Estate Axes

Warren Buffett, the $35 billion man, was a dear friend of the recently departed Katherine Graham. He met Graham in the 1970s as an investor in The Washington Post Company, her family’s lauded enterprise, where she became the first female Fortune 500 CEO. The relationship matured into deep personal reverence. Roger Lowenstein’s biography, Buffett: The Making of an American Capitalist, chronicles their association. "She considered him her 'closest friend' and relied on him for personal as well as business advice. Buffett became sort of an uncle to Graham's kids." Graham in turn, introduced him to Washington Society, "Suddenly, Warren Buffett of Omaha was mixing with the likes of Henry Kissinger."

It was more than dinners, dignitaries, and touching moments though. Buffett made a fortune, rather one of his fortunes, from his investment in the Post. Lowenstein writes, "By the end of 1985, when Buffett would leave the board, Berkshire’s [Buffett’s holding company] $10 million investment would be worth $205 million." According to Berkshire Hathaway’s 2000 annual report the firm still owns 18% of the Post, which equates to a $976,000,000 position in the paper-cum-media empire.

Buffett gave a speech at Seattle’s CityClub this past Friday, July 21^st. In it he shared his view on the estate tax. Paul Nyhan of the Seattle Post-Intelligencer quoted Buffett as saying, "I am not a big believer in the divine right of the womb." His comments weren’t hasty. "Warren had strong feelings about his money and warned his kids that they should not expect a penny of it. He seemed to fear that even a droplet of his money would spoil them," writes Lowenstein.

Buffett’s relationship with Graham, both professionally and personally, isn’t consistent with his sentiment regarding estate taxes. By investing in the Post he was co-opting the divine right of the womb that bore Katherine, as she inherited her post.

Buffett himself must have seen how important the Graham family, those with divine womb rights, was to the Post. "He signed his proxy over to Don Graham (letting Kay's son and heir cast Berkshire's votes) – an unusual show of faith in management," notes Lowenstein.

In Buffett’s ironic utopia Graham wouldn’t have inherited the wealth her father created with The Washington Post. Graham wouldn’t have been the "Grand Dame" as eulogized by Benjamin Bradlee. Thusly Buffett wouldn’t have reaped any bounty from his investment nor had his sweet fellowship with Graham. Would he really trade his utopist dream for a reality that couldn’t have been better written?

One could never blame Buffett for making such an investment; Lowenstein says Buffett calculated the company to be worth $400 million, the market said it was worth $100 million. But given his womb comments, we can raise one eyebrow and ask him to what extent Katherine Graham’s managerial acumen factored into the Post’s performance, and to what extent her pedigree and her inherited ownership factored into her competence. Does he as an investor hope for more opportunities like the Post, or does he prefer that the government make things "fair"?

Buffett’s vision points to some sort of governmental wealth transfer mechanism. The trick is in deciding exactly what mechanism would be fair. This is the other side of the stick with Buffett’s sentiment, the cost in the cost/benefit analysis of such a system.

Lets assume he doesn’t condone the complete confiscation of an estate by the state. He’d likely settle for a reasonable percentage. What should it be? The only arguable figure is zero percent. How can we mathematically derive any other figure? The impetus is to tax first, spend later. This puts us in a position of creating problems to solve. Taxation is ideally a solution to a problem that requires money, but there is no said problem with Buffett’s stance.

Assuredly people agree that the government, on occasion, will waste money. Most would also concur that such waste is a bigger problem than the masses of millionaires unfairly spoiling their children. To which cause would you lend your voice? (Incidentally, the spoiled children of millionaires seem to need no governmental prompting when it comes to redistributing their wealth with wanton spending. A friend’s grandfather passed on the following popular expression to his grandkids, "The first generation makes the money, the second loses it, and the third spends what’s left.")

Wealthy folks defend themselves from unseemly things like probate with a cavalry of attorneys. Trusts are established to funnel wealth to charitable purposes, and some say, to avoid taxes. The first intention is undeniably noble. But what’s the point when you know the all-wise government is going to be there in the end justly doling out your money to worthy causes?

Bill Gates and a bunch of other billionaires agree with Buffett, lobbying with him against recent estate tax reforms. Gregg Eaterbrook of The New Republic suggests they amend their wills to say, "In the event the estate tax is repealed, I leave 55 percent of everything to the United States Treasury." Surely they would want to set an example before enacting legislation forcing everybody to abide by their ideology. Maybe they’ll scuttle their trusts as well.

The overly money minded see financial success as the ultimate yardstick of human happiness. They therefore think it’s unfair for the children of the rich to have been assured their bliss in life while those of the poor have to earn theirs. Happiness is marked in greater part by achievement and relationships than money. Somebody who is the first to go to college in their family is probably happier than the child who fails to add to his family’s famous worldly standing. If doubt exists that we haven’t spent enough time with our children teaching them to be wealthy and responsible it’s easy to fear our wealth spoiling them.

More Information: "An unlikely coalition for estate-tax repeal"

July 26, 2001

Adam Jones publishes SteadyGains.com, a site tracking Berkshire Hathaway and Warren Buffett.

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