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Carol Roth

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Warren Buffett Should Hold the Government to His Investment Standards

Posted: 09/06/11 05:04 PM ET

In his New York Times column a few weeks back, Warren Buffett lamented that our government was "coddling the super-rich" and advocated increases in taxes on the wealthy through higher rates on capital gains, dividends and income in excess of $1 million and $10 million, respectively.

Certainly Mr. Buffett is one of the most successful and well-respected investors of our time. So, if he is seeking for Americans to give more capital to the government, then why not hold them to the same standards that he does for the management of the companies that he invests in?

Income tax transfers money from individuals to the government to ostensibly be put to use for the good of the country. However, the government hasn't proven its ability to effectively manage and allocate that capital. From racking up a $14 trillion deficit and fostering an economy demonstrating anemic growth, to producing a 9.1% unemployment rate and loaning over a half billion dollars to the now insolvent solar panel manufacturer Solyndra, our government has racked up an abysmal financial track record. Buffett would never invest in a management team that couldn't achieve an acceptable rate of return on investment or at least show some prowess in the financial management arena, so why would he suggest that Americans give our government more of our money?

The government in many ways is like a company that has been making investments in personnel, programs, marketing and other functions but not seeing any results. If they were a publicly traded company, the stakeholders (i.e. investors) would be able to hold them accountable as managers. While I recognize that the government is not a business, the American people certainly are stakeholders in this country, which means that they should be able to hold the government accountable for their financial missteps as well as creating a bloated, ineffective and complicated system that is impeding our ability to grow and compete. While it's not just about financial metrics, that is certainly a hot button issue right now, and clearly a more effective scorecard needs to be development for all of our elected officials, similar to the way an investor would hold accountable any company's management.

Mr. Buffett has always had a penchant for strong, competent management, so one would surmise that he would favor meritocracy over bureaucracy. If the management team of any of his portfolio companies wasn't doing an effective job, wouldn't he also seek accountability? Why not ask for the politicians to take pay and benefit cuts to "share the sacrifice" that he is saying Americans need to make (especially since it was the mismanagement by many of these individuals in the first place that caused this scenario)? Or how about suggesting some real term limits, so that we don't have career politicians that derive benefits from making those loophole deals that coddled Mr. Buffett and friends to begin with?

Another Buffett investing hallmark is his propensity to invest in companies that he understands (not to mention that he also shies away from companies that are over-leveraged). Simplicity of business models has long been a key Buffett investment criteria. But our government and its policies are far from simple. It seems that every bill that comes to be voted upon gets convoluted with side deals and issues unrelated to the item at hand. The tax code is more than uneven- it's downright baffling. Streamlined policies, codes and regulatory agencies would seem to favor and mirror what Mr. Buffett has always advocated. I'm surprised that rather than suggesting an increase in taxes on the wealthy that Mr. Buffett wouldn't favor lowering taxes on the lower and middle classes, while simultaneously closing all loopholes, special deals and incentives as a clean way to level the playing field in a revenue-neutral way.

So, if Mr. Buffett would like to allocate more of his wealth to the government, I suggest he go right ahead and do so, but that should be a personal donation, not a tax code change. He should also be aware that suggesting any increase in tax rates is not consistent with his typical philosophy on the best use of capital. But rather than doing that, I think that the biggest benefit Mr. Buffett could provide to the U.S. government would be to spend some quality time with them sharing and teaching them his business and investment philosophies. The discipline that Mr. Buffett has brought to investing for decades would do far more for the government across the board than any taxation of the mega-wealthy could ever do.

As for me, I am still a Warren Buffett fan, but given our current situation, I will stick to following his philosophy on investments rather than his political rhetoric.

 

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