I just came across a interview of Warren Buffett and Bill Gates which I thought was relevant to our earlier discussions of wealth, luck and whether the wealthy should complain less about their share of the tax burden. (I say “discussion” because, yes, I did get some of you to comment. And no, I didn’t pay anyone to comment.)
In the interview with Liz Claman of Fox Business News on May 4, both Buffett and Gates say they are in favor of the estate tax. They make a pragmatic point similar to the one Robert Frank of the Wall Street Journal made in passing – the estate tax raises significant revenue. If we repeal the estate tax, how will we replace the lost revenue?
Buffett also does the following calculation. Approximately 2,450,000 people in America will die in 2009, but only about 12,000 federal estate tax returns will be filed, which means that only 1 in 200 people leaves a taxable estate. If you went to a funeral every month, says Buffett, it could take 17 years to attend the funeral of someone whose estate will be federally taxed. I haven’t checked his numbers, but his point is that if we repeal the tax on 1/200th of the population, we’d have to shift the tax burden downward to everyone else.
Gates then says that people with very rich estates, himself and Buffett included, have benefitted from the rules and stability of this country. If they had to choose where to be born, they would choose the U.S., even if that meant paying the estate tax.
According to a blog post by Edward Zelinsky, a law professor at Cardozo, Warren Buffett has made the same argument in the past:
Among his other observations, Buffett has correctly noted the dangers to a democracy of inherited wealth as well as the moral obligation of those who have done particularly well in American society to give back to that society. As Buffett observed, he would not be Warren Buffett if he had been born in Bangladesh.
These concerns have led Buffett to support retention of the federal estate tax and to express dismay that his federal income tax bracket is lower than his secretary’s.
Which seems very civic minded indeed, except that, as Zelinsky notes, Buffett and Gates appear to have planned their estates around charitable giving to avoid paying federal estate tax.
Zelinsky writes:
Buffett (and Gates) might explain this apparent contradiction by arguing that their charity is an effective substitute for taxation. Thus, the argument would go, when they give $1.00 to the Gates Foundation with no corresponding tax payment, they should nevertheless be treated as if they had paid $1.00 in tax since the contributed $1.00 is devoted to public purposes.***
[But] giving money to the Gates Foundation is not the same as giving money to the federal Treasury. The federal Treasury is controlled by the people of the United States through their elected representatives. The Bill and Melinda Gates Foundation is controlled by Bill and Melinda Gates.
Zelinsky urges Buffett to put “his money where his heart is” and give charity to the Gates Foundation on a taxable basis. The logic escapes me. If Buffett really believes that the best place for his money was the federal government, he should donate it all to the Treasury and encourage Bill Gates to do the same. After all, Buffett’s estimated $37 billion is 2% of the projected $1.84 trillion federal budget deficit for 2009.
It seems to me that Buffett’s actions imply a clear distrust of governmental taxing and spending programs and their ability to improve society in an efficient manner. As we’ve said, the argument that one has a moral obligation to society for the opportunity to acquire wealth does not necessarily lead to an endorsement of government tax and spend policies. Philanthropy has a long history of improving society. Warren Buffett obviously trusts the Gates Foundation more than he trusts the Treasury to use his money wisely for the public good.
On the other hand, perhaps people who have attained a certain level of wealth stop making sense and maybe I should stop trying to figure them out. At the beginning of the clip Warren Buffett says that the income tax charitable deduction is “peanuts” to him, and he isn’t at all effected by the Obama proposal to reduce the deduction. By the end of the clip, he and Bill Gates are talking about the piles of coupons they used at McDonald’s in China. I’m sure they had a blast.
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Your logic doesn't necessarily follow. Just because Bill and Warren donate their fortune to charity does NOT mean that they do so to avoid paying taxes. It's possible, but you have no proof of that. I would argue that donating your wealth to charity has much more to do with supporting causes that you're passionate about – whether or not you think that they're the responsibility of good government. For example, the Gates Foundation invests heavily in R&D for the developing world, not something that is traditionally the domain of the US gov.
Bigcitythinker:
I highly doubt that Bill Gates and Warren Buffett are donating their wealth to charity for the purpose of avoiding estate tax. As you say, this is clearly about supporting important causes. However, the question, as posed by Professor Zelinsky, is why they do so in a way that avoids the estate tax if they’ve also publicly supported the retention of the estate tax. Why not give to charity on a taxable basis?
I’ll plead guilty to slippery-sloping Professor Zelinsky’s suggestion that the Treasury get a significant share of the estates. I don’t know Professor Zelinsky, but by urging Gates and Buffett to give charity on a taxable basis, he probably does not mean that the best use of wealth is to turn it all over to the government. But he does want to see Warren Buffett back up his support for the estate tax with actions.
My point, though, is that the moral obligation for the wealthy to give back to society, attributed to both Gates and Buffet, is consistent with the kind of philanthropy Gates and Buffett are engaged in. You don’t have to wholeheartedly sign on to the U.S. government’s spending policies to give back to society. In fact, it appears that by not giving charity on a taxable basis, Warren Buffett is saying that the Gates Foundation will do more good with his money that the U.S. government.
“If Buffett really believes that the best place for his money was the federal government, he should donate it all to the Treasury and encourage Bill Gates to do the same.” I think you miss Zelinsky’s point. From Buffet’s viewpoint, Buffet doesn’t need to believe that the federal govt. is the best place for his money to logically fund his foundation with after-tax money. Rather, if Buffet thinks that there is a debt owed to the U.S. for enabling the creation of his great wealth, then taxes should be paid, regardless of whether this is the absolute best use of the money.
To me, these two individuals carry little credibility on this issue. It is one thing to have billions of dollars, which after taxes will leave enough wealth to sustain many generations. It’s entirely different to work your entire life, own a business, farm or just have 1 million dollars in wealth and have the government 50% of what your family could have to live on. It’s simply not right for the “state” to have claim to that much of one’s hard earned wealth.
Avrohom: I think you are construing the idea of a moral debt to society a little narrowly, as though it were a debt specifically to the U.S. government. Zelinsky would like to see at least some of the money intended for the public good go through the Treasury rather than charitable organizations. He places a lot of importance on the fact that “the federal Treasury is controlled by the people of the United States through their elected representatives,” while “the Bill and Melinda Gates Foundation is controlled by Bill and Melinda Gates.”
On the other hand, it is perfectly natural, and I think appropriate, for someone who is giving his entire wealth back to society to plan for what he believes will make the biggest positive impact on society. And as long as it’s legal to do so, why should his philanthropy take a back seat to what the people through their elected representatives deem the best use of his money? Just to make the point that the estate tax is morally defensible?
Your logic doesn’t necessarily follow. Just because Bill and Warren donate their fortune to charity does NOT mean that they do so to avoid paying taxes. It’s possible, but you have no proof of that. I would argue that donating your wealth to charity has much more to do with supporting causes that you’re passionate about – whether or not you think that they’re the responsibility of good government. For example, the Gates Foundation invests heavily in R&D for the developing world, not something that is traditionally the domain of the US gov.
Bruce — all I’m pointing out is that that kind of tax planning, regardless of motivation, is inconsistent with Buffett and Gates’ public statements in support of the estate tax. Sure, philanthropy is about supporting causes you’re passionate about — in fact, that’s half the point. The U.S. government isn’t quite as passionate about R&D in the developing world, and yet rather than fulfill their moral obligation by supporting the society and democratic principles (including decisions as to the allocation of public funds) that made their wealth possible, they’ve privately chosen to support causes they consider more important. I don’t necessarily disagree with the decision — hey, I help clients with tax planning — but it is inconsistent with their statements.
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