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The White House Should Stop Coddling Buffett

Author: Benn Steil, Senior Fellow and Director of International Economics
March 27, 2012
Financial Times


In a New York Times op-ed on August 14 2011, Berkshire Hathaway chief executive Warren Buffett wrote that the US should "stop coddling the super-rich" and called for tax rates to be raised "immediately on taxable incomes in excess of $1m, including, of course, dividends and capital gains". The next morning, at a televised "town hall" meeting in Cannon Falls, Minnesota, President Barack Obama praised Mr Buffett's intervention. A few weeks later a "Buffett rule", requiring that millionaires pay higher taxes as a share of their incomes than middle-class Americans, featured in the budget plan the president sent to Congress.

What Mr Buffett actually proposed would, notably, have a trivial impact on his own tax bill. This is because the "taxable income" he refers to is a minuscule portion of his total income – amounting to less than 1 per cent of his income held within Berkshire Hathaway, of which he owns 22 per cent.

Mr Buffett's share of Berkshire's 2010 pre-tax income was a whopping $4.2bn, taxes on which amounted to more than $1.2bn – a 29 per cent rate. This income would be subject to tax again at the personal rate if it was taken out of the company but since Mr Buffett has pledged to give away his fortune he would avoid the tax he wants to increase. At the Berkshire annual meeting in 2010, Mr Buffett urged fellow shareholders to "follow my tax-dodging example".

In any case, there is no evidence that Mr Buffett wants higher taxes on his share of Berkshire income: just a few weeks before his op-ed was published, he defended the tax-deductibility of corporate jets, telling CNBC he didn't "really see where a business aircraft is different from a business locomotive".

Perhaps Mr Buffett's op-ed was just gesture politics. After all, he also opposed President George W. Bush's tax cut on dividends, of which Berkshire pays none.

But consider this. On August 25 Mr Buffett announced that Berkshire was investing $5bn in Bank of America, while receiving warrants to buy 700m common shares. News of the deal sent BofA's shares sharply higher, at one point up 25 per cent, before falling back to a 9 per cent rise at the end of the day's trading. Professor Linus Wilson, an expert on bank warrant pricing, estimated that the deal was worth $3.17bn to Berkshire, not including the post-announcement share-price surge.

This may simply be more evidence of Mr Buffett's investment genius, or evidence of the public's belief in it. Yet there is surely the appearance that Mr Buffett is leveraging political capital to support Berkshire's investments in a sector of the economy that has been deeply involved in Washington politics since at least 2008. He cannot be unaware of the perception in the market, which he has done much to create, that the party that controls the White House and the Senate has his back. He has been in this game of bank-stock roulette way too long, beginning with his ill-timed $700m investment in Salomon Brothers during the market crisis of 1987.

With the Dodd-Frank Act and the US Department of Justice breathing down their necks, which of the too-big-to-fail banks wouldn't welcome a capital infusion from a recipient of the 2010 Presidential Medal of Freedom? And if you're a greedy undertaxed investor, don't you feel a tad safer holding the same stock as the billionaire the president called three days before the BofA deal to ask for advice on creating jobs?

Mr Buffett is certainly no stranger to putting his money where his mouth isn't. He denounced derivatives as "weapons of mass destruction" to Berkshire's shareholders in his 2002 annual report, before revealing in 2008 that the company was selling credit default swaps.

The Buffett rule's eponymous author, and owner of billions of dollars of BofA and Wells Fargo stock, recently told Berkshire shareholders that banks had been victimised by the reckless behaviour of their evicted borrowers. David Rolfe, chief investment officer of Berkshire shareholder Wedgewood Partners, read this as a "kind of message to his Democratic buddies". Mr Buffett now appeared to be saying: "Enough with the lambasting of the banking system and all these bankers."

Notably, Mr Obama kept mum. His selective quoting of Mr Buffett, together with his naming of an important policy initiative after him, necessarily raise questions about whether Mr Buffett's business interests could be receiving favoured treatment. The president's decision to reject the Keystone XL oil pipeline permit, benefiting Berkshire's huge Burlington Northern railroad investment, is one such case.

Mr Buffett, whose father was a four-term Republican congressman who decried crony capitalism and the passage of the federal income tax law, is hardly alone among today's American super-rich in appearing to navigate his business and public policy interests awkwardly. This should be considered par for the course. The burden is surely on the White House, for the sake of maintaining the integrity of the market and the policy-making process, to keep its distance.

The writer is director of international economics at the Council on Foreign Relations and co-author of 'Money, Markets and Sovereignty'

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