En route to his take on the estate tax, Ratigan recounts what he took to be Buffett’s “most important consideration” in a capitalist system: that capital should find good people.
He cites Buffett’s belief in putting trustworthy people control of good businesses and resources and then turning them loose. Buffett believed that doing so would lead to the creation of real value over long periods of time. Interestingly, the products they’d create weren’t terribly important and didn’t need to elevate society, per se. Ratigan writes, “What mattered was whether the people running the company could be trusted to allocate capital intelligently.”
The Buffett Paradox?
While Buffett has been a frequent and vociferous proponent of the estate tax, I’m not sure the paradox Ratigan sees inheres in the elder Buffett’s action. The reason is simple: Buffett’s jeremiad against inherited wealth primarily boils down to the relative inability of business titans’ children to allocate capital. And Warren left that task at Berkshire to CEO Greg Abel.
Despite Ratigan overstating the ‘paradox’ in Buffett’s actions, the Berkshire Hathaway leader’s rationale for breaking from the orthodoxy of much of the contemporary WSJ set is worth examining.
Preventing Plutocracy
"A meaningful estate tax is needed to prevent our democracy from becoming a dynastic plutocracy."
Providing a ‘Death Present’
Those who call inheritance taxes a “death tax” are “dead wrong”. Buffett thinks a better, more accurate term is “death present”.
Preventing the Indolence of Dynasties
"If they pass the bill they're talking about, I could leave $75 billion to a bunch of children and grandchildren... Is that a great way to allocate resources in the United States?"
Argument for Meritocracy
"I don't think we should have our Olympic team 20 years from now be the eldest sons of the Olympic team currently."
At bottom, Buffett argues for inheritance taxes on the basis of incentives. His longtime partner Charlie Munger coined this ‘golden rule’ on the power of incentives: "Show me the incentive and I'll show you the outcome". Arguing that event those who understand the power of incentives typically underestimate their importance in shaping behavior and determining outcomes. Munger argued, “I think I’ve been in the top 5 percent of my age cohort almost all my adult life in understanding the power of incentives, yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower.”
Buffett’s arguments for the wrongheadedness of framing the discussion on inheritance taxes as ‘death taxes’ are a prime example of Munger’s belief that People will unconsciously twist reality and rationalize bad behavior if the incentive structure rewards it.
Ratigan’s emphasis on Buffett’s conclusions is understandable, given the incredible impression talking—and no doubt eating hot dogs—at the Omaha Royals’ baseball game must have been for him. It’s worth looking backward to the origins of Buffett’s (and Munger’s) ideas on estate taxes, capital allocation, and the health of the polity and economy.
Looking Back; Looking Forward: Buffett, Munger, & Adam Smith
One of Charlie Munger’s favorite pastimes was what he called ‘making friends with the eminent dead’. He explicitly references Smith in this vein. "I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the 'eminent dead,' but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better for you in life and work better in education."
As we in the United States celebrate the nation’s 250th Anniversary, the original source of Buffett’s perspective remains as salient as they did that same year when Adam Smith originally penned The Wealth of Nations. (Some of his ideas came from the earlier Lectures on Jurisprudence, written between 1762–1766).
Natural Right vs. State Creation: The Philosophy of Inheritance
Smith explicitly rejected the notion that children have a natural right to inherit their parents' accumulated wealth beyond basic provision during upbringing. In Lectures on Jurisprudence and Book I of The Wealth of Nations, he argued that property rights naturally terminate at death. The ability to pass property to heirs or devise it by will is a construct of civil law and state protection, not a rule of nature.
Buffett operates from the same premise: wealth accumulation is made possible by the economic structure and rule of law provided by society. So, for Buffett like Smith, society has a legitimate claim to set rules on how much capital can pass unconditionally across generations.
Dynastic Aristocracy and European Capital Stagnation
In Book III of The Wealth of Nations, Smith delivers a critique of feudal European laws—specifically primogeniture (all land going to the eldest son) and entails (preventing land from being divided or sold). Smith noted that these laws were instituted to maintain the power of feudal lords, which crippled European agricultural and industrial development:
"They are founded upon the most absurd of all suppositions... that the present generation should be restrained and regulated according to the fancy of those who died five hundred years ago."
Smith observed that hereditary landholders were rarely good improvers of capital because they lacked the incentive or discipline forged by market competition.
Writing and thinking a couple hundred years later, Buffett draws a contrast between European aristocratic stagnation and U.S. capital mobility that directly echoes Smith’s critique of feudal Europe. Both argue that allowing capital to lock into family bloodlines creates an unproductive "hereditary aristocracy" that undermines dynamic, competitive markets.
The Meritocratic Analogy: The Olympic Team vs. Feudal Landlords
Smith consistently argued that market competition, rather than birthright, ought to determine who manages resources. He observed that great inherited fortunes almost inevitably breed indolence and poor decision-making because the heirs did not have to acquire the skills required to generate the wealth.
Buffett’s "Olympic sprint team" metaphor is a modern version of Smith’s core insight: managing capital is a skill set, and genetic lineage is a poor proxy for economic competence or capital allocation skill.
Differences on the Mechanism of Taxation
While their philosophical motivations align, Smith and Buffett differ when it comes to the technical mechanics of taxation:
Revenue vs. Capital Destruction: In Book V, Chapter II of The Wealth of Nations, Smith examined actual taxes on the transmittal of property (such as the Roman vicesima hereditatium or contemporary Dutch and British stamp duties). Smith voiced caution regarding high death duties if they consumed primary capital rather than revenue/income:
Taxes on the transfer of property from the dead to the living, Smith warned, risk converting productive capital (used to employ labor) into government revenue spent on unproductively consumed state expenses.
Adam Smith's Canons of Taxation: Smith measured all taxes against his Four Canons: Equity, Certainty, Convenience, and Economy. While death taxes scored high on convenience (paid when assets are changing hands) and equity (ability to pay), Smith cautioned against taxes that encourage capital flight, complex legal evasion, or forced liquidation of productive enterprises.
Where Smith evaluated death duties primarily as a revenue-raising tool within an 18th-century agrarian economy, Buffett treats the estate tax as an engine of systemic circulation—designed to prevent capital concentration and keep market incentives sharp across generations.
The Middle Ground Between Smith and Marx
In one of his most famous observations on business ethics and capital retention, Buffett directly referenced Adam Smith alongside Karl Marx. If it comes as a surprise that Buffett would deviate from (small ‘C’) conservative economic doctrine in invoking Smith on the benefits of the estate tax, it’s downright shocking that the billionaire hews even further left *toward Karl Marx* in striking a middle ground in practice.
Buffett wrote in his 1985 letter to shareholders, "I won't close down a business of subnormal profitability merely to add a fraction of a point to our corporate returns. I also feel it inappropriate for even an exceptionally profitable company to fund an operation once it appears to have unending losses in prospect. Adam Smith would disagree with my first proposition and Karl Marx would disagree with my second; the middle ground is the only position that leaves me comfortable."
Whether or not Buffett’s naming his son Howard Chairman constitutes a paradox or not, Buffett’s thinking and practice are worth paying attention to.
I would agree with Ratigan’s point if Howard had been installed in the role Abel has been, well, ably, filling since the new year, but not so much given the younger Buffett’s more ceremonial role. Graham Priest, a leading expert on paradoxes, wrote, "when you meet a contradiction, draw a distinction." This, of course, was the basis of the entire scholastic movement from the time Aquinas wrote Summe Theologaie. Buffett and Munger considered teaching one of society’s highest callings. Using Buffett’s thought and practice to help ourselves draw distinctions would serve us well. After all, Qui bene distinguit, bene docet.
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