GREG MANKIW: WARREN BUFFETT DOESN’T TELL YOU ABOUT HOW HE’S A MASTER OF TAX AVOIDANCE

warren buffet

By Joe Weisenthal | Business Insider

In a NYT Op-Ed todayWarren Buffett argued that the rich should pay a certain minimum tax, and he explained to activist Grover Norquist that it’s preposterous to think that businessmen would forgo profitable deals merely because the rate of tax on the profits would go up.

But why do people listen to Buffett on taxes?

Basically because he’s a rich, successful guy (which is why a lot of people are listened to on a lot of subjects).

To that end, economist and former Romney advisor Greg Mankiw has a short post talking about Buffett as a master of “tax avoidance,” wherein he lists four things Buffett does to avoid paying taxes.

  • Berkshire never pays a dividend (so the jump in dividend tax hikes don’t effect him).
  • Berkshire only trades long-term  (so short-term cap gains, which are taxed at income tax rates don’t effect him).
  • He’s giving most of his money away to charity.
  • His children won’t pay income taxes on any assets that are bequeathed to them, so an income tax hike doesn’t affect them.

None of these are wrong or illegal or anything. And giving your money away to charity is admirable. So the point isn’t that Buffett is doing anything wrong, but that he’s advocating policies which will have very little effect on him. So if we’re going to listen to him because of who he is, it’s not preposterous to note how little of an effect rule changes would have on him.

Other folks, in the past, have charged that Buffett specifically benefits from the tax proposals he backs.

Tim Carney of the Washington Examiner has pointed out:

Buffett regularly lobbies for higher estate taxes. He also has repeatedly bought up family businesses forced to sell because the heirs’ death-tax bill exceeded the business’s liquid assets. He owns life insurance companies that rely on the death tax in order to sell their estate-planning businesses.

All that being said, the arguments against raising taxes marginally on the rich (assuming a deficit reduction deal is warranted) tend to be pretty poor.

A MINIMUM TAX FOR THE WEALTHY

By WARREN E. BUFFETT | The New York Times

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.

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.

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.

BUFFETT MOCKS NORQUIST IDEA ON TAXES THWARTING INVESTMENT

By Zachary Tracer and Noah Buhayar – Bloomberg

Warren Buffett, the second-richest man in the U.S., pressed his call for more taxes on the wealthy by mocking the idea that higher rates discourage investment.

Legislators should increase taxes on those earning more than $500,000, including minimum rates of at least 30 percent on all income above $1 million, Buffett said in an opinion piece in the New York Times today.

U.S. lawmakers returning this week from the Thanksgiving recess are seeking a budget deal to avoid a so-called fiscal cliff with more than $600 billion in tax hikes and spending cuts set to begin in January. Republicans including Mitt Romney, the defeated presidential candidate, and Grover Norquist, who encourages lawmakers to sign a pledge shunning tax increases, have said lower rates can boost the U.S. economy.

“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,” Buffett wrote. “Only in Grover Norquist’s imagination does such a response exist.”

Buffett, worth $46.5 billion according to data compiled by Bloomberg, is using his clout to urge Congress and Obama to include measures that raise revenue as part of a deal to resolve the fiscal cliff, which may push the U.S. economy back into recession.

“We need to get rid of arrangements like ‘carried interest’ that enable income from labor to be magically converted into capital gains,” Buffett, chairman of Berkshire Hathaway Inc. (BRK/A), wrote. “And it’s sickening that a Cayman Islands mail drop can be central to tax maneuvering by wealthy individuals and corporations.”

Cayman Islands

Romney’s returns show investments in funds located around the world, including Ireland, the Cayman Islands and Bermuda. The former governor of Massachusetts has said it is fair for him to pay a lower tax rate than a worker making the median annual income of about $50,000.

“It’s the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work,” Romney said in an interview with “60 Minutes” on CBS, broadcast on Sept. 23. Romney, who paid a 14.1 percent tax rate on $13.7 million in income last year, makes most of his income from investing a fortune estimated at $250 million.

Buffett has said his tax rate is the lowest among the about 20 employees at Berkshire’s headquarters in Omaha, Nebraska. Capital gains from most assets held for longer than a year are taxed at a top rate of 15 percent, while wage income is taxed at a top rate of 35 percent. The difference between those two accounts for Buffett’s lower rate.

Middle Class

Buffett managed funds for investors from 1956 to 1969 through partnerships. Taxes never led any of his clients to forgo an investment during that period, he wrote today, even though the capital gains rate was as high as 27.5 percent and the top marginal rate was at least 70 percent.

“Under those burdensome rates, moreover, both employment and the gross domestic product increased at a rapid clip,” Buffett wrote. “The middle class and the rich alike gained ground.”

Buffett continued to make investments under Berkshire, a textile maker he took control of in 1965 through a partnership. Since then, he has built the firm into a business with operations in insurance, retail, energy, freight and manufacturing. Its market value as of Nov. 23 was $220 billion. Buffett is the company’s largest shareholder.

BUFFETT EXPECTS ‘FISCAL CLIFF’ FIX, BUT NOT BY DECEMBER 31

By: Alex Crippen | Executive Producer

Warren Buffett expects Washington lawmakers will come up with a compromise on the “fiscal cliff,” but he’s not sure that will happen by the end of the year. 

He doesn’t, however, think it will take several more months to come up with a fix and it won’t be the “end of the world” if a compromise comes shortly after the December 31 deadline.

Buffett appeared live on CNBC’s Squawk Boxwith long-time friend Carol Loomis to promote a book about him that she compiled from Fortune magazine articles over the years.

Buffett didn’t outline a specific solution that he prefers, saying he could “go with any number of plans.”

But he thinks the end result should have U.S. revenues at 18.5 percent of GDP and expenditures at 21 percent.

Those levels would be “sustainable” because the ratio of the nation’s national debt to GDP wouldn’t increase, and might even fall over time, as economic growth makes up for the revenue gap.

Buffett said the “fiscal cliff” is having no effect on his long-term investing decisions.

He repeated his call for a minimum tax rate for the ultrarich, saying the small minority that don’t pay any taxes at all are among the “moochers” Mitt Romney referred to in his “47 Percent” comments.

Buffett argues that many middle-class people are unfairly burdened with payroll taxes for Social Security and Medicare, calling it the “most regressive” tax.  They only apply to income under a cutoff just above $100,000 but generate $800 billion a year, one-third of U.S. revenue.

He rejected Joe Kernen’s suggestion that payroll taxes should not be part of the debate because they’re for an insurance system. With a laugh, he said, “Believe me, it’s a tax on income.”

CNBC TRANSCRIPT: WARREN BUFFETT ON ‘FISCAL CLIFF’ AND TAXKING THE RICH

By: Alex Crippen | Executive Producer

Warren Buffett and his long-time friend Carol Loomis, an editor at Fortune, appeared live on CNBC’s “Squawk Box” to promote a book that collects the magazine’s past articles about the Omaha billionaire.

During the interview, Buffett said he expects Congress to reach a “fiscal cliff” deal but thinks it could happen after the December 31 deadline.

This is a transcript of the entire appearance on Wednesday, November 28, 2012 at 8a ET.

JOE KERNEN: We have a big line-up this morning. Warren Buffett — last time I saw Warren, he had an ugly tie on, and he sent it to me. He brought—right?

ANDREW ROSS ANDREW: It’s true.

(Read More: Buffett Expects ‘Fiscal Cliff’ Fix, but Not by December 31)

JOE: You brought it back—I have it up at my desk. It’s an ugly tie. He sent me a brick so far, which is pretty ugly, and a tie. That’s it.

BECKY QUICK: Have you thanked him for either of those gifts?

JOE: When I get the NetJet card, I will—I will thank him appro—I will. Thanks, Warren, for the brick. Warren Buffett’s going to join us with biographer Carol Loomis in just a minute. Thanks for coming on. We have plenty to talk about with the Oracle of Omaha.

***

ANDREW: Everything down. Not a great way to start the morning, but a great way to start the morning since we do have Warren Buffett on the show.

BECKY: That’s right. And red arrows. You know that Warren Buffett likes to buy when he sees red arrows, so.

ANDREW: That is true. That is true.

BECKY: Warren Buffett, obviously, is a familiar face here on “Squawk Box”. He is the subject of a new business biography. He joins us this morning along with Carol Loomis, who is senior editor-at-large at Fortune magazine. Carol’s the author of the new book on Mr. Buffett, “Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012.” And Warren and Carol, thank you both for joining us this morning.

WARREN BUFFETT (Berkshire Hathaway Chairman and CEO): Thanks for having us.

CAROL LOOMIS (Fortune Magazine Senior Editor-At-Large): Great to be here.

BECKY: You know, Carol, you’ve known Warren Buffett for over 45 years. You have a long friendship and you’re somebody who knows probably his take on business better than anybody out in the world. People have been waiting for a book like this…

LOOMIS: Great.

BECKY: …but you talk to him every day and in putting this book together, is there anything that you learned or anything that you were able to say, you know, ‘This is something I hadn’t thought about in a while’?

LOOMIS: Well, first of all, I just learned all over again how good he is. You just see it all through the book. He’s—the brilliance and the new ideas that keep coming up. But I think the thing I was most struck by was how consistent his thinking has been as he has gone through these years. In the early part of the book when he is advising Grinnell College about its—how to invest its investments—how to invest its endowment fund, he is staying off to the side while Grinnell decides to invest not—to invest in Intel. Bob Noyce went to Grinnell. And so Grinnell is making an investment in Intel, but Warren is just standing off to the side saying, ‘I don’t understand semiconductors, so I think you should just go ahead and do whatever you do, but I’m not—I’m not getting into this one way or the other.’ And that—and then he’s exactly the same when he gets to the bubble. And if we had another bubble, he’d be exactly the same again.

BECKY: Wow. You know, Carol, when you first met him back in 1967, what was your first impression? Did it jump out at the time that he was a great investor?

LOOMIS: Well, my husband had already told me who had met him earlier that he thought he was—he had met the greatest investor in the country. And, you know, I probably was a might skeptical about that at that point. And then I met him with (Buffett’s first wife) Susie. We all had lunch in New York. And I realized that Warren was unlike anybody I’d ever met—more impressive than anybody I’d ever met, knew more details about things that I was interested in. And I thought, `No, this guy is really different,’ and I must say we bought the stock. So—and he was—he was really virtually unknown at that point.

JOE: Grinnell—who would’ve thought Grinnell College would be in the news? Did you write a letter to that guy, Warren, or did you give him a dollar a point or $10 a point for those 138 points ? Did you see that? That kid? That was Grinnell.

BUFFETT: What?

LOOMIS: Oh, the one that had the basketball.

BUFFETT: The basketball player, yep.

JOE: One hundred and thirty—yeah.

LOOMIS: The big basketball—oh, sure.

JOE: This is the first time we have said Grinnell College twice in the last week and that has got to be—I don’t think that has ever…

BECKY: Happened on “Squawk” before?

JOE: Yeah. I would have never imagined that. It’s amazing.

BECKY: Yeah.

BUFFETT: I think he got 70. He had a high percentage of three-pointers, too, I’m right.

LOOMIS: Yeah.

JOE: He did. Twenty-one out of 27, but taking 27 three-pointers…

BECKY: Three point shots. Right.

JOE: …in one game is amazing. Warren, is that—that looks like the tie you sent me. Did you have more than one or something?

BUFFETT: Joe, I have—I have lots of ties to send you, although the sort of plugs they get after I send them to you, I’m not sure I’ll keep doing this.

JOE: So that’s what I see, bricks and—bricks and ties you don’t really like…basically.

BUFFETT: What would—what would you like? Dilly Bars? We’ve got those. I mean, you name it.

BECKY: Andy.

JOE: See, he’s asking like he doesn’t know what I really want. You know…

LOOMIS: My experience over the years, having known Warren this long, is he gets a favorite tie, he sticks with it for quite a long time.

JOE: It works for him.

LOOMIS: It works for him. So he really doesn’t change.

JOE: Carol, I just heard some stuff. Have you—have you ever played—do you play golf with Warren, Carol?

LOOMIS: I have played golf with Warren.

JOE: Did you bring him to Winged Foot? Has he been—that course would kill either the east or the west would kill him.

LOOMIS: Well, I don’t think that we have tried out Winged Foot. We have mainly played in Maine at a course called Prouts Neck.

BUFFETT: Yeah. We played on my 50th birthday, though, remember? We had the semi-centennial tournament at Winged Foot.

LOOMIS: Oh, that’s right.

BUFFETT: Yeah, George.

LOOMIS: Oh, I did forget—I did forget about that. So and also in Omaha, I’ve started to play a little bit with him.

JOE: All right.

BECKY: Warren, when you first met Carol, what was your first impression?

BUFFETT: My first impression was that she was pregnant.

LOOMIS: It does stick with you.

JOE: Was she?

ANDREW: I hope she was, right? I mean, that’s…

BUFFETT: I had a—I already had an impression. I knew she was a terrific writer. I’d been reading her stuff, and, you know, she was the first—the first woman to become a writer for Fortune, and they made a terrific choice. And ever since then, I mean, she’s been the number one read for me in the financial world.

ANDREW: So, Warren, Carol helps edit your annual report or your annual letter to investors . When did that start and what inspired you to do it?

BUFFETT: Well, in 1977, I gave her a copy of the draft and asked her if she would edit it. She’s a terrific editor. And I’d been on a committee at the SEC on disclosure, and I really decided that year I was going to step up the communication with shareholders, and so I thought I’d let her take a look at it. And she made very few changes the first year, but she’s sort of gotten in the swing of it since.

LOOMIS: It’s not—I wouldn’t say it’s accelerated every year, but there are a few more comments, a few more suggestions.

BUFFETT: She’s very diplomatic. When she doesn’t like something, she says, ‘This is my least favorite part of the report,’ which means it’s a bunch of junk.

CNBC’s “Squawk Box”
Becky Quick and Warren Buffett

BECKY: Why don’t we talk about some of the issues that are in the news today. And, Warren, you’ve made news this week with your op-ed piece that you had earlier this week in The New York Times about taxes. A lot of people have talked about what you’ve laid out, the “Buffett Rule,” and what you’d like to see. One thing that we may not have talked about a lot, though, is in that, you laid out where you thought higher taxes should be raised on people. You thought the starting point should be at 500,000 instead of the 250,000 that the president has proposed. I know you spoke with the president last week, he put out a news release about that. Did you tell him at that point that you thought the starting number was too low?

BUFFETT: Yeah. He—well, he knew my view on it because I had sent—they made a call on Friday and said would I be available for a call on Saturday from the president. I’ve never called him, but—and since I knew I was going to put out this op-ed piece, I sent him a copy prior to the phone call on Saturday, of the piece. So he had seen the $500,000 figure when we talked. He did not specifically bring it up.

BECKY: Did you bring it up to him?

BUFFETT: No, he’d seen it. I mean, I knew it was there in front of him. Since he—since he was saying 250, I did not think it was a great subject to bring up.

BECKY: Did he make any comments about your op-ed piece?

BUFFETT: Well, he certainly didn’t argue with any of it. I mean, he just briefly said that he’s seen it. He said something to the effect that he liked it. But we didn’t get into a detailed discussion of it.

BECKY: You know, you two have seen a lot of things that have happened in business and seen a lot of things that have happened around the country, and we have been trying here to try and find some sort of fit—fix to the fiscal cliff and the fiscal abyss. I know, Warren, in the past you’ve told us if you sat down, you could figure out in a matter of minutes some sort of solution that probably both sides could live with. Warren and Carol, if you could put up some sort of a plan, having seen what’s happened with politics in Washington, what would that plan look like?

BUFFETT: Well…

LOOMIS: I’ll defer to Warren.

BUFFETT: Well, the plan would have—would get us in the near future to having 18 1/2 percent of GDP as revenues and 21 percent of GDP as expenses. We’ve had that plan basically in effect since World War II. I mean, it’s bounced around a little bit, but that—those two levels, 18 1/2 and 21 are sustainable in the sense that they will not increase the ratio of the national debt to GDP. They’ll run a deficit every year, but because our economy grows, 18 1/2 and 21 is a—is a very sustainable figure. In fact, it’ll probably bring down the debt to GDP over time. And…

BECKY: But…

BUFFETT: …it’s not just me, Becky, I mean, you know, all three of you, a lot of people among the American public, have come up with a plan that worked its way to 18 1/2, and 21 and most people could accept it. We’d all have a little—a few differences, but that’s where we have to get at.

BECKY: But, Warren, that’s the logical approach and a commonsense approach, and what we’ve been hearing from Washington these days is almost a winner take all, take no prisoners sort of approach to this. ‘It’s my way or the highway’ on both sides. I mean, do you think, having lived in Washington and seeing what happens in Congress, that this group of people is going to find some commonsense solution that does exactly what you just laid out?

BUFFETT: Yeah, I think they will. I’m not sure they’ll do it by December 31st; but, you know, I have seen Washington and they don’t want to negotiate in public, obviously. So you’re not going to hear people come on—you’re not going to hear Democrats talk a lot about what expenditures they’re willing to cut.

JOE: Yeah. Right.

BUFFETT: You’re not going to hear Republicans talk a lot about what revenues they’ll increase. But at—and it’s probably a good thing because then you get stuck in those positions and your ego gets involved and your constituents say, ‘Well, you said this and why did you back off?’ and all that. But in private, they will—they will—in my view, they’ll get to something like that, but it may not be by December 31st.

JOE: I wonder—I wonder, Warren, what we’d really need to do on both sides in a—in a 4 percent world of GDP growth if we could somehow get back there through pro-growth policies, the 25 percent would be 25 because not as many people would need government services and that. And then the tax—the revenue side wouldn’t be 15 or whatever it is right now. I mean, we could probably in a 4 percent world, we’re almost there without doing anything, I would think. So I wish we could figure out a way to do—to do growth.

BUFFETT: Yeah.

JOE: You know, and then we could—and then we could do what we needed to do on taxes and cutting entitlements.

BUFFETT: And, Joe, we’ll get growth. I mean, but 4 percent is a pretty lofty number. We’ll…

JOE: Even 3 1/2—even…

BUFFETT: Yeah.

JOE: What would it be at 3 percent, Warren?

BUFFETT: Well…

JOE: We’d probably be at—we’d probably be at 17 1/2, 22.

BUFFETT: Yeah. Three percent would allow a bigger spread between revenue and expenditures as a percentage of GDP.

JOE: Just where we are with the current tax rate and with the current…

BUFFETT: Yeah.

JOE: Even funding the entitlements we have now, we could get—we’d almost be there.

BUFFETT: But 3 percent growth, if you think about it, 3 percent growth with 1 percent population growth, that means a 40 percent change upward in one generation, in 20 years, to the—to the standard of living. That’s a pretty lofty goal. We’ve hit it sometimes in the past, but even at 2 percent growth, with 1 percent growth in population, the next generation lives 20 percent per capita better than the present generation, which is pretty remarkable. And what I suggest will work even with 2 percent growth. Obviously, the more growth you get, you know, the easier the problems become.

JOE: Yeah.

BUFFETT: I mean, the more your income grows, you know, the fewer problems you’re going to have in your family, Joe.

JOE: Yeah, well, still won’t have a Marquis Jet card.

BUFFETT: Well, we can arrange that.

JOE: Oh yeah, you always say that, and I get a brick. Anyway. Thanks for the brick. Becky wants me to thank you for the brick. Thanks for the brick.

BUFFETT: Well…

BECKY: We’re trying to teach manners here.

BUFFETT: You’re the only person I’ve sent a brick to, I want you to know.

JOE: What am I supposed to do with a brick? And don’t say—don’t answer that. Anyway, go ahead, Andy.

ANDREW: We’ll talk—we’re going to continue this conversation with Warren Buffett and Carol Loomis after the break. That’s still ahead.

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