How does Warren Buffet pay such a low tax rate, and are the people who've told me so far correct?

How does Warren Buffet pay such a low tax rate, and are the people who've told me so far correct?
Warren Buffet made the news in October saying he paid a lower rate on
his taxes than did the other 14 people in his office, including his secretary. (He doesn't have his own office, it seems, but part of a big room with 14 other people. I wonder if there are cubicles?)
I brought this up and someone tells me that Buffet is including unrealized capital gains, Is he?
Another person says he donates his shares rather than sells them, so maybe his taxable income is low, but the NYTimes says** his taxable income last year was 39.8 million dollars. Shares donated before being sold wouldn't be part of taxable income, would they? They would be a dediuction from gross income iiuc.
Who is telling me the truth? How does he pay a lower rate than his secretary?
Is that because REALIZED capital gains are taxed at 15% and salaries at 30 or 32 percent?
What is the rate for interest? And dividends? ( I wish I had interest, dividends, and capital gains. Then I might know!) Are they also lower than the tax rate for salaries?
Thanks a lot.
** http://www.nytimes.com/2011/10/13/business/in-letter-to-congressman-buffett-claims-17-4-tax-rate.html?_r=4&ref=warrenebuffett
In Response to Lawmaker, Buffett Claims 17.4% Tax Rate By REUTERS Published: October 12, 2011
Adding fuel to the debate over his proposal for higher taxes on the rich, Warren E. Buffett said in a letter to a Kansas congressman that he paid $6.9 million in federal income taxes in 2010.
The figure represent 17.4 percent of his $39.8 million in taxable income, a percentage he has repeatedly said is too low compared to what his own staff members pay.
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On 2011/10/26 14:31, micky wrote:

I think it would be almost impossible to know for sure without seeing his tax return. I also wonder why his staff members would share the details of their personal income tax returns with him.
But, it's almost certain the long-term capital gains tax rates have a lot to do with it. Here's one scenario:
Assume MFJ with no dependents, and standard deduction. If his ordinary income (wages plus interest plus non-qualified dividends) was $350K, and he had $38,900K of qualified dividends or long-term capital gains, then his taxable income would be $39,229K, his regular tax would be $5,921K, and added AMT would be $8K. Tax bracket would be 35% but effective tax rate would be 15%. Since he probably pays his staff far above the US average wage, that is almost certainly less than their rate, even without knowing all of their individual details.
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wrote:
t

This also can't be just income taxes (where most of the hooha resides). He has a person paying 41% which (if I understand this ) is 6% more than the top bracket which is impossible for many reasons (not the least of which is that everybody pays the same on their first so much money, more on the next bracket, etc). The average is around 1% more than the top bracket. His facts can't match up with the possibilities if he is really only talking about fed income taxes. Am I missing something?

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On 10/26/11 5:47 PM, Kurt Ullman wrote:

Based on press reports and interviews, his statement includes payroll taxes.
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Thanks for replying.
So you figure the reason his effective tax rate is so low is that most of his income is dividentds or long term capital gains, both taxed at 15%?
The rate for long term capital gains about 10? (15?) years ago was cut in half from 30% iirc, right?
Isn't the rate for dividends about the same as for ordinary income, or maybe that changed too?

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On 10/27/11 1:28 PM, micky wrote:

Qualified Dividends (dividends paid out of profits) & long-term cap. gains taxed at 15% and municipal bond interest taxed at zero.
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Muni bonds may have private activity bond interest which makes them taxable for AMT.
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Keep in mind that his share of the corporate taxes paid by corporations he is a shareholder of have paid millions if not billions annually. Yes, that is not his personal income tax, but he is still paying it.
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I suspect that most of his income is capital gains, taxed at 15%. It's fairly well-known that his salary at Berkshire Hathaway is $100,000, and he included $15,300 in payroll taxes, that being the sum of the employer and employee share.
For some reason I think his income was about $40 million and his taxes were $7 million. Let's do a really crude calculation:
Capital Gains: $39 million @ 15% = $5.85 million Salary and other income: $1 million @ 35% = 0.35million Payroll taxes = 0.02 million Total taxes = 6.22 million tax / income .6%
According to Turbo Tax, last year I paid something like 20-22% of my income in federal taxes, and my income is a bit north of Buffett's Berkshire Hathaway salary, but not that much higher. My payroll taxes (including employer share) were maybe 10%. So this would be 30-32%. Of course, TurboTax does not include in my income items like salary deferrals to my 401(k) or my employer's matching and profit-sharing contributions, which were substantial. So allowing for these, my total taxes might have been in the 25-27% range.
By a huge margin, the factor driving Buffett's tax situation is the 15% rate on capital gains. (Probably not on dividends, since his Berkshire Hathaway stock doesn't pay dividends.)
There's no tax on unrealized capital gains.
The "Buffet Rule" could be easily implmented by simply providing that capital gains and dividends should be taxed as ordinary income.
I am reminded that in the early 1980's, the Wall Street Journal regularly lamented on their editorial page that tax differentials between ordinary income and capital gains led to attempts to reclassify earned income as capital gains, and therefore the rate between the two should be levelled (by, of course, reducing the rate on ordinary income.) Following the Tax Reform Act of 1986, which did just that, they then switched their position to saying that rates on capital gains should be lowered, to provide extra incentive for investing and risk-taking.
It has long been a conservative goal that once a person "earns" their income, it should not be taxed again in the form of taxing accumulations on that wealth in the form of dividends or capital gains. By a succession of steps including creation of the Roth IRA, expansion of the Roth IRA to include 401(k)'s, higher income limits on Roth IRA contributions, abolition of income limits on Roth Conversions, and now the ability to contribute to a non-deductible IRA and immediately convert to a Roth with no taxes paid, they've taken quite a few steps toward that goal, at least in regard to upper-middle- income people. Those in the middle class and below usually don't have enough money to take advantage of these machinations, and for those making several hundred thousand and up, the contribution limits do restrict how much use they can make of these accounts.
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In article

But how much of what is driving the employee's pay comparison is the relatively higher %age of income that goes in payroll taxes because of the cap on salary those are paid on. Also, it is my understanding that the salary cap on SS taxes is based on where the cap is for getting benefits. In other words, I can earn $16 gazillion and still only get SS benefits based only on whatever the cap is.
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I'm not sure I agree that social security is a tax. In theory you get the money you put in, plus interest, back at retirement. If I contribute the maximum $16,500 to my 401(k) and a rich person does the same, their contribution is of course a smaller percentage of their income. Now if you call their contribution a tax, then it looks like the rich are not paying their fair share of social security tax.
Social security is more of a tax for those who make close to the wage limit as per the benefit formula they get back more, but at a smaller rate than someone making less (90% of first $749, 32% above that up till $4517, 15% above that to the max possible value). Using the social security benefit estimate at http://www.ssa.gov/pubs/10070.html#estimate , I found if someone was making the maximum taxable cap for social security for the last 35 years they would get $2519 per month. If someone makes one-fifth as much, they contribute one-fifth or 0.20 as much into the system as the high earner; but they get back $942 or 0.37 of the high earner. If they implement full means-testing, someone making a lot (say more than $1M or some huge number) won't get anything back, and for these people all of the "social security contribution" would be a tax.

That is true. The estimator is at http://www.ssa.gov/pubs/10070.html#estimate . Column B is the maximum taxable security, column C is a factor to adjust for inflation (to convert dollars in those days to today), Column D is the product of these and will thus be based on the maximum social security limit. You then find the highest 35 years in the last 50 or so, and add up column D and divide by 420 (the number of months in 35 years). I found the maximum social security for someone working only for the last 35 years is $2519.
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No, that's just hype. In reality it's a tax. And benefits are paid out of the proceeds. Otherwise nobody would have gotten social security payments until the 1960's.
___ Stu http://DownToEarthLawyer.com
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It's a tax. What if you die?

If you choose not to contribute anything to your 401(k) then you don't get people with guns (at the end point) taking your stuff away and throwing you in jail. Therefore it isn't a tax.
Seth
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On 10/29/2011 2:12 PM, Seth wrote:

Survivors benefits can be substantial.
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But they are only payable under limited circumstances.
___ Stu http://DownToEarthLawyer.com
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That's a common misconception, but it's completely wrong. Social Security has always paid current benefits out of current revenue, other than a quickly repealed death benefit in the 1930s. The first recipient of SS retirement, Ida Mae Fuller, paid in $24.75 from 1937 to 1939, got her first check in January 1940, and died in 1975 at the age of 100, having received almost $23,000 in benefits.
http://www.ssa.gov/history/briefhistory3.html#idamay
For the past several decades, FICA revenue has exceeded SS outlays, with the excess transferred to the general fund to pay general expenses of the US government. In the near future, it'll flip the other way (maybe already has), with the SS deficit made up from general revenues. The transfer from SS to the general fund has been accounted as a loan from SS to the general fund via a special series of treasury bonds, and the transfer the other way will be accounted for by redeeming those bonds. In 30 years or so the bonds will be all gone, which will be a major opportunity for political posturing, although it'll be economically meaningless since we can continue to pay SS benefits at any plausible level by minor adjustments to FICA and/or income taxes. (Medicare is a much more difficult issue, but it's the same issue as the rest of our bloated, inefficient medical care industry.)
R's, John
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wrote:

SS seems to be a combination of a mandatory Ponzi scheme and a tontine. "Investors," including employees and employers are required to invest. It is not the usual Ponzi scheme because it is not set up primarily to benefit the operator. Nevertheless, a relatively benign Congress does get to use the excess money collected. As people die off, their shares are divided amongst those remaining alive (tontinr component).
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Sam

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On 2011/11/01 10:04, Salmon Egg wrote:

But the remaining shares don't increase if more people die off, so it's not like a tontine.
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wrote:

Strictly speaking, that might be true. But if they did not die off, there would not be enough money to keep the value of the shares up. It noted some time ago that if it were not for cigarette smoking, SS would already be broke.
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Sam

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Pay-outs are actuarialy determined, just like life (or any other kind of) insurance, annuities and pension payment. Are you saying that they are all ponzi schemes, too?
___ Stu http://DownToEarthLawyer.com
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