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Buffett's Voodoo

From Nightline to The Washington Post, Warren Buffett has been hitting the media hard this week to express his discomfort with the tax cut currently before Congress. He's sounding like Robin Hood might have –- if he had $30 billion at his disposal.

By Bob Bobala (TMF Bobala)
May 22, 2003

I am sad to report that I have never invested in Berkshire Hathaway (NYSE: BRK.A) -- largely for one reason. I just can't get interested in insurance, which makes up so much of the company's business. I send a check to Berkshire property Geico twice a year, and even that I do grudgingly. The prospect of trying to pretend I care how the insurance industry is doing is enough to route me straight into an index fund.

But every so often I'll be listening to Warren Buffett and thinking, "Damn, that man's gonna have me investing in insurance before he turns over the reins of that company." Last night was one of those moments that made me just want to invest in the man.

The Oracle of Omaha made an appearance on Nightline, marking the convergence of two of the minds I most respect in America: Ted Koppel and Mr. Buffett. Koppel I respect for his journalistic integrity, and because I met him once and he looked me in the eye and pronounced my last name correctly. Buffett I have never met, but fellow Fool Selena Maranjian (TMF Selena) has had dinner with him and I used to sit next to her at Fool HQ -- so we're talking only one degree of separation, or something like that.

Anyway, it's pretty rare that Koppel devotes an entire broadcast to a single guest, but Buffett is one of those rarities. Ted has the ability to somehow let you know where he stands on people and issues and yet sound impartial at the same time. This is how he opened last night's program:

Although I will be the first to admit that most discussions of the president's plan to eliminate taxes on dividends make my eyes glaze over, I expect to understand almost everything that our guest tonight says. Beyond that, you can have a reasonable expectation that he will make it interesting, at times even amusing.

You may think me unduly influenced by the fact that our guest has a net worth of over $30 billion. You would be wrong. His good friend Bill Gates, the only man in the world currently richer than he is, is worth over $40 billion and he is rarely amusing and only sporadically interesting.

Warren Buffett, on the other hand, operates on the curious assumption that investors in his company ought to understand what he is doing with their money. And occasionally he even extends that assumption to apply to what the government is doing with all of our money....

Koppel owns Berkshire Hathaway stock, by the way, or at least he did the last time he interviewed Buffett -- while seated in a Dairy Queen (one Berkshire property I can get my head around). Last night, Buffett videoed in from a conference of CEOs that Microsoft (Nasdaq: MSFT) was hosting in Washington State. He spoke cleanly, if not eloquently, looking as unstylish as ever, with the big, fat collar of a tan, checkered shirt sticking out of an equally boring tan sweater. This is the second-richest man in the world on paper, and it's a beautiful thing.

Of course, the fact that he was on the tube complaining about a tax cut that in essence could eventually save him millions of dollars per year was the greater testament to his character. He's been on an all-out media blitz this week, including a very well-written editorial in Tuesday's Washington Post called "Dividend Voodoo." Now, obviously this is a political argument, and if you've already formed your opinion, you're not going to change your mind regarding the $350 billion tax cut that Congress could pass before the weekend is out. But the op/ed is a good read, as frank and filled with common sense as all of Buffett's writing.

The best example he gives to illustrate his opposition to the dividend tax cut is this: Hypothetically speaking, if the bill passes, Berkshire would likely pay out a dividend to its investors (it currently does not). Say it pays out $1 billion. Buffett, owning 31% of the company, would receive $310 million in additional income, tax-free once the law takes full effect, effectively plunging his tax rate to 3%, fully 10 times less than that of a Berkshire Hathaway receptionist.

"The Senate," he wrote in the Post, "voted last week to supply major aid to the rich in their pursuit of even greater wealth."

And he doesn't think it's right. Buffett is sounding like a modern-day Robin Hood -- only with a $30 billion war chest at his disposal. You can't help but admire his broad thinking, the philanthropic tendencies, his sheer nobility.

Of this, I am certain: He is a better man than I am. Quite frankly, I'm not entirely sure what to make of the proposed tax plan, and if I did you would be lighting up my inbox with flames from both sides right now. There's a greedy part of me that wants those tax-free dividends in my pocket. But the rational side of me thinks the proposal to make them 50% tax-free in 2003, 100% tax-free in 2004-2006, and then once again fully taxable in 2007 sounds like one of the most asinine things I've ever heard.

Plus, I hate debt and deficits, to which further tax cuts could contribute (in fact, in the short term, they most definitely would grow our deficit).

I grew up with parents who ran up their credit cards for years and are still suffering under the weight of the interest payments. The government's going to spend $2.2 trillion or so this year -- no matter how much it has to borrow to do so. It's easy to get lost in the big numbers. Perhaps the debt we are running up as a nation is indeed smaller as a percentage of our gross domestic product (GDP) than in past deficit-ridden years and a deficit is better than tight money in softer economic times.

Perhaps a tax cut will stimulate the economy and raise the government's revenues so that it needs to borrow less. But if it doesn't pan out -- does anyone believe the government ever cuts spending? -- the kind of debt we're racking up now may well again be inflationary (despite the deflationary talk we hear today) and is not a legacy I'll be proud to hand over to our children.... OK, my baser side does say spend away and let future generations handle it after I'm dead, but we all know this is not a good plan.

Buffett argues a better economic stimulus would occur if you put the money in the hands of those who would spend it: "Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets." He proposes a Social Security tax "holiday" or a flat-sum rebate for people with low incomes.

"If it's class warfare, my class is winning," Buffett told Koppel. I'm not sure where that leaves me, a middle class schlep just watching from the couch in his living room. Well, I guess it leaves me in admiration for a rich guy who has enough perspective to appreciate his position in the world and uses it to talk about what he thinks is right. In the past, he has even raged against eliminating the estate tax, which can't be a popular position at Buffett family reunions. You da man, Warren.

Many Fools, by the way, would strongly disagree with him on the dividend tax cut and argue it's a good thing for the economy. Regardless of where you stand, as Bill Mann (TMF Otter) put it in the latest issue of The Motley Fool Select, "How we approach investing in common stocks over the next decades hangs in the balance." If that's the case, the stakes are pretty high, I would say.

Check out Bill's column The Truth About the Dividend Tax for another perspective. Fool Community members can let their opinions be heard on the Political Asylum or Current Events discussion boards. And you can learn all about Buffett's company on the Berkshire Hathaway board.

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