Diane Francis on Business Issues

Tuesday, August 08, 2006

Bill Gates & Warren Buffett on Estate Taxes

The Republicans, fearing a bloodbath in this fall's mid-terms, have honed a cynical compromise. Most seem ready to agree to boost minimum wages by US$2.10 an hour to US$7.25 within a decade in order to camouflage their attempt to scrap estate taxes for a few thousand super wealthy.

But the camouflage isn't working, thanks to America's two richest individuals Warren Buffett and Bill Gates. Both are totally opposed to scrapping estate taxes which, by the way, Canada scrapped in 1972 and replaced with a 25% capital gains tax upon death or departure.

The two most successful men in the United States oppose scrapping estate taxes based on the indisputable logic that such taxes are absolutely essential in order to foster free enterprise.

This is because such taxes mitigate the creation of an elite which can control the economy and politics, thus removing opportunities for new, smarter players. Look at Latin America or Saudi Arabia if you think unfettered inherited wealth builds sound economies and good societies.

Warren Buffett described the rationale behind estate taxes best: "Repealing estate taxes is equivalent to choosing the 2020 Olympic Team by picking the eldest sons of the gold-medal winners in the 2000 Olympics."

He made that statement the day he announced that his wealth was mostly going to the Bill and Melinda Gates Foundation (and four smaller foundations to be run by his three children). The Gates Foundation finances social development and healthcare projects that governments and the private sector have neglected.

Mr. Buffett and Mr. Gates not only oppose scrapping the tax but favor increasing it. Gates' father, a Seattle attorney, leads the political movement in favor of higher taxes.

Despite the compelling logic, the Republicans seem to be listening to the lobbyists on behalf of the richest families who have spent US$500 million since 1994 lobbying to repeal the taxes, according to U.S. think tanks Public Citizen and United for a Fair Economy.

By the way, these estate taxes are rarely paid to governments. The wealthy have a choice: pay the money to the government or set up a bona fide foundation and give it away.

And that's another benefit derived from the taxes. These foundations fill a void that's often missing. These foundations and families divest their wealth to build hospitals, universities or to make contributions to social development projects, foreign aid schemes, public-interest research or the arts.

It's a win-win situation for the public.
And estate taxes are one of the main reasons why Americans are roughly four times' more charitable than Canadians on a per capita basis.

Currently, the taxes in the United States are punitive and can total 90% in some regions. There is a federal estate tax of 55% on estates worth US$2 million or more and, in addition, most state governments impose a death duty.

By contrast, Canada is unique among developed nations in that it has no estate taxes.
Worse than that, Canada also allows its wealthiest citizens to pay a 25% departure tax on wealth created in Canada and then move to tax-free or lower tax offshore havens forever so they never have to pay taxes again.

This is what Canadian families headed by tycoons such as Frank Stronach, Michael deGroote and the billionaire Irvings of New Brunswick, among others, have done with their wealth.

While this is not illegal, morality is another matter. People who have made fortunes should pay back the country that gave them the opportunity to become wealthy. So should their offspring and their offsprings' offspring.

By contrast, the U.S. taxes its wealthiest citizens when they die but also wherever they live even if they have renounced their citizenship.

Mr. Buffett, who lives in a house he bought for $31,500 even though he is the world's smartest stock market investor, also articulated estate taxes as an important cornerstone of social justice.

"It's in keeping with the idea of equality of opportunity in this country, not giving incredible head starts to certain people who were very selective about the womb from which they emerged," he said.

He chose the Bill and Melinda Gates Foundation to give his US$31 billion to because he said the couple has demonstrated that it knows how to do its due diligence so that its "giving" is leveraged and provides sufficient scale to make a difference.

The Gates' Foundation has a very small staff and prefers partnerships or networks as a giving strategy. But it is selective in how to hands out funds.

For instance, the Foundation has provided badly needed technology to 11,000 public libraries in the U.S. It has given US$100 million to 8% of New York City's public high schools providing they met certain curriculum criteria. And it just announced US$237 million in grants to several research groups to come up with a vaccine against AIDs providing they all agreed to cooperate and to share their results globally for others to work on.


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