In the second presidential debate, Donald Trump indicated that Warren Buffett had deducted, for federal income tax purposes, net operating losses in a manner similar to Trump’s deduction of his net operating losses. In response, Buffett, an outspoken supporter of Hillary Clinton, released a summary of Buffett’s 2015 federal tax return.
Buffett’s intended message was clear: Trump didn’t pay federal income taxes; I did.
However, the story revealed by Buffett’s tax data is more complicated than this simple narrative suggests. Buffett’s summary confirms his commendable generosity to the Bill and Melinda Gates Foundation. In 2015, Buffett contributed an eye-popping $2.8 billion to the Gates Foundation, apparently in the form of appreciated shares of Berkshire Hathaway.
The data released by Buffett also confirm that Buffett has astutely minimized his federal income, estate, and gift tax obligations. Indeed, the data reflects the tension between Buffett’s outspoken support for federal taxation and his own aggressive avoidance of such taxation.
Buffett argues that America’s economically successful citizens should help to pay for the public services which facilitate their success:
“I was lucky enough to be born into a time and place where society values my talent, and gave me a good education to develop that talent, and set up the laws and the financial system to let me do what I love doing—and make a lot of money doing it. The least I can do is help pay for all that.”
Notwithstanding these sentiments, the data Buffett released indicate that he pays no federal capital gain tax on the appreciated Berkshire Hathaway shares which he transfers to the Gates Foundation.
Buffett’s intended message was clear: Trump didn’t pay federal income taxes; I did.
This is perfectly legal. But it deprives the Treasury of any federal income tax payment for the public services which, by Buffett’s own telling, helped create that appreciation.
Buffett’s transfers to the Gates Foundation similarly avoid federal estate and gift taxation since these transfers are fully deductible for purposes of the gift tax, and are thereby removed from Buffett’s estate tax-free. Buffett has supported Responsible Wealth, a lobbying effort to preserve the federal estate and gift taxes spearheaded by Bill Gates, Sr.
However, Buffett’s gifts to the Gates Foundation guarantees that Buffett’s Berkshire Hathaway wealth will never be subject to federal estate or gift taxation. In terms of his personal generosity, these gifts and Buffett’s support of the Giving Pledge deserve the encomia they have received. However, the charitable contributions by Buffett and his fellow adherents to the Giving Pledge carry a hefty cost, namely, the federal estate and gift taxes these rich individuals avoid via their charitable contributions, contributions which deplete their respective estates tax-free.
I believe there is a need for limits on the federal estate and gift tax charitable deductions to assure that all large estates pay some federal estate tax. Buffett’s return data confirm the urgency of that proposal. Indeed, Buffett’s avoidance of all federal estate and gift taxes stands in sharp contrast to Secretary Clinton’s strong support for strengthening those taxes, as well as Buffett’s own statements advocating those taxes.
I hope that Buffett, the other Giving Pledgers, and the affluent supporters of Responsible Wealth will advocate amending the Internal Revenue Code to require their estates pay some federal estate tax even when these individuals leave wealth to charities. Just as the Internal Revenue Code requires a taxpayer to pay some federal income tax even if they devote all of their income to charity, the Code should, in similar fashion, require all large estates to pay some estate taxes.
In the meanwhile, Buffett, his fellow Giving Pledgers, and the supporters of Responsible Wealth can make voluntary payments to the federal Treasury to offset some or all of the federal income, estate, and gift taxes they avoid by their charitable transfers. Such voluntary contributions to the Treasury in lieu of taxes would indeed be, as Buffett says, “the least [he] can do.”
Featured image credit: President Barack Obama and Warren Buffett in the Oval Office, July 14, 2010 by Pete Souza. Public domain via Wikimedia Commons.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the 
“Notwithstanding these sentiments, the data Buffett released indicate that he pays no federal capital gain tax on the appreciated Berkshire Hathaway shares which he transfers to the Gates Foundation.”
Why on earth would it make sense for Buffett to pay capital gains on shares that haven’t realized a gain? The “gain” in capital gains represents a profit that is realized from actually selling the asset. If the asset hasn’t been sold, then what gain are you referring to? If you want the Gates Foundation to pay capital gains when they finally do sell the asset to finance their mission activity, then that is a different story. I would disagree on that as well, I believe their use of funds for society’s benefit is actually very effective.
The author’s contention boils down simply to the premise that the government can better decide how to spend money than can a private charity. If the government could force itself out of the charity business and show that there was insufficient resourcing to do the functions enshrined in the Constitution I could see the logic of increasing tax revenue. But to neck down the source of all charitable relief to a single entity with taxing authority is to restore the feudal system that we have been outgrowing since the Magna Carta. This proposal is a dangerous step on that path.
I disagree in the author’s implied immorality of tax planning. The tax code can never operate on a moral level where one is expected to make “voluntary contributions to the Treasury” simply because the law gives tax benefits on donations to charity.
Always more complicated beneath the surface. Simple flat tax says I, or even better, a consumption based tax.