During last weekend’s debate / parade of Bill Clinton accusers, Donald Trump claimed that the billionaires supporting Hillary, including Warren Buffet, took advantage of the same type of deductions he did when he claimed a $916 million loss in 1995.
Many on the left wanted to believe that this wasn’t true, that other billionaires didn’t seek expert tax advice, and instead just put their earnings into Turbo Tax with the help of a receipt scanner they bought off of Groupon.
To be clear, $916 million is a big loss to claim even for a billionaire – especially in 1995. You could basically have taken the entire country to the movie theaters to see Toy Story for that price (you could’ve also taken the entire country to see The Brady Bunch Movie, but that doesn’t seem like as big of a loss).
So it is no wonder that the media was quick to pounce on the huge write-off. Strangely though, they didn’t really know what to make of the news. They ended up simultaneously claiming that Trump was a business failure, but also that he was a crook for not paying taxes on his successful business – never realizing the two concepts were as incompatible as Mel Gibson-branded challah.
While you can rightly criticize Trump for losing money, the idea that claiming losses is a “loophole” is nonsense. The tax code is complicated, but the basic premise isn’t hard – you pay money on income, not losses. Life does not neatly line up with the tax year, so we allow people to carry their losses forward (imagine buying business equipment on December 31 and selling it on January 1 for the same price – you haven’t made a profit, but if you weren’t able to carry through your loss, your taxes would make it appear that you had).
Given the media fervor around Trump’s taxes, it should come as no surprise that when Buffet released his taxes to prove Trump wrong, Buffet’s returns were glorified like they were a new Adele album. Vox praised Buffet for calling “bullshit” on Trump’s statement, and CNN said Buffet “dug the knife deeper” into Trump by touting his charitable contributions.
While all these news outlets were quick to praise Buffet, none of them were responsible enough to actually do any math regarding the numbers. But if you look the actual numbers Buffet claimed to have paid in taxes, they’re paltry:
- Adjusted gross income: $11.6 million
- Deductible charitable contributions: $3.5 million
- Total deductions: $5.5 million
- Federal income tax paid: $1.8 million
Buffet paid $3.5 million on $11.6 million in income, which sounds like a lot, until you realize that he is worth about $65 billion dollars. The man has a dollar for every year since dinosaurs walked the earth, yet he paid the equivalent of an NBA bench player’s salary in taxes.
Income is different than wealth, but his percentage of taxes paid compared to his wealth was a minuscule 0.005%. If Buffett was the median American, it’d be like him paying just $2.25 in federal income tax – so the media is more or less applauding Warren Buffet for ordering the government something off the dollar menu .
This is not to say Buffet is a bad person. He gives much of his money to charity. But it is ridiculous to compare Buffet’s taxes to Trump. Buffet pays almost no taxes because he holds his wealth in Berkshire Hathaway stock which doesn’t pay dividends – which to Trump’s point, and as Barron’s points out, is a strategy for rich people to avoid paying taxes while their gains compound:
HOW MUCH TAX is Warren Buffett able to avoid by fixing Berkshire’s dividend at zero? The dividend yield of the Standard & Poor’s 500 is about 2%. The price/earnings ratio of the S&P 500 is about 18. Thus, for the S&P 500, approximately 30% of earnings are paid out to shareholders. These dividends are taxable at a current maximum rate of 23.8%.
If Berkshire followed the average of the S&P 500, it would have paid out about $6 billion in dividends in 2014, and Buffett’s share would have been about $1.2 billion.
At a 23.8% tax rate, that would have given Buffett a tax bill of $280 million, or about 40 times the taxes he said he actually paid in 2010.
In addition to not paying dividends, the Washington Post explained how Berkshire Hathaway avoided taxes by doing stock swaps rather than outright sales during its Phillips 66 and Proctor and Gamble transactions:
In transactions in 2014 and last year, Berkshire did three “cash-rich split-off” transactions that allowed it to end up with lots of cash and assets while avoiding what I estimate to be a total of about $2.5 billion in capital gains taxes.
Berkshire did what amounted to complicated trades with three companies whose shares it had owned for years, swapping those holdings for a combination of cash and operating assets. The transactions are treated by the IRS as tax-free trades, rather than sales.
The end result is that Warren Buffet, like Trump, is avoiding paying billions in taxes. The only difference is that Trump was dumb enough to structure his business in a way where it shows up on his personal tax returns (and then run for president). If he’d been running for president for the past 30 years like Hillary has, he’d have no doubt have structured his business in a more opaque way.
Billionaires are always going to hire smart people to find ways to avoid paying taxes. That’s why we need politicians to re-write the code and force them to pay up.
Trump’s taxes are ultimately a minor issue. His campaign is exploding so quickly you’d think it was manufactured by Samsung. However, the treatment of his taxes versus Buffet’s is indicative of the media’s propensity to publish anything anti-Trump without even asking basic questions. The danger of that laziness and bias will last much longer than Trump’s ability to carry forward his business losses.