Tag Archives: taxes

Small Cap Analysis; Buffett on Taxes and Rebuttal by Norquist

Presentation on Brick


Gottfried_TheBrick_VICNY2011 (3)    (Powerpoint)

Tap dancing to work (Buffett Interview on Charlie Rose) http://www.charlierose.com/view/interview/12672

Buffett Opines on Raising Taxes (Comments in Italics)

When taxes change, would-be investors will certainly change their decisions about where to direct capital, even “though the companies’ operating economics will not have changed adversely at all.” Buffett saw this clearly in 1986, with respect to Berkshire’s own investment decisions; it’s hard to believe that Buffett no longer believes that today, with respect to private investors.

November 25, 2012

A Minimum Tax for the Wealthy By WARREN E. BUFFETT

SUPPOSE that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”

Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.

It’s a catchy opener, attracting headlines and guffaws from the expected quarters. But I’m struck by his opener because I can think of at least one real-world example in which a rich investor nearly spiked a deal due to taxes: Warren Buffett himself, as recounted in Alice Schroeder’s terrific biography, The Snowball (pages 230-232).

Early in his career, Buffett invested heavily—almost one third of his early fund’s capital—in Sanborn Map, a company that mapped utility lines and such. But he soon grew frustrated with the company’s leadership, which “operated more like a club than a business,” and which refused to return greater dividends to investors. So Buffett amassed more and more stock, and with control of the company finally in hand he pressed the board of directors to split the company in two (one for the mapping business, and one to hold the company’s other outsized investments).

Finally, the board capitulated. But with victory finally at hand, Buffett nearly scuttled the deal because of … taxes. As Schroeder recounts, quoting Buffett, one director proposed that the company just cleanly break the company, despite the tax consequences—”let’s just swallow the tax,” he suggested.

To which Buffett replied (as he recounted to Schroeder): And I said, ‘Wait a minute. Let’s — “Let’s” is a contraction. It means “let us.” But who is this us?  If everyone around the table wants to do it per capita, that’s fine, but if you want to do it in a ratio of shares owned, and you get ten shares’ worth of tax and I get twenty-four thousand shares’ worth, forget it.’
Buffett was willing to walk away from a deal because the taxes would have taken too much of a bite out of it.

Between 1951 and 1954, when the capital gains rate was 25 percent and marginal rates on dividends reached 91 percent 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 percent — and the tax rate on capital gains inched up to 27.5 percent. I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.

Under those burdensome rates, moreover, both employment and the gross domestic product (a measure of the nation’s economic output) increased at a rapid clip. The middle class and the rich alike gained ground.

So let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities.

That’s not the only time that taxes played a major role on Buffett’s decisions, as recounted by Schroeder. Later in the book (pp. 533-534), she recounts how Buffett chose to structure his investments under Berkshire Hathaway’s corporate umbrella, rather than as part of his hedge fund’s general portfolio, precisely because of the tax advantages.

In fact, as he explained in his 1986 letter to investors, changes in the 1986 tax reform act posed a specific threat to certain investment decisions:

If Berkshire, for example, were to be liquidated – which it most certainly won’t be — shareholders would, under the new law, receive far less from the sales of our properties than they would have if the properties  had been sold in the past, assuming identical prices in each sale. Though this outcome is theoretical in our case, the change in the law will very materially affect many companies. Therefore, it also affects our evaluations of prospective investments.  Take, for example, producing oil and gas businesses, selected media companies, real estate companies, etc. that might wish to sell out. The values that their shareholders can realize are likely to be significantly reduced simply because the General Utilities Doctrine has been repealed – though the companies’ operating economics will not have changed adversely at all.  My impression is that this important change in the law has not yet been fully comprehended by either investors or managers.

And, wow, do we have plenty to invest. The Forbes 400, the wealthiest individuals in America, hit a new group record for wealth this year: $1.7 trillion. That’s more than five times the $300 billion total in 1992. In recent years, my gang has been leaving the middle class in the dust.

A huge tail wind from tax cuts has pushed us along. In 1992, the tax paid by the 400 highest incomes in the United States (a different universe from the Forbes list) averaged 26.4 percent of adjusted gross income. In 2009, the most recent year reported, the rate was 19.9 percent. It’s nice to have friends in high places.

The group’s average income in 2009 was $202 million — which works out to a “wage” of $97,000 per hour, based on a 40-hour workweek. (I’m assuming they’re paid during lunch hours.) Yet more than a quarter of these ultrawealthy paid less than 15 percent of their take in combined federal income and payroll taxes. Half of this crew paid less than 20 percent. And — brace yourself — a few actually paid nothing.

This outrage points to the necessity for more than a simple revision in upper-end tax rates, though that’s the place to start. I support President Obama’s proposal to eliminate the Bush tax cuts for high-income taxpayers. However, I prefer a cutoff point somewhat above $250,000 — maybe $500,000 or so.

Additionally, we need Congress, right now, to enact a minimum tax on high incomes. I would suggest 30 percent of taxable income between $1 million and $10 million, and 35 percent on amounts above that. A plain and simple rule like that will block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of ours. Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these warriors for the wealthy.

Above all, we should not postpone these changes in the name of “reforming” the tax code. True, changes are badly needed. We need to get rid of arrangements like “carried interest” that enable income from labor to be magically converted into capital gains. And it’s sickening that a Cayman Islands mail drop can be central to tax maneuvering by wealthy individuals and corporations.

But the reform of such complexities should not promote delay in our correcting simple and expensive inequities. We can’t let those who want to protect the privileged get away with insisting that we do nothing until we can do everything.

Our government’s goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P. — levels that have been attained over extended periods in the past and can clearly be reached again. As the math makes clear, this won’t stem our budget deficits; in fact, it will continue them. But assuming even conservative projections about inflation and economic growth, this ratio of revenue to spending will keep America’s debt stable in relation to the country’s economic output.

In the last fiscal year, we were far away from this fiscal balance — bringing in 15.5 percent of G.D.P. in revenue and spending 22.4 percent. Correcting our course will require major concessions by both Republicans and Democrats.

All of America is waiting for Congress to offer a realistic and concrete plan for getting back to this fiscally sound path. Nothing less is acceptable.

In the meantime, maybe you’ll run into someone with a terrific investment idea, who won’t go forward with it because of the tax he would owe when it succeeds. Send him my way. Let me unburden him.

Warren E. Buffett is the chairman and chief executive of Berkshire Hathaway.

Norquist hits back against Buffett op-ed, calls argument ‘silly’

By Daniel Strauss – 11/26/12 06:12 PM ET

Americans for Tax Reform President Grover Norquist responded to an op-ed by billionaire Warren Buffett Monday, saying Buffett’s argument was “silly.”

On Monday The New York Times published an op-ed by Buffett criticizing Norquist’s anti-tax pledge and urging Congress to pass legislation rolling back the Bush-era tax rates for incomes above $500,000 a year. Later on Monday Norquist appeared on Fox News and called Buffett’s argument silly, and said Buffett got rich by “gaming the system.”

“Warren Buffett has made a lot of money, some of it off of gaming the political system. He invests in insurance companies and then lobbies to raise the death tax, which drives people to buy insurance. You can get rich playing that game but it’s all corrupt,” Norquist said. “It’s not investing; it’s playing crony politics and economics. That’s a shame. He’s done the same thing with some green investing. Shame on him for gaming the system and giving money to politicians who write rules that make your assets go up.

“The real economy, the real economy, if he thinks that the government can take a dollar and then you go to an investor who doesn’t have that dollar and it doesn’t affect investment, I’m sorry that’s just silly unless he plans on going to Obama and getting money from a stimulus package and he considers that investment. When the government takes a dollar away from the American people or a trillion dollars, that’s a trillion dollars not available to be saved and invested. I’m sorry if Buffett can’t see that but that’s kind of silly on his part.”

The back-and-forth between Norquist and Buffett comes as legislators seek to come to an agreement on a deficit-reduction package to avoid the “fiscal cliff” of spending cuts and tax increases set to hit next year.

A number of Republicans have indicated that they could disregard supporting the Americans for Tax Reform pledge in order to reach a deal.

Buffett, an outspoken supporter of President Obama, published an op-ed in the Times in 2011 arguing that the tax rates on the wealthiest Americans should be higher. The Obama administration subsequently began pushing for a “Buffett Rule” that would raise the marginal tax rate for some of the wealthiest Americans. Obama has since called for increasing the tax rate on incomes above $250,000 a year. The Buffett Rule also introduces a base 30 percent tax rate for incomes between $1 million and $10 million and a 35 percent rate for incomes over $10 million.

Source: http://thehill.com/blogs/blog-briefing-room/news/269435-norquist-calls-buffet-argument-silly-





Buffett’s Split Personality?

“Do I contradict myself? Very well then I contradict myself, (I am large, I contain multitudes.)
Walt Whitman, “Song of Myself” ―   Walt Whitman

Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong. — Ayn Rand

Below is an unusual article (from www.marktier.com) on the split between Buffett’s private and public beliefs.  Interestingly, when Buffett was growing up his father, Howard Buffett, was an advocate for the gold standard, low taxes and extremely limited government.  Thoughts on this article?

6 January 2012     Warren Buffett’s “Split Personality”

How Warren Buffett’s investment and political philosophies just don’t get along with each other.

Economic Franchise

Warren Buffett became the world’s richest investor by following a clear and straightforward investment philosophy. Intriguingly, though, his political convictions contradict the investment principles that made his fortune. For example, he refused to invest in companies which can’t control their prices; he looks for what he calls “an economic franchise.” His definition, from his 1991 Letter to Shareholders:

“An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation.” [emphasis added] This produces what he calls a “moat” — a barrier that hinders competitors who want to invade their turf.

Nebraska Furniture Mart — probably the world’s biggest furniture store located in, of all places, Omaha, Nebraska, and 100% owned by Buffett’s company, Berkshire Hathaway — keeps its costs and prices so low that national furniture chains simply avoid Omaha entirely. Coca-Cola, of which Buffett is the biggest shareholder, has such a powerful brand name that only Pepsi is in the race for second place.

By the same token, Buffett avoids “commodity businesses” like agricultural products, where producers are at the mercy of the market. And (until 1999) he shunned businesses whose retail prices are regulated.

An Energy Czar for California

In 2000-2001, California suffered severe rolling blackouts across the state. Pacific Gas and Electric Company went bankrupt and Southern California Edison almost did as well.

The cause? The state had deregulated wholesale prices, but left retail prices fixed (This is an example of a HAMPERED or price-controlled market). When wholesale prices zoomed 800%, Californian utilities had to buy power out-of-state to resell in California at the lower, regulated prices. A recipe for financial disaster.

Buffett’s reaction to the California energy crisis is an example of the dichotomy between his investment principles and his political views. When asked for his solution, he replied: “California needs an energy czar.”  (More centralized, bureaucratic control? How would Buffett’s company managers like to be micro managed from a person/group without aligned profit motives?)

California already had one — the reason there was an energy crisis!

And…with an energy czar regulating and dictating every aspect of the energy business, how much money do you think Buffett would invest in utilities in California?

Quite clearly, none.

What’s more, in a world where every investor acted like Buffett, nobody would have invested in Californian utilities.

Logically then, it follows from Buffett’s investment principles that the solution to California’s energy crisis was the deregulation of retail prices as well (politically impossible at the time). Only then would Buffett and investors like him be willing to put up the money needed to resuscitate California’s ailing utilities.

By rooting for an energy czar, obviously Buffett hadn’t connected the dots.

Interestingly, when Buffett made this “recommendation,” he’d recently added the gas and electric utility, Mid American (with zero exposure to California at the time), to Berkshire’s portfolio of “outstanding companies.”

Had he changed his spots? No, he’d lowered his standards. He had to. With billions of dollars to invest, gone were the days when a See’s Candies or Nebraska Furniture Mart could make a difference to Berkshire’s net worth. He now needed to find “elephants” where he could sink billions of dollars at a time. When he only had millions at his disposal, he’d never have looked twice at companies like Mid American or Burlington Northern.

To Tax or Not to Tax

Buffett calls taxes a “drag” that Berkshire must overcome to “justify its existence.”

This has been his attitude since he started his first investment partnership in 1956. Indeed, back then, one way he persuaded doctors and other professionals to invest with him was by stressing the tax benefits they’d get.

Today, he says he likes to hold his investments “forever” … so capital gains tax, payable only when an investment is sold, is also delayed “forever.” In his 1989 Letter to Shareholders he gave an example showing how just delaying capital gains could multiply Berkshire’s returns 27-fold, concluding that the government would gain in exactly the same ratio when capital gains taxes were ultimately paid, “though admittedly, it would have to wait for its money.”

He also prefers companies to distribute money to shareholders by buying back stock rather than paying dividends. Shareholders must pay taxes on dividends, which are paid from profits that have already been taxed at the corporate level. Stock buy-backs, by raising the value of the remaining shares, increase the shareholders’ wealth free of the dividend tax.

That double taxation is one reason Berkshire Hathaway doesn’t pay dividends. It’s also a reason why, when Buffett buys a company, he wants a minimum of 80%. Then, dividends to Berkshire are taxed at a lower rate.

If taxes are a drag on Buffett’s investments, surely they’re a drag on everyone’s? If Buffett and Berkshire are better off with minimal tax rates, wouldn’t everyone else be too? So you’d expect Buffett to support pretty much any proposal to cut taxes, right?

If you did, you’d be wrong.

“Voodoo Economics”

Buffett’s underlying political belief is that the rich should pay more tax than the poor, both absolutely and as a percentage of their income.

Indeed, in an op-ed for the New York Times Buffett complained that the previous year he’d paid only 17.4% of his income in tax, compared to an average of 36% for the 20 staff in his office in Omaha. He recommended the government raise his taxes, and those of the other super-rich.

He does not, however, put this belief into practice by voluntarily making up the difference between the tax he must pay and the amount which, according to his beliefs, he would deem “fair.” Indeed, his personal affairs are arranged the same way as Berkshire’s: to pay the least tax possible.

A case of “do as I say, not as I do.”

Shortly after becoming president, George W. Bush proposed slashing the tax on dividends. Buffett’s reaction? “Voodoo economics” that uses “Enron-style accounting,” saying it further tilts the scales towards the rich.

Maybe. But the widespread ownership of stocks in America today (through mutual funds and pension plans) means that the rich are not the only beneficiaries of a lower dividend tax.

And by opposing such a tax cut, he clearly contradicts a significant element of his investment philosophy, which implies it is iniquitous to tax corporate profits again when they’re paid out to shareholders as dividends. Indeed, if every company followed Berkshire’s lead and paid no dividends, the government wouldn’t collect any taxes on dividends at all.

Buffett also opposes abolishing the estate tax: he believes that you shouldn’t get “a lifetime supply of food stamps just because you came out of the right womb.”

Buffett has arranged his personal affairs accordingly. When he dies, his children certainly won’t be poor. But they will only have enough money so that, as he puts it, they’ll “feel they could do anything, but not so much that they could do nothing.”

Most of his wealth is going to the Bill & Melinda Gates Foundation. As it’s a non-profit organization the bequest will be — guess what? — tax-free!

It is clearly more important to Buffett that Berkshire Hathaway, his creation — his “baby” — survives his death, than remaining true to his political beliefs, no matter how sincerely they are held. After all, Berkshire Hathaway might not live on if a chunk of his controlling shareholdings had to be sold off to pay estate tax.

However, by requiring the Gates foundation to spend his annual donations immediately, he’s practicing what governments do so well: consuming capital, not investing in the future.

And he often ignores the overall context, as he did when he was an advisor to Arnold Schwarzenegger during his campaign to become Governor of California.

Buffett told the Wall Street Journal he thought California’s property taxes were “too low.” He compared the property tax he paid on his home in Laguna Beach, California with the tax on his home in Omaha. He paid twice as much property tax in Nebraska, even though his home there is one-eighth the value of his house in California.

Is that “unfair”? Not when — unlike Buffett — we look at the total context. When you add income tax, sales tax and all the other taxes Californians pay, they’re stung by the state for much more Nebraskans. Californians get a break on property taxes — and absolutely nothing else.

An American Liberal

Politically, Buffett tends to support government action to correct what he sees as society’s inequities.  And he believes that the rich should pay for it.

Yet, he arranges his own affairs to avoid government intervention wherever possible. Indeed, when price controls in New Jersey made it impossible to earn what Buffett considers a decent return of capital, one of his insurance subsidiaries turned in its license and shut down its operations there. With Buffett’s hearty approval.

His comments on business and investing draw on 55 years of proven and tested knowledge and experience.  His political recommendations have no such pedigree.  They are an expression of his beliefs unalloyed by experience.

Indeed, one would think that his experience in creating, from nothing, a highly successful, almost debt-free Fortune 500 company with outstanding managers and (until recently) one of only eight corporate AAA credit ratings in the United States would lead him to be skeptical of the ability of governments to solve any problem.

After all, in almost every respect governments exhibit qualities 180 degrees opposite to Berkshire Hathaway: they lose money every year; run up more debt every day; hardly ever kill programs that are known failures; and if governments have a higher credit rating than Berkshire Hathaway, it’s not from a gilt-edged reputation but from the knowledge that they can always make repayments by collecting money at the point of a gun — or by printing it.

Something else often missing from government is a principle central to Buffett’s style of doing business: integrity. “In evaluating people [to hire or work with],” Buffett says, “you look for three qualities: integrity, intelligence and energy. And if you don’t have the first, the other two will kill you.”

While Buffett might enjoy playing golf with politicians like Bill Clinton, he’d have to break one of his fundamental principles to ever put one of them on Berkshire’s payroll. Mark Tier

Have a question or a comment?

Well……I never quite bought the howdy doody act, but I respect Mr. Buffett as an investor and human being.  His public proclamations on economics seem Daffy.