I’m getting tired of hearing our president state that Warren Buffett pays fewer taxes than his secretary.
The fact is that his personal income tax rate is lower than that of his secretary because she is paid a salary, while he – being the owner of Berkshire Hathaway – has opted not to take a salary but to receive his compensation in the form of dividends.
By law, dividends are taxed at the rate of 15 percent, while salaries can be taxed at a much higher rate, depending on her total income. So I’m sure that although his tax rate is lower than hers, the actual amount of taxes he pays is significantly higher.
But more important than that, as the majority stockholder of Berkshire Hathaway, his income is really that earned by Berkshire Hathaway, which pays corporate taxes. The more tax that the corporation pays, the less income Mr. Buffett earns. So, because of his structuring his holding company as a corporation, the tax on its income is paid by the corporation.
If BH were not incorporated, that tax would have to be paid by Mr. Buffett himself. Therefore, if we want to talk about the amount of Mr. Buffett’s taxes, we have to add the corporate tax paid by BH to Mr. Buffett’s personal tax.
Lastly, by opting to take his compensation as dividends rather than as salary, Mr. Buffett is avoiding completely any Social Security and Medicare taxes paid by all employees and self-employed on their earnings.
David J. Didimamoff
(The writer is a retired certified public accountant.)