Buffett's BAC Taxes

http://www.futureofcapitalism.com/2011/08/buffett-bac-taxes

Warren Buffett's company, Berkshire Hathaway has put out a press release disputing the Wall Street Journal editorial about his taxes on the Bank of America preferred dividend, and, by extension, the earlier post here on the same topic. Says the press release:

Virtually all of the stocks that Berkshire owns are held in its property-casualty subsidiaries, and that will be the case with the Bank of America preferred.

The tax treatment for dividends paid by U.S. corporations to property-casualty insurance companies was materially changed by a law passed in 1986. The changes were described in detail in the chairman's letter included in Berkshire's 1986 annual report.

A minor change in rate was made in 1993. Since that time dividends that insurers receive from U.S. companies incur an effective tax rate of 14.175%. For Berkshire, that rate will apply to dividends it receives from Bank of America.

The fact remains that the rate that Berkshire will pay on its Bank of America dividends, at 14.175%, is lower than the 15% rate that most individual taxpayers would pay if they owned the stock directly rather than through a corporation. If one applies the questionable logic that Mr. Buffett used in his New York Times op-ed — "stop coddling the super-rich" — maybe dividends received by "hundred billionaire market cap" companies should be taxed at a higher rate than "average" companies.

That 1986 chairman's letter to which the Berkshire press release refers makes for some interesting reading. Two thousand, one hundred and twenty-two words of it refer to the Tax Reform Act of 1986, about which Mr. Buffett says, "the net financial effect for Berkshire is negative: our rate of increase in business value is likely to be at least moderately slower under the new law than under the old. The net effect for our shareholders is even more negative: every dollar of increase in per-share business value, assuming the increase is accompanied by an equivalent dollar gain in the market value of Berkshire stock, will produce 72 cents of after-tax gain for our shareholders rather than the 80 cents produced under the old law. This result, of course, reflects the rise in the maximum tax rate on personal capital gains from 20% to 28%."

This is pretty rich coming from the same guy whose New York Times "stop coddling" article claimed, "I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off."

The 1986 Mr. Buffett called the capital gains tax increase "important" and "negative" and warned that the tax increases would slow the rate of increase in the value of its business. The 2011 Mr. Buffett now claims tax rates on gains can be raised to virtually any level with virtually no perceptible effect on investment. The 2011 Mr. Buffett might want to be a little careful about referring readers back to that 1986 letter — some people might actually read it and find it more credible than his New York Times op-ed.

by Editor  |  Aug 30, 2011 at 9:27 pm Related Topics:  Taxes, Warren Buffett receive the latest by email: subscribe to the free futureofcapitalism.com mailing list