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OPINION
- Warren Buffett is getting roasted for avoiding taxes after ProPublica's bombshell report.
- The billionaire investor is donating almost all of his money to good causes.
- Buffett lives modestly, supports higher taxes on the wealthy, and doesn't use popular tax loopholes.
- See more stories on Insider's business page.
Warren Buffett is being cast as the face of billionaire greed after ProPublica reported this week that he pays very little in federal income taxes relative to his vast wealth.
However, the investor's minimal tax bill seems far less outrageous when viewed in the context of his modest lifestyle, philanthropic efforts, the nature of his company and its shareholders, his calls to raise taxes on the wealthy, and his refusal to use popular tax loopholes.
The case against Buffett
ProPublica analyzed leaked copies of Buffett's tax returns between 2014 and 2018, and found the Berkshire Hathaway CEO paid just $24 million in federal income taxes on $125 million of reported income. The non-profit publication emphasized how little tax he paid by pointing out that his net worth grew by an estimated $24 billion in that five-year period.
"No one among the 25 wealthiest avoided as much tax as Buffett, the grandfatherly centibillionaire," ProPublica declared.
Politicians including Sen. Chris Murphy, Sen. Bernie Sanders, Sen. Elizabeth Warren, and Rep. Pramila Jayapal rushed to condemn Buffett and his fellow billionaires, calling for heftier taxes on the super rich and the closure of loopholes in tax laws.
ProPublica highlighted Buffett's two main strategies to minimize his income, and therefore his taxes. The investor keeps over 99% of his wealth in Berkshire stock - which isn't taxed until sold - and his company doesn't pay a dividend, which shareholders would have to pay taxes on.
Not a typical billionaire
ProPublica reported that billionaires such as Amazon CEO Jeff Bezos and Tesla CEO Elon Musk paid no federal income taxes in some years, partly by taking out loans and deducting the interest paid on them from their incomes. There's no indication that Buffett uses the same tricks; the investor said in 2016 that he has paid taxes every year since 1944.
Bezos is reportedly building a yacht so large that it comes with a support yacht, while Musk previously boasted a real-estate portfolio valued at north of $100 million - although he appears to have sold most of it to fund his dream of colonizing Mars.
The 90-year-old Buffett lives far less extravagantly. He resides in the same house in Omaha, Nebraska that he bought for less than $32,000 in 1958 ($290,000 in today's dollars). He grabs breakfast at McDonald's on his daily drive to Berkshire headquarters, guzzles Coca-Cola, and snacks on See's Candies. He treats himself with an occasional trip to Dairy Queen, and entertains himself by playing online bridge.
The investor doesn't use a company car, belong to any clubs where Berkshire pays his dues, or commandeer company-owned aircraft for his personal use - even though Berkshire owns NetJets, which sells fractional ownership of private jets.
Buffett also buys damaged cars and has them repaired to save money, and drove the same Cadillac for eight years until his daughter told him it was embarrassing and badgered him into upgrading to a newer model in 2014.
Notably, the Berkshire chief has drawn a $100,000 annual salary for the past 40 years - a fraction of the $15 million average pay of S&P 500 CEOs in 2019 - and doesn't receive bonuses or stock options. While some details might be embellished, it's clear that he lives a modest lifestyle relative to other billionaires.
Giving it all away
Buffett defended his tiny tax bill in a detailed statement to ProPublica, explaining that he's pledged to donate more than 99% of his fortune to good causes. He's donated about half of his Berkshire stock - worth about $100 billion at the current stock price - to five foundations since 2006.
The Berkshire chief told ProPublica that he prefers to hand his money to charitable organizations such as the Bill and Melinda Gates Foundation instead of the government.
"I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing US debt," he said.
Buffett, aware that skeptics would likely dismiss his charity as a tax write-off, added that he's only garnered 50 cents in tax benefits for every $1,000 he's donated over the past 15 years.
The investor made a similar point in 2016, after Donald Trump accused him of taking a massive tax deduction. Buffett shared the details of his 2015 tax return, highlighting that he paid $1.8 million in federal income tax on $11.6 million of gross income, and only deducted $3.5 million for charitable contributions despite giving almost $2.9 billion to charity that year.
Moreover, Buffett noted that only $36,000 of his $5.5 million in total deductions that year were unrelated to charity or state income taxes. He added that he's never used a "carryforward," which allows taxpayers to deduct losses or tax credits from previous years. He pegged his unused carryforward at north of $7 billion in 2010.
Buffett clearly sees charitable donations as a reasonable way to pay fewer taxes, and has championed them in the past.
"If you want to give away all of your money, it's a terrific tax dodge," he quipped in response to an investor's question at Berkshire's annual shareholder meeting in 2010. "I welcome the questioner or anybody else following my tax dodge example and giving away their money. They will save a lot of taxes that way, and the money will probably do a lot of good."
Buffett is also happy to keep his fortune in Berkshire stock. It signals to investors that he's confident in his company and focused on generating long-term value, and means he has more skin in the game than anyone else. Moreover, he doesn't feel guilty as his company's success will ultimately benefit society.
"Many shareholders, including me, enjoy the long-term buildup in value, knowing that it is destined for philanthropy, not consumption or dynastic aspirations," he told ProPublica.
Buffett also explained that Berkshire doesn't pay a dividend because its shareholders overwhelmingly voted against one in 2014. They prefer Buffett to allocate Berkshire's profits across the conglomerate and use them to buy quality stocks and businesses, instead of returning cash to them. Buffett also views buybacks as superior to dividends for several reasons, not just tax efficiency.
Buffett wants higher taxes
While some billionaires complain of excessive taxes on the wealthy, Buffett has called for higher taxes on the richest 1% of Americans, as well as changes to the tax code to prevent tax avoidance.
The investor highlighted more than a decade ago how ridiculous it was that his secretary paid a higher tax rate than him. The revelation spurred President Barack Obama to pursue the removal of tax breaks for the wealthy, and name his ultimately unsuccessful bill after Buffett. "If all the diseases have been taken, I'll take a tax," the investor joked at the time.
Buffett has also called for policies to reduce income inequality, such as expanding the earned-income tax credit to help workers get ahead. He once testified to Congress that estate taxes should be higher and better enforced, he told ProPublica, but his "persuasive powers proved to be limited."
Overall, it's not surprising that under the current tax rules, a 90-year-old who keeps his fortune in his company's stock, and funds a simple lifestyle with a modest income, doesn't pay a lot of tax.
It seems harsh to go after Buffett when he's giving away virtually all of his money, calling for higher taxes on the wealthy, refusing to use several loopholes to pay less tax, and running a company where holding its stock for the long term and not paying a dividend makes perfect sense.