Buffett's Tax Remarks -- Was Anyone Listening?
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.