Alan Reynolds

 Sen. John Kerry recruited two famous businessmen to what The New York Times described as his "motley team" of economic advisers. Kerry turned to Steve Jobs of Apple Computer and Warren Buffet of Berkshire Hathaway. (When Kerry said he was fighting for Jobs, we didn't realize he meant Steve).
 
Buffett is the second wealthiest man in the world. Steve Jobs just received America's second largest executive pay package. Both are amazingly talented at what they do. But what they do not do is economics. Until now, nobody imagined Steve Jobs had any interest in economics. Buffett, on the other hand, has sounded off on numerous topics. Unfortunately, Buffet's paper trail makes it reasonable to conclude that Kerry approves of his views. And that could prove embarrassing.

 One Buffett article the Kerry camp surely enjoyed was opposed to cutting the tax on dividends -- "Dividend Voodoo" in the May 20, 2003, Washington Post. Buffett argued that if Berkshire Hathaway were to pay $1 billion in dividends, then he would receive $310 million in tax-free income under the president's original proposal, and still a good deal even with the final 15 percent tax.

 But Buffet's could easily take out much more than $310 million out of his $43 billion at any time by selling some shares and paying a 20 percent tax (now 15 percent). The capital gains tax was reduced in 1997 and 2003 because people like Buffett who do not have to sell will simply refrain from selling if the tax is too high. Unfortunately, taxing dividends at a higher rate than capital gains encouraged people like Buffett to vote against paying a dividend, even when the alternative was to risk retained earnings on high-yield euro-denominated bonds.

 A major goal of reducing the tax on dividends to 15 percent was to encourage companies like Berkshire to pay a dividend. Berkshire collects dividends from stocks in companies it owns, but still refuses to pay its own shareholders. And Berkshire's 21 percent rise last year did not keep pace with the 29 percent rise in the S&P 500 or the 32 percent average rise among equity mutual funds.

 Buffett's opinions about the desirability of high taxes on dividends happen to be consistent with maximizing his own wealth, but not necessarily with that of his second-class, non-voting shareholders.

 Similarly, Buffett's famous crusade to compel tech companies to expense a bogus estimate of the cost of stock options is consistent with his aversion to owning tech stocks. Expensing would make it much harder for companies like Apple to compete against companies like Coca Cola for executives and capital. Kerry would be wise to keep Buffett and Jobs in separate rooms.


Alan Reynolds

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