Monthly Archives: January 2012

Warren Buffett’s Altruism, Or Lack Thereof

I am all in favor of raising taxes on the wealthy, as Warren Buffett recently proposed, even though this would certainly increase my tax burden.  My motive is not only the zeal to “do for my country,” but the knowledge that the greatest risk to my personal well-being is income inequality so great that it leads to revolution.   As most wealthy taxpayers realize, paying taxes is a small price to pay for preserving the status quo.

But Buffett has an even more cynical motive for advocating more taxes from the super rich.  Taxes are his best friend.  Higher taxes act as a barrier to wealth creation.   The higher the taxes, the safer is Buffett ‘s position on top of the wealth pyramid.

To understand this, one needs to understand that for the mega-rich like Buffett, money has absolutely no utility.  There is simply nothing they want that they cannot buy.  One or five or ten billion more or less simply means nothing.  All that matters is their relative position among the super-wealthy.  The best case scenario for someone like Buffett is that no one ever challenges his position on the Forbes list.  For Buffett, a 100% income and capital gain tax would be absolutely in his best interest.  No wonder he now favors higher taxes.

Another way to understand this is to consider the following: what if overnight the government doubled the amount of money you have?  If everyone else stayed the same, this would really be a bonanza for you.  But what if at the same time everyone else also doubled his money?  Then you’d expect prices to double and everything would end up the same as it was before.  Your buying power would not increase at all even though you had twice as much money.  The fact is that money is just a measure of your buying power.  The only thing that matters is where you stand relative to everyone else

Buffett’s late call for higher taxes is therefore perfectly consistent with his own self-interest.  Indeed, low taxes pose the greatest threat, as it would allow others to catch and overtake him on the wealth pyramid.  Buffett’s demand for higher taxes is merely a way to protect his buying power, just the latest manifestation of his relentless pursuit of his own self-interest.

In his August 2011 op-ed in the Washington Post, Buffett claimed that his income taxes were just under $7m and that this figure was just 17% of his income.  Probably the numbers seemed so large that most people didn’t even bother to think twice about them.  But the figures are grossly, almost criminally, misleading.  Buffett implied that his income was $42 million, which sounds like a lot.  It isn’t, at least not for Buffett.  That amount is just 0.1% of his net worth.  If he put his assets in a CD at his local bank he’d make more than four times that amount.  Investing just 2% of his assets in US Treasury bonds would generate an equivalent amount of income.  To keep his taxable income so low, Buffett has to invest nearly all of his assets in stock that pays no dividends (like Berkshire Hathaway) or in tax-free municipal bonds.  In other words, with a more “normal” asset distribution, one not designed solely to avoid paying income taxes, Buffett’s gross income would be far, far more than what he implies in his article.

Buffett does not disclose how his charitable gifts affect his $42m in taxable income, whether the figure is before or after taking a deduction.  But charitable gifts are another one of Buffett’s misleading schemes.  In 2006, Buffett announced with much fanfare that he would give $31 billion to the Bill & Melinda Gates Foundation.  The present value was actually far less, since the gift was to be made over a period of 20 years, or at Buffett’s death (when he has no option but to let go of his money).  As it turns out, Buffett gives about $1.5 billion per year, or just 3% of his assets to the BMGF.  In other words, even as Buffett announced one of the largest gifts in history, he made sure that he would still be getting richer every year until he died.  Apparently, even in his eighties, Buffett still feels the need to hold on to and play with his money.  And the BMGF, while generously distributing several billion dollars each year, has managed to grow from $29 billion in 2005 to $37.4 billion in 2010.  While Buffett mandates that his annual contributions be spent by the BMGF, in fact that spending is merely used to help satisfy the minimum spending requirement for the foundation, allowing other money to remain in the foundation rather than increasing substantially the charitable dollars distributed to charities.  In other words, the BMGF itself has become a type of holding company, much like Buffett’s Berkshire Hathaway, investing its assets, growing (largely untaxed), and spending just enough each year to qualify as a charitable foundation.

Most people who give to charity do so to support their personal charitable interests.  Buffett apparently has none.  Unlike billionaires George Soros or Eli Broad, Buffett has no desire to use his money for any particular cause.  Nor does he wish to spend any time thinking about which charities he might support.  Rather, he has abdicated the decision-making to the BMGF.

As nice as Buffett’s charitable contributions seem, they really are quite unimaginative and, in the context of his excessive wealth, hardly noticeable.  He could double his contributions and still be the third richest man in the world until he dies.  It is actually not hard to give away large sums of money.  He could give $50 million to endow a university economics department in each of the fifty states and that would total $2.5 billion.  Each year he could do the same for ballet or diabetes or solar power or you name it.  He could even help the country by readjusting his portfolio to a more normal distribution among asset classes, which would hardly hurt his portfolio but would result in more income taxes.  But to do these things he would have to have an interest in something other than his own wealth, and that, apparently, is the one thing Warren Buffett is lacking.