Warren Buffett Makes Money On Tax Breaks He Discredits

Published December 3, 2012

There he goes again, Warren Buffett bleating about the supposed need for government to more heavily tax high-income earners while he owns life insurance companies that sell high earners “estate planning” products that help them avoid those taxes.
Of course, the higher taxes go, the more tax-sheltered products Buffett’s companies sell, and the more money he makes.
Buffett’s hypocrisy is matched only by the size of his multibillion-dollar investment portfolio. He displayed this in a recent column he wrote for the New York Times.
He pointed out the Forbes 400 list of the wealthiest individuals has about $1.7 trillion in wealth, then called for “a minimum tax on high incomes. I would suggest 30% of taxable income between $1 million and $10 million, and 35% on amounts above that.”
But wealth and income are different things. Wealth is the stocks, bonds, real estate, paintings, wine collections, businesses, and other things a person has acquired. Buffett has lots of wealth. Income is what a person gets paid for working or investments, through capital gains, dividends, and the like. Most of Buffett’s “income” is in dividends and capital gains, which are taxed less heavily than wages, and which he can choose to take or not take.
Few wage earners have the luxury of enough wealth to be able to defer income to lower their tax bite. Buffett has that luxury. Few wage earners can take capital gains or not take them at their convenience in order to control nearly their entire tax bite. Buffett can.
The avuncular Buffett told readers a story about his early days: “Between 1951 and 1954, when the capital gains rate was 25% and marginal rates on dividends reached 91% in extreme cases, I sold securities and did pretty well. In the years from 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70% — and the tax rate on capital gains inched up to 27.5%.
“I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.”
Ah, but in those days, Europe, Japan, Russia, Korea and China were still a war-torn shambles, leaving the economic field ours to dominate. And virtually no one paid those marginal rates. What matters are the actual rates, which are the marginal rates minus the deductions for this and exemptions for that.
Remember the days of the tax-deductible three-martini lunch? The days of being able to write off interest paid on credit cards? Long gone.
Buffett says taxes were never mentioned as a reason to forgo an investment. I wonder, then, about the government’s many credits for alternative energy, the many states that offer film production tax credits, the many companies that go begging for tax incentives before deciding where to put their corporate headquarters, stores or factories, and the many state and local economic development entities that dangle tax incentives to lure and retain businesses.
The people in these industries, businesses and agencies seem to be telling us taxes are a big investment factor.
I wonder about Buffett himself, who pays a stable full of accountants and attorneys to provide advice on how to minimize taxes. Nothing in the tax code requires Buffett-owned businesses to take tax deductions or credits, yet they do, thus putting more wealth in Buffett’s portfolio.
Consider this Bloomberg News report from earlier this year: “NetJets Inc., the private-plane company owned by Warren Buffett’s Berkshire Hathaway Inc. was countersued by the U.S. over $366 million in taxes and penalties.
“NetJets in November sued the U.S., saying the federal government had wrongly imposed taxes, interest and penalties totaling more than $642.7 million.” That $642.7 million tax bill would have been small change to Buffett, yet he fought it, as he’s fighting nearly $1 billion of claims the IRS has against his companies.
That Forbes 400 list Buffett mentioned says he’s worth $46 billion. If Buffett were to pay the $1 billion the IRS says his Berkshire Hathaway company owes going back to 2002, that would be less than 1/40th of his wealth. Yet he fights. This is a man who says he wants people who earn $1 million a year to pay a minimum of nearly one-third in taxes.
I suspect if his idea for a minimum tax is implemented, he’ll have a way around it … for himself and those who pay for his services.
[First published at Investors Business Daily.]