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Warren Buffett’s Double Standard

Billionaire Warren Buffett gives a lot to charity, a generally admirable quality that probably redounds to the benefit of many. He has great investment savvy, something to admire in a different sort of way. But there are other, less savory things. For all his aw-shucks, midwestern manner, he manages to take advantage of everything in the tax code and the economic system that privilege can exploit while at the same time relentlessly promoting himself as a champion of everyday people, a fighter for equality, and a man who despises the sorts of advantages that he has nonetheless leveraged.

Part of the smell emanates from the non-existent Keystone XL pipeline, proposed years ago because the flows of Canadian oil and fracking had already overwhelmed capacity.  When it was still unclear how President Obama would proceed, his friend, advisor, and major donor, Warren Buffett, began confidently buying up the Burlington Northern Santa Fe Railroad (BNSF), a major oil carrier, the major alternative to pipelines, in fact. At the same time, Buffett, through his company Berkshire Hathaway, also began to acquire Union Tank Car, a manufacturer of railroad freight cars designed to carry crude oil.  Buffett knew that most every barrel the pipelines failed to carry would go by rail in tanker cars. What is more, he knew that his new holdings would benefit even if Obama eventually approved Keystone, which, in the end, he did not. All Buffett’s investments needed was for the president to slow walk the decision, which he did. While the president deliberated, railroad deliveries of crude oil soared, quadrupling in 2012 alone. In four years from the first purchase, Berkshire Hathaway’s investment doubled. Now, with Keystone done, the gravy train will continue to roll.

There is no smoking gun here, no proof that the White House associations of this major Obama donor and advisor gave him information others lacked or that those associations helped influence the president’s decision. Perhaps Buffett just got lucky. But with most other people, the juxtaposition of events would have at least prompted a few tough questions from the SEC. It is, after all, not inconceivable that influence was used and that privileged information was gathered. At the very least, Buffett, noting his interests, should have recused himself from communication with the White House or its agents.  Instead the lines of influence and power remained active throughout, a fact to which innumerable news items of the President and Buffett in consultation testify.

Then there is Warren’s well-publicized distaste for inherited wealth. To the praise of numerous reporters, commentators, the president, and others, Buffett has very publicly decried what he calls “dynastic wealth,” labeling it a source of inequality in our society. Why, he has complained, should the sons and daughters of the wealthy inherit, “when six billion others have much poorer hands than we do in life.” He laughs, he says, when the wealthy hang out at their country clubs to “talk about the debilitating effects of the welfare society” and then “leave their kids a lifetime and beyond of food stamps.” Their heirs, he mocks, have “a trust officer” instead of a “welfare officer.” To remedy this great inequity, he, along with George Soros and to the applause of many, has proposed a heavy tax on any inheritance above $4 million per couple, in practice really $2 million, since few couples die together.

However valid his point on inequity and inheritance, his proposals are in practice far less selfless than they seem. The many who see him as principled enough to penalize his own vast estate miss a crucial point. The very wealthy hardly use inheritance to provide for their loved ones. For them, it is at most a small part of the equation. Inheritance is a major factor only to the middling rich, small business owners, for instance, popular writers or entertainers, an inventor with a successful patent on a useful medical device. Buffett’s proposals would see to it that most of these people’s wealth would be taxed away, maybe even force their heirs to sell the business or patent in order to pay the tax. The Buffetts of the world have better, tax-advantaged ways to provide for their loved ones.

One such vehicle is the establishment of charitable foundations that, if they also help others, certainly help heirs.

Here is how it works. Warren Buffett or some other very wealthy individual sets up a charity. To be sure, anyone can do this, but the care of one’s loved ones requires greater amounts than anyone but a billionaire has. That rich person then transfers assets, stocks, bonds, real estate—whatever—into the trust behind the charity. He or she gets a tax write-off on all as a charitable donation. The tax break accrues at the current value of the assets, even if the billionaire acquired them at much lower cost. No question here of capital gains taxes either. After pocketing the tax breaks, the billionaire then puts one or more loved ones into high office at the foundation and sees to it that a handsome salary goes with the position, as well as, perhaps, lavish prerequisites, such as a car and driver, a residence, even a private jet. The arrangement then gives that loved one a handsome income and other benefits from the assets, as if they came in an inheritance, but with not a dime paid in taxes. On the contrary, the transfer comes equipped with tax benefits.

To be sure, the loved ones set up this way pay taxes on the income they receive. If the foundation is cleverly written, they can, however, avoid taxes on the prerequisites. All the charity must do is claim that the perks are an essential part of the job.

Those provided for in this way may or may not work hard. But whether they do or not, they gain from all the assets, something Buffett’s proposed taxes would deny lesser wealth. The foundation’s charter may even designate which loved ones from younger generations will fill the high positions when the initial appointees leave. Or the foundation may leave it up to those first put in place to choose their successors, presumably their heirs. In these ways, the use of the assets can flow from one generation to the next without incurring any taxes. The initial fortune remains intact, and, if the chosen loved ones no longer own it, they get the use of it, which in practice is just as good.

In this way, Buffett and other progressive billionaires, while decrying “dynastic wealth” and winning praise as an altruist from every quarter, have a way to set up their children. Buffett’s daughter, Susie, chairs the Sherwood Foundation, the Susan Thompson Buffett Foundation, and the Buffett Early Childhood Fund. Her one-time husband, Allen Greenberg, serves as executive director of the Buffett Foundation.  Warren’s youngest son, Peter A. Buffett, heads another Buffett-funded charity, the NoVo Foundation. The billionaire’s other son chairs another Buffett-backed entity, the Howard G. Buffett Foundation. Without access to the charters of these organizations, it is impossible to know exactly what benefits and successor powers these Buffett children possess, but it is nonetheless clear they are well provided for and not a penny paid in capital gains or inheritance taxes.

As of the 2013 required filing of disclosures with the IRS, the Buffett family members employed by foundations took combined salaries of $928,414. On usual rules of thumb, this amount would take some $18.5 million to maintain, quite a bit more than Warren would like other folks to inherit but small beer in terms of the Buffett fortune. Of course, these figures certainly exclude perquisites and the IRS makes clear that some officer compensation might get classified under the foundation’s charitable giving instead of its expenses. Beyond more voluntary disclosure by Buffett, there is no way to know if additional money is flowing to family through his foundations, but current arrangements would make it possible.

Even if Buffett is taking advantage of his foundations to avoid inheritance taxes, there would be nothing illegal about doing so. There would be if the railroad deal mentioned above were connected with material inside information or influence at the White House, but that would be hard to prove. But even if all is perfectly legal, that does not make it right or honorable or equitable. It is certainly illustrative of how the system allows extremely powerful, well-connected men and women to feather their own nests in ways unavailable to those less powerful and less well connected. It smells especially bad because it is done by someone who has gone out of his way to criticize, mock, and penalize those with less, all the while collecting praise for having eschewed privileges in which in fact he has fully indulged.

Milton Ezrati is a contributing editor to The National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and recently retired as senior economist for Lord, Abbett & Co. His most recent book,Thirty Tomorrows [1], describes the challenge of aging demographics and how the world can cope.

8 Comments (Open | Close)

8 Comments To "Warren Buffett’s Double Standard"

#1 Comment By SteveM On April 12, 2016 @ 10:38 am

Milton Ezrati essentially describes the 501c racket generally. Washington is saturated with them. For example, Brent Bozell, president of the “non-profit” Media Research Center is paid Half a Million a year. Janet Murguía, president the Hispanic advocacy organization La Raza is paid over 400 Grand to shill for Crony desired cheap immigrant labor.

Matt Kibbe, the president of the ostensible “Tea Party” 501c FreedomWorks is paid $381,000 a year. His predecessor, Congressman Dick Armey was paid $500,000 to do what 501c Cronies do best – just show up and gas-bag.

The president of the Heritage Foundation is paid $1 Million. Senator Pat Toomey of PA was paid 600 Grand as the president of the Club for Growth to stump for “free trade” and cheap immigrant labor. Hyper-Neocon Frank Gaffney, (a Ted Cruz stooge) is paid over $300,000 to generate Crony MIC propaganda at the Center for Security Policy.

MIC front Keith Payne is paid over $400,000 as president of the National Institute of Public Policy, which appears to be headquartered in a post office box in Fairfax. AEI Über-Neocon Danielle Pletka is paid over $275,000 at AEI for her recurrent fear-mongering mind-dumps.

And here’s the way it works. A Beltway Crony will set up a 501c and have his/her pals named to the Board of Directors (BoD). The BoD sets the compensation levels of the officers. All they have to do is point to existing 501c’s that shovel tons of money to their cronied-up officers and use those numbers as references for shoveling tons of money to their own Cronies. It’s a one way ratchet to Beltway Easy Street.

The list goes on and on and on. And the system really does include everybody and his brother-in-law given that it is so incestuous. E.g. see the Clinton Foundation.

So what do those people actually do to earn that money? They oversee no actual business functions related to P/L and the have little operational responsibilities beyond schmoozing with their Crony benefactors and picking out nice digs. In other words, they show up, mouth some propaganda scripts aligned with the objectives of their specific Crony money sources and then retire to the Palm or Ruth’s Chris for thick steaks and double martinis. It is indeed good to be them…

But most importantly, where does that money come from? What is really unfortunate is that the MSM in on the scam. They are part and parcel of the rotten, fetid Washington Nomenklatura, so will never follow the money. Americans are getting hosed by the Cronies right and left and there is no one around to even tell them it’s happening.

#2 Comment By Clint On April 12, 2016 @ 11:19 am

Buffett’s Berkshire Hathaway, as a shareholder of American Express, Bank of America, Goldman Sachs and Wells Fargo, also benefitted from their government TARP funding.

#3 Comment By Tomas On April 12, 2016 @ 12:29 pm

When we think of the early Christians, images of them being fed to lions come to mind. But that was really only the fate for those who would’ve been allowed to practice the Faith but they refused to burn a pinch of incense for the Roman gods. Those who hypocritically honored the Roman gods (to save their skin) as well as the one true jealous God were generally left alone.

Buffett will be left alone as long as he keeps saying he doesn’t pay enough taxes.

#4 Comment By Johann On April 12, 2016 @ 12:58 pm

Its gotten better here in ND since the oil price collapse, but for years the oil tanker trains took priority on all of the railroad tracks. It was horizon to horizon oil tankers, and the horizon is a long way away in ND. The grain elevators were hugely backlogged with huge grain piles on the ground.

It got so ridiculous that one had to wonder why the trains couldn’t just be stopped, a trench dug next to the tracks, the ends cut off of each tanker car, rolled into the trench, and all of them welded together to make a pipeline.

#5 Comment By Antony On April 12, 2016 @ 1:51 pm

” Inheritance is a major factor only to the middling rich, small business owners, for instance, popular writers or entertainers, an inventor with a successful patent on a useful medical device. Buffett’s proposals would see to it that most of these people’s wealth would be taxed away, maybe even force their heirs to sell the business or patent in order to pay the tax.”

Which is why estates less than $5.45 million per individual /$10.9 per couple are exempted. How much more (tax free) head start do they need? But reform of nonprofit payrolls would be good too.

#6 Comment By George Taylor On April 12, 2016 @ 8:37 pm

Good article, also note when they set up the charitable organization the wealth not only avoids capital gains taxes but estate taxes as well. I’ve noted this for years, and that journalist who interview him never grill him on this.

#7 Comment By Ben in WA On April 12, 2016 @ 8:39 pm

Fantastic, informative article. Thank you

#8 Comment By libertarian jerry On April 13, 2016 @ 4:56 am

Many Progressives(socialists)claim that during the FDR years and going well into the boom 1950s the Income Tax rates for the “Rich” was over 90% and that today a tax rate of say 50 or 60 percent on the incomes of the “rich” would be more than fair. When,in reality,most of the “rich” since at least the inception of the Income Tax have had their wealth tied up in endowments,foundations,trusts and corporations making their effective tax rate less than 10% and in many cases the “rich” didn’t pay any taxes at all. The tax code today mostly favors the “old money rich”and instead places the tax burden on the Middle,Upper Middle and newly affluent top 30%. If the Income Tax was extended to the “tax free” Trusts,Foundations and Endowments of the super rich elites I am sure that the tax would either be abolished or dramatically lowered.