An updated version of the first blog I ever wrote (July 3, 2006)
The photo above depicts Warren Buffett and Bill Gates at a bridge event in Omaha, Nebraska in 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.
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. Why does he resent others doing so? His philosophy on taxation can 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 after all? What do you think? Is this not a similar statement as "from each according to his abilities and to each according to his needs"? If the government is such an efficient allocator of wealth, why does he not contribute, say, 40% a year of his annual increase in wealth to the Feds? His deterministic philosophy has not prevented him from maximizing total control of his own wealth. Worse, his 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 moron and ghoul. One of his greatest "charitable causes" is global birth control, a very ghoulish pursuit indeed.
The heralded joining of modern American Capitalist icons, Gates and Buffett, in the Gates Foundation (Business Week) is disturbing on several fronts. Everyone should have the right to do with their money as they wish. But why is it unquestionably assumed that "charitable foundations" are somehow better for society than merely leaving money to one's heirs tax free? Have not free markets made great progress toward alleviating poverty in the 20th/21st century? Does monolithic directed activity from Foundations "solve" social problems (even if done in the private sector) better than free markets? If given a choice, I prefer Gates and Buffet to the US Government---although I am not sure what I base that on other than it seems hard to be worse than the US Government in allocating scarce resources.
Even good for nothing heirs have to do something with their money. All money not spent is invested--and somehow that invisible hand has gotten scarce resources to the right spot more times than other methods of resource allocation. Even profligate consumers make others profitable who in turn invest. One of my favorite quotes, of which their are dozens of variations, relates to a Stalinist Minister who visited London in the 30s and noticed that the stores were all stocked with bread. "Who is in charge of getting bread to the stores?" he wondered to his host. Of course the answer is no one. The question must be asked, "why are Gates-Buffett style Foundations better at resource allocation than free markets and thus deserving to be untaxed?"
Again, one should have no problem with people doing with their money as they wish. Even "charitable foundations" who fund various and dubious projects (Ford Foundation) should be allowed to do as they wish. However, what is really objectionable about the moralistic crowning of Buffett-Gates is what their own tax views are. Both Buffett and Gates (through his father) have come out square against eliminating the estate tax. Implicit in their opinion is that they know best about what to do with money (i.e., it should be given to foundations). If it is not given to foundations then it should be confiscated (taken, taxed, stolen...whatever) by the Government. However, in no instance should it go untaxed if merely left to heirs. Why, because we need someone in charge of getting bread to the stores? Self important and self righteous, these otherwise admirable men have determined they deserve demi-god status (of course they are not alone, but they are the most well known) in determining what mere mortals should be allowed to do with their earned (and previously taxed) capital.
For Buffett-Gates it is my way or the highway. As far as I'm concerned they can take their foundations (and their nauseating chest beating Bridge Tournaments) and just------go away.