Billionaire Warren Buffett is leading by example by disclosing how much personal income tax he pays and this kind of leadership should be encouraged, say economists.
Buffett’s disclosure was in response to comments made by US Republican presidential nominee Donald Trump in a debate with Democratic presidential nominee Hillary Clinton, in which Trump claimed Buffett “took a massive deduction” on his personal tax bill in the past.
During the debate, Trump acknowledged that he used a business loss of $US916 million ($1.2 billion) in 1995 to avoid paying federal income taxes, and said that such strategies are commonly used by wealthy individuals.
But the next day Buffett hit back, using a statement titled “Some Tax Facts for Donald Trump” to reveal that he has paid federal income tax every year since 1944, when as a 13 year old he paid $US7 in tax.
“Mr Trump says he knows more about taxes than any other human. He has not seen my income tax returns. But I am happy to give him some facts,” Buffett said.
Buffett said his adjusted gross income for 2015 was $US11,563,931, with deductions of $US5,477,694 and “allowable” charitable contributions of $US3,469,179.
He said all but $US36,037 of the remaining amount went to state income taxes and his federal income tax bill for the year was $US1,845,557.
“Returns for previous years are of a similar nature in respect to contributions, deductions and tax rates,” Buffett said.
“I have copies of all 72 of my returns and none uses a carryforward.”
The well-known investor also added that his total charitable contributions for 2015 totalled $US2,858,057,970, of which $US2.85 billion “were not taken as deductions and never will be”.
The figures from Buffett come after he and Trump have been at loggerheads for months over how much tax they pay, with the Oracle of Omaha previously challenging Trump to meet him to swap tax returns and answer questions, according to Bloomberg.
Trump has to date declined to disclose details of his tax affairs, despite a history of US presidential nominees making this information available.
A supporter of Hillary Clinton, Buffett has publicly campaigned for Trump’s opponent on the issues of income inequality and taxes, having long made his views known about the unfairness of progressive tax systems that allow high-income earners like himself to pay a lower effective tax rate than his employees by aggressively claiming multiple deductions. This is despite his company, Berkshire Hathaway Inc, being shown to use sophisticated methods to lower its tax bill.
His views have led to the birth to the idea of a potential introduction of a “Buffett rule” in the US, which would charge a minimum average rate of tax on very high income earners. Closer to home, economic think tank The Australia Institute proposed a similar idea in 2015.
What others can learn from Buffett’s disclosure
Politics aside, economists have told SmartCompany Buffett’s disclosure of his personal income tax affairs, and the fact that he is paying personal income tax, sets a good example.
For Tim Harcourt, J.W. Nevile Fellow in Economics at the UNSW Business School, paying their fair share of taxes is an important way in which business leaders and large corporates can be good corporate citizens.
“What they do does set an example,” he told SmartCompany.
“If business leaders want good infrastructure, want governments to cover things like cyber security and bank guarantees, then pay your tax.”
While Harcourt does not believe everyone should necessarily be required to disclose their tax affairs, he says many wealthy business leaders and large corporations spend significant amounts of time on their corporate social responsibility, but paying their fair share of taxes should fall under the same umbrella.
“It trickles down and it feels unfair, when small businesses are honest and do pay,” he says.
In his proposal on introducing a “Buffett rule” last year, Australia Institute senior economist Matt Grudnoff argued for placing a floor or “Buffett rule” on the top 1% of Australians who earn more than $300,000 a year.
At a tax rate of 35% – just below the average level of tax paid by someone who earns exactly $300,000 a year and claims no deductions – Grudnoff said the federal government could raise an additional $2.5 billion per year.
The tax would only apply to those who earn more than $300,000 and through deductions effectively reduce their average tax rate to below 35%.
Grudnoff told SmartCompany this morning while there is likely some support for this kind of proposal in Australia, more disclosure is first needed around the tax arrangements used by both high-income individuals and corporations.
“The more transparency we have, the better,” he says, adding that disclosures like Buffett’s should “absolutely” be encouraged.
When it comes to taxation of high income individuals and private companies, both the complexity of the arrangements used and the hidden nature of those arrangements are problematic, Grudnoff says. Reform in the area is also highly contested.
“In the Australian context, disclosure laws [for private companies] were watered down by the Abbott government,” he says.
“There was a huge fight on, which included ridiculous arguments about people being kidnapped.”
Grudnoff argues continuous disclosure of how much tax is paid by the highest earners in society would “shine a light” on the issue and enable members of the public to call on governments to make changes if policies are not working.
And that would include small and medium business owners.
“[Small businesses owners] don’t have the time and resources to develop [tax] plans in the same way that big companies and high wealth people do,” he says.
“It’s unfair; these arrangements are not accessible to everyone.
“The vast majority get no benefit, including small and medium businesses.”