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by Eric Englund
Through
Warren Buffett’s letters to Berkshire Hathaway’s shareholders,
and his op-ed pieces, one can conclude Warren Buffett has
little respect for private property rights. If Mr. Buffett
took the time to read Frank Chodorov’s masterful book The
Income Tax: Root of All Evil, he would properly conclude
(I hope) taxation is theft. Instead, he celebrates the Sixteenth
Amendment to the U.S. Constitution and has written forcefully
about his support for income taxes, estate taxes, and double
taxation of dividends (for more on these matters, read this
Forbes article: Warren
Buffett's Tax Fetish). Warren Buffett earnestly portrays
himself as a loyal financial supporter of Uncle Sam and deems
himself to be Uncle Sam’s "grateful
nephew." However, when examining how Warren Buffett
and Charlie Munger have structured Berkshire Hathaway’s investment
portfolio, it is painfully clear Warren Buffett does not put
his money where his mouth is. For someone who has pledged
financial allegiance to the United States, Mr. Buffett speaks
with a forked tongue.
So let’s
begin with how Warren Buffett paints his image as to being
one of Uncle Sam’s most devoted financial benefactors. He
does so by writing this folksy passage in his February
27, 2004 letter to Berkshire Hathaway’s shareholders.
To be sure, he gushes about the staggering amount of federal
taxes Berkshire Hathaway will pay against its fiscal-year
2003 income, and wonders aloud how he can do even more to
help Uncle Sam carry his "fiscal load." Without
further ado, here is the spin master himself, Warren Buffett:
On
May 20, 2003, the Washington Post ran an op-ed piece
by me that was critical of the Bush tax proposals. Thirteen
days later, Pamela Olson, Assistant Secretary for Tax Policy
at the U.S. Treasury, delivered a speech about the new tax
legislation saying, "That means a certain Midwestern oracle,
who, it must be noted, has played the tax code like a fiddle,
is still safe retaining all his earnings." I think she was
talking about me.
Alas,
my "fiddle playing" will not get me to Carnegie Hall – or
even to a high school recital. Berkshire, on your behalf
and mine, will send the Treasury $3.3 billion for tax on
its 2003 income, a sum equaling 2½% of the total income
tax paid by all U.S. corporations in fiscal 2003. (In contrast,
Berkshire's market valuation is about 1% of the value of
all American corporations.) Our payment will almost certainly
place us among our country's top ten taxpayers. Indeed,
if only 540 taxpayers paid the amount Berkshire will pay,
no other individual or corporation would have to pay anything
to Uncle Sam. That's right: 290 million Americans and all
other businesses would not have to pay a dime in income,
social security, excise or estate taxes to the federal government.
(Here's the math: Federal tax receipts, including social
security receipts, in fiscal 2003 totaled $1.782 trillion
and 540 "Berkshires," each paying $3.3 billion, would deliver
the same $1.782 trillion.)
Our
federal tax return for 2002 (2003 is not finalized), when
we paid $1.75 billion, covered a mere 8,905 pages. As is
required, we dutifully filed two copies of this return,
creating a pile of paper seven feet tall. At World Headquarters,
our small band of 15.8, though exhausted, momentarily flushed
with pride: Berkshire, we felt, was surely pulling its share
of our country's fiscal load.
But
Ms. Olson sees things otherwise. And if that means Charlie
and I need to try harder, we are ready to do so.
I do
wish, however, that Ms. Olson would give me some credit
for the progress I've already made. In 1944, I filed my
first 1040, reporting my income as a thirteen-year-old newspaper
carrier. The return covered three pages. After I claimed
the appropriate business deductions, such as $35 for a bicycle,
my tax bill was $7. I sent my check to the Treasury and
it – without comment – promptly cashed it. We lived in peace.
Being
one of America’s top-ten taxpayers, indeed, indicates Berkshire
Hathaway is "…pulling its share of our country’s fiscal
load." Buffett’s key phrase in this passage, with respect
to carrying Uncle Sam’s fiscal load, is this: "And if
that means Charlie and I need to try harder, we are ready
to do so." This is pure baloney and hypocrisy, on Buffett’s
part, and I will show you exactly why – this folksy, self-promoting
quote truly is a gift which keeps
on giving.
Before
exposing Warren Buffett’s insincerity, let’s allow Buffett
to provide some more spin regarding his deep devotion to Uncle
Sam. On November 16, 2010, the New York Times published
Buffett’s op-ed piece titled Pretty
Good for Government Work. In this piece, Buffett
heaps praise on the federal government’s response to the financial
crisis of 2008:
When
the crisis struck, I felt you would understand the role
you had to play. But you’ve never been known for speed,
and in a meltdown minutes matter. I worried whether the
barrage of shattering surprises would disorient you. You
would have to improvise solutions on the run, stretch legal
boundaries and avoid slowdowns, like Congressional hearings
and studies. You would also need to get turf-conscious departments
to work together in mounting your counterattack. The challenge
was huge, and many people thought you were not up to it.
Well,
Uncle Sam, you delivered. People will second-guess your
specific decisions; you can always count on that. But just
as there is a fog of war, there is a fog of panic – and,
overall, your actions were remarkably effective.
Buffett
goes on to close this op-ed piece depicting himself as one
of Uncle Sam’s steadfast supporters:
So,
again, Uncle Sam, thanks to you and your aides. Often you
are wasteful, and sometimes you are bullying. On occasion,
you are downright maddening. But in this extraordinary emergency,
you came through – and the world would look far different
now if you had not.
Your
grateful nephew,
Warren
Well,
Mr. Buffett, how grateful are you really? Are you and Charlie
Munger honestly trying harder to help Uncle Sam carry his
fiscal load? Certainly you are aware that your beloved Uncle
Sam needs to borrow over a trillion dollars to cover his deficit
for fiscal-year 2011. The company that you and Charlie run,
Berkshire Hathaway, is one of the wealthiest and most liquid
on the face of the planet. You decide how to deploy Berkshire
Hathaway’s war chest of funds. Therefore, if your actions
are consistent with your words, Berkshire
Hathaway would have loaned Uncle Sam tens-of-billions of dollars;
with such loans appearing on Berkshire Hathaway’s balance
sheet as fixed maturity securities. Actions, ultimately, speak
louder than words.
So let’s
see if Berkshire Hathaway’s latest financial statement (dated
9/30/10) reveals Warren Buffett to be a grateful nephew dedicated
to helping Uncle Sam carry his considerable fiscal load. We
must begin by examining Berkshire Hathaway’s balance sheet.
At September 30, 2010, Berkshire Hathaway had $34.46 billion
of cash and an investment portfolio of $117.08 billion. Hence,
this company’s cash and investments totaled to $151.54 billion.
Within this total, Berkshire’s fixed maturity securities amounted
to $36.35 billion. By going to Note 4 of this financial statement,
it is divulged that Berkshire Hathaway’s holdings of Uncle
Sam’s debt obligations amounts to a paltry $2.25 billion.
Uh, oh; I’m beginning to sense "ungrateful nephew"
is a better description of Warren Buffett.
To give
some additional context as to why it is obvious Warren Buffett’s
actions are completely at odds with his words, consider the
following:
- Of
Berkshire Hathaway’s total fixed maturity securities, only
6.2% were Uncle Sam’s debt obligations.
- Less
than 2% of Berkshire Hathaway’s investment portfolio consisted
of U.S. Treasuries and U.S. Agency debt (in other words,
Uncle Sam’s debt obligations).
- Less
than 1.5% of Berkshire Hathaway’s total liquid assets were
comprised of U.S. Treasuries and U.S. Agency debt.
- Berkshire
Hathaway’s foreign government fixed maturity securities
totaled to $12.03 billion versus $2.25 billion of Uncle
Sam’s debt obligations.
With
Berkshire Hathaway’s cash and investments of $151.54 billion,
and Warren Buffett’s proclamation that he stands ready to
work harder at helping the federal government carry its fiscal
load, does it not seem duplicitous to have loaned Uncle Sam
a trifling $2.2 billion. To add insult to injury, Berkshire
Hathaway’s portfolio of foreign government fixed maturity
securities exceeds U.S. debt obligations by almost $10 billion.
Does this mean Mr. Buffett loves foreign governments five
times more than he does Uncle Sam? Why are Buffett’s actions
inconsistent with his words? Does the "grateful nephew"
not trust his beloved uncle? Never in history has there been
a time where Uncle Sam has become so dependent on the kindness
of lenders. So, Uncle Sam, has Warren Buffett forsaken thee?
Ah, the
truth of the matter is that Warren Buffett has never trusted
Uncle Sam. Is it not risky, after all, to lend to an entity
capable of creating money out of thin air? This is the essence
of what Warren Buffett wrote, on February 25, 1985, in his
letter
to the shareholders contained in Berkshire Hathaway’s
1984 annual report:
…we
dislike the purchase of most long-term bonds under most
circumstances and have bought very few in recent years.
That’s because bonds are as sound as a dollar – and we view
the long-term outlook for dollars as dismal. We believe
substantial inflation lies ahead, although we have no idea
what the average rate will turn out to be. Furthermore,
we think there is a small, but not insignificant, chance
of runaway inflation.
Such
a possibility may seem absurd, considering the rate to which
inflation has dropped. But we believe that present fiscal
policy – featuring a huge deficit – is both extremely dangerous
and difficult to reverse. (So far, most politicians in both
parties have followed Charlie Brown’s advice: "No problem
is so big that it can’t be run away from.") Without
a reversal, high rates of inflation may be delayed (perhaps
for a long time), but will
not be avoided. If high rates materialize, they bring with
them the potential for a runaway upward spiral.
While
there is not much to choose between bonds and stocks (as
a class) when annual inflation is in the 5%-10% range, runaway
inflation is a different story. In that circumstance, a
diversified stock portfolio would almost surely suffer an
enormous loss in real value. But bonds already outstanding
would suffer far more. Thus, we think an all-bond portfolio
carries a small but unacceptable "wipe out" risk,
and we require any purchase
of long-term bonds to clear a special hurdle. Only when
bond purchases appear decidedly superior to other business
opportunities will we engage in them. Those occasions are
likely to be few and far between.
To be
sure, Warren Buffett has remained true to the words he penned
nearly 26 years ago. Berkshire Hathaway, over the years, has
avoided purchasing U.S. Treasury bonds because Warren Buffett
and Charlie Munger distrust the long-term soundness of the
dollar. Specifically, they fear the "…chance of runaway
inflation." In spite of missing out on a major bull market
in T-bonds, Berkshire Hathaway’s investment portfolio has
performed so spectacularly well that Warren Buffett’s investment
acumen has become the stuff of legend.
Although
far from legendary, Warren Buffett’s cognitive
dissonance, regarding taxes, is maddening. On the one
hand, he celebrates the Sixteenth Amendment and brags about
the billions of dollars Berkshire Hathaway pays in federal
income taxes – after all, Buffett is self-described as Uncle
Sam’s "grateful nephew." Yet, on the other hand,
he basically refuses to lend money to Uncle Sam for fear that
the federal government will pay back the loans with cheaper
dollars; which is, as Ron Paul describes, the
inflation tax. Taxation is theft regardless
if it is through the overt coercion of income taxes or through
the stealth of inflation. Apparently, Warren Buffett approves
of theft at gunpoint yet detests having his pocket picked.
Go figure.
Don’t
get me wrong, I thoroughly sympathize with Warren Buffett’s
aversion to lending money to the U.S. government. Frank
Chodorov would have agreed with this aversion, and would
have preferred that Berkshire Hathaway not lend a single dime
to Uncle Sam – for reasons that go well beyond the devastation
that inflation brings to a portfolio of Treasury bonds.
But,
please Mr. Buffett, stop draping yourself in the American
flag and shamelessly promoting yourself as one of the U.S.
government’s top financial benefactors willing to do more
to help Uncle Sam carry his fiscal load. Your company has
tens-of-billions of dollars which could immediately be loaned
to Uncle Sam, who is in desperate need of it, yet no such
loans are forthcoming from you. This is nothing short of hypocritical.
Perhaps
Uncle Sam should ask his grateful nephew the following question:
How do you put your money where your mouth is when you speak
with a forked tongue?
February
17, 2011
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