Okay, we don’t actually know about Mr. Buffett’s personal tax situation. We can dream, however…

In lieu of real knowledge, here’s a tax scenario that shows a comparison of 2017 and 2018 taxes for an extremely wealthy taxpayer and the effects of the 2018 tax act commonly known as TCJA. Certainly Mr. Buffett’s actual tax return is infinitely more complex than what we’ll show here, but you can see some basic principles included in the TCJA and how they apply to the very wealthy. First the income assumptions used:

Source of Income	Amount	Comment
Social Security	30,000	up to 85% taxable
W-2 earnings	100,000	according to media
Municipal interest	9,000,000	non-taxable
Other int & income	1,000,000
Qualified Div/LTCG1	50,000,000	preferred tax rates
Rental/other	3,000,000	farmland in Iowa?
Total income	63,130,000
Taxable income (AGI)	54,125,500	SS & muni exempt

Itemized deductions in this example are $2,536,598 in SALT and $20,000,000 in deductible charitable contributions, for a total of $22,536,598. Personal exemptions were $4,050 per person in 2017. However, the old tax law limited itemized deductions and personal exemptions for higher-income taxpayers. The new tax law limits SALT deductions to $10,000 but eliminates the income-tested itemized deduction limit. Those limitations and changes are reflected in the comparison below.

Description	2017	2018	Change
AGI	54,125,500	54,125,500
Pers. Exempt.	0	0
Itemized	20,922,247	20,010,000	-912,247
Taxable	33,203,253	34,115,500	912,247
Income tax	6,605,731	6,787,570	181,839
AMT2	184,449	2,000	-182,449
NIT3	1,955,860	2,047,269	91,409
Total tax	8,746,040	8,836,839	90,799

Clearly, individuals with this level of wealth have very complex investments, and effects such as foreign tax deductions or credits and complex depreciation adjustments aren’t shown here. In our example, the rate reductions were more than offset by the limitation on state and local taxes, and resulted in a higher tax bill in this scenario. As a percentage of AGI, the average tax rate increased from 16.16% to 16.33%. As a percentage of taxable income, the average tax rate dropped from 26.34% to 25.90%.

Mr. Buffett is has famously said he pays tax at a lower rate than his secretary. If his secretary has W-2 earnings more than, say, $100,000, from a perspective of gross income he’s likely correct. Of course, he could pay tax at his marginal tax rate of 37% on an increase in his salary. There is nothing compelling him to do so, and it would be foolish. And Mr. Buffett likely gives away a far higher percentage of his annual income than the 30% of income this scenario demonstrates. In fact, the new tax law allows up to 60% of AGI to be deducted as charitable contributions, up from the prior law limit of 50%, so Mr. Buffett may be taking advantage of that change.

The scenario presented also takes advantage of tax law by the taxpayers receiving most of their income in tax-favored qualifying dividends and long-term capital gain. Comparing apples to oranges, this may seem unfair. However, history has shown cutting capital gain tax rates actually leads to an increase in federal revenue from capital gains.

¹Qualifying dividends and long-term capital gains are taxed at a lower rate for almost all taxpayers. In these examples, federal taxes were reduced by $6,303,539 in 2017 and $5,772,544 in 2018 due to this tax preference. ²Alternative Minimum Tax. ³Net investment tax, levied on high-income taxpayers.