2004: Does Berkshire pay its fair share of taxes?

AUDIENCE MEMBER: My name is Martin Wiegand from Bethesda, Maryland. Thank you for hosting this wonderful, educational, and fun weekend. We —

WARREN BUFFETT: Well, thanks for coming —

AUDIENCE MEMBER: —appreciate it.

WARREN BUFFETT: —Martin, yeah. (Applause)

AUDIENCE MEMBER: In this year’s annual report, you defended Berkshire’s tax payment record against criticism from certain newspaper columnists and Assistant Secretary [for Tax Policy at the U.S. Treasury] Pamela Olson.

Compared to other large corporations, particularly insurance companies, does Berkshire pay its fair share so we can our Berkshire Activewear with the American flag on it with pride?

WARREN BUFFETT: Incidentally, Pamela Olson is here today. I don’t know whether she can stand up. But I owe her an apology.

She’s done a great job as a public servant and I teased her a little bit in the annual report. But she actually has worked actively at the Treasury in cracking down on tax shelters and some things that Charlie and I think shouldn’t exist. So Pamela has my admiration. And, like I say, if she’s here and can stand up, we’ll give her hand. (Applause).

Some of the tax shelter proposals — I met with her yesterday — and she told me of some things that I’ve sort of seen myself. But some of the things that have been done and, in some cases, sponsored by the most prominent auditing firms, you know, are absolutely disgusting, and are the reason why, in my view at least, the middle class probably pays a lot more than they should be in terms of raising the total funds that are needed to sustain the government.

Berkshire, as we noted in the report, is a heavy contributor to the Treasury. As I mentioned, if only 540 entities in the country paid what we pay in income tax, no one else would have to pay anything, no Social Security, no nothing.

We have not — I mean, we may own tax-exempt bonds. We own dividends, which receive a dividend receive credit. But we pay on a very, very high percentage of our income — including capital gains — we pay at the full 34 percent corporate rate.

So go out and buy the Fruit of the Loom underwear with the flag on it, you’re entitled to wear it. (Laughs)

Charlie?

CHARLIE MUNGER: I’ve got nothing to add. But you understate the evil that crept into our leading accounts — accounting firms — when they started selling these fraudulent tax shelters in exchange for contingent fees.

One of them actually explained to me that they were an ethical seller of fraudulent tax shelters. (Laughter)

He said, “The other firms just sold these to anybody. And we just sold them to our 20 most important clients so they were more likely to stay secret.”

WARREN BUFFETT: Yeah. And of course, the lawyers would write the opinions so that, if they did get caught with these things that they hoped that no one even picked up because they were so obscure, convoluted, the lawyers wrote the opinions so that the — they could walk — you know, when the IRS came around, they could wave that letter and say, “Well, gee, we’re sorry we made a mistake, but we did it on the advice of counsel and therefore you shouldn’t assess fraud penalties or anything.” I mean, they would — we don’t want to leave the lawyers out of this, Charlie. (Laughs)

We had people come to our office. Not the auditing firm that we use, I want to make that clear. But we had people come to our office from the top auditing firms with these propositions which they said we had to sign away a given percentage of the amount we saved. And then they would give us these proprietary methods, you know, which would usually involve about 20 off-shore trusts and partnerships around the world and all kinds of things.

Many of — part of the design being to have so many entities involved so that the numbers that popped up here or there on the return, that no agent could figure out what the totality of the transaction was.

You know, it’s — those are — the people who don’t pay taxes because of that, increase the taxes of the people in this room. So we — I applaud Pamela for her efforts on that and a lot more are needed.