Just how well-off is Warren Buffet’s secretary?

One of the more interesting choices for a Presidential SOTU speech prop during the last few years has been Debbie Bosanek, personal secretary to mega-billionaire Warren Buffett.  Bosanek was chosen to be a visual illustration of a theme repeated a lot by Warren Buffet these days – “My secretary pays more tax than I do.”

Buffet has long publicized his effective tax rate, which he claims is 17.4% and is “unfairly” low.  In contrast, Debbie Bosanek’s tax rate was said to be a whopping 35.8%.

That claim sent financial writers into a tizzy.  The highest US marginal income tax rate is 35.1%, which is paid on adjusted gross incomes greater than $373,650.  Most taxpayers who primarily earn wage-derived income and end up with an AGI of over $373,000 (after deductions and other adjustments) earn wages in the neighborhood of $500,000 a year.

Of course this is mostly meaningless speculation, because Buffett himself has never explained exactly how his 17.4% tax rate is calculated.  Buffett claims it is his effective Federal income tax rate, derived from a 2010 AGI of $39.8 million, which is derived from total income of $62.8 million.  But at the same time, Berkshire Hathaway, Buffett’s investment company, is contesting the results of IRS audits and re-computations for at least a decade’s worth of tax returns.  If the IRS’s figures are correct, Berkshire Hathaway (the bulk of Warren Buffett’s personal wealth consists of his ownership of the company) may have underpaid its Federal corporate income taxes by as much as $1 billion.

Anyway, amid the stink created over the 35.8% tax rate claimed for Debbie Bosanek, someone pointed out that Buffett has already publicly admitted that he pays Bosanek about $60,000 a year.  Instead of making things better … well, read on.

For starters, one of the world’s five richest men paying his personal assistant a paltry $60,000 a year makes Buffett look like a huge cheapskate.  Second, how on earth does a wage-earner making $60k a year end up with an outrageous 35.8% Federal income tax rate?  Bosanek’s likely Federal income tax rate is 25%.  If you add in Federal employee withholdings for Social Security and Medicare (7.65% in 2010) you come closer to 35.8% but still fall a little short.  Further, we have no idea what Bosanek really receives in compensation from Buffett.  Bonuses?  Stocks (I hope they’re BRK-A)?  Warrants or options for BRK-B shares? Interest/dividend income?  We just don’t know.

The bottom line here is simple.  There is no way to honestly compare the taxes paid by Debbie Bosanek, who presumably earns primarily wage income, and Warren Buffett, whose income is largely derived from corporate dividends, capital gains, and interest payments.  Much of Buffett’s paper wealth is tied up in his ownership stake of Berkshire Hathaway; another significant portion is tied up in the non-profit Buffett Foundation.  Financially, Buffett lives in a different world from Debbie Bosanek.  And he has wisely constructed his wealth portfolio to take full advantage of our nation’s tax laws, as well he should.

Buffett and President Obama agree that the super rich (those earning over $1 million annually) should be paying an effective tax rate closer to 30%.  But for Buffett to pay taxes in this range, increasing the marginal rate for wage income is largely useless.  We would have to radically alter the tax code for capital gains and dividends, as well as possibly introduce a way to compute and extract a tax unrealized capital gains.  Until Congressional Democrats start pushing those kind of reforms (and I’m not supporting them, by the way) we can be sure that their “tax the rich” rhetoric is nothing but election year hot air.

"What are the vegetarian and vegan store business owners to do?"
PG&E Wants Higher Rates Even While Collecting Millions for Improvements Never Made?