Warren Buffett on Tax Efficiency

http://www.futureofcapitalism.com/2011/08/warren-buffett-on-tax-efficiency

In the context of Warren Buffett's call to increase capital gains taxes on taxpayers making $1 million or more a year, it's worth remembering the Sage of Omaha's remarks from as recently as this April, at the Berkshire Hathaway annual meeting. As Shira Ovide reported it in the Wall Street Journal:

Buffett admits conglomerates are "unpopular" but says it can be a smart structure. (Note that two of the most valuable countries in the company by market value, General Electric and Berkshire, are indeed conglomorates.)

Buffett said one benefit of conglomerates is allowing the tax efficient transfer of money from businesses that don't have good ways of using it, into sister businesses that have better uses for it.

What Mr. Buffett is saying is that by doing his business through a conglomerate, he is able to reinvest his profits from one business (say insurance) into another business (say railroads) without having to generate a personal income tax or a capital gains tax on the distribution out to the shareholder (himself). This is an important point and it is important to Mr. Buffett. He is keenly aware of the friction of taxes on the accumulation -- and redeployment -- of capital. The absence of taxes on redeployment of profits has contributed both to the efficient reinvestment at Berkshire and to the high returns (without personal income or capital gains taxes) that Mr. Buffett has earned over the years.

This is something that most individual investors are unable to do now. And raising the capital gains taxes in the way that Mr. Buffett proposes would make it even harder for individuals to reallocate capital in the friction-free way that Mr. Buffett extols. This is related to the point made in the Richard Epstein piece linked earlier today about the "lock-in effect" of high capital gains taxes. If, as Professor Epstein suggests, there is a utilitarian argument that privately allocated capital "will do better than a command and control system in satisfying the individual's wants and needs," government should be trying to make it easier, not harder, to, as Mr. Buffett paraphrased by the Journal puts it, transfer money from businesses that don't have good ways of using it into other businesses that have better uses for it.

by Editor  |  Aug 23, 2011 at 1:25 pm Related Topics:  Taxes, Warren Buffett receive the latest by email: subscribe to the free futureofcapitalism.com mailing list