Buffett’s Bad Math Unquestioned by Brokaw

October 30, 2007

Last night on the NBC Nightly News, former anchor Tom Brokaw sat down for an interview with stock market mogul Warren Buffett. Forgetting the reporter’s role of asking critical questions, Brokaw never once challenged anything Buffett said, even when Buffett reiterated his (false) claim that he pays a lower tax rate than his $60,000-a-year secretary.

Buffett means only to slander President Bush, but he is slandering every congress and president in our lifetime, because nothing has happened during the Bush administration to change the tax code so substantially. If secretaries are paying a higher tax rate than executives now, then they have been doing so for decades. Is that true? In short, no. That’s impossible.

Buffett reveals almost nothing about his calculations, merely asserting that he pays 17.7% in payroll and income tax, his secretary 30% and the other employees in his office an average of 32.9%. Here’s where the tricks probably lie: in payroll taxes (where Buffett probably adds 15.3% to the employees’ rate and zero to his own) and corporate income taxes (which Buffett ignores entirely).

Every middle-income wage earner’s total tax rate has always been jacked up by the Social Security system’s payroll tax, but she theoretically gets that money back during retirement. A cornerstone of the system since Roosevelt has been the formula that tabulates our retirement benefits according to how much we’ve paid in while working. That formula has always included a ceiling on benefit payments and a comparable ceiling on tax payments. The idea is that a person should never pay an amount that is much higher than she could ever live to receive in retirement benefits. Right now, the maximum payroll tax (Social Security and Medicare) for a single person is 15.3% of the income ceiling, currently $97,400, or about $15,000. Even that amount, if paid each year, is much larger than what anyone could receive in retirement. But at least the income ceiling prevents a total mockery of the original concept of Social Security as a savings system.

However, a by-product of these ceilings on annual benefits and tax payments is that people who make much more than the income ceiling are not paying the 15.3% payroll tax on every dollar they earn, especially if they receive dividend income which isn’t subject to the tax. (Buffett doesn’t reveal how much of his income is from dividends or capital gains.) So the question is how to fairly count the Social Security tax for a business owner who pays in the maximum amount but earns more than the ceiling? It’s a tricky question, but no matter how we answer it, Buffett’s businessman-to-secretary comparison is an assault on this basic tenet of Social Security.

Secondly, Buffett ignores the tax that hits business owners hardest, the corporate income tax. Ask yourself this question — If the corporate income tax (top rate of 35%) were repealed tomorrow for Buffett’s phenomenally profitable company Berkshire Hathaway, would Buffett’s income go up? Of course the answer is yes, and it would go up by a lot.

But Berkshire Hathaway IS paying that corporate tax, and only after doing so can it turn around and pay out dividends and capital gains to Buffett and other large shareholders who then pay a 15% rate on their personal tax returns. The tax rate, then, on Buffett’s income should be tallied as 35% of his before-tax corporate income plus 15% of his after-tax corporate income, which would work out to about a 45% rate, not the 17.7% that Buffett is citing.

The rate may be slightly less than 45% depending on the number of corporate loopholes that Berkshire Hathaway claims to reduce its effective corporate tax rate and the amount of exemptions and deductions (i.e. charity, mortgage interest, state and local taxes paid, etc.) that Buffett deducts from his AGI on the individual tax side. But even allowing for clever tax planning on his corporate and individual tax returns, and for the fact that investors may not bear the entire burden of the corporate tax, Buffett’s tax rate would still be much higher than any middle-income wage earner’s, and the executive-to-secretary comparison goes right out the window.

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