Buffett's low salary lowers tax rate

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It's a point of pride among Berkshire Hathaway shareholders that CEO Warren Buffett's salary is $100,000 a year and has been unchanged for decades.

Salaries of the other CEOs of the top 10 Fortune 500 corporations, by contrast, averaged $1,503,945 in 2010, ranging from a high of $3.3 million for General Electric's Jeffrey Immelt to $566,667 for General Motors' Daniel Akerson.

CEOs of Buffett's contemporaries in the four other largest publicly owned property insurers averaged $1,548,462 in salary last year.

Buffett's supporters say his $100,000 salary reflects his modest lifestyle and is a sign of humility from a guy who could, if he wanted, command millions in annual salary. At a time when other CEOs make huge salaries, his admirers view Buffett as an example of laudable restraint.

But Buffett's recent call to raise taxes on the "ultra-rich" who pay low tax rates, like himself, has spawned an objection, coming up at least twice recently during The World-Herald's weekly online chats and in a conservative journal and some blogs: By taking such a low salary, the critics say, Buffett is purposely avoiding income that would require a bigger income tax payment.

It all started in August when Buffett wrote in a New York Times opinion article that his 17.4 percent federal income tax rate last year was the lowest in his office, even though his 2010 income was the highest — $62 million in adjusted gross income, taxable income of $39.8 million after deductions, resulting in a $6.9 million federal income tax payment.

The reason his tax rate is so low, he wrote, is that nearly all his income was taxed at 15 percent because it came from dividends and gains on investments, while the others in his office received mostly ordinary wages subject to higher tax rates.

Ultra-rich people, Buffett has said repeatedly since then, should pay fair tax rates so they will "share the sacrifice" of helping the government resolve its financial problems. President Barack Obama adopted Buffett's idea, calling it the Buffett Rule, and included it in his $447 billion jobs package.

That opened the door to criticism from people who oppose Obama, those who oppose Democrats, those who dislike taxes and others. Some turned their criticism toward Buffett's paycheck.

The conservative National Review said in an editorial last month that Buffett's $100,000 salary is "part of a calculated strategy to avoid paying taxes" within the federal tax system.

"While we do begrudge Mr. Buffett his ridiculous moral posturing, we do not begrudge him the benefit of such allowances as the tax code affords: Mr. Buffett, after all, did not write the tax laws. And he shouldn't start writing them now," the editorial said.

Some bloggers carry the comments further, saying Buffett is cheating the government out of taxes. Their argument goes like this:

If Berkshire paid Buffett like the average CEO of a big corporation, he would pay a much higher tax rate and he wouldn't have his lowest-in-the-office status. That would undermine his call for higher taxes for the ultra-rich.

And, the critics say, doesn't the IRS require employers to pay executives reasonable wages according to their work, so that they owe the proper taxes?

It's true that Buffett would pay more tax if his salary were higher. If he had received the average salary of the nine other Top 10 CEOs, his 2010 tax bill likely would have increased by about $500,000, to a total of about 18 percent of his income instead of the 17.4 percent.

That's still far below the tax rates paid by others in his office — between 33 and 41 percent, an average of 36 percent, according to Buffett's New York Times article.

But is Buffett cheating on income taxes — violating tax laws?

In a word, the answer is no, says Clint Stretch, managing partner for tax policy at the Deloitte Touche accounting firm's office in Washington, D.C., who explained the tax rules in general, not commenting on Buffett's taxes specifically.

Stretch said the federal income tax principle of "reasonable compensation" for executives is based on decades of court rulings involving small, closely held businesses, not large corporations. The Internal Revenue Service files such cases to make sure the U.S. Treasury gets the revenue it is owed under tax laws.

Let's say a doctor's professional corporation pays the doctor a $30,000 salary and a $100,000 "dividend." The doctor pays ordinary tax rates on the $30,000 income but only a 15 percent tax on the dividend.

"The IRS will look at that and say that the dividend was really compensation," subject to tax rates for ordinary income, Stretch said. The IRS says court cases have defined what's reasonable, taking into account factors such as training, experience, responsibility, time on the job, pay for other employees and pay by comparable businesses.

While there's not a "bright line" between what's reasonable and what's not, Stretch said, "where you get into trouble is where it's clearly out of line."

But isn't a $100,000 salary for a Top 10 CEO "out of line"?

Stretch said the difference is that with a public corporation, the government gets its tax revenue whether the money is paid as a salary to the CEO or is kept within the company and added to profits.

If the money goes to the executive, the corporation deducts it as a wage expense, reducing its taxes, while the executive pays more tax. If the corporation keeps the money, it adds to corporate profits, which are taxed.

That means there's not a "tax play" that would cut down the money going to the U.S. Treasury, Stretch said. "The tax is paid, one way or the other."

There's no IRS rule against paying a low salary to the CEO of a publicly traded corporation, he said.

Even the National Review editorial didn't accuse Buffett of breaking tax laws, saying that he "has shown himself shrewd when it comes to minimizing his taxes."

Critics of Buffett's low salary seem to be saying that it's hypocritical to use tax laws to trim his tax payment while advocating higher tax rates for high-income people, said Joy Mullane, an assistant professor of law at Villanova (Pa.) University who has researched executive compensation and taxes.

"On one hand it looks like a valid criticism to say that if you're concerned about paying too little, structure your compensation so that you pay more," Mullane said. "But on the other hand, I do think that what he's saying is, 'It's beyond me. I'm an example of this. I could change my compensation, but that's not going to solve our big budgetary problems. We need to share the burden more generally.'

"In that sense it doesn't seem hypocritical to me."

Creighton University ethics professor Beverly Kracher said Buffett and executives in some other corporations take relatively low salaries to set a tone of fairness. "He's saying that there's something else that's valuable here, something we need to keep our eye on, and it's the value that's delivered by the firm to the shareholders."

As agents for shareholders, corporate executives do what they can within legal and ethical boundaries to provide a strong return, she said. "If accepting a lower salary accomplishes this, then the executive — the agent — is acting appropriately and fairly."

But did Buffett pay enough income taxes last year?

Although he may say his personal tax rate was too low, in the past Buffett also has pointed out that Berkshire's corporate taxes represent a large share of the nation's federal taxes. In 2010 Berkshire paid $5.6 billion in income taxes, out of a total $2.16 trillion collected by the government in individual, corporate, Social Security and other taxes.

If 385 others had paid as much as Berkshire, nobody else would have had to pay any federal taxes.

Since Buffett owns 37 percent of Berkshire, you could argue that his piece of Berkshire accounted for about $2 billion in corporate income taxes in 2010.

Contact the writer:

402-444-1080, steve.jordon@owh.com

twitter.com/buffettOWH

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