Subject: Berkshire Tax Titan v Mag 7 Minnows
2024 extract on taxes from Mr Buffett:
“Berkshire Hathaway - paid far more in corporate income tax than the U.S. government had ever received from any company – even the American tech titans that commanded market values in the trillions. To be precise, Berkshire last year made four payments to the IRS that totaled $26.8 billion. That’s about 5% of what all of corporate America paid.
“Cash income-tax payments to the U.S. Treasury, miniscule in the first decade, now aggregate more than $101 billion . . . and counting.”

I was thinking about Buffett’s Fortune article from years ago, that talked about the share of the economic pie, between the government and shareholders. The federal income tax rate is currently 21%.

I don’t live in the USA, but I get the impression that the necessary Government stimulus in 2008 and in 2020 has widened the inequality gap. When Buffett talked about the share of the pie: he expected that taxes would have to get higher in the future. That has not happened… yet. As a result, it helped fuel stock market valuations. He probably still thinks, that taxes will have to rise at some point in the future, to deal with a growing government debt problem. He might also thing the masses will get tired of the growing wealth gap. What will happen is a political question but it does link to equity valuations.

We also have a technological change that will affect jobs. The America tech titans are enjoying good times currently and leading the world, with China chasing hard. The valuations of these tech titans, reflect expectations of tremendous future profits from efficiency gains and leaps forward in solutions to problems. There is of course a debate around the returns they will make on the hundreds of billions of investment and no one knows how it will all play out good or bad.

If it did turn out that the big tech companies make larger and larger profits, voters may want a bigger share of those profits, particularly the ones that that are unable to find jobs.

I wanted to have a look at the taxes the big tech firms have paid recently. This is what I found. (The numbers are from their most recent annual reports. Apple was adjusted down by $10.2 billion, to account for an exceptional back taxes payment to Ireland)

Tax multiple = Market cap divided by taxes.

Berkshire Hathaway taxes $26.8 billion. Market cap $1.039 trillion. Tax multiple 39x.

Microsoft $21.8 billion. Market cap $4 trillion. Tax multiple 185x. Effective tax rate 18%.

Apple taxes $19.5 billion. Market cap $4 trillion. Tax multiple 205x. Effective tax rate 16%.

Alphabet taxes $19.7 billion. Market cap $3.2 trillion. Tax multiple 164x. Effective tax rate 16%.

Nvidia taxes $11.1 billion. Market cap $5.1 trillion. Tax multiple 454x. Effective tax rate 13%.

Amazon taxes $9.3 billion. Market cap $2.4 trillion. Tax multiple 264. Effective tax rate 14%.

Meta taxes $2 billion. Market cap $1.9 trillion. Tax multiple 966. Effective tax rate 40%?

Tesla taxes $1.8 billion. Market cap $1.5 trillion. Tax multiple 838. Effective tax rate 20%.

Buffett’s $26.8 billion number is an enormous number and Berkshire benefits from tax credits at BHE.

I am not sure what to make of the above numbers.

The Federal corporate tax rate is 21%. All of these companies are paying less than that apart from Meta which there is no doubt some reason for. In the context of their market cap, the taxes are almost nothing anyway.

Tesla’s P&L tax line for the last 3 years is actually negative $2 billion, so taking 2024 $1.8 billion may be generous, given the immediate P&L challenges they are having.

It is comforting to look at taxes paid or accrued. Companies don’t generally like paying taxes, so the tax numbers are usually not overstated. It can be a red flag if a company is reporting PBT but low taxes. Berkshire is certainly paying a lot of tax and that tells us they are making a lot of real money.

Microsoft (18%), Apple (16%) and Alphabet (16%) are all paying less than the 21% federal corporate tax rate. Nvidia (13%) and Amazon (14%) are paying a lot less that the 21%. Meta and Tesla are barely paying any tax in the context of their huge market caps.

Maybe the observation is Berkshire stands out as the biggest tax payer and the stock market has considerably lower future profit expectation for the firm, compared to the tech titans.

Microsoft, Apple and Alphabet pay a lot of tax but maybe should be paying a bit more. There valuations are not as extreme as some of the others.

The total market cap of the Mag 7 is $22.2 trillion and they paid $85.2 billion in tax = tax multiple of 261x.

Berkshire’s market cap is $1.039 trillion and it paid $26.8 billion in tax = tax multiple of 39x.

If I take the mag 7 taxes of $85.2 billion and convert that to PAT i.e. the shareholders share of the pie (79%) and calculate a PE ratio on that basis = 69.3x compared to Berkshire at 10.3x.

There is a combination of: the stock market likes the future for big tech more than Berkshire; and big tech is currently not paying taxes to the extent that Berkshire is. Not big news there.

The government debt and society inequality, may however, require that the Tech Titans will have to pay more taxes in the future.
I am not really sure what the point of this exercise was, so I asked AI to convert it into a more readable analysis.

###############################################################################################################################################


Here it is:

“The financial landscape appears increasingly defined by two distinct cohorts: legacy titans like Berkshire Hathaway and the reigning 'Magnificent 7' (Mag 7) tech giants. An analysis of their tax payments relative to market capitalization highlights a significant divergence in how the market values current versus expected future profits, a dynamic compounded by disparate effective tax rates.

Company/Group Taxes Paid (Annual, $Billions) Market Cap ($Trillions) Tax Multiple (Market Cap / Taxes) Effective Tax Rate (%)
Berkshire Hathaway $26.8 $1.039 39x
Mag 7 Total $85.2 $22.2 261x
Microsoft $21.8 $4.0 185x 18%
Apple $19.5 $4.0 205x 16%
Alphabet $19.7 $3.2 164x 16%
Amazon $9.3 $2.4 264x 14%
Nvidia $11.1 $5.1 454x 13%
Tesla $1.8 $1.5 838x 20%
Meta $2.0 $1.9 966x 40%?
________________________________________

The Tax Contribution Divide

Berkshire Hathaway stands out as an exceptional taxpayer, contributing $26.8 billion, which Warren Buffett noted is approximately 5% of all U.S. corporate tax paid (total cash payments aggregate over $101 billion over time). Its low Tax Multiple of 39x suggests the market's valuation is closely tied to its substantial current earnings and tax payments.

In stark contrast, the Mag 7's collective Tax Multiple is 261x. This dramatically higher ratio indicates that the market is assigning valuations based on expectations of tremendous future, hyper-efficient, and potentially lower-taxed profits—reflecting investor excitement over technological advancements like AI.
________________________________________

Effective Rates and Valuation

Most of the major tech companies report an Effective Tax Rate well below the 21% US Federal Corporate Tax Rate:

• Microsoft (18%), Apple (16%), and Alphabet (16%) pay the closest to the statutory rate among the tech giants, and their Tax Multiples (164x to 205x) are relatively lower than their peers.

• Nvidia (13%) and Amazon (14%) have significantly lower effective rates and higher Tax Multiples (454x and 264x, respectively).

• Tesla (Tax Multiple 838x, 20% ETR) and Meta (Tax Multiple 966x, 40%? ETR) exhibit the most extreme Tax Multiples, suggesting their valuations are overwhelmingly decoupled from their current tax contribution, implying vast future profit expectations or significant current tax shelter usage.

This divergence raises questions about the sustainability of current equity valuations, especially when viewed through the lens of Buffett’s long-standing concern over the rising wealth gap and government debt. Should political will and societal demand for a fairer share of the economic pie force the Tech Titans to pay taxes closer to the federal rate, it could introduce a significant headwind to their prodigious future earnings estimates.