Monday, August 15, 2011

Buffett Takes Off the Gloves? He’s Getting Worried.


Stop Coddling the Super-Rich

Our leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.
While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks….
These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places….

—Warren E. Buffett, New York Times, August 12, 2011 



  Warren Buffett’s politics have always been a surprise to first-time Berkshire observers.   “How can a billionaire like that be such a liberal?” is almost always one of the questions I get after a speech, or before a speech, or during a speech, about Buffett.

 But as anybody who’s followed Berkshire for a few years knows—or who’s read “Secrets in Plain Sight—Business and Investing Secrets of Warren Buffett”— Buffett’s Democrat credentials go as far back as 1968, when he supported anti-war candidate “Clean Gene” McCarthy in the presidential primaries.
 And Buffett’s strident stance on the inequities in the U.S. tax code is nothing new: he’s been talking about the tax advantage accruing to so-called “unearned” income versus wages for years, even testifying before Congress on behalf of “fairness,” at least as he sees it.
 Still, Buffett doesn’t—as readers of “Secrets in Plain Sight” also know—mention that while running what was, for all practical purposes, a hedge fund during the late 1950s, he took advantage of an even greater disparity in the tax code (the top marginal tax rate was 91% back then)—one of those ‘Do as I say, not as I do’ aspects to the Buffett PR machine that drives some investors crazy.
 But Warren Buffett is the most successful investor of his times, possessing not only one of the most rational minds in the business but also the uncanny ability to frame the cloudiest issue in a crisp, clear frame that makes whatever he’s talking about sound, well, pretty rational.
 And while today’s op-ed piece sounds pretty rational, the more interesting aspect is that it unleashes a new aspect to Buffett’s tax “fairness” campaign: he takes off the figurative gloves and talks about what he would do if he ran the joint.
 Among these are “pare down some future promises that even a rich America can’t fulfill,” “leave rates for 99.7 percent of taxpayers unchanged,” “continue the current…reduction in the employee contribution to the payroll tax,” and “raise rates immediately on taxable income in excess of $1 million…”
 Whether Buffett’s prescription is what America needs, let alone whether it will work, we make no judgment on here.
 We’re more interested in why he’s taking off the gloves now.
 And the reason—at least based on a close reading of “Stop Coddling the Super-Rich”—is that Warren Buffett is getting worried:

Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances. They’ve been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.

 The emphasis above—“That feeling can create its own reality”—was added by your editor, but having been written by a man born ten months after the Crash of ’29 who happens to be the head of a company with 260,000 employees making everything from chocolate candy to wind farms, and who is the overseer of insurance businesses holding tens of billions of dollars of exposure to financial markets through stocks, bonds, and the same kind of derivative contacts he once called “ticking time bombs,” the words fairly jump off the page on their own.
 Sounds like Warren Buffett is getting worried.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com


© 2011 NotMakingThisUp, LLC
                                                             
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

31 comments:

Anonymous said...

WSJ estimates it would bring in $40-50 billion in annual revenue. Only $1.45 trillion more to go to balance the budget!

Adam said...

I realize this is a bit of a naive question / tangential to the point, but why is Buffett even paying $6.9M in income taxes? His total comp from BRK is listed at roughly $525k. BRK doesn't pay a dividend. If his tax rate is 17.4% that implies almost $40M of income.

Jeff Matthews said...

Adam, not naive: a lot of people don't realize Buffett has a personal portfolio (outside of his BRK holdings) in the $1B+ area.

In the past he has bought stocks and assets too small for Berkshire--his famous Korean investments a decade or so ago, for example.

And when he wrote "Buy America, I Am" in the NY Times in October 2008, he was referring to his personal account holdings.

So $40 million of income on $1 billion+ in stocks/bonds is a good guess.

And, yes, Anonymous: it wouldn't exactly close the gap, would it?

JM

Anonymous said...

You first, Warren. The U.S. Treasury does accept donations. If he pays too little in taxes, he's free to pay more voluntarily. It would be nice to see Buffett lead by example. Also, let's keep in mind that he benefits from at least one portion of the current tax code. How many times has he written about purchasing lovely family businesses at more than fair prices so that the owners can avoid the estate-tax hit?

Anonymous said...

Interesting from a guy who has enjoyed the benefits of the US tax system (unrealized capital gains and the insurance company's float!) and who gave all his wealth to a charity...now when he is the richest man in the world he wants everyone to pay more. He can write a big check to the US government at any time he wants. Equal opportunity versus equal outcomes - he grew up in a time of equal opportunity and now he wants to ruin it. Shame on you!

Anonymous said...

Every dollar of increased revenue for the government will help. There is no "magic wand" we can wave. We should also withhold Social Security taxes from all income, not just the first $105,800 of income. Close the loopholes wich allow profitable American corporations to pay ZERO income taxes to Uncle Sam.
Trying to solve the debt crisis without increasing revenues is putting one hand behind your back. It will not work.
Remember, Social Security and Medicare did not generate the current financial disaster, Bush Tax cuts and unnecessary war in IRAQ did, along with regulatory incompetence by Bush appointees.
There is no question that expense reductions are necessary, also.
Warren Buffet deserves our thanks for his intelligence and courage to speak out for America through the fog of TEA Party and GOP ideology. He is a known problem-solver with his heart in the right place.

Anonymous said...

I think our tax code needs to be totally changed. We should not tax income or corporations. We should tax consumption above a certain subsistence level and wealth. And the tax on wealth should be progressive. Then Warren could have his wish because he and Gates would be paying more taxes than anyone else in the country.

Anonymous said...

"Do as I say not as I do". Why doesn't Buffett just pay more money in taxes, no one is stopping him.

Windchasers said...

Sure, Buffett could up his own personal rate.. but paying an additional 20% would increase federal revenues only $8 million. One person making a moral stand won't do much, which is why we try to change the system.

Or couldn't we just say "well, if you think SS and Medicare need budget cuts, why don't *you* accept less of their benefits?" Even Ayn Rand partook of the gov't program that she was forced to pay into.

Jeff Matthews said...

Hmmmm... Anonymous #2 hit the nail squarely on the head (echoed by Anons #3 and #5). i.e. Buffett is free to pay a higher personal tax rate any time he likes.

And as we pointed out in "Secrets in Plain Sight," and rightfully noted by Anonymous #2, Buffett has in fact advertised the tax advantage for family businesses selling to Berkshire for stock, in order to "defer taxes indefinitely," in the Berkshire annual report. You could look it up, as they say.

Anonymous #4 is the least value-add of the lot, with a partisan agenda that sounds straight from the DNC playbook. We play no political favorites here: markets don't care about your party affiliation.

If Anon #4 wants to agree with Buffett, make the case with data, not dogma.

Cheers,
JM

Trent said...

If the Bush tax cuts were reversed, then we get $200 bn tax revenue per year.

Higher tax for the rich is good for business at this time, i.e., it is good for growth. It's counter intuitive. Buffett is calling for it because it will help his business, not necessarily out of the goodness of his heart. But his policy prescription is absolutely spot on. Smart guy.

You guys should go read Keynes. It's econ 101 stuff. Do some homework please!

Anonymous said...

Jeff, do you think that Buffett´s last year piece on the NYT kind of meant that he was bulish and trying to predict that the economy was starting to get much better (I mean, does anyone buy that whole Bernanke praise thing?)?
Also, does BRK´s issuing 2B worth of debt last week signals that Buffett is rushing to take cash out of the market before things get uglier?

Meanwhile, it looks like Brazil´s bubble is about to burst, as can be seen by car companies huge inventory levels, as well as economic indicators signaling a slow down as well as the quotes from the guys below:

Unilever: "Second quarter performance in Brazil was constrained by actions taken to reduce trade stocks"

Abilio Diniz, chairman of one of Brazil´s largest supermarket chains: "As months pass by, we notice an increasing difficulty to sell"

But What do I Know? said...

Any time I find myself agreeing with Warren Buffett's op-eds I wish there was an 800 number I could call to talk me out of it. While the current screed is timed to help his buddy Obama, and while the people who have commented here that WB is free to write a check to the Treasury are spot on, the undercurrent of his remarks are interesting. As you pointed out Jeff, he is reminding his fellow super-rich that they have the most to lose from social upheaval (because they have the most)--and I think he is right on that score.

That's why they instituted the social programs in the first place, after all.

Anonymous said...

I don't understand the cries of "he can pay more tax if he wants to". One guy cannot make a dent in government finances no matter how rich he may be. It would only make a difference if every single one his Forbes 400 peers followed on a voluntary basis, every year, which would never happen.

Anonymous said...

"You first, Warren. The U.S. Treasury does accept donations."

You're missing the point. If he did that, others still would not... they are weasels who would avoid until compelled.

Anonymous said...

Buffets opinion piece sounds like PR for the rich. What is his point of the suferring of poor fighting wars? Can rich match this suffering with taxes? why publish in NY Times? Preaching to choir. Where does he spend his money to truly influence politics? He is not liberal version of Koch or Coors families.

TradingStrategyLetter - Weekly Summary said...

More insanity. It never seens to end nowaday. Many of the 'tax breaks' that Buffet has utilized are designed for critical R&D, targetted investment, and industrial development incentive. That is money which goes directly to those 'real' job creating companies & not the bleeding heart wealth redistributing spenders in Washington. Warren needs to give himself a slap!

VennData said...

The 'Why doesn't he pay more if he wants' is the GOP media talking point, which commetors find they must remind us, as a 'logical' conclusion.

But Buffett is trying to solve the problem. And this 'why not just pay' retort is sheer sophistry, as is the author's claim that everone' first question is 'why is Buffett a liberal?' Buffett ia a moderate and he is smater than you.

But adding a straw man line and then concluding Buffett's worried is the height of sophistry. Buffett is and has been the biggest 'America will always do great' proponent.

When a right winger like Jeff Mathews who has been so doom and gloom, and wrong, wants to take a shot after stock market correction, he'll even sell out the man whose coattails he rides.

Anonymous said...

now when he is the richest man in the world he wants everyone to pay more.

"Everyone" makes over $1m a year?

Thanks for stopping by, Rush.

rcyran said...

The replies that "Buffett can always increase his payment to Treasury" are missing his point.

This is similar to living in a group house where nobody is doing much cleaning. So it's a disgusting sty.

Doing your own dishes doesn't make the situation better, and doing more than your fair share just makes you a sucker (and isn't enough to make the house clean).

Everybody might be better off doing a bit more cleaning.

Nobody likes paying taxes. But I think raising rates and reducing deductions will be needed to balance the budget.

PS- Jeff, do you think his worry could be for other reasons than fear that the population is losing faith in the system? seems like Buffett is under fire on multiple fronts (Sokol, finite reinsurance, support for rating agencies etc.)

Jeff Matthews said...

VennData apparently is not a steady reader of these virtual pages. His "doom and gloom" remark indicates he never read, for example, "Meet the New Normal, Same as the Old Normal" back in April 2010, and other likewise optimistic musings, back when the world was, indeed, "doom and gloom," and we were highlighting good news that wasn't making the front pages of whatever newspapers or websites on VennData's RSS feed. Nor do his other random shots add any value to the discussion--although we give him credit for not posting as "Anonymous," which is usually the name under which the least intelligible rants/comments come.

Trent cites Keynes with a glass-half-full notion that raising taxes on productive individuals to fund unproductive government programs will somehow "be good for growth." We point out that Keynesian economics has failed thus far in the cycle.

Anonymous #6 quotes some very interesting conference call quotes out of Brazil, which has several ingredients of a bubble about to burst: an inverted yield curve, tightening monetary policy and high interest rates, all intended to dampen a strong currency. We thank him for those and point to a recent interview with the Unilever CEO in the WSJ regarding the state of affairs in the USA, too.

Anonymous #7 asks why anyone would say "why Buffett doesn't just pay more taxes himself?", since it wouldn't make a dent in the deficit. The point, we think, is simple: if Buffett really wants the super-rich to pay more, why doesn't he start doing it? It's the do-as-I-say-not-as-I-do syndrome, and it sticks in peoples' craws.

Anonymous #9 is incoherent: we have no idea what the point is. Please make a point next time.

RCRyan, on the other hand, draws a very coherent analogy to explain Buffett's tax-raising sentiment (it is a very simple, Buffett-esque analogy, too). And while we disagree with him (we agree with the "why doesn't he just do it himself?" side of the debate), but thank him for a well-made point.

RCRyan then asks whether Buffett's fear may be deeper than simply being afraid of consumers losing faith in the system--that perhaps it relates to other issues that have Buffett playing defense.

I'd say, no--it really is a fear about the economy hitting stall speed as savers retrench. I'd guess he's afraid that the Fed has been pushing on a string (after $1 trillion in Keynesian fiscal stimulus and $600 billion-plus in debt-monetization the economy is stalled at a low altitude), and if savers decide their money is safer under the mattress, the economy can go into a 1930's style collapse.

That's what I think this is about. His inherent optimism makes it unlikely he really believes that would happen, but he's worried...otherwise he wouldn't be writing about it.

Cheers,
JM

Anonymous said...

I think that if Warren has extra money that he believes would be better off in the Govts. hands, he should instead use that capital as a VC fund to create new companies that will develop new goods and services, businesses that employ people and create new jobs. A much better use of capital than pissing it away on Govt. programs, and will likely create new wealth....

wroclaw said...

All right, Buffett is a hypocrite. Period. Now what about his message: 17% < 31% (read: super rich are suboptimally taxed)? True or false?

Worried said...

$200 billion a year from retiring the Bush tax cust still only gets you $2 trillion over the next decade, when you really need to cut about $12 trillion to keep debt levels from becoming unsupportable in the event short-term interest rates ever return to levels consistent with a sustainable and healthy long-term economy (e.g. about 4%).

We'd all better get used to the idea that more of us will see a UFO than retire on Social Security and Medicare. And the Chinese will continue to spend heavily on Defense, so that we will have to as well, trying to bankrupt us like we did to the Russians.

Not happy times in the Land Of The Free.

Kyle said...

I'm no genius but it would seem to me that moderation would be the key to, well, almost everything. I would say that capitalism and socialism act like the throttle and brakes on any economy, respectively. You can't pin the throttle and expect things to turn out well just as standing on the brakes does nothing productive. To me dropping the corporate tax rate to something in line with other developed countries while raising personal rates would seem to be a step in the right direction. You want unbridled capitalism go to Somalia. You want the ultimate in social welfare and safety nets, look at communist Russia. So where's the moderation. Look to most of europe before they forgot how to balance a checkbook. BTW this blog and Bronte are read daily by me because of their quality and if I may suggest theoildrum is the energy side equivalent to this blog.

Anonymous said...

I still don't get it. He could raise his personal tax rate to 100% and it would plug the deficit for about 5 minutes. He could donate his entire net worth to the Treasury and it would make us whole for about two weeks. And nobody would follow him. People will only follow him if they have to, because tax rates increased. You can debate Buffett on whether higher taxes is good policy, but the idea of him paying more by himself is silly. It won't do a lick of good; he knows it won't; and he's not stupid enough to do it.

Jeff Matthews said...

It's called putting your money where your mouth is.

JM

Anonymous said...

It appears that a lot of people think that Buffet's proposal is bunk since he doesn't "put money where his mouth is". Seems like a cheap way to avoid commenting on the actual merit of the proposal while taking a shot at the person making the proposal.

As far as That feeling can create its own reality, considering that the disparity between upper and lower class in this country is considerably higher than just about any other industrial country and even a few autocratic hellholes, Buffet might be thinking about long term consequences as well. It won't be a revolution, but the potential unrest will surely affect everyone, from small shop owner to a multi-billion hedge fund.

Anonymous said...

Why not restructure the tax system. Everyone pay 10% no deductions and a 5% sales tax. NO DEDUCTIONS PERIOD!!! Freeze government hiring until the budget is balanced. Eliminate redundant federal jobs. Remove the troops from Afghanistan. Completely restructure education. Fire all the idiotic professors and hire retired engineers, entrepreneurs, etc who have worked in the private sector who have real knowledge about making money and hard work. Return responsibility to the individual. No government handout without first having some type of job. Legalize marijuana. Don't send no one to prison for using drugs. Fine them. Those who are in prison, put them to work doing hard labor. All this is just common sense. Something that is missing with our politicians. Professing to be wise, they have becomes fools!!!!

Unknown said...

Buffet has put his money where his mouth is. He has donated most of his fortune to the Gates foundation. I know we are talking income here, so a similar argument is that all people who want to cut entitlements hate old people. You want to cut Medicare; therefore, you don't like old people that use it. This of course cheapens your policy discussion, ignores facts, and simplifies all your arguments to appeal to base emotions. The counter is also true. Buffet can have valid arguments for tax policy without writing a check to the treasury that he doesn’t owe under law. It cheapens your argument to say that he doesn’t.

Jeff Matthews said...

1. "Don't send no one to prison for using drugs"? Please spell-check before posting.

2. As for the outright rants, they are not being posted here, no matter what side they take. If you commented and it does not appear, you have used what we call "Yahoo message-board" type language, which means abbreviations, misspellings and language you wouldn't say to your mother.

3. As for "Unknown" who says Buffett has indeed 'put his money where his mouth is' by donating his fortune to the Gates charity, we would say otherwise, since by doing so, Buffett--and this is merely stating a fact, not, as "Unknown" appears to believe, taking a political point of view on the matter--is avoiding the biggest inheritance tax bill in world history, which is yet another example of his not doing what he tells others to do. (Buffett has testified before Congress in support of the inheritance tax.)

Readers wishing to see a more detailed look at both sides of this issue (Buffett and taxes), without the cable TV-type talking head yelling and screaming, should read "Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett."

It's only $4.99 and it's downloadable at Amazon. And it's always fully up-to-date because it is an eBook!

Cheers,
JM