November 27, 2012

Mankiw on The "Master of Tax Avoidance "

The good professor offers four dents to Warren Buffett's armor as the noble wealthy knight of high taxation:

1. His company Berkshire Hathaway never pays a dividend but instead retains all earnings. So the return on this investment is entirely in the form of capital gains. By not paying dividends, he saves his investors (including himself) from having to immediately pay income tax on this income.

2. Mr Buffett is a long-term investor, so he rarely sells and realizes a capital gain. His unrealized capital gains are untaxed.

3. He is giving away much of his wealth to charity. He gets a deduction at the full market value of the stock he donates, most of which is unrealized (and therefore untaxed) capital gains.

4. When he dies, his heirs will get a stepped-up basis. The income tax will never collect any revenue from the substantial unrealized capital gains he has been accumulating.

I'd add that he sells financial instruments to aid customers with tax avoidance, and that Berkshire-Hathaway profits on the buy side when families sell out because they cannot afford estate taxes.

Y'know, Warren Buffett starts to make that Dalai Lama fellow look less bad...

Economics and Markets Posted by John Kranz at November 27, 2012 6:37 PM

This talk about tax rates drives me to drink. Talk about the gross amount paid in taxes and the argument gets very different very rapidly.

Posted by: Bad Science at November 27, 2012 7:28 PM

@BadScience: cheers!

Posted by: jk at November 27, 2012 7:48 PM

Well at least he doesn't have bank accounts in the Cayman Islands like that 1%er LOOOZER Mitt Romney!

Sorry, couldn't resist a little Occupy snark.

Seriously, there is nothing wrong with Buffett avoiding as much tax as possible. What is wrong is his hypocrisy as he denounces others for doing the same thing.

Posted by: johngalt at November 28, 2012 12:30 AM

I find it one click past hypocrisy on the bad scale. These policies drive revenue to his businesses at the expense of others' property rights.

Posted by: jk at November 28, 2012 9:54 AM | What do you think? [4]