Louis Proyect: The Unrepentant Marxist

June 26, 2006

Warren Buffett largesse

Filed under: economics — louisproyect @ 11:23 pm

“I’ll tell you why I like the cigarette business. It cost a penny to make. Sell it for a dollar. It’s addictive. And there’s a fantastic brand loyalty.”

–Warren Buffett

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USA TODAY’ April 13, 1993

Buffett buys a 5% chunk of UST

By Dan Dorfman

Super investor Warren Buffett isn’t a smoker – but he’s apparently been smitten by a tobacco company.

USA TODAY has learned that Berkshire Hathaway, the multibillion-dollar diversified company run by Buffett, has taken a sizable stake – perhaps close to 5% – of UST, formerly U.S. Tobacco. UST, a leading maker of smokeless tobacco (Skoal, Copenhagen) is one of the nation’s most profitable companies.

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NY Times, June 26, 2006

Buffett Always Planned to Give Away His Billions

By JEREMY W. PETERS

Warren Buffett, the billionaire investor and executive, said today that he never seriously considered doing anything with his $44 billion fortune except giving it all away.

“I’m not an enthusiast for dynastic wealth, particularly when 6 billion others have much poorer hands than we do in life,” Mr. Buffett said at the New York Public Library, where he was appearing with Bill and Melinda Gates, the only Americans richer than he is.

Mr. Buffett said on Sunday that he would give away 85 percent of his fortune ­ about $37.4 billion worth of stock in Berkshire Hathaway, the company he runs ­ to five charitable foundations, with the greatest share, about $31 billion, going to the Bill and Melinda Gates Foundation, which is dedicated to improving health and education, especially in poor nations.

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Ferdinand Lundberg, “The Rich and the Super-Rich”:

While the largest foundations and flotillas of foundation: have been mentioned, size is not alone important. Smaller foundations act as conduits and control points, useful in sorts of secret business affairs and especially in tax evasion. Nearly every large corporation and many of the large now have their own foundations. And small foundations often suddenly flower into huge growths.

Among other things, as [Congressman Wright] Patman found, foundations can become tax-free receptacles for capital gains. An individual or corporation may have an investment it wishes to liquidate but which stands to incur a huge capital gain on large long-term appreciation. Payment of a capital gains tax may be avoided by turning the investment over to a foundation (no gift tax) and then having the foundation sell the investment (no capital gains tax). The foundation may now lend the entire liquid sum back to the donor at a nominal interest rate (no law requires that the foundations seek maximum earnings), or it may with the untaxed money obtain a controlling block of stock in some company the original donor wishes to control. With this control he can raise or lower the company’s] dividend rate, obtain power over its possibly large cash and management and perhaps even obtain for himself further low-interest loans.

With low-interest loans received, a donor can make lucrative investments. He could, for example, with a loan which he paid 1 percent, itself tax deductible, go out buy tax-free local government bonds paying him a tax-exempt 3 percent.

Let us suppose that an original investment of $10 million was now valued at $100 million. If it were sold it would incur a capital gains tax of approximately $22.5 million. But if were all given to a foundation the foundation could sell and pay no gains tax. Now if the foundation lends the whole sum back to the donor at 1 percent he pays it $1 million a year. And if he makes $3 million on a tax-free investment in government bonds he keeps $2 million annually, tax free. But if he had sold the original amount he would have had only $77.5 million after-tax capital which, invested at 5 percent, would have brought him $3,875,000. After payment of about $2,712,500 (or 70 percent) income tax, he would have remaining $1,162,500 annually or almost a half less than by the first procedure. It was clearly financially advantageous to filter the money through the “charitable” foundation.

If he so desires he can in fifty years build the original sum in his personal name back, all tax free. After fifty years he or his family can possess, in fee simple, $100 million in free new assets and also control the disposition of the original $100 million in the foundation, which may satisfy legal requirements by using its small income to assist crippled newsboys or homeless dogs.

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