Jobs Bill Will Tax Jennifer Aniston More - But Not Warren Buffett

Originally Published on forbes.com on September 17th,2011

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President Obama had a chat with Warren Buffett in preparation for his labor day address where he unveiled his American Jobs Act of 2011.  The American Jobs Act of 2011 contains many nifty positive provisions.  As Samuel Johnson said “Every man thinks meanly of himself for not having been a soldier or been to sea”, so how can the President, Mr. Buffett and myself not love something that includes The Returning Heroes and Wounded Warriors Work OpportunityCredit.  Of course it has to all be paid for.  Now Mr. Buffett has complained that he is not being taxed enough- a statement that sent the tax blogosphere into a frenzy in which I gleefully participated in with several posts including one titled   We Won’t Get Ahead by Taxing Warren Buffett More – Jennifer Aniston Maybe.  That post generated some interesting discussion.  As I noted in the post I use Jennifer Aniston as an example of someone with high income ($27,000,000) though modest net worth (just north of 100 million) when compared to Mr. Buffett.  If she is not doing anything fancy, her income tax is likely in the vicinity of Mr. Buffett’s $7,000,000 or so which in his case is from income consisting mostly of realized capital gains of around $60,000,000.

The data on Mr. Buffett’s tax situation is well enough known from his own disclosures and other publically available information (like the 990-PF of the Bill and Melinda Gates Foundation available onguidestar.org) that I was able to run a scenario that showed he might have saved $675,000 by recognizing more gains. What I am trying to establish here is that my educated guesses about Mr. Buffett’s tax situation have a pretty firm basis which brings me to my question:

Why didn’t the President put something in the Jobs Bill that would raise Warren Buffett’s taxes ?

Of course the bill doesn’t include revenue raisers to offset its entire cost.  It cherrypicked from the populist grab bag five provisions that are tough to defend against politically particularly when pitted against the wounded warriors. Those aren’t enough, so the balance will be covered by adjusting the Select Committee’s targets. I doubt Mr. Buffett, who is reputed to be frugal, is worried that much aboutcorporate jets. I don’t think he is much worried about the oil industry, which accounts for two of the provisions.  That leaves carried interest and the 28% limitiation on certain deductions and exclusions.

The Bill Doesn’t Treat Buffett’s Carried Interest in Berkshire Hathaway as Ordinary Income

I suppose you could view the above as flame bait for people to jump in and say that BH is subject to 35% corporate income taxes.  I had thatdiscussion here.  Before you throw that number around look at the actual expense rate in the 10-K’s, figure out how to factor in that over 30 billion of tax that is deferred and then consider that the market capitalization of BH is greater than its book capital.  Pretty hard to nail down what the real number is.  Presumably many of the companies that the hedge funds invest in are subject to corporate income tax, also, which I suppose you would want to consider in an apples to apples comparison.

Nonetheless, I think it is safe to say that Mr. Buffett’s net worth is largely attributable to his work and his genius.  He will pay income taxes on very little of it.  Some of the appreciation shelters his other income as he is allowed a charitable deduction based on fair market value.  Someday the Bill and Melinda Gates Foundation will pay an excise tax of a percent or two, when they sell the stock.

As I discussed in another post, I’m not sure many hedge fund guys are going to be hurt that badly by the carried interest restriction as it is written into the Jobs Bill.  It doesn’t even pretend to do anything to Mr. Buffett.

The Part That Costs Jennifer Aniston Something

Much of the interest in Jennifer Aniston is a desire to see her naked:

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There is not that much out there on what her tax return looks like.  Nonetheless the $27,000,000 has to be mostly ordinary income and she  must have significant itemized deductions.  She supports many charities publically.  It would be unchartiable to not assume that she must be giving them some of her own money.  So the provision that limits the benefit of certain itemized deductions and exclusions will have to be costing her something.  The detailed computation is mind numbing, but the simple explanation is that if you are in the 35% bracket without taking any itemized deductions, the deductions will only give you a 28% benefit.  It also applies to some exclusions and above the line deductions. If Ms. Aniston is tithing, this provision might cost her a couple of hundred thousand.

28% Limit on Deductions Does Not Cost Warren Buffett Anything

Mr. Buffet’s marginal rate situation is peculiar.  He notes that he pays an average rate of just over 17% on his taxable income.  His marginal rate on any additional income whether capital or ordinary is 15% ,since his deductions are far in excess of his ordinary income.  His marginal benefit for gifts of appreciated property is 0%, since he has, in effect, an infinite supply of 30% charity carryover deduction.  When you throw in the carryover his actual marginal rate on income is 10.5%. He could get a a 15% benefit on cash  charitable contributions up to 20% of his adjusted gross income.   So limiting the benefit of charitable deductions to 28% doesn’t seem to do anything to him.  

It is possible that I’m missing something in the computation, which is much harder when you try to do it line by line than the explanations you will read about it.  Of course most professionals will rely on something like profx to do it and amateurs will have Turbo-tax.  So only a few computer programmers and Robert Flach – The Wandering Tax Pro will have to get really good at it.

Conclusion

I’m not knocking Mr. Buffett for doing good tax planning throughout his life.  As Learned Hand said “There is nothing sinister in arranging one’s affairs to keep taxes as low as possible.  Everybody does so, rich or poor, and all do right, for nobody owes any public duty to pay more than the law demands.”  Nonetheless, Mr. Buffett has gone on record as saying that the law should demand more of people like himself.  He sits down with the President and the President puts out some tax proposals that demand more of many people, but not him.  Seems a little peculiar.