Earlier this week, I featured a video of an inteview conducted by Matt Lauer of Warren Buffett, in which the multibillionaire recommended tax hikes on the wealthy as a morale-booster for the middle class.  “I think would have a great effect in terms of the morale of the middle class,” Buffett told Lauer, while scoffing at the argument that higher taxes on capital gains would have any impact on investment decisions.  “Only in Grover Norquist’s imagination,” he chuckled at Lauer’s question.  On top of this, Buffett also recommends continued federal spending at 21% of GDP (it’s closer to 25% at the moment) with revenues calculated at 18.5% of GDP, and says not to worry about the debt and deficits as long as they remain stable.

That, however, is not the only opinion on the matter of dynamic consequences of tax-rate increases, deficits and debt, and other budgetary policies.  Let’s see if we can identify some of the Wall Street legends who have offered differing opinions on the importance of tax policy and deficits on investment decisions.  I’ll have the answer key below:

  1. “My net worth is the market value of holdings less the tax payable upon sale.  The liability is just as real as the asset unless the value of the asset declines (ouch), the asset is given away (no comment), or I die with it….Investment decisions should be made on the basis of the most probable compounding of after-tax net worth with minimum risk.”
  2. In the case of WPPSS, the “business” contractually earns $22.7 million after tax (via the interest paid on the bonds),and those earnings are available to us currently in cash.  We are unable to buy operating businesses with economics close to these.  Only a relatively few businesses earn the 16.3% after tax on unleveraged capital that our WPPSS investment does and those businesses, when available for purchase, sell at large premiums to that capital.
  3. That’s because bonds are as sound as a dollar – and we view the long-term outlook for dollars as dismal.  We believe substantial inflation lies ahead, although we have no idea what the average rate will turn out to be.  Furthermore, we think there is a small, but not insignificant, chance of runaway inflation. Such a possibility may seem absurd, considering the rate to which inflation has dropped.  But we believe that present fiscal policy – featuring a huge deficit – is both extremely dangerous and difficult to reverse. (So far, most politicians in both parties have followed Charlie Brown’s advice: “No problem is so big that it can’t be run away from.”) Without a reversal, high rates of inflation may be delayed (perhaps for a long time), but will not be avoided.  If high rates materialize, they bring with them the potential for a runaway upward spiral.
  4. The faith that foreigners are placing in us may be misfounded.  When the claim checks outstanding grow sufficiently numerous and when the issuing party can unilaterally determine their purchasing power, the pressure on the issuer to dilute their value by inflating the currency becomes almost irresistible.  For the debtor government, the weapon of inflation is the economic equivalent of the “H” bomb, and that is why very few countries have been allowed to swamp the world with debt denominated in their own currency.  Our past, relatively good record for fiscal integrity has let us break this rule, but the generosity accorded us is likely to intensify, rather than relieve, the eventual pressure on us to inflate.  If we do succumb to that pressure, it won’t be just the foreign holders of our claim checks who will suffer.  It will be all of us as well.” 

So who are the geniuses who dare to contend with Buffett?

  1. Warren Buffett.
  2. Warren Buffett.
  3. Warren Buffett.
  4. Warren Buffett.

Daniel Schuchman pulled these quotes from Buffett’s extensive writings of the past for Forbes, in a column that should be read in its entirety.  Schuchman blasts Buffett for pretending that his entire history of investment strategy doesn’t exist in order to advance a political agenda — especially an ultimately incoherent agenda:

Mr. Buffett now proposes that the minimum individual tax rate for those making between $1 million and $10 million should be 30%, and for those making over $10 million it should be 35%.  No rationale is given for these rates.  Why not 25%?  Why not 50%?  The reader is given no insight as to whether these rates are based on some distributional principle, an attempt to maximize government revenue, or something else.  We are left only with The Oracle’s arbitrary decree which we are apparently not to question.  Mr. Buffett’s sanctimonious tone is inversely proportional to his willingness to propose any reform that would materially impact his own financial position.  Virtually all Mr. Buffett’s wealth is attributable to the ownership of stock, not current wage income.  He has commenced a plan to give away his shareholdings to various charitable foundations (a noble endeavor) which will also avoid triggering many billions of dollars in tax payments.  He is conspicuously silent about whether he would support a tax reform that eliminates charitable deductions.

But perhaps the most disturbing aspect of Mr. Buffett’s revisionist history comes when he turns to his prescriptions for our nation’s deficit and debt.  The federal government’s goal should be to raise revenues of 18.5% of GDP and to spend 21% of GDP, he recommends.  Nowhere does he explain why these levels are optimal and whether they derive from a social, economic, moral, fiscal or national security perspective.  Mr. Buffett acknowledges that these ratios guarantee future annual deficits but he takes comfort that “assuming even conservative projections about inflation and economic growth, this ratio of revenue to spending will keep America’s debt stable in relation to the country’s economic output.”  He seems awfully complacent about the prospect of our country incurring hundreds of billions of dollars of additional debt, every year, potentially forever.

Buffett wins this debate, of course … but not the latest iteration of Buffett.