The Buffett Observation

Warren Buffett has periodically noted that his effective personal tax rate is lower than his secretary’s. The point he was making is how the legal system and tax code are designed to benefit the rich… but that doesn’t mean you can’t take advantage of the same provisions once you know how.

The mechanism:

• Buffett’s income: primarily long-term capital gains from Berkshire Hathaway shares and other investments, plus modest salary (~$100K/year from Berkshire)

• Secretary’s income: predominantly wages (ordinary income)US tax framework:

• Long-term capital gains tax: 0-20% federal + 3.8% NIIT for high earners → importantly, capital gains taxes only apply when the gain is realised (realised means when you sell, so if you hold an asset for the long term, as Buffet does, you won’t pay any CGT on them until you actually sell for a profit)

• Wages: progressive to 37% federal + 7.65% employee payroll taxes

For someone with $10 million in long-term assets, effective federal rate ~20-24% on net profit when you sell, 0% in the years prior to selling.

For someone earning $500K in wages, effective federal rate ~35-40% every year.

Therefore, someone with $10 million in stock (a portfolio or ownership of their own company) will pay less tax than someone on a salary of $500k per year. In fact, they might pay less tax than someone on $100k per year. All without even delving into offshore structures.

Why It’s Legal

The capital gains preferential rate is deliberate US policy, intended to encourage long-term investment. It’s not a loophole. It’s the structure of the code.

The Underlying Principle

Wealth compounded through appreciation of held assets faces lower tax than wealth earned through labour.

This applies in many jurisdictions:

• US: 0-20% long-term capital gains (upon realisation/selling only) vs to 37% ordinary (every year automatically)

• UK: 10-24% CGT vs to 45% ordinary

• Germany: 25% flat CGT vs to 45% ordinary

• Canada: 50% inclusion for capital gains (effectively 25% max) vs to 33% federal ordinary

The Lessons for Wealthy Individuals

1. Structuring wealth for the CGT rate rather than the ordinary income rate: Hold appreciating assets long-term. Realise as capital gains rather than income.

2. Structure business ownership for equity-value growth rather than dividend distribution where possible.

3. Consider entity structures (S-Corp, LLC, corporation) that allow capital gains realisation vs ordinary income treatment.

4. Look international when building your portfolio: some jurisdictions have 0% CGT entirely (Singapore, Hong Kong, UAE, Panama for foreign source, and others).

The Buffett-Scale Lesson

For an entrepreneur building a business:

1. Value in equity (share value growth) is capital gains treatment at eventual sale

2. Value distributed as dividends or salary is ordinary income treatment continuously

3. 20-year hold + eventual sale produces dramatically better tax outcome than 20 years of dividend distributions

This is why founder wealth typically compounds at a lower effective tax rate than salaried executive wealth: founders hold and sell; executives receive and pay tax annually.

Combined Cross-Border Applications

• Residency in a 0% CGT jurisdiction + long-term equity build + sale event = substantial legal tax minimization. Panama (for foreign-source), Singapore, Hong Kong, UAE, and others offer this.

• Residency in a standard jurisdiction + long-term equity build + relocation-before-realisation = timing-based CGT minimisation. See Article A15 (Selling Business Before Emigrating).