I was looking around on YouTube, and I found a very interesting interview that Tom Brokaw did with Warren Buffett. 

It’s about 5 minutes long.  If you watch it below, you’ll see that Buffett points out the astounding fact that he pays a lower tax rate than his receptionist and his employees.

Apparently, in 2006 (I think), his tax rate was 17.7%, and the average tax rate for his office was 32.9%.  Buffett’s taxable income was $46 million.

Buffett has been a proponent of overhauling the tax system for quite some time.  He thinks a result such as this one is unjust.  But put aside this issue of whether it’s unjust, and try to figure out why Buffett (one of the richest people in the world) pays a lower percentage in taxes than his employees:   

 

Buffett’s tax rate is lower because he is a business owner, not an employee.  Sure, he is the CEO of Berkshire Hathaway, but he is also its largest shareholder.  As its largest shareholder, Buffett enjoys two significant tax advantages that his employees do not:

1) Dividend Income and Capital Gains.  Buffett earned the majority of his $46 million on dividends and capital gains.  The top tax rate for capital gains is 15%, and the tax rate on dividends is 15% as well. 

2) ”Only” a $100,000 Salary.  A fraction of Buffett’s $46 million in income is his “salary” of $100,000.  Buffett’s salary is lower than most CEOs.  The government taxes his salary at rates ranging from 15% to 28%. 

Buffett enjoys these advantages because he is primarily a business owner and not an employee.  He criticizes the fact that the tax system allows this result.  Nevertheless, it’s the system we live in, and it encourages people to start their own businesses and invest their money.  Entrepreneurship and investment drive our economy and help us prosper.

In addition, owning your own business provides significant tax advantages that enable you to grow your own wealth.  One of the biggest reasons employees cannot get rich is because they have to pay so much in taxes to Uncle Sam.  Starting and growing a business takes you out of that framework and allows you to develop passive income that isn’t taxed like earned income.  Paying less taxes helps you keep more of your money, and it helps you get rich quicker. 

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