Taxes & Spending

Warren Buffett Benefited From Death Tax

Recently, billionaire investment maven Warren Buffett made national headlines when he used $30 billion gift to the Bill and Melinda Gates Foundation as a platform to reiterate his support for the death tax. Mr. Buffett’s gift deserves our admiration, but his policy pronouncements should be taken with more than a grain of salt. You don’t become the world’s second wealthiest man without keeping both eyes firmly on the bottom line and Mr. Buffett has advocated keeping the death tax for years. What could a billionaire possibly gain from keeping a tax on inherited wealth?

The answer, of course, is money. In the process of building his company, Berkshire Hathaway, Mr. Buffett benefited tremendously from death tax. In fact, the tax is critical to two of the three legs that make up Mr. Buffett’s financial stool.

The “Oracle of Omaha’s” wealth has come from making wise investments in three different business activities. First, he’s made substantial investments in major corporations that he believes will appreciate; second, he operates a huge casualty and life insurance business which provides massive reserves of cheap capital to support his other two investing activities; and third, he purchases family owned businesses at fire sale prices. The last two practices are directly dependent on the death tax, and it’s unlikely that Mr. Buffett would be the world’s second richest man without it.

The life insurance companies that give Mr. Buffett such a large reserve of capital to draw on are heavily dependent on the death tax. As an industry, life insurance companies make $12 billion a year off of the tax and have fought tooth and nail to keep it in place. What’s the connection? Because life insurance policies are tax free, they have long been the most commonly used loophole to avoid paying the death tax.

A family business owner or farmer takes out a large life insurance policy which his sinks tens or hundreds of thousands of dollars into each year. When he finally passes away, the life insurance pays out his policy to his family—tax free. In short, the business owner pays a huge sum of money over a long period to the insurance company to avoid paying an even larger sum of money to the federal government all at once. The only group this tax avoidance scheme really helps is life insurance company owners like Mr. Buffett.

Many business owners loath these payments, which they see as basically protection money, but they often have no choice but to pay up. They’d rather pay the financial thugs in the insurance industry than see their business torched by the much more dangerous thugs at the IRS. The vast sums they send to the insurance industry stunts the growth of their businesses—which is one of the major reasons repealing the death tax would create 240,000 new U.S. jobs every year.

Even as Mr. Buffett’s insurance companies are “protecting” family businesses from the IRS, he is buying companies that are forced to sell themselves to pay the death tax. Mr. Buffett’s ability to buy family businesses at bargain basement prices depends on families being desperate to sell—and nothing produces family businesses desperate to sell quickly like a 55% bill from the IRS on all of the businesses’ assets.

Mr. Buffett has bought numerous companies who were forced to sell because of the death tax including: Dairy Queen, Jordan’s, Justin Industries, Star Furniture, Borsheim, Ben Bridge Jewelers, U.S. Liability, NetJets, R.C. Wiley, Flight Safety and Nebraska Furniture Mart.

These investments are the financial equivalent of a vulture scavenging a corpse. Berkshire Hathaway is benefiting directly from the misfortune of others – and the economy would be much better off if the death tax didn’t force families to sell their businesses under duress. According to the Congressional Joint Economic Committee (JEC) the death tax sucks $847 billion in capital from the economy every year.

Even though he’s personally benefited from the death tax, Mr. Buffett’s donation has underlined one of the most widespread yet misleading arguments for keeping the death tax—forced charity. Pro-tax advocates argue that we need to keep the death tax because it encourages charitable giving, and that if the tax is repealed charities across the nation will lose billions. The only problem is that the evidence to back up their argument is spotty at best.

Since the federal government began scaling back the death tax in 2001 we’ve had a chance to test its impact on charity. Over the last five years the tax’s rate has decreased and the deduction has increased—but charitable bequests haven’t dropped. According to the 2005 edition of Giving USA, published by an organization that seeks to advance philanthropy, “Despite prediction, there has been no observed impact on charitable giving from the gradual change in estate tax filing requirements.”

Is it really a good idea to destroy nearly a quarter million jobs each year to keep a tax that may or may not encourage charity?

Everyone familiar with this issue knows that truly wealthy families in the U.S. have managed to avoid the death tax for decades through careful estate planning. Even Warren Buffett admitted to reporters that his money would be better spent by a foundation than by the federal government.

That’s the biggest irony of Mr. Buffett’s advocacy for the death tax—he doesn’t want the government spending his money either. A business owner who has worked hard, played by the rules and paid their taxes all their lives deserves to decide where their legacy will go without the IRS staring over their shoulder. Despite his lifetime of profiting from the death tax, Mr. Buffett has made an admirable decision about what to do with his wealth—but shouldn’t other business owners have a choice as well?

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