Give Berkshire Hathaway chairman Warren Buffett some credit for acknowledging that he has revised his views about the perils of federal budget deficits. A careful reading of Buffett’s latest annual letter to shareholders indicates that the Oracle of Omaha may be revising his public positions about taxes, too, though he isn’t quite so bold as to come out and say so directly.
Mr. Buffett’s letter is worth a close read every year, and this year more than ever. Mr. Buffett, who is 88, serves a lot of functions, but one of them is as a public face of capitalism at a moment when the free enterprise system seems increasingly under attack by self-proclaimed socialists such as Senator Bernie Sanders and a newly elected member of the House, Alexandria Ocasio-Cortez.
Taxing and spending — and managing the gap between the two — is one of the central functions of politics. So Mr. Buffett’s word on the matter carries the weight of his accumulated experience and reputation. That’s something, even after discounting for his tendency to promote his own interests — “talk his own book,” as they say on Wall Street — and to adjust his sails to the prevailing political winds.
On the deficit point, Mr. Buffett seems to throw his lot in with those in the economic debate — tax-cutting supply-side economists on the pro-growth right and big “stimulus” spenders on the pro-growth left — who argue that concerns about accumulated deficits are overstated or misplaced.
“Those who regularly preach doom because of government budget deficits (as I, myself, regularly did for many years) might note that our country’s national debt has increased roughly 400-fold” over the past 77 years, Mr. Buffett writes in the letter released this past weekend. “That’s 40,000%!”
Mr. Buffett notes, though, that anyone who “panicked at the prospect of runaway deficits and a worthless currency” and put $114.75 into gold instead of American stocks 77 years ago would have made a poor decision, foregoing more than a half million dollars of gains.
On the tax point, Mr. Buffett is more subtle. In a 2012 New York Times op-ed, Mr. Buffett had described an investor turning down a deal for tax reasons as a figment of “Grover Norquist’s imagination,” a reference to the longtime president of Americans for Tax Reform.
“Let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased,” Mr. Buffett wrote then, dismissively.
Now that taxes at the corporate level have been cut instead of raised, Mr. Buffett is telling something of a different story. In this year’s letter, he explains that the Trump corporate tax cut “materially increased the intrinsic value of the Berkshire shares you and I own. The same dynamic, moreover, enhanced the intrinsic value of almost all of the stocks Berkshire holds.”
One of the most useful aspects of this year’s Berkshire Hathaway shareholder letter is the concrete and specific way that Mr. Buffett explained how the tax cut makes companies worth more to their shareholders.
Here is how he put it: “Like it or not, the U.S. Government ‘owns’ an interest in Berkshire’s earnings of a size determined by Congress. In effect, our country’s Treasury Department holds a special class of our stock – call this holding the AA shares – that receives large ‘dividends’ (that is, tax payments) from Berkshire. In 2017, as in many years before, the corporate tax rate was 35%.”
Buffett went on to describe the effect of the lower rate enacted by the Republican Congress at Mr. Trump’s urging. “Last year, however, 40% of the government’s ‘ownership’(14/35ths) was returned to Berkshire – free of charge – when the corporate tax rate was reduced to 21%. Consequently, our ‘A’ and ‘B’ shareholders received a major boost in the earnings attributable to their shares.”
Mr. Buffett’s defenders will surely point out that his New York Times op-ed was about personal income and capital gains tax rates, while the discussion in this year’s shareholder letter was about corporate tax rates. The principle, though, is precisely the same — the value of an asset or of a flow of earnings changes depending on how much of it the government is going to seize in taxes. It doesn’t matter whether that seizure is annually at the corporate tax level, or at the level of an individual shareholder’s capital gain on sale of stock or income on receipt of a dividend. Either way, the less the government takes, the more the asset or the flow of earnings is worth.
This has implications, too, for whether American stocks overall are overpriced or underpriced relative to historical levels. Many of the price-earnings-multiple comparisons that get thrown around don’t take individual tax-rate changes into account. If the Trump corporate tax cut “materially increased the intrinsic value of the Berkshire shares,” so too do individual income and capital gains tax cuts materially increase the value of companies and their shares.
That’s not a figment of Grover Norquist’s imagination. It’s basic math.