Warren Buffett called on Congress to maintain the estate tax

Nov. 14 (Bloomberg) -- Warren Buffett called on Congress to maintain the estate tax, saying that plans to repeal the levy would benefit a handful of the richest American families and widen U.S. income disparity.

Buffett, the billionaire chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., told the Senate Finance Committee that advocates of repeal were ``dead wrong'' to call the levy a ``death tax.''

It would be more appropriate to call it a ``death present,'' said Buffett, 77, who is the third-richest person in the world, according to Forbes Magazine. ``A meaningful estate tax is needed to prevent our democracy from becoming a dynastic plutocracy.'' Heirs to vast fortunes, he said, have already won the ``ovarian lottery'' and shouldn't be further rewarded by the tax system.

Congressional Democrats are likely to seize on Buffett's comments to bolster their argument that repeal of the estate tax amounts to a windfall for a few wealthy families. Republicans have pushed to permanently eliminate the tax or reduce the rate and increase the value of exempt estates.

Buffett said that in the last 20 years, tax laws have allowed the ``super-rich'' to get richer.

``Tax-law changes have benefited this group, including me, in a huge way,'' he said. ``During that time the average American went exactly nowhere on the economic scale: He's been on a treadmill while the super rich have been on a spaceship.''

Dormant Issue

The estate tax has been a dormant issue for the last year after Republicans failed to lure enough Democrats to agree to a repeal or permanent reduction of the levy. In August 2006, former Senate Majority Leader Bill Frist, a Tennessee Republican, tried to win Democratic votes by tying repeal to an increase in the minimum wage.

Lawmakers are under pressure to reach some agreement on the future of the tax because a law enacted by Congress in 2001 gradually phases it out through 2010, when it will be fully repealed for one year. The tax is scheduled to return in 2011 with a top rate of 55 percent on estates worth more than $1 million. For this year, individual estates valued at more than $2 million are taxed at a top rate of 45 percent. By 2009, estates valued at less than $3.5 million will be exempt.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said today that less than 1 percent of U.S. households currently pay the tax. He said repeal lacked support in the Senate and the purpose of the hearing today was to solicit ideas for replacing the shifting rules and uncertainty of the current system.

`Taxable Event'

Senator Charles Grassley of Iowa, the ranking Republican on the panel, said the estate tax should be repealed because ``death should not be a taxable event.''

``As long as a person has accumulated an estate in accordance with the law, the government should not be able to profit from that person's death,'' he said. He said, however, that he may be willing to accept a compromise short of repeal, as long as lawmakers ``are looking out for small business owners and family farmers.''

Buffett urged the committee to keep the estate tax in some form and to use the $24 billion it raises to give a $1,000 tax rebate to low-income households.

`Shifting' Tax Burden

``We need to raise about 20 percent of GDP to fund the programs the American people want from the federal government,'' he said. ``Further shifting this burden away from the super-rich is not the way to go.''

He said that if he had his ``druthers,'' the tax code would be restructured to remove some of the burden from households earning less than $20,000 a year. Those households pay a 15.3 percent Social Security and Medicare tax, he said, while top money managers at hedge funds and private-equity firms pay a 15 percent rate on most capital gains, dividends, and profits they earn.

``I can't imagine a tougher problem than living in the United States and having a $20,000 income and having $3,000 taken out of that,'' Buffett said.

Weighing in on another tax issue being debated in Congress, he said he favored increasing the tax rate on so-called carried interest, the compensation that executives at buyout and venture- capital firms, as well as real estate partnerships, receive for investment services. Carried interest is currently taxed at the 15 percent capital-gains rate. The House passed a measure last week that would require it to be taxed as income, at rates as high as 37.9 percent.

Bill Gates

Other billionaires have joined Buffett in urging Congress to keep the estate tax, including Bill Gates, the world's richest man and founder of Microsoft Corp. Gates told a Senate panel in March that he agrees with his father, William H. Gates Jr., who wrote a book in support of the estate tax.

George Soros, a billionaire investor, has joined Buffett in signing a petition sponsored by an activist group called Responsible Wealth that calls on lawmakers to preserve the tax. More than 2,000 people whose estates would be subject to the tax have signed the petition, according to the group's Web site.

Republicans say the estate tax threatens small family businesses and farms because heirs are often forced to sell the business to be able to pay the levy.

Eugene Sukup, founder and chairman of Sukup Manufacturing Co. told the committee today that the tax is ``one of the greatest threats to our family-owned business.'' He told the panel that if he and his wife die, his sons would have to sell the Sheffield, Iowa-based company, which makes grain-handling equipment, to pay as much as $20 million in taxes.

Tax Planning

Sukup said tax-planning strategies that minimize that liability cost his company money that otherwise would be reinvested.

Dean Rhoads, a rancher and state senator from Nevada, testified that his family had to sell a ranch in the 1970s when his parents died and they owed $300,000 in estate tax. The family owed an additional $340,000 in 1995 when his father-in-law died.

``Because of this, I can say without a doubt that we have not made very many capital improvements to our ranch,'' he said.

Mark Bloomfield, president of the American Council for Capital Formation, a Washington group that has lobbied for repeal of the levy, said the Senate hearing today is a prelude to a congressional compromise on the issue next year.

Missing Votes

``I don't think complete repeal has the votes, has not had the votes for a few years, and won't have the votes in the future,'' Bloomfield said.

A compromise that exempts estates worth several million dollars and sets a rate on those valued at more than that at between 15 percent and 35 percent may be achievable, he said.

Committee members appeared to be leaning to an overhaul that would raise the exemption to between $4 million and $6 million and lowering the rate.

``The parameters for a deal are there. They've been there for the last couple of years. The politics have gotten in the way,'' he said. The thorniest disagreement, Bloomfield said, has been over setting the rate. Republicans such as Senator Jon Kyl of Arizona, want it to be 15 percent, while Democrats have rejected a 30 percent rate as too low.

Buffett said lawmakers should find a compromise that creates certainty for taxpayers and businesses.

Senator Maria Cantwell, a Washington Democrat, pointed out that Buffett has pledged to donate the bulk of his fortune to the Bill & Melinda Gates Foundation and will largely avoid paying estate tax on that amount.

In an interview after the hearing, Buffett said that after his wife's death in 2004, her estate paid $82 million in federal taxes and $32 million in state estate tax. He said he would give the Gates Foundation his Berkshire Hathaway stock, valued at more than $40 billion, and estate taxes would be paid on the assets he leaves his children.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net Alison Fitzgerald in Washington at Afitzgerald2@bloomberg.net

Last Updated: November 14, 2007 14:38 EST