It is frequently reported that Warren Buffett pays a lower overall rate of tax than his secretary pays. This is correct, but such distinctions are meaningless without some knowledge of the specific circumstances.
It is necessary to understand the sources of the income in question to fully appreciate why Mr. Buffett’s (no doubt well-paid) assistant remits a greater percentage of her paycheck to the IRS than her oracular employer.
The bulk of Buffett’s compensation comprises capital gains and dividends. These forms of income generally are taxed at a rate of 15 percent, provided that the investments are held for at least a year. While this rate is certainly lower than the average effective rate on ordinary income, direct comparison is misleading because of the different level of risk.
Capital gains result from appreciation in the value of an investment, be it stocks, real estate, gold coins or Beanie Babies. But a gain is by no means guaranteed, and investments can and do produce losses. Most of us have had the dubi-
ous pleasure of buying high and selling low; risk of loss is inherent in the investment process.