Hypocritical Buffett

Almost everyone argues their interests on tax reform, excluding me, but including Buffett.  Buffett is in favor of increasing taxes that he doesn’t pay.  Estate tax?  Buffett isn’t paying it, he’s giving his fortune away to the Gates foundation, largely.  Income tax?  Relative to the increase in his net worth, Buffett pays almost nothing in taxes because we don’t tax stocks until a dividend is paid, or until some stock is sold.  What’s more, BRK has a $38 billion deferred tax liability, which measures taxes that would have been paid on GAAP income, but weren’t paid because taxable income was lower for reasons that may revert, someday.

Thus, I say Buffett is a hypocrite on taxes.  Let him argue for the following:

  • Unrealized gains on assets should be taxed each year, for corporations, partnerships, and individuals.  Losses should receive deductions.
  • Eliminate deductions/credits from the personal and corporate tax codes.  We could eliminate the deficit instantly with that one simple change.  Don’t use the tax code for social engineering.  Much as I favor a Balanced Budget Amendment, perhaps a “No Social Engineering” Amendment would be better.  Or an amendment that incorporates my anti-gerrymandering idea.
  • Tax corporations on their GAAP income, or better, whatever they represent to investors as the true increase in period-to-period net worth.
  • Add in an EBITDA tax on private equity, and everything like it, such that we assume a 15% ROE for tax purposes that trues up when the partnership closes.  Everywhere, make the tax basis equal to GAAP, or modifed GAAP, where it exists.  Where it doesn’t exist, make the taxes punitive enough that adopting GAAP is preferable.

With the present tax rates, implementing all of these would put the budget in a decided surplus, WITHOUT RAISING RATES.  You would even eliminate the estate tax, because estates would finally be taxed year-by-year.  The tax code would then be close to fair, like it was with TRA ’86.

But there is one place where I agree with Buffett entirely:

People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Taxes affect business decisions when the definition of taxable income gets changed or credits get offered.  I’ve seen it working on section 42 housing credits, and in insurance company accounting.  I’ve seen it with private equity; I’ve seen with clever investors that max out debt while growing net worth.

In that sense, the definition of income, and the offering of credits make a huge difference in the behavior of those taxed.  But within reason, tax rates don’t make that much difference.  Yes, up 10%, there will be some effect on economic activity.  The bigger changes come from deductions and credits.

You want a pro-growth tax code?  Eliminate the deductions, credits, and deferrals.  Tax us year-by year on an estimate of our increase in income including unrealized capital gains and losses.

Yes, there will be unemployed accountants, actuaries, attorneys and administrators.  But the system as a whole will be better off, and for once, who will argue in favor of preserving the nation, and ignoring special interests?

What Buffett suggests will get little in the way of results.  A focus on defining income properly will bring in more than sufficient taxes, and especially from Mr. Buffett, one of the least taxed relative to the increase in his net worth.

About David Merkel 144 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

1 Comment on Hypocritical Buffett

  1. hes saying that the tax code should be changed so that he and other greedy sobs should pay their share back to a country that made them rich
    how is that hypocritical
    self made rich man no such thing there is some poor working person breaking their back to put gold in the pocket of the rich
    when there is over 150,000,000 people working for $30,000.00 making millions and billions for the wealthy then are told thy don’t pay taxes even if the get all their with holding back they have given the government an interest free loan for a year were talking federal taxes but if they drive they pay federal taxes if the smoke they pay federal taxes if they have a phone they pay fereral taxes. now do you realy want to go into now tell me who in hell thinks the working poor dont pay taxes whitch go to the rich through goverment contract no bid for friends of the politicions
    even housing asstence ends up in the pockets of the rich slum lord food stamps end up in walmars Kroggers safeways pockets
    it all keep floting back to the top richest in this country
    ssi witch has been raided over the years whitch no income taxe went to pay for was a stand alone retitement ended up in the pocket of the corperations and wealth farmers bankers hedge funds people who sent job over seas and want the lower two thierds of th population to work and compete with thirdd world people but they sell 80% or better of their good in this country
    if thats not anty america tell me what is

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