Warren Buffett’s Nifty Tax Loophole. Warren Buffett has backed higher individual tax rates–while ensuring that his vast wealth in Berkshire Hathaway is almost immune.

Barron's reports:

Warren Buffett is fond of saying his tax rate is lower than his secretary’s. He does not publicize his tax returns, but for the tax year 2010, he paid $6.9 million on taxable income of $39.8 million, according to partial disclosures he made in 2011.

What is astounding about those numbers is not the 17.3% tax rate, but that Buffett’s $39.8 million of taxable income is only about 0.05% of his reported net worth ($71 billion according to Forbes, which put him third on its list of the 400 wealthiest people in the world for 2015).

Proportionately, that’s like someone with an ever-expanding net worth, currently $10 million, reporting taxable income of only $5,000 and paying a federal tax bill of only $900.

So, how does he do it? Buffett’s principal holding is an economic interest of about 20% of Berkshire Hathaway, the huge conglomerate he has been building since the 1960s. It has a market value of about $350 billion. Berkshire hasn’t paid any cash dividends since 1967. Rather, the company accumulates its prodigious after-tax income ($19.9 billion in 2014) and cash flow ($32 billion in 2014) to get bigger by buying companies, lots of companies. Among its large recent acquisitions were Lubrizol, Burlington Northern Santa Fe, and a shared acquisition of H.J. Heinz.

The Berkshire Model is to buy companies rich in cash flow with histories of paying dividends, then cancel those dividends and retain the cash flow going forward for future acquisitions.

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.

Warren wants you, yes you: to pay taxes while he doesn't pay his "fair share". After all, Warren Buffett is an expert at ripping off federal taxpayers via TARP.