined several of the Obama fundraisers throughout the years, and back in 2010 Obama awarded Buffett with the Presidential Medal of Freedom, the highest civilian honor in the nation.
In Barron’s, Propp writes that the IRS “chooses not to see anything” in regards to what he has termed “The Buffett Loophole.”
Propp 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 mitigating 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.”