An updated version of the first blog I ever wrote (July 3, 2006)
Warren Buffet was back on television last weekend telling ABC News how the rich don’t pay their fair share of taxes. One would suppose that just the very fact of that statement, coming from a man worth $50 billion or so, who pays and has paid virtually no taxes, is 78 years old, and whose estate also will never pay taxes would be self evidently ridiculous. For some reason it is not. He apparently agrees with Obama’s definition of the rich as a married couple making $250,000 (in New Jersey for example) whose marginal income tax rate is over 50%. Let me explain the nature of Buffet’s tax advantages.
He is a major shareholder of Berkshire Hathaway. Berkshire Hathaway is simply a publicly traded company called a holding company that owns a portfolio of parts or all of other companies. For example, it might own 5% of Coca Cola and 100% of a furniture company. Berkshire Hathaway and Buffet’s style of investing is as a long term investor. Relative to other portfolio managers and the overall market he is far less diversified. He is really a hedge fund manager who uses a publicly traded company as the vehicle. Despite his views about taxation, his 55 year track record has outperformed the overall market by a large margin. There is some probability this is just luck, but it is a very low probability. Given the length of his track record and the magnitude of his risk-adjusted out performance, it is likely his results are not merely luck. I for one have no problem with his earned wealth. (I am ignoring for purposes of brevity his constant lobbying for policies which favor his investments. These are many and worthy of another essay which includes all Rent Seeking Enterprises: (The Concise Encyclopedia of Economics | Library).
But one should have a problem with his tax views. Most of his income comes from unrealized capital gains, so he pays no taxes. He pays himself a small salary. Most people who invest, first pay taxes on income and then invest. He does not. He initially invested successfully with other people’s money and has effectively been able to grow his wealth virtually tax free through his percentage ownership of the publicly traded Berkshire Hathaway. But why does he want to prohibit others from the opportunity of earning tax free compounded wealth? His philosophy on taxation may be divined from a quote in a May 1977 article in Fortune Magazine.
“A market economy creates some lopsided payoffs to participants. The right endowment of vocal chords, anatomical structure, physical strength, or mental powers can produce enormous piles of claim checks (stocks, bonds, and other forms of capital) on future national output. Proper selection of ancestors similarly can result in lifetime supplies of such tickets upon birth. If zero real investment returns diverted a bit greater portion of the national output from such stockholders to equally worthy and hardworking citizens lacking jackpot-producing talents, it would seem unlikely to pose such an insult to an equitable world as to risk Divine Intervention”.
So does Buffett believe he was really lucky due to his random cosmic receipt of superior investing powers? This statement above is “communist manifesto light” (“from each according to his abilities and to each according to his needs”). If the government is such a moral allocator of wealth, why does he not contribute, say, 40% a year of his annual increase in wealth to the Feds? If it’s good for people making $250k to do it, how much better must it be for those worth $40 billion?
His deterministic philosophy has not prevented him from maximizing total control of his own wealth. Worse, this implied deterministic attack on existential freedom (is it really just the right “vocal chords” which makes one a singing star?) seems to be something that excludes himself. Who should decide from whom and to whom one is to “divert” these portions of national income? Well, people like Warren Buffet, of course, whose legacy foundation (with Gates) will never surrender its economic freedom. Surrendering freedom is for dopey “hardworking citizens lacking jackpot-producing talents” but make more than $250K a year. He views himself a philosopher king. Like so many people with great talent in one field he believes this talent translates to other fields. But Buffett is a philosophical naif and a borderline moral ghoul. One of his great “charitable causes” is global birth control, an activity perfect for persons who feel comfortable making choices for others.