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Tuesday, May 20, 2003

The Case for the Tax Cut-Part 1-Buffett, the Democratic Parrothead-Josh points out that Warren Buffet has come out against the tax cut bill heading through Congress. There are two reasons to ignore Buffet’s rejection of the dividend tax proposal. The first is that Buffet has been a consistent critic of tax cuts in the recent past and the second is that it is bad for his business. A little bit of financial history is an order. Buffet’s big claim to fame is his corporation, Berkshire Hathaway. One of the quirks of BH is that it never pays dividends. The second is that it never splits its stock. Thus, BH stock closed at $73,400 a share today. No, I didn't put a comma in there by mistake, that is seventy-three thousand and four hundered United States dollars a share. Not exactly appealing to the small investor. His paean to the small investor, the class B shares, which are 1/30th of a class A share, trade at $2446. Back when I was taking my first finance class in the fall of 1987, the stock was trading for $3800 and it was the stock with the highest price on the NYSE at the time. Since then, the stock has gone up nineteen-fold without a stock split. One thing the tax bill will do to Berkshire Hathaway is to both make its no-dividends policy passé. For a firm to plow profits back into a company that is in a high-dividend paying industry such as insurance will cause it to lose its value if dividends become tax free. It will also make the mature, dividend-paying companies that it likes to buy more expensive. Thus, Buffett is not only opposed to higher taxes on philsophical grounds, it's bad for his business, which explains some of the venom in his piece.

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