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Wednesday, November 4, 2009

Warren Buffett: Tax Hypocrite?

Future of Capitalism, Warren Buffett's Tax Hypocrisy:

When Warren Buffett criticized President Bush's tax cuts while plumping for the presidential campaigns of Barack Obama and Hillary Clinton, he garnered prominent, adulatory headlines ... Consider that as the context for two pieces of information:

First, the observation, amid a column in today's Wall Street Journal, about Berkshire Hathaway's cash mountain: "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. Mr. Buffett's reluctance to pay a dividend leaves him with little choice but to buy big companies outright."

Second, the news (again, from the Wall Street Journal) that Mr. Buffett's Berkshire Hathaway is joining in a bid to buy $3 billion in tax credits from Fannie Mae. Reports the Journal: "The credits are virtually worthless to Fannie Mae and require the company to take losses each quarter as their value declines. Companies such as Berkshire Hathaway and Goldman Sachs could use them to offset federal tax expenses."

Neither Journal article places the news in the context of Mr. Buffett's stated support for higher taxes.

Prior TaxProf Blog coverage:

Update:  Business Week, Thinking Like Warren Buffett:  "For all his skill at picking stocks, the Oracle of Omaha's approach to taxes is even more astute, as the P&G-Gillette deal proves."

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Comments

Um,

1) BRK doesn't just buy big companies outright just because they have a ton of cash but rather they have a ton of cash so they can do that. I think Buffet has said something along the lines of, "if i ever don't have a better use for the cash, i'll pay a dividend."

2) Isn't Buffet's duties to the shareholders and thus if it's beneficial to buy tax credits from Fannie Mae then he should do it rather than making voluntary contributions to the federal government just because he's a good guy?

Posted by: Joe C. | Nov 4, 2009 12:14:33 PM

Apropos of the point raised in the blog post, the fact that Buffett utilizes options available under current law to limit his tax burden isn't in the least inconsistent with his support for a system that would impose higher taxes on an evenhanded basis. Saying that wealthy Americans as a group should be required to pay more in taxes does not oblige an individual wealthy American to volunteer to pay more than others in his position are paying. Taking taxes into consideration in his business decisions is not "hypocrisy" on Buffett's part but simply "rational behavior," something that I would think a blog dedicated to capitalism would be proud of.

(I submitted a similar comment on the "Future of Capitali$m" blog. We shall see whether the moderator there has the stones to post it.)

Posted by: Matt | Nov 4, 2009 3:25:49 PM

The credits are of no use to FNMA. The point being missed is that you have to buy the real estate to get the credits, potentially making Berkshire the largest landlord in the US. What is the harm in allowing FNMA to fund its own toxic assets by sellng its real estate investments, or do you think taxpayers should continue to chase good money after bad ? If all of the banks were forced to sell their tax credit assets and pay back the government with the proceeds, we could reduce the budget deficit. The bad side is the price of credits will continue to go down, and less affordable housing will be built for the needy.FNMA is never going to use those credits and their value is going down.

Posted by: Glenn | Nov 4, 2009 7:54:33 PM

Joe C.

Yes, Buffet has better things to do with his money than making voluntary contributions to the federal government.

So does everyone else.

Which is why we don't advocate for raising everyone else's taxes while trying to pay the minimum amount ourselves.

Posted by: Rich T. | Nov 4, 2009 8:18:45 PM

Buffet, Soros, etc..., all these very wealthy folks who complain that their taxes are too low are very welcome to write a personal check to the US Treasury.

Posted by: TheOldMan | Nov 4, 2009 8:21:16 PM

Joe C: The criticism is not on his use of shareholders' money, it's his support for higher taxes and does his darnest to avoid said taxes. He can hide and avoid paying taxes,(e.g. his estate planning), but middle income earners have no place to hide and avoid but pay the high taxes he supported.

Why is he a "good" guy just because he wants other people to pay higher taxes, and he avoids said taxes, and actually buy "credits" from Fannie who was bailed out by the taxpayers? So he not only avoids to pay his "fair" share, he is shafting the taxpayers.

Posted by: ic | Nov 4, 2009 8:40:19 PM

Fannie Mae is owned by the U.S. taxpayers? If that is correct, some Congress critter should rush a tax bill thru that prevents Fannie Mae from selling the tax credits.

Because anyway you count it, the U.S. taxpayers lose when the credits are sold no matter the ultimate selling price of the tax credits.

Posted by: AJ Lynch | Nov 4, 2009 8:41:35 PM

Um.

It seems like Warren is ok with the little people (you know, the one's without a mountain of $$$ for acquisitions) paying higher taxes. That's what makes him a hypocrite.

Where do I get me some of them tax credits?

Posted by: VA Gator | Nov 4, 2009 8:54:53 PM

To Joe C:

Buffet is a hypocrite because he advocates for the govt forcing me to pay higher taxes while he maneuvers to pay the lowest taxes with strategies that are not available to the regular middle class guy.

I don't begrudge him paying the lowest taxes he can, I do condemn him for wanting me to pay higher taxes.

Posted by: WJ | Nov 4, 2009 8:55:28 PM

Um,

1) Correct.

2) Yes.

Neither one of your points addresses the issue of whether Buffet is a 'Tax Hypocrite', which he is. Let me be clear, Buffet isn't a hypocrite because he does what he can to lessen the tax burden on himself and his shareholders. Buffet is a hypocrite because he does what he can to lessen the tax burden on himself and his shareholders while advocating that everyone else should pay more. As a contrast, I also do what I can to lessen my tax burden, but I also advocate that other people should pay lower taxes also. Thus, I'm not a hypocrite, see the difference?

Posted by: Michael G | Nov 4, 2009 8:55:54 PM

Yes he has duty to his shareholders to make the most of both his cash holdings and his capital asset holdings. If he believes that paying higher taxes is not good for his shareholders but is something that the rest of us should do, he's still a douchebag.

Posted by: Diggs | Nov 4, 2009 9:01:41 PM

How about the inheritance taxes that Mr. Buffett's estate will avoid? Regardless of any altruistic motives you may wish to ascribe to his actions, Buffett's hypocrisy is repellent. Most people don't have the luxury of avoiding what he so glibly advocates.

Posted by: Scott | Nov 4, 2009 9:05:34 PM

What Joe C. said. This post is a stretch, at best.

Posted by: Matt | Nov 4, 2009 9:36:10 PM

Since he's donating the vast majority of his billions to charity I don't think we can question his sincerity. Maybe he doesn't want to make his contributions to society via the IRS because he thinks the money could be put to better use through non-profits like the Gates Foundation (which is undoubtedly true).

Posted by: l.a.guy | Nov 4, 2009 10:08:35 PM

Buffett is a giant hypocrite when it comes to taxes. He has stated on numerous occasions that he wants to pay more taxes.

He actually can pay more taxes at any time. He can write a check to the US Treasury and they will cash it.

He will not do that, however, because while he likes to open his mouth about paying more taxes, what he really wants is for other people to pay more taxes.

Do as I say, not as I do. Typical Leftist behavior.

Posted by: JB | Nov 4, 2009 11:05:10 PM

Is this the same Warren Buffet who encouraged the "death tax" so his insurance companies would make more money, but when push comes to shove - or when it would come time to walk his congressional testimony, his good friend Bill Gates had convinced him to make sizeable donations during what is left of his life and Mr. Buffet will now avoid paying billions upon his death?

Is this the same Mr. Buffet who did not make provisions for 1 granddaughter because she was adopted? As long as his ex-wife was alive, he played the game.....but when he was doling it out, she got nothing? Because she wasn't his blood?

Is the Pope Catholic?

Vile, petty, greedy man.

Posted by: Sandy P | Nov 4, 2009 11:10:26 PM

Um,

Isnt it funny how whenever someone starts a post with "um.." they go on to say something snarky. However, if they bothered to read the post to which they are commenting, they would know that what they wrote was rebutted already?

Posted by: Tom B | Nov 4, 2009 11:59:04 PM

1. Its negligence to not minimize taxes for your corporate entity if you have shareholders

2. His personal donations are so vast he is clearly a net giver beyond taxation, smart enough to trust the Buffet foundation in terms of intelligent spending beyond Ms. Pelosi.

Posted by: macaristotle | Nov 5, 2009 12:51:05 AM

This is just Buffet doing what he does best: making money using any means available.

But when he tries to be "folksy", as with his silly tax anecdotes, he's full of, er, himself.

I've always maintained that these bored billionaire types could care less if the formal tax rate shoots to 100%, since their lifestyles won't change a bit. They have enough tax lawyers, skilled accountants, and pet politicians to make sure they'll never see them.

Posted by: Foobarista | Nov 5, 2009 1:16:50 AM

Joe C. -- you kind of missed the point.

Posted by: The Portly Lawyer | Nov 5, 2009 1:42:58 AM

Joe, you completely miss the point. You snark at the thought that he should make "voluntary contributions to the federal government just because he's a good guy".

The point is that he wants to make US pay COMPULSORY contributions to the gov't....because HE's a good guy.

Posted by: jeanneb | Nov 5, 2009 2:50:48 AM

Of course Buffet is a hypocrite. He has avoided billions in capital gains taxes and instead received billions in tax deductions by donating appreciated shares to charitable foundations. Since Mr. Buffet is only in favor of higher taxes for people who earn a paycheck for their labour- he has never come out in favor of higher taxes for tycoons like himself.

There is a simple way to stop subsidizing tycoons
1) Eliminate the Corporate income tax. This will lead to more foreign investment in the US. If the US needs revenue and wants to incent hiring and exports even further, then establish a gross receipts tax with deductions for US-sourced labour and input costs.

2) As corporate income is no longer taxed, tax all capital gains and dividends as ordinary income. This would raise billions from Buffet alone

3) Require that appreciated property be taxed before deductions are given for charitable contribution of said property

4) Only allow charitable deductions for charitable contributions which are actually used for charity. In other words, tycoons like Buffet who fund foundations (like Gates') should only get deductions equal to the actual disbursement of principal (not investment returns) of charitable assets.

In other words, if Gates dispenses 10% per year from his foundation and has a 5% investment return, he should only be able to deduct the net 5% that was actually directed to charity, not the full value of the assets sitting around earning interest and buying influence.

Posted by: Treeamigo | Nov 5, 2009 3:16:29 AM

Buffet calls for higher taxes but avoids them personally.

California this week (Nov 1) arbitrarily raised its income tax 10% on everyone who pays taxes in the state.

Buffet is, of course, happy about this, no? Then again, he doesn't live in California....

Posted by: Koblog | Nov 5, 2009 3:41:46 AM

For a bunch of people who read a tax blog, you guys sure don't get it. Berkshire Hathaway pays billions in taxes each year. And as a corporation, they do it at the full 35% corporate income tax rate. Whatever other cash accumulates within the company, to be reinvested, accumulates tax-DEFERRED, not tax-free. Meanwhile, the government has Warren Buffett compounding the money for them.

It's a win-win.

Meanwhile, they tax shareholders' estates.

Posted by: Jason Van Steenwyk | Nov 5, 2009 4:26:21 AM

I can and do question his sincerity. He didn't need to wait this long to make donations. He could have started at say, $5 billion?

IIRC, he and Gates Sr. testified in Congress that there should be a death tax.

Bob Brinker had a caller about this when it was going on and his response was that mulitmillionaires and billionaires shouldn't be making tax policy.

I have no problem with how rich they are. I have the problem with they weren't donating all along. They don't walk their talk. And they shouldn't need congressonal tax policy to force them. But they have no problem making sure I don't keep my money.

Hmmm, Bastiat comes to mind.

Posted by: Sandy P | Nov 5, 2009 6:05:06 AM

I respect Buffett as an investor and manager, but let's not forget that as he proclaims how well-to-do people should pay more taxes, most of the "rich" can't afford to help their children by endowing multi-billion charities and install their children as hi-paid executives of same, as he did.

Or, that he could make a voluntary donation of his own money to the US government any time he wants to, and it is more than a little (OK, it's VERY) unseemly that he tells others what to do with their much more limited resources, and the press plays along as if someone worth $50B is in the same financial or ethical situation as someone worth $5M.

Liberals = do what I say, not what I do.

Posted by: Marty | Nov 5, 2009 6:13:29 AM

The bigger problem is our income tax system, particularly the difference between taxable income and real income. High-net-worth rich (as opposed to high-earned-income rich) pay shockingly low amounts of income taxes.

This loophole is one of the better arguments for a consumption tax, imho. A consumption tax will up being more progressive, in the tax-policy sense, because the hallmark of being "rich" is "living the good life."

Posted by: Curmudgeon | Nov 5, 2009 6:17:34 AM

Mr. Buffet has an undisclosed conflict of interest in tax matters. His failure to acknowledge his conflict seriously calls into question his opinion.

The conflict stems from his large interest in insurance and reinsurance companies. Much of the life insurance industry is based off selling a legal form of tax shelters to individuals. As already noted above, insurance is one of the primary tools used to avoid the estate tax. Additionally, however, whole life insurance policies (and their variations) and annuities are also used to avoid income taxes. The higher the income tax rate, the higher the demand for these products. In other words, the higher the tax rate, the more money Buffet makes.

Posted by: Think38 | Nov 5, 2009 7:08:00 AM

Which is better... to simply GIVE money to children who haven't earned it? Or to make them earn it by creating a charitable foundation and installing them in managerial roles?

Understand also, that the higher their salaries, the more the government gets in tax receipts. So what are you complaining about again?


Posted by: Jason Van Steenwyk | Nov 5, 2009 7:37:07 AM

Even worse - because of how his capital is protected from taxes, higher taxes weaken the ability of others to become competitors. This means the higher taxes also protect him (and his proxy BerkHath) from competition.

This is consistent with other Millionaire and Billionaire liberals - they seek rules that close off as many avenues to "hyper" prosperity from new comers. The exceptions are the useless politicos like Obama, able to use public office to enrich themselves. But he's already been vetted (by nature of his lack of real success and willingness to feed at the public trough in corrupt fashion.)

As for him being a net giver and Gates being smarter than Pelosi - yeah duh. A lot of conservatives feel this would be a good way: get the Gov't out of the charity business, let people keep more money, and then people can give to charities of their choosing.

Buffet's a hypocrite because he supports rules that force others to pay higher taxes, that either marginally effect him, or he can avoid altogether. He's also a hypocrite for thinking the average Joe should be forced to give to the Federal charity racket, while he'll get to give to the Bill and Melinda Gates foundation.

And for cutting the adopted granddaughter out of the will once his wife died (assuming that's true) - he's an jackass.

Posted by: Brendan | Nov 5, 2009 7:49:20 AM

To most above,

I don't have a problem with people criticizing Buffet because he states he should pay higher taxes yet he doesn't pay more voluntarily. My problem was the entry was criticizing him for increasing the value of a public company rather than having the company and all of its shareholders pay more taxes.

Posted by: Joe C. | Nov 5, 2009 10:39:06 AM

with "26% of Berkshire's shares, a cash dividend would saddle Mr. Buffett with one of the largest personal-income tax bills in American history."

If Mr. Buffet were interested in minimizing his eventual tax paid then massive dividend payouts would be with way to do it. The tax on Capital gains and qualified dividends is 15% in both the regular and AMT schemes. Futhermore, I would bet that a man with Mr. Buffet's resources, with very careful planning, could have structured his income stream in such a way as to fall into the 15% tax bracket and avoid tax on qualified dividends all together.

Perhaps the WSJ author believes Mr. Buffet is counting on the demise of the estate tax in 2010, and a carefully planned final exit before new year's day 2011.

Posted by: richd | Nov 5, 2009 11:24:54 AM

First question then comments, does anyone know what the tax credits where initially used for, because I don't think anyone has mention the purpose of which the tax credits where created.

This is an investment plain and simple, as a shareholder you want the highest possible return on your money with the lowest possible risk.

Investing in tax credits (that were used to create thousands of affordable apartments and homes) at a discount (I am guessing 57 cents on the dollar in order to produce a 30 % return) provides GS and Berkshire with a return, while also providing MORE MONEY TO THE US GOVERMENT than would be otherwise realized.

Every day that goes by Fannie has to write off more of these tax credits because they expire and become useless, and since they have no profit they can't use them against their own taxes. So this is a Win for Berkshire, a win for the US GOV, a win for tax payers and a win for low income Americans as it should help the affordable housing industry restart new development in locations it is needed.

If you want to know more about the program that utlizes these tax credits to help low income americans please look up Sec 42 in the Tax Code.

And in my humble opinion, the reason buffet supports higher taxes is he realizes that the way we have been spending government money in the last 9 years can only be supported by higher revenue i.e. taxes It is not because he simply wants higher taxes for the sake of having higher taxes.


Posted by: Framer | Nov 5, 2009 12:48:30 PM

> IIRC, [Buffet] and Gates Sr. testified in Congress that there should be a death tax.

Buffet and MS Gates have arranged things so the vast majority of their estates will not be subject to the estate tax.

At least one of Buffet's companies sells life insurance to cover the estate tax that other folks owe.

In short, Buffet is not just "tax the other guy", he personally profits from the policy that he advocates.


Posted by: Andy Freeman | Nov 5, 2009 12:56:38 PM

Anyone who votes Democrat gets what he or she deserves. Of course Buffett and Soros are hypocrites. But it's people who vote for Dems who make it possible.

Posted by: Rachel Johnson | Nov 5, 2009 1:23:17 PM

Then there is the structure of his business which has made a fortune (I am a Berkshire Shareholder so I have done well too) by helping out family firms who need to avoid inheritance taxes.

Posted by: drtaxsacto | Nov 5, 2009 2:18:12 PM

Rich D:

You are mistaken - the govt loses no matter what if they allow Fannie Mae to sell the tax credits.

The price [cash] paid to Fannie Mae [aka the US taxpayers] will surely be less than the value of the tax credits sold to Buffet's corporation. So the govt loses real cash money! There is no other way to look at this transaction.

Posted by: AJ Lynch | Nov 6, 2009 11:00:33 AM