Greg Mankiw points out that super investor Buffett, calling yet again for higher taxes on high-income earners (this time in the Sunday New York Times), is a master of tax avoidance:
1. His company Berkshire Hathaway never pays a dividend but instead retains all earnings. So the return on this investment is entirely in the form of capital gains. By not paying dividends, he saves his investors (including himself) from having to immediately pay income tax on this income.
2. Mr Buffett is a long-term investor, so he rarely sells and realizes a capital gain. His unrealized capital gains are untaxed.
3. He is giving away much of his wealth to charity. He gets a deduction at the full market value of the stock he donates, most of which is unrealized (and therefore untaxed) capital gains.
4. When he dies, his heirs will get a stepped-up basis. The income tax will never collect any revenue from the substantial unrealized capital gains he has been accumulating. [Greg Mankiw’s Blog, November 26]