Warren Buffett: Tax Dodger?
by Alexander Green, Investment U Chief Investment Strategist
Friday, November 30, 2012: Issue #1916
I’m a longtime admirer of Warren Buffett.
He taught me a lot about stock investing, including the most important thing about it I know: Forget about outguessing the market and focus instead on identifying businesses that are selling for less than they are worth.
While Buffett is a genius at equity analysis, he is no expert on government policy issues. And so it was with regret that I read his New York Times Op-Ed piece this week calling for higher taxes on the nation’s top income earners.
I won’t bore you with arguments about fairness or job creation or economic growth. The truth is confiscatory tax rates won’t change the slightest thing about the national debt crisis we face. And every American should understand why.
Imagine that your 18-year-old son goes off to college for the first term of his freshman year. You are happy to pay for his education costs – room, board, tuition, books, etc. – but you also give him a credit card “in case of emergencies.”
When he comes home for Christmas, you discover that he has run up $70,000 on his MasterCard. You hit the roof and demand an explanation.
“Now hold on, Dad,” he says. “Before we start talking about how much less I might spend, let’s talk about how much more money you’re going to give me.”
Consider your response – and whether it would be printable in a family paper. Yet Congress makes our hypothetical spendthrift look like a piker.
Most reasonably well-informed Americans know that our $16.1-trillion federal budget deficit is now larger than the nation’s GDP. But what most don’t realize is this figure doesn’t include the unfunded liabilities for Medicare, Medicaid, Social Security and the Prescription Drug Benefit. That’s another $121.6 trillion. Combine the federal budget deficit with the unfunded liabilities for current entitlement programs (excluding ObamaCare) and it comes to a mindboggling $1.2 million per taxpayer. (To understand how this fiscal mess is already affecting you – even if you don’t realize it – click here).
Some will argue that this is exactly why we need to stick it to the ultra-rich, an approach that has clear populist appeal. But here’s a bit of perspective. Less than a hundred years ago, the nation’s richest man, John D. Rockefeller, could have written a personal check and paid off all the entire national debt, every penny accumulated since 1776. Today the government could confiscate the entire net worth of the nation’s wealthiest man, Bill Gates, and it wouldn’t pay six weeks’ interest on the national debt.
Our elected misrepresentatives have spent so recklessly, promised so promiscuously and behaved so immodestly, that raising the revenue required to meet future outlays isn’t just difficult, it’s impossible.
Writing in The Wall Street Journal this week, former Congressional Committee Chairmen Chris Cox and Bill Archer note that even if the government confiscated the entire adjusted gross income of every individual and corporation in America, it still wouldn’t cover U.S. entitlement obligations. Yet the first order of business according to President Obama, Senator Reid and Mr. Buffett is not to reform entitlements or rein in spending but to raise tax rates? You might as well try bailing out the Pacific Ocean with a teaspoon.
Congress has a world-class spending addiction, but then so do most other Western democracies, including Canada, Britain, Western Europe and Japan. In every case, politicians on both side of the aisle have learned that promising lush government benefits paid for by “someone else” is a big winner at the polls.
As for the current fiscal cliff negotiations, the Congressional Budget Office estimates that raising the top marginal tax rate to 39.6% – as Obama proposes – would generate approximately $70 billion a year. That’s not an inconsequential sum. But it won’t come close to fixing this year’s $1.1 trillion federal budget deficit. Where would we get the other $1.03 trillion?
Finally, it’s also interesting to note that while Warren Buffett feels strongly about raising taxes on “the rich,” he has done a masterful job of avoiding them himself. As he notes in his New York Times piece, past taxes on dividends ranged as high as 91%. But Berkshire Hathaway has never paid a dividend, so Buffett has never paid a dime in dividend taxes on his own multi-billion-dollar holdings. And he has sold few shares, so he has avoided paying capital gains, as well.
He won’t be selling those shares and paying taxes on them down the road, either. He has pledged most of his fortune to the Bill & Melinda Gates Foundation. That’s certainly a worthy thing to do. However, his contribution came with a single string attached. The donation is contingent on charitable contributions remaining tax deductible.
In short, when it comes to taxes, you’d be well advised to do what Buffett does. And pay no attention to what he says.
Good Investing,
Alex
Editor’s Note: Over the past few months, many readers have asked what the tax debate has to do with investing. The fact is, taxes are the biggest cost investors face – and thus the most unyielding attack on your wealth. That’s why one of our Four Pillars of Wealth is the effective management of both fees and taxes in your portfolio.
And these four pillars are behind everything we do here at Investment U, and at our sister organization The Oxford Club. For more information on just how successful these core tenets have made us over the past 20 years, click here
Warren Buffett: Tax Dodger?,Any investment contains risk. Please see our disclaimer.
26 Responses to “Warren Buffett: Tax Dodger?”
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Most likely, I know even less than Warren Buffet about tax policy issues, but my sense of fair play is intact. I am a retired physician,
and i pay a substantially higher tax rate than Mitt Romney. I don’t want to “stick it” to The Rich, nor do I blame them for taking every legal tax deduction they can (so do I). I just want simpler, fairer taxation that doesn’t leave me feeling like someone stuck it to me. For example, how about eliminating the deduction for mortgage interest on homes other than one’s primary residence? How about throwing out the existing tax code and starting over, so we can close the great gap between nominal and actual tax rates?
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You can argue all you want about not taxing the rich. The fact is they are not paying their fair share. (as a % of income) And what you do not understand is every one knows it. Fix the tax system and make it fair. Then I will be willing to pay my fair share.
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You can tell these articles are pure lies, first they never give you the numbers (government lay out to poor entitlements vs government losses to tax breaks (wealthy ENTITLEMENTS).
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it is astonishing that liberals really believe that allowing somebody to keep what they have earned is some how an entitlement. The sad part is that the vast majority of people with that mindset will always be “victims” and never find success.
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The word “fair” and its synonyms are useless because “fair” means different things to different people. One person’s “fair” can be completely opposite another person’s.
Imagine a politician addressing a campaign rally promising the, if elected, he will insist on a “fair” system of taxation. The crowd roars its approval. But over here is a guy who thinks a “fair” tax system means everybody pays the same number of dollars; over there is a guy who thinks everybody should pay the same percent of income; and, look over there — that guy thinks it would be “fair” if, after paying income taxes, everybody would have the same number of dollars left. Forget “fair.”
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This column demonstrates the dangers of mixing investment advisory with politics. There has been far too much of that in the past few months. Of course there is a clear relationship between the two, but the facts and examples can be selected and embellished to support whichever partisan line one desires to emphasize. I for one prefer to read the analysts who write political columns, such as toay’s useful column by Daviud brooks, and read the investment letters for financial analysis.
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Your right investor need to stick to investing advice and not try to (LIE) lobby to the public.
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I agree with Joe Wade above who says the rich are not paying their fair share. Alex I believe you are a good stock picker but wish you would stay out of politecs in an investing letter.
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Alex—I am disappointed to find out that you are in that group that does not realize that to fill a bucket takes many drops and I think a drop of fairness from the most wealthy in our society is not too much to ask.
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Why don’t you tell us how much money the government will bring in with getting rid of the (wealthy ENTITLEMENTS)tax break. Numbers will always PROVE your point unless…..then tell us how much the government spends on the poor entitlements. Please let us see YOUR NUMBERS.
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The tax break was written to stimulate the economy and did nothing to that. And the more you all whine about going back to the 2000 tax code is proof why it DIDN’T WORK.
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I have no issue with having an opinion, and clearly you have yours. But the issue is people making up misleading arguments to support their perspective, to whit the 18 year old with a $70k Mastercard bill.
Clearly that amount is unnecessary, and then you say more is being asked for.
Alternatively, the analogy could be drawn about hospitals closing down mid-year due to lack of funds, or fire services and police unable to attend fire and crimes because their budget funds have run out, and so funds are needed just to keep them running.
People need to constructively work on the specific details instead of this simplistic rah, rah, x is bad criticism. It’s actually _destructive_ to improving the situation.
Oh, and I found the opener amusing. So “Buffett is no expert on government policy issues?” I guess because you’re proclaiming it that means you are?
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As an investor, i appreciate the “reality check” Alex gives us in his article. Many, many Americans do not have a clue of the degree of seriousness this deficit has on us and potentially many generations to come! If businesses operated like our government in terms of fiscal management, there would be exponentially more people out of work! Thanks Alex for shedding more light on a subject that will certainly impact my investments!
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Fellas, you miss the point…the politics are irrelevant to the math, and whatever any of us think is fair or envious… the “rich” DO NOT HAVE THE MONEY! no matter how you define them…cause neither do you or I, or all of us combined…which leaves all of us a very BIG problem….
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I disagree with those who posted above regarding you “staying out of politics”. I appreciate your input. What you stated was simply that Warren Buffett is a hypocrit. He says taxing the wealthy is fine, as long as it isn’t him. He along with Bill Gates, another hypocrit, say the rich should be taxed higher but they both avoid paying taxes by not selling stock, not getting dividends and in Gates’ case, keeping millions of dollars of Microsoft out of the country so it cannot be taxed. There are plenty of wealthy Americans paying more than their fair share and there are many Americans not paying any taxes. I agree that everyone should pay his/her “fair” share, but the problem is determining what is “fair”. We seem not to be able to agree with this. Personally I think we would be better off with a flat tax as a percentage of income. That way everyone gets to pay what is fair for them. Then we could do away with the IRS (big cost savings to the country) and would not have to pay expensive CPA’s to do our taxes and try to find us “loopholes” to avoid taxes.
There seem to be lots of hypocrits in that we all try to avoid taxes as much as possible. After all it is the “American Way”.
Keep your columns coming Alex, you are always right on the mark!
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Thank you Alex for helping us see the dire straits we are in and that taxing the rich, even to infinity, will not solve the problem. I don’t feel that this is partisan–you mention our representatives (all political parties included.) Too many goodies have been promised. I agree with others here that we need a system that does not allow some with high incomes to escape all income taxes.
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Love the article, one of the few I read that is full of common sense (this will make liberal attacks unavoidable-they have a problem with common sense).
Truth is Warren, as great as he is, has just turned himself into the personal bodyguard of Obama. And that’s fine he can do whatever he wants with his money, but I don’t understand why do we have to force other people into flushing money down the toilet (give it to the government) just because Warren likes it. By the way he was just fine paying the taxes under any other US Presidents but now, after decades, it’s all different. That’s hypocrisy Warren.
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Sorry, Alex, but you are really scraping the bottom of the barrel here:
1. I fail to see anything hypocritical about a charitable donor wanting to ensure that the income from his charitable gift is used for qualifying charitable purposes rather than potentially being used for related, but “for profit” endeavors, or wanting to maximize the potential impact of his charitable gift.
2. I also fail to see anything hypocritical about Mr. Buffet’s leaving his wealth tied up in Berkshire Hathaway rather than taking distributions out of the company; maybe he thinks this is where his money will earn the best returns – or, more to the point, maybe he believes that he owes it to his shareholders to leave his “skin in the game.” Are you suggesting that he be taxed on unrealized gains just because he is rich? Or because his political views do not accord with yours?
In any event, calling Mr. Buffet a “tax dodger” is a pretty heavy accusation to level against someone merely for practicing sound tax planning, much like anyone else – and you have effectively done so without even a scrap of supporting evidence (on that note, maybe you ought to review your own comment policy) – apparently to insist, against the repeatedly expressed requests of your readers, that you please refrain from using an investment letter as a forum for promoting your personal political views.
As a final point, I note that, although the comment I submitted earlier today fully complied with your comment policy, you refused to post it. It seems to me that if you are going to continue to make political arguments under the aegis of “investment advice,” then as a matter of fairness and integrity you should accept the fact that others may not agree with your views and may take issue with unsubstantiated accusations.
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Who gives more to charities that really give with out the write off the would not give.
BILLIONAIRE BUFFET?
HIS SECRETARY? maybe can’t works for BILLIONAIRE
BILLIONAIRE GATES?
V.P. JOE BIDEN 300.00 DOLLARS?
PRES. OBAMA BOOK REVENUE 72,000$?
ANY CHURCH GIVER IN BASKET 5$ ?
PRES. BILL CLINTON $4 PER PAIR OF UNDER WARE?
CHURCH WINNER PERSON IS ONLY REAL GIVER THE REST DO IT FOR SHOW AND TO SAY LOOK AT ME
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James and Courtland: I SO agree with you…:) I wish the writer would leave his political beliefs out…
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You are so wrong at so many levels that one can only conclude that you are pandering to your richest Republican friends.
I agree with all above that this is the wrong place for that.
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as a Canadian I look south and ask why should the Americans get a deduction for their house mortgage? Especially on second and third homes! Canadians get zero credit for home ownership. As to who pays, the claim that the “Rich” don’t pay thier share of the tax burden, some facts, 47% of Americans don’t pay any tax at all, of the remaining tax payers 90% of the tax paid is paid by less than 10% of the group, yep the top 10% pay 90% of the tax collected! finally check the expatriots some 800K millionaires have left the USA never to return, and historically raising the tax rates ddoes not raise the tax recieved! Apple corp has almost 100 billion offshore won’t repatreate it because of punitive taxes! add GE, UTX, and a few dozen more all perfectly legal!
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Alex,
My grandfather’s last words were “stay away from Politicians, Lawyers, Brokers and Doctors”. In real life it is not that easy. We get involved with them one way or another. The best we can do is to minimize any interaction with them……Tin
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I have read that if it were not for the 2008 bailouts at the tax payer’s expense, Buffett’s wealth would have been wiped out by as much as 75%.
Buffett was heavily invested in the likes of Goldman Sachs, AIG etc., all of who received bailout money or would have gone under.
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All your post did was support Buffets argument – he is one of the richest men in the country, follows the law & pays no tax – therefore as he says, the tax systems needs to change so that the rich do pay their fair share of tax – everyone else does, why should they of all people be exempt??
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was surprise to read buffet the tax dodger, specially since he is so vociferous in calling for taxing the rich. as the second richest man wonder what he would say if ever rich and su0per rich guy followed his example of how not to pay taxes.
great article!!!
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