Warren Buffet and taxes

Tax Prof reported today on a critique of Warren Buffet.   As many will recall, Buffet was outspoken during the presidential campaign about the problem of a tax system that favors the super-rich over the middle class.  He noted that he paid tax at a rate considerably below that of his secretary, suggesting that we have a distorted tax system that should be addressed.

The Wall Street Journal reports on Buffet's recent deal for his Berkshire Hathaway firm to buy the Burlington Northern railway.  See Behind the Decision, a Lesson from a Mentor (Nov. 5, 2009).  The author notes the perhaps unique problem perennially plaguing Berkshire--lots of cash on hand to invest.  He states that

Mr. Buffett would rather not resort to the simplest way of solving this problem--paying excess cash out to shareholders in the form of a dividend.  Since he owns roughly 26% of Berkshire's shares, a cash dividend would saddle Mr. Buffett with one of the largest personal-income tax bills in American history.  That's not the kind of thing at which he likes to excel.

Further, Buffett's firm is bidding for Fannie Mae's low-income tax credits, which are not of use when Fannie is losing money but can be sold for a significant boon to the buyer in reduced taxes.  See this Wall STreet Journal article (noting that credits used to sale for about 95 cents on the dollar, but recently the market has dropped to 65-79 cents on the dollar).

So now Ira Stoll (a former New York Sun editor and Wall Street Journal consultant), in his website on the future of capitalism (which suggests, in its "about" page, that it is exploring the "financial downturn" and that way the "big argument" about "communism and socialism" versus "capitalism" had been thought to be settled prior to the "financial downturn" that was turned into a "crisis" and "panic" "in part" by "government regulators) suggests that Warren Buffet is a tax hypocrit.  See post, here.

When Warren Buffett was critical of the way the tax system works, he didn't say that he planned to personally redress the imbalance in our system by paying lots more taxes to make up for it, nor would one have expected him to do so.   A vow of poverty (which could be accomplished by giving all of one's assets to the state) is a mode of action for some who protest the excesses of capitalism, but not within the fortitude of most and certainly not in any way a price of credibility--or treatment as not being a hypocrit-- when merely stating the obvious fact that those of us who are better off pay relatively too little in taxes under our system.

Buffet was using his personal situation of high income/low taxes to illustrate a system gone awry, one that favors the titans of financial wealth over the Everyman and Everywoman who are the bulwark of this country's economy and its society.  The fact that he prefers to keep cash in the business, and invest that cash in businesses that he thinks will be here for the long term, rather than paying out dividends to himself and others (which, by the way, would be taxed a very preferential low capital gains rates) doesn't make him a hypocrit. 

And in spite of my dislike for the way low income housing tax credits work, it's quite clear that the credits are available for businesses that can take advantage of them and owners of those businesses might well object to a "principled" refusal to do so.  I'd prefer to eliminate them from the system (I'm not convinced that subsidies like that make sense at all), but I'm not in a position to fault anyone for taking advantage of them, any more than I can fault a neighbor for using the homeowner's tax credit, in spite of my view that it is a frivolous waste of taxpayer money that gives an unfair subsidy mostly to those who would buy anyway and real estate professionals.  

What would be genuine hypocrisy, from my perspective, is for someone to claim that they are supportive of tax policies that favor the lower and middle income classes and then to actually lobby for or enact policies that are predominantly of value to the upper class and super-rich.  Think of all those legislators claiming that they were concerned with ordinary Americans, family farmers,  entrepreneurialism and small business owners, while they were busy trying to pass a zero income tax rate for capital income and eliminate the estate tax for estates of the rich.

Comments

[Paul Neiffer]

If you look at almost all of Warren's recent investments such as Goldman Sachs, General Electric, they were almost all in the form of convertible preferred stocks paying dividends.

This allows Berkshire to not pay tax on at least 70% of the income. There is a reason why he is one of most wealthy persons in the world.

[Raza]

Excellent post, Linda - as usual. Thanks for the links as well -

[LindaMBeale]

So? How else would you have Berkshire make investments in corporate entities than by buying stock. Earnings on corporate stock are ordinarily in the form of dividends, and preferred stock is generally issued to encourage investors to invest so that they can be assured of a dividend flow. That's just ordinary corporate business.

The reason Buffet is wealthy is not because Berkshire invests in tax-preferred ways compared to every other similar investor, but rather because of his investment strategies--he seems to make wiser choices than many of us, and seems to invest for the long haul rather than based on short-term trading whims. Also, with a lot of money at stake, Berkshire can make a lot of money on good investments with steady returns. Contrast the strategy of Long Term Capital Management, which was super-leveraged and going for those 18% to 30% or even more returns. Risky strategies that do well when they work, and bust when they don't (which is why LTCM had to be rescued and why it is worrisome to continue to allow mega-financial firms to hold deposits, do investment banking business for others, AND trade speculatively in huge sums for themselves).