Skip to comments.AN ALTERNATIVE VIEW ON MR.BUFFETT’S ANTI-TAX POSITION [good stuff]
Posted on 05/07/2003 9:32:37 AM PDT by NativeNewYorker
..But we are angriest of all to have heard Warren Buffet come out against the Presidents tax cuts, for the centre-left has had a field day with the notion that if Americas richest man is opposed to tax cuts, why should anyone be in favour of them? Indeed, when asked by the national media covering Berkshire Hathaways annual meeting what he thought of the tax cut proposals put forth by the Administration, Mr. Buffett said rather succinctly
I am not for the Bush plan. It screams of injustice. The main beneficiaries will be people like me... giving a lesser percentage of our incomes to Washington than the people working in our shoe factories.
He is so utterly wrong as to be stunning. But the media....a and the Left... lapped it up. The reality is that Mr. Buffett may well be arguing against tax cuts for his own very selfish reasons. We note a brilliant report yesterday from Mr. Bill King of The King Report that was carried in the daily compilation of data assembled by our good friends at Bianco Research L.L.C. Mr. King noted that Buffett is against repealing the double taxation of dividends, saying it would unfairly benefit rich people like himself. Warren is not telling the whole truth about his opposition to the repeal of taxation of dividends.
In the 80s, zero coupon bonds and strips became hugely popular. The IRS stepped in and said investors must pay tax on in the imputed interest for a given year, even though the interest was not received. Buffett then realized that the converse must also be true. Buffett issued zero coupon bonds and bought high-yielding preferred stocks with the proceeds. Berkshire received the 85% tax exclusion on the dividends that only corporations receive and was able to write off the interest on the zero coupons bonds they issued/shorted, even though he didnt pay out any money. So, Buffett got a monstrous tax break by being short zero coupon bonds (tax benefit of the imputed interest without paying it) and got the 85% tax break on the dividends. Is this the real reason Warren is against the repeal of the double taxation of dividends? Warren is not as altruistic as he is portrayed. He wants the government to socialise his business risks on insurance, and he wants to keep his corporate tax arbitrage with dividend benefit. How about giving the average citizen the same 85% dividend exclusion that corporations receive? But if that happened, it would tighten the markets and corporations would loose their dividend investing advantage. If a corporation has a tax rate of say 32%, they are only paying 32% of 15% or 4.8% on dividends received. Contrast that with the 38% tax on most individual investors.
This was brilliant work in our opinion. So, we contacted Mr. King, asking permission to reproduce his comment here. He was kind enough to note further the following:
I dont know what else to say about Buffett except he exploits the 85% dividend exclusion that corporations receive. In fact, that why he actually constructed preferred stocks. Hed go to companies (remember Salomon?) and get them to create a special 9% convertible preferred just for him. He got voting benefits, which made the company feel safe plus the dividend exclusion on an above market-rate preferred. He then would issue zeros and take the annual imputed tax write off. What I cannot recall, is if Buffett also uses the tax loop hole that other insurance companies (and some hedgies) exploit in the Caribbean.
What we have then is a very savvy Wall Street investor, quite willing to exploit any advantage he can find (and we fault him not a whit for that, for that is indeed the very essence of the game we play). What we object to is that Mr. Buffet hides behind the curtain of fiscal propriety on a national level, while exploiting that for his own corporate and personal welfare. What we object to is Mr. Buffet allowing himself to be used by the Left to argue against tax cuts that are clearly needed to spur economic growth, while appearing to be concerned about the fiscal welfare of the nation. If he were that concerned, hed turn his positions around, pay more in taxes rather than having his taxes reduced, and would be in favour of the the tax cuts. Self interest cuts deeply, and it cuts very deeply here.
Buffett LIKES being "the only Buffett on the scoreboard."
Considering Buffett has supported an effort to preserve the estate tax and provided financial support to Hillary Clinton's Senate campaign, it's pretty clear where his political sympathies lie. As a colleague said in explaining the relatively light coverage this received: "He's known as a Democrat, [so] it stops being an ultrarich-guy-bucks-the-system story [and becomes a] rich-Democrat-criticizes-Republican-idea story."
Rush Limbaugh did take notice of the "Oracle of Omaha's" stance on taxes, which the arch-conservative commentator decried as standard-issue liberal claptrap.
On Wall Street, however, folks are more inclined to follow the money.
Most market participants deride Buffett's oft-described homespun wisdom as really just another guy talking his book. "He dismisses derivatives because of his own problems with General Re, he nixes stocks because he would like to be buying at lower prices and he frowns at CEO salaries because the billionaire takes little in cash compensation, while having to compensate more than his fair share of others," as RealMoney.com contributor Paul Kedrosky summarized.
Yet the pocketbook of a legendary value investor like Buffett would seemingly be enhanced by dividend tax reform, which he opposes. Same with President Bush's tax proposals in general. How do those who generally believe everyone talks their book explain Buffett's seemingly self-defeating stance on taxes?
Simple: It may not be self-defeating, after all.
In the 1980s, the IRS ruled investors must pay tax on "imputed interest" on zero coupon bonds and Treasury 'strips,'" recalled Bill King, principal and market strategist at M. Ramsey King Securities, a Burr Ridge, Ill.-based securities broker, and author of The King Report, a daily service for institutional clients. "Buffett then realized that the converse must also be true [and Berkshire Hathaway] issued zero coupon bonds and bought high-yielding preferred stocks with the proceeds."
By King's reckoning, Berkshire received the 85% tax exclusion on the dividends the corporation received and simultaneously was able to write off the interest on the zero coupon bonds it issued. "So, Buffett got a monstrous tax break by being short zero coupon bonds -- tax benefit of the imputed interest without paying it -- and got the 85% tax break on the dividends," he concluded, wondering: "Is this the real reason Warren is against the repeal of the double taxation of dividends?"
Ah, so maybe it's about self-interest after all. Whew, I was worried there for a second.