Daniel J. Mitchell

President Obama, echoed by the establishment media, routinely trumpets Warren Buffett’s support for higher taxes.

If this rich guy is willing to pay more, the story goes, then surely the rest of us peasants should just roll over and acquiesce to the President’s class-warfare tax policy.

Well, one reason we shouldn’t surrender is that Buffett is either stupid or dishonest. In previous posts, I’ve exposed his fiscal innumeracy and explained that he is understating his own tax rate.

I also posted a video exposing the hypocrisy of rich leftists, who refuse to write checks to Uncle Sam notwithstanding their self-proclaimed willingness to pay more. As far as I’m aware, this also describes Buffett.

But maybe all this tax talk is a distraction. Perhaps the real story is that Buffett is a clever political manipulator and that his support for higher taxes is a way for him to pay back the politicians who have enacted policies to line his pockets.

Here are some very revealing passages from a new Reason column by Peter Schweizer. We start with the image that Buffett is creating for himself.

He frequently takes to the nation’s op-ed pages with populist-sounding arguments, such as his August 2010 plea in The New York Times for the government to stop “coddling” the “super-rich” and start raising their taxes.

Schweizer than puts forth an alternative hypothesis.

Warren Buffett is very much a political entrepreneur; his best investments are often in political relationships. In recent years, Buffett has used taxpayer money as a vehicle to even greater profit and wealth. Indeed, the success of some of his biggest bets and the profitability of some of his largest investments rely on government largesse and “coddling” with taxpayer money.

Buffett’s self-interested behavior during the Wall Street bailout is especially revealing.

…on September 23 that he became a highly visible player in the drama, investing $5 billion in Goldman Sachs, which was overleveraged and short on cash. Buffett’s play gave the investment bank a much-needed cash infusion, making a heck of a deal for himself in return: Berkshire Hathaway received preferred stock with a 10 percent dividend yield and an attractive option to buy another $5 billion in stock at $115 a share. Wall Street was on fire, and Buffett was running toward the flames.

What’s remarkable is that Buffett basically admitted he was investing money in the expectation that Uncle Sam was going to make his investment profitable.

But he was doing so with the expectation that the fire department (that is, the federal government) was right behind him with buckets of bailout money. As he admitted on CNBC at the time, “If I didn’t think the government was going to act, I wouldn’t be doing anything this week.”

According to Schweizer’s analysis, Buffett very much needed a pipeline to the Treasury because of his investments in Goldman Sachs and other financial institutions.

Buffett needed the bailout. In addition to Goldman Sachs, which was not as badly leveraged as some of its competitors, Buffett was heavily invested in several other banks, such as Wells Fargo and U.S. Bancorp, that were also at risk and in need of federal cash. So it’s no surprise that Buffett began campaigning for the $700 billion Trouble Asset Relief Program (TARP) that was being hammered out in Washington. …Buffett received better terms for his Goldman investment than the government got for its bailout. His dividend was set at 10 percent, while the government’s was 5 percent. Had the bailout not gone through, and had Goldman not been given such generous terms under TARP, things would have been very different for Buffett. As it stood, the arrangement with Goldman Sachs earned Berkshire about $500 million a year in dividends. “We love the investment!” he exclaimed to Berkshire investors.

The same was true for his investment with General Electric.

The General Electric deal also was profitable. As Reuters business columnist Rolfe Winkler noted on his blog in August 2009: “Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.” …Buffett did very well with Goldman Sachs and GE too after they received their bailout money. His net gain from General Electric as of April 2011 was $1.2 billion. His profits from the Goldman deal by then had exceeded the gains of July 2009, reaching as high as $3.7 billion. He had bet on his ability to help secure the bailout, and the bet paid off.

I don’t know whether the $1.2 billion and $3.7 billion profits were for Berkshire Hathaway of for Buffett, but he still would be accumulating lots of additional wealth even if it was the former.

It also seems that Buffett’s support for the faux stimulus may have been for pecuniary reasons, or at least has a self-interested component.

In late 2009, Buffett made his largest investment ever when he decided to buy Burlington Northern Santa Fe Railway (BNSF). It was not just an endorsement of the railroad industry’s financials; it was also a huge bet on the budget priorities of his friend Barack Obama. …the railroad industry saw Buffett’s involvement as very helpful, precisely because he was so politically connected. “It’s a positive for the rail industry because of Buffett’s influence in Washington,” Henry Lampe, president of the short-haul railroad Chicago South Shore & South Bend, told the Journal. …After Buffett took over the railroad company, he dramatically increased spending on lobbyists. Berkshire spent $1.2 million on lobbyists in 2008, but by 2009 its budget had jumped to $9.8 million, where it more or less remained. Pouring money into lobbying is perhaps the best investment that Buffett could make. …Buffett also owns MidAmerican Energy Holdings, which received $93.4 million in stimulus money. General Electric, in which he owns a $5 billion stake, was one of the largest recipients of stimulus money in the country.

By the way, Bloomberg reported that the President’s decision to kill the Keystone Pipeline was a boon to Burlington Northern.

Was it part of a quid pro quo? We don’t know, but Schweizer’s conclusion is right on the mark.

Warren Buffett is a financial genius. But even better for his portfolio, though worse for the rest of us, he is a political genius.

And if you want more info on Buffett’s unseemly connections with Washington, the invaluable Tim Carney has a column about how the political elite coddles Warren Buffett and another looking at how Buffett profits from bailouts.

The bottom line is simple. When people get rich by providing goods and services in a competitive market, that’s capitalism. When they get rich because of subsidies, bailouts, preferences, and handouts provided by the ruling class, that’s Argentina.

I have no idea whether Buffett is corrupt, but I know he is benefiting from a corrupt system. So it’s understandable that people like me suspect that his endorsement of higher taxes is not because of a mistaken view of fiscal policy, but rather because he wants to do something nice for the politicians who rig the rules to give him more wealth.


Daniel J. Mitchell

Daniel J. Mitchell is a top expert on tax reform and supply-side tax policy at the Cato Institute.
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