Warren Buffett on Corporate Taxation: A Reality Check​

A recent article published on Yahoo Finance was titled “Warren Buffett Says You Wouldn’t Owe A ‘Dime’ In Federal Taxes If 800 Companies Paid The IRS Like Berkshire — And That Includes Social Security Too.” This article offered a favorable presentation of Warren Buffett’s remarks regarding corporate taxation and taxation in general.

One of the comments from the eminent investor, during a 2024 shareholder meeting, points out that Berkshire paid more than $5 billion in corporate taxes in fiscal 2023. Subsequently, Buffet claimed that if 800 corporations followed suit, then: “No other person in the United States would have had to pay a dime of federal taxes.” He proceeded to list taxes that make up a large percentage of the US federal tax revenues, such as income taxes and Social Security taxes, and noted that nobody would have to pay these taxes any longer.

It is perhaps instructive to start by examining the math behind this idea before addressing some of the economic implications. According to the Congressional Budget Office, in fiscal 2023, tax revenues were $4.4 trillion (and their revenues are much higher today). Consequently, the government would be collecting $400 billion less in revenue than it already was if 800 firms each paid $5 billion dollars at the time of the speaker’s original reference (and this shortfall would be substantially greater currently). Furthermore, the US federal government had already not been collecting sufficient revenues to offset its outlays, and thus it was operating at a fiscal deficit, which would exacerbate under Buffett’s plan, despite the fact that US fiscal policy “scares” Buffett, and the investor has called it “unsustainable.”

If we simply ignore the $400 billion dollar loss in revenue, issues with this plan still become evident upon basic scrutiny. Buffett’s claim that nobody else will pay, even if true in legal terms, could scarcely be further from the truth in terms of the actual burden of taxation (often called “economic incidence”).

As Buffett already knows, investors value corporate stocks and all assets based on the discounted after-tax cash flows that they produce over time. In short, in the evenly rotating economy, every entrepreneur necessarily receives the same net return, even in a world with taxation. An implication of how future cash flows are valued in a world with corporate taxation is that the production of outputs across the economy, the allocation of resources, remuneration of various resources, and the alternatives that agents face are changed vis-à-vis what they otherwise would have been.

For instance, suppose taxes on accounting profits were raised to 100 percent, and that the tax was perfectly enforced. Among numerous other things, entrepreneurs would find that all investments are no longer profitable to embark upon, and thus entrepreneurs would not be willing to bid for labor, land, and produced means of production—they would not be willing to pay a penny for it if the valuation was based on the end of attaining money profits via production.

Hence, to the extent that you have a corporate tax, the lower real wages, rents, interest, and profits will tend to be. The reduction in real incomes vis-à-vis what incomes would have been is certainly a genuine incidence that virtually every income earner incurs. Of course, some will have increased incomes as they benefit from how the government spends its funds. However, as far as private enterprises that do not benefit from government resources are concerned, incomes in those enterprises will tend to be lower than otherwise, and most real incomes across the economy, for that matter.

Profits—a marvelous feature of the price system—are the lifeblood of the economy. There is simply no complex production without profits. Capital accumulation implies growth in aggregate profits versus losses, which is made possible by savings. The accumulation of capital is made possible by “parsimony,” as Adam Smith called it, and it is parsimony which causes entrepreneurs to plow their profits back into productive enterprise.

Although most economists tend to overemphasize the desirability of particular ways of collecting tax revenue as opposed to others, a tax on profits is perhaps one of the most evil and disastrous forms of taxation conceived. Surely the loss in what living standards otherwise would have been is a cost that everyone incurs. Therefore, when Mr. Buffett claims that nobody will pay, it is important to consider that this is only true in a sense that doesn’t actually matter for human welfare (who legally pays), but it obviously is not true for what does matter (economic incidence).