Wednesday, January 20, 2010

Warren Buffett shows his true colours

Warren Buffett rose in many people's estimations in 2008 when he observed that

"In our office fifteen people cooperated in a survey out of eighteen: my total tax - payroll taxes plus income taxes - mine came to 17.7 percent - and the average for the office was 32.9%. There wasn't anyone in the office, from the receptionist up, who paid a lower tax rate. And I have no tax planning, I don't have an accountant, I don't have tax shelters. I just do what Congress tells me to do."

Well, now he's come out, in two different places simultaneously, in favour of tax abuse. First, in discussing a recent takeover deal involving Kraft and Cadbury, saying that Kraft used an “enormously tax-inefficient way” for the sale. As we noted in our short Dictionary of Offshore Obfuscation (see the bottom of this blog), "tax-efficient" means "efficient for me, but not for you." In other words, there's no overall efficiency gained, as a rule.

And this needs pointing out - a lot of mergers and acquisitions over the years have been driven very substantially, and sometimes entirely, by the logic of tax abuse. A predator sees a takeover target, and sees that it isn't being tax-abusive enough. So it takes over the target, in order to be able to play the tax-dodging game more effectively, such as by using that takeover target's particular geographical configuration to get into new kinds of tax gymnastics, in order to wring more money out of taxpayers (and what goes for tax, here, also applies to regulation in the financial sector.) This kind of thing is especially common in private equity deals.

Note that nobody's made a better, cheaper widget here - it's just about redistributing money, nearly always from the poor to the rich. And a good slice of the benefit ends up in the pockets of management - as noted in an example here.

It's hardly surprising that so many mergers and acquisitions destroy value, if the primary aim isn't to increase real productivity, but instead simply to play financial engineering. Buffett is simply talking his own book here.

And now we have Buffett coming out against a bank tax.

“I don’t see any reason why they should be paying a special tax,” said Buffett . . . Supporters of the plan to tax the banks “are trying to punish people,” he said. “I don’t see the rationale for it.”

Once again, Buffett is talking his own book. And guess what? He owns a chunk of banks Wells Fargo, and provided an equity injection for Goldman Sachs. As the usually well-informed Naked Capitalism notes:

"This little bit of lobbying via the media should end any delusions that Buffett is a friend of the little guy. But what is even more striking is his failure to mount a serious argument. . . . You can argue about the design of the tax, but there is nothing wrong with the logic."


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