Does Warren Buffett Practice What He Preaches?

Published on: 18:43PM May 27, 2014

President Obama sometimes refers to the Buffett Surtax when promoting a new budget or tax law changes. This surtax refers to the famous Omaha investor (Warren Buffet) who talks about volunteering his willingness to pay a higher income tax rate than the current law provides for.

However, much of Warren's wealth is not current income which would be subject to income taxation, but rather, shares in Berkshire Hathaway. He has already indicated that his estate plan is to transfer almost all of his shares in Berkshire Hathaway to the Gates Foundation. By making this transfer, almost all of his wealth will be exempt from federal estate taxes (depends on how much he leaves to his child and others). Therefore, raising the federal estate tax to 50% or more would not change the amount of tax that Warren's estate might pay. Now, if Congress eliminated the deduction for transfers to charities, then Warren may not be pleased with that provision.

The other area where Warren actually does a great job of paying his "low" fair share of taxes is inside of Berkshire Hathaway. This company owns several utilities in the US and UK and the production of wind and solar energy entitles Berkshire Hathaway or its subsidiaries to substantial credits. Credits are better than a tax deduction since they offset tax dollar for dollar. The National Legal and Policy Center just released their estimated analysis of the 2013 Berkshire annual report and how the income tax rate for the energy section of Berkshire Hathaway enjoys a less than 10% tax rate which is substantially lower than the overall 31% reported for other operations.

The energy part generated pre-tax income of $1.806 billion yet only had a tax provision of $170 million or a 9.41% tax rate. In reading through the analysis which is very detailed, it becomes apparent that since Berkshire Hathaway now generates about 7% of the green energy produced in the US, this results in credits of about $450 million being utilized by the company to reduce its overall tax burden. All of this is allowed by the Code and Warren and his company is smart in taking advantage of it.

The cost to Warren individually of raising his individual income tax bracket by 10% annually may cost him personally a couple of million or less, while his company saves over $400 million in tax by using energy tax credits. I would make the trade-off any time.