Warren Buffett's Worst "Investment"

Warren Buffett is a gifted investor. No doubt about it. Over a career spanning roughly six decades, he’s amassed a fortune for himself upwards of $50 billion. As the primary shareholder, chairman and CEO of Berkshire Hathaway, the “Oracle of Omaha” has also done well for his investors. Those who bought shares of his investment company back in 1990 have since made over seventeen times their money, or more than 14% per year. Even though that return has fallen to about 5 or 6% per year over the last decade, Berkshire has still handily outperformed the market. As such, his annual shareholders’ meeting draws an adoring crowd large enough to make most rock bands blush.

Last year, according to his own accounting, Mr. Buffett earned a “taxable income” of almost $40 million. It goes without saying that most of us will never see that kind of money in our lifetimes. Not by a long shot. You’d think, therefore, all would be “good in the hood” for one of America’s richest men.

But Buffett has a big problem: Taxes. He is unhappy with the amount he pays. It’s not enough, he says. Nor is the amount paid by his super wealthy friends. Earlier this week, Buffett’s odd desire to keep less of what he earns led him to pen an op-ed piece in The New York Times in which he decried Washington for “coddling the super-rich.” Perhaps you saw it.

To his apparent disgust, Buffett benefits from an array of “tax advantages” conferred on he and his high net worth mates by members of Congress.

“Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as ‘carried interest,’” he confessed, “thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.”

In 2010, Buffett paid almost $7 million in taxes to the federal government, about 17.4 percent of that whopping “taxable income.” Despite his immense earnings, that percentage came in considerably less than the 20 other folks working in his office. “Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent,” he wrote.

This discrepancy sits uneasily on Buffett’s mind. And perhaps it should. But rather than advocating a less-onerous tax burden for the “little guys” he says he wants to help, Buffett wants the ends to meet from the other direction. He wants to pay more in taxes himself. And he wants his high earning friends to do the same.

At first glance, Buffett’s impulse might appear to be a charitable one. He wants to give more. Certainly there is nothing wrong with voluntary acts of charity. But what is a voluntary act…and how does it square with taxes? Put simply, it does not.

Charity is not consistent with coercion. Any individual, having come about his earnings by honest, voluntary dealings with others, ought to be able to save, invest or otherwise exchange his property in any way he sees fit, provided it does not infringe on any other persons’ ability to do likewise. This goes for the mega rich as it does for the rest of us.

If Buffett wishes to give his money to one institution or another, that is his own business. But by advocating higher taxes, Buffett is not asking that his fellow high earners donate money to causes he sees as worthy. He is not imploring them or otherwise trying to convince them. Instead, he is seeking the hired gun of the government to demand it from them. To steal it.  To expropriate it without their consent. To be clear on this point, there is no such thing as “voluntary taxes.” It is either theft…or it is not.

Moreover, if, as Buffett asserts, his goal is to help the poor and middle classes of America, to alleviate some of the economic hardship they are currently enduring, one could scarcely imagine a worse institution to support than the federal government, an institution that so tirelessly works toward impoverishing them.

Readers of these pages will be familiar with the many and varied ways politicians go about oppressing those they affect to serve, so we won’t go through them all here. Suffice to say that financially enabling an institution that actively steals from the poor and middle classes (both directly, through taxes, and indirectly, through inflation), debases the integrity of their mandatory, unchallengeable currency, pursues reckless fiscal policies at home, promotes costly, immoral military adventures abroad and regulates small and medium businesses to within an inch of their lives, to name but a few of its primary offences, is anything but charitable and compassionate. It’s feeding the beast that burdens a productive society. Nothing more. Nothing less.

But let’s ignore these “abstract” contentions for a moment and get down to the numbers. The main problem here is that they just don’t add up…at least not to much.

In 2008, the aggregate income of the highest 400 earners in the nation equaled roughly $90.9 billion. At present, the government steals about one-fifth of that, some $19.1 billion.

Let’s say for a moment that Mr. Buffett’s friends feel the same as he does, and that they wouldn’t mind kicking in a bit more in taxes. In fact, just for sake of argument, let’s say they wouldn’t mind working for nothing, contributing their entire yearly income…the whole shebang…100%. What does that come to? In an era of $1.5 trillion-plus annual deficits – projected out for the next decade, at least – $90 billion is barely enough to cover a fraction of the ever-increasing interest payments on the national debt. This year the government will spend $3.89 trillion (according to their own budget). That’s around $10 billion per day, give or take. In other words, soaking the mega rich wouldn’t even keep the lights on for two workweeks. And that’s assuming the highest earning individuals in the land are even willing to go along with a 100% tax. Not likely.

But it’s not only his super rich buddies Buffett would like to see cough up.

“[F]or those making more than $1 million – there were 236,883 such households in 2009 – I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains.”

According to Jeffrey Miron, senior lecturer and director of undergraduate studies at Harvard University and Senior Fellow at the Cato Institute, the income earned by these 236,833 taxpayers in adjusted gross income was about $727 billion. “Imposing a 10% surcharge on this income would generate at most $73 billion in new revenue,” writes Miron, “only about 2% of federal spending. And $73 billion is optimistic; the super-rich will avoid or evade much of the surcharge, significantly lowering its yield.”

But let’s go even further. Let’s say these folk, like Buffett’s super-rich friends, decide to give the first million they earn to the state. There’s another 237 billion. And folks who make over $10 million – there were 8,274 in 2009 – they hand their first ten million in cash over too. Another $82 billion. So far we have only about one fifth of this year’s budget deficit. About 8% of total spending. Even if you doubled those “contributions,” you’d still only cover one in six dollars the government currently spends. So you triple it…and still only cover one in four dollars spent. You see where this is going…

And in the end, what would the middle and poor classes get for all this? The richest quarter of a million people in the country, having surrendered their entire incomes to the state, have invested in nothing productive. They have not backed a single startup company, a single business, neither in America nor elsewhere. They have not opened a single factory or employed a single worker. They have not invested any of their capital in the stock market, bought a single American product, a house, a car…nothing. They have slaved for the state, yet still it sinks at a rate never before matched in its history…and with nobody left to bail it out.

Warren Buffett is a brilliant investor, yes. But that only makes us wonder: If the American government were a private company – with a balance sheet in tatters, sky-high debt and a management team made up of crooks and eggheads of every stripe – would he still invest in it? More importantly, would you?

Joel Bowman
for The Daily Reckoning

The Daily Reckoning