Bashing Buffett...Once Again With Feeling

“Right now bonds should come with a warning label,” opines Warren Buffett in this year’s letter to Berkshire Hathaway shareholders. That seems like a reasonable idea, but why stop there? Why not slap a warning label on each one of Buffett’s public pronouncements as well?

The warning would go something like this: This pronouncement may or may not express my honest opinions, but it will almost certainly advance a hidden political agenda that enables me to gain access to preferential treatment from elected officials and various agencies of the federal government.

Buffett knows investing, no doubt about it. He’s an expert’s expert. But Buffett also knows how to make sure the government’s butter lands on at least one side of his bread, if not both. He’s an expert’s expert.

Both activities are perfectly legal, but only one of them is perfectly disgusting.

“Stop Coddling the Super-Rich,” Buffett pleaded last summer in an infamous op-ed piece for the New York Times. “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…

“Last year,” Buffett continued, “my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.”

Ah shucks!… Gee whiz!… and Golly gosh! Mr. Buffett must feel just awful about this injustice. If only he had discovered it earlier, he could have paid tens of billions of dollars more in taxes during his lifetime. And, gee willickers, he could have told all his mega-rich friends about his great discovery so that they, too, could have paid tens of billions of dollars more in taxes.

Golly gee, isn’t that just the way life is? You always discover the best stuff after it’s too late to do anything about it. It’s just too darn bad that Buffett and his mega-rich friends had already amassed their mega-billions of dollars during the “unfair” tax regime of the last two or three decades before Buffett discovered how unfair it was.

But, shucks, you can’t turn back the clock. So despite Buffett’s profound regret, he will simply have to keep all those billions of dollars that the IRS did not permit him to contribute to the US government.

Gee whiz…life just ain’t fair sometimes. You try to be magnanimous with the US government and the IRS just won’t let you. Hey, but at least you can publicly proscribe for others the identical high-tax regime that you methodically and assiduously avoided throughout a career spanning several decades.

And fortunately for the US government, there is a brand-new generation of folks who aspire to become billionaires like Buffett, or perhaps merely millionaires. And as Buffett astutely observes, it’s not too late to tax them.

At this point, a few Dear Readers may be saying to themselves, “Well, okay, but even if Buffett should have said something earlier, at least he said something now… and that means that he would start paying higher taxes now.


Implementing a higher income tax would barely move the needle on Buffett’s annual tax bill, as the nearby chart illustrates.

Warren Buffett's Share of Berkshire Hathaway's 2010 Net Income vs. His Own Personal Taxable Income

Buffett paid $6.9 million in taxes on his 2010 personal income of $39.9 million dollars — or 17.4%. But he paid zero personal taxes on his portion — $2.9 billion — of Berkshire Hathaway’s net income. (Of course Berkshire paid corporate tax, but that fact is not germane to the discussion of personal taxes that Buffett addressed in his article last year).

In other words, even if you bumped the personal income tax all the way up to 100%, and literally confiscated every cent of Buffett’s direct personal income, the effective tax rate on the totality of his increased wealth in 2010 would have been only 1.4%!

So you see how easy it is to be a do-gooding, “fair-share-paying” billionaire?

Buffett’s “tax fairness” ideas — focusing as they do on personal income, dividends and capital gains taxes — would leave Buffett, himself, virtually unscathed. That’s because:

1) His personal income represents less than 2% of his annual wealth accumulation;

2) Berkshire Hathaway has never paid a dividend in its history;

3) Buffett, himself, has no intention of generating any capital gains because he has no intention of selling a single share of Berkshire Hathaway.

Tellingly, Buffett’s proposals exclude any mention of estate taxes or of disallowing certain deductions for those he calls the “mega-rich.” These exclusions are no accident.

When disclosing his multi-billion-dollar gift to the Bill and Melinda Gates foundation in 2006, Buffett established three conditions, the second of which was that the foundation “must continue to satisfy legal requirements qualifying my gift as charitable and not subject to gift or other taxes.”

More recently, Buffett defended the tax-deductibility of corporate jets and urged Berkshire Hathaway shareholders at the 2010 shareholder meeting to “follow my tax dodging example.”

Unfortunately, dear reader, Buffett’s hypocrisy on this topic does not end there. It merely begins. In fact, the story just goes on and on, ad nauseum. Buffett, the tax crusader, is also Buffett, the IRS litigant. Yes that’s right, just a few months after complaining to the nation that rich folks aren’t paying their fair share of taxes, this particular rich folk filed a lawsuit against the IRS asserting an unfairly large tax bill.

“Last November,” Bloomberg News reports, “NetJets, the private-plane company owned by Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), sued the US, saying the federal government had wrongly imposed taxes, interest and penalties totaling more than $642.7 million.

“Claiming the federal Internal Revenue Service wrongfully assessed a so-called ticket tax — an excise tax on payments made in exchange for air transportation — to private aircraft owners maintaining their own planes, the Columbus, Ohio-based company demanded refunds and abatements.”

A few weeks ago, the federal government countersued — asserting that, not only does the IRS owe no money to NetJets, but also that NetJets owes an additional $366 million in taxes and penalties.

Certainly, Warren Buffett has a fiduciary responsibility to NetJets shareholders to advance their interests. So if, in fact, the IRS is trying to take funds from NetJets that it does not legally deserve, so be it.

But in light of the fact that Buffett publicly laments his inability to pay more taxes, the do-gooding billionaire would seem to be passing up a golden opportunity. Why not, for example, allow NetJets to battle the IRS, while simultaneously, and very publicly, agreeing to pay the disputed taxes out of his own pocket?

If Buffett genuinely wished to hand more money to Uncle Sam, the solution would be relatively simple: “Just write a check and shut up,” as New Jersey Governor, Chris Christie put it succinctly.

But don’t hold your breath waiting for Buffett to write any charity checks to the government, or even to write any op-eds about forms of “tax fairness” that would cost him much more per year than the cost of his vacations on Martha’s Vineyard with President Obama.

Warren Buffett has not become a latter-day tax crusader so that he can pay his “fair share”; he has become a crusader so that he can continue plundering his unfair share of tax receipts and crony favoritism. By lending his reputation to the “tax fairness” crusade, Buffett legitimizes the progressive/socialist agendas that tickle the fancy of so many political leaders. As a result, Buffett endears himself to those with the power to advance his financial interests.

Fanning class warfare is good business, assuming you don’t mind the whole dishonest, hypocritical part of it. This tactic added billions of dollars to his personal wealth during the credit crisis of 2008-9, while also saving Berkshire Hathaway from a near-certain demise.

During the depths of the 2008 Credit Crisis and stock market selloff, “Wall Street was of fire,” recalls Peter Schweizer in his expose, Throw Them All Out. “[But] Buffett was running toward the flames…with the expectation that the fire department (that is, the federal government) was right behind him with buckets of bailout money…Indeed, Buffett needed the bailout…Beyond Goldman Sachs, Buffett was heavily invested in several other banks that were at risk and in need of federal cash. He began immediately to campaign for the $700 billion TARP rescue plan that was being hammered together in Washington.”

“As the political debates surrounding the proposed $700 billion Troubled Asset Relief Program (TARP) bailout bill heated up,” recalls blogger, Pat Dollard, “Buffett maintained an appearance of naiveté, an ‘aw shucks’ shtick that deferred to the judgment of politicians. ‘I’m not brave enough to try to influence the Congress,’ Buffett told the New York Times.

“Behind closed doors, however, Buffett had become a shrewd political entrepreneur,” Dollard continues. “The billionaire exerted his considerable political influence in a private conference call with then-Speaker of the House Nancy Pelosi and House Democrats. During the meeting, Buffett strongly urged Democratic members to pass the $700 billion TARP bill to avert what he warned would otherwise be ‘the biggest financial meltdown in American history.’”

“If the bailout went through,” Schweizer correctly observes, “it would be a windfall for Goldman. If it failed, it would be disastrous for Berkshire Hathaway.”

Buffett’s “hard work” paid off.

“In all, Berkshire Hathaway firms received $95 billion in bailout cash from the Troubled Asset Relief Program (TARP). Berkshire held stock in the Wells Fargo, Bank of America, American Express, and Goldman Sachs, which received not only TARP money but also $130 billion in FDIC backing for their debt. All told, TARP-assisted companies constituted a whopping 30% of its entire company disclosed stock portfolio.”

But these billions of dollars represented only the most visible portions of the bailout funds that flowed to Berkshire’s companies. Wells Fargo, for example, received “only” $25 billion of TARP funding, but it also received another $45 billion at the same time from the Federal Reserve’s Term Auction Facility (TAF).

The Funds Wells Farco Borrowed from TARP and TAF

Incredibly, Wells Fargo’s borrowings paled alongside those of Goldman Sachs. Throughout the crisis, Goldman gorged itself at every available government trough. The morally challenged investment bank borrowed only $10 billion from the TARP. But at the same time Goldman was griping about “being forced” to take the $10 billion TARP loan, the company was borrowing tens of billions of dollars more from obscure government lending programs with acronyms like: CPFF, PDCF and TSLF.

And that’s not all!

Amidst much fanfare and self-congratulatory press releases, Goldman repaid its TARP loan in June 2009, but only after securing $25 billion of government capital at a different trough. As we observed in a December 15, 2010 edition of The Daily Reckoning:

On June 17, 2009…thanks to some timely, undisclosed assistance from the Federal Reserve, Goldman repaid its $10 billion TARP loan. But just six days before this announcement, Goldman sold $11 billion of mortgage-backed securities (MBS) to the Fed. In other words, Goldman “repaid” the Treasury by secretly selling illiquid assets to the Fed.

One month later, Goldman’s CEO Lloyd Blankfein beamed, “We are grateful for the government efforts and are pleased that [the monies we repaid] can be used by the government to revitalize the economy, a priority in which we all have a common stake.”

Goldman's Short-Term Borrowings from the Fed and Cumulative Net MBS Sales to the Fed

As it turns out, the government continued to “revitalize” that small sliver of the economy known as Goldman Sachs. During the three months following Goldman’s re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman’s TARP re-payment.

Is it any wonder that Buffett’s $5 billion “investment” in Goldman Sachs succeeded so nicely?

“Later, astonishingly,” recalls Peter Schweizer, “Buffett would publicly complain about the bailouts in his annual letter to Berkshire investors, claiming that government subsidies put Berkshire at a disadvantage…”

“It takes chutzpah to lobby for bailouts,” observes Reuters journalist, Rolfe Winkler, “make trades seeking to profit from them, and then complain that those doing put you at a disadvantage.”

Yes indeed, chutzpah and a wee dose of hypocrisy. Please don’t misunderstand us dear reader; the only difference between our hypocrisy and Warren Buffett’s is the number of dollars that flow from it. But that’s a meaningful difference. Our hypocrisy does not divert hundreds of billions of dollar from the government coffers into our pockets, while masquerading as folksy, good old-fashion “fairness.”

Let’s start printing those warning labels!

Eric Fry
for The Daily Reckoning

The Daily Reckoning