Buffetted: the Sage of Omaha loves the estate tax--as well he might.

'THE Bush Money Machine: An Industry Gets Its Way," screamed a headline on the top front-page story of the May 17 Washington Post. The article quoted a major Bush campaign contributor saying that he supports the GOP because of its belief in "less government, more individual freedom, more individual responsibility." But, in a typical Post "gotcha," the story (by James V. Grimaldi and Thomas B. Edsall) detailed another possible motive for the gentleman's contributions: The Bush administration had reversed one of the Clinton administration's "midnight" environmental regulations that would have affected his business. This, the piece declared, was an example of one of "the subtle intricacies between corporations and an administration determined to roll back what it considers to be regulatory overkill." The article went on to document the Bush administration's adoption of policies "benefiting sectors of the business community ... that happen to be a source of major fundraisers and donors." "Securities and investment banking firms," for instance, "have benefited enormously" from tax changes pushed through by President Bush.

It's perfectly fair, of course, to ask who benefits from a candidate's policies; but the coverage by the Post and other mainstream media outlets has not been evenhanded. In the past few months, quite a few of the super-rich have backed John Kerry and attacked Bush's policies; among them are currency speculator George Soros, insurance magnate Peter Lewis, and Warren Buffett, the CEO and largest shareholder in Berkshire Hathaway, a holding company that owns, among other things, more than 20 percent of outstanding shares of the Washington Post Co. Yet the parallel question is never asked: Would these tycoons benefit from the more interventionist government policies advocated by Kerry and the Democrats?

RAIDING THE ESTATES

Alook at Buffett's holdings shows that in at least one case, that of the estate tax, the answer is a strong yes. Since Bush started pushing for repeal of the estate tax, Buffett--the second richest man in the world, just behind Bill Gates--has emerged as one of this tax's most prominent supporters. Repealing the tax undermines meritocracy, the billionaire argues to a fawning press. It's like "choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics," he told the New York Times. The Post gave him space for a whole column blasting Bush's tax cuts as "class welfare. For my class." Buffett is now on Kerry's economic team. Kerry, in explaining his plans to reverse Bush's phaseout of the estate tax, cites the supposedly noble sacrifice of Buffett. "If Warren Buffett can tell America that he just got a bonanza ... and he thinks it's more important to give $1,000 to every family, I think that's pretty good thinking," Kerry told PBS's NewsHour. At least two of this year's crop of anti-Bush books, Kevin Phillips's American Dynasty and Peter Singer's The President of Good and Evil, laud Buffett for his selflessness in opposing the estate-tax rollback. Liberal pundit Mark Shields has referred to Buffett as the rare "good CEO" who spoke out against the Bush tax cuts.

But Buffett's efforts look considerably less noble to those who have dug into his business holdings and methods: Buffett reaps a windfall because of the destructive impact the estate tax has on family businesses. Through Berkshire Hathaway, Buffett acquires profitable family businesses that are sold to him in large part because the businesses cannot meet the estate-tax burden, while at the same time selling estate-tax-insurance products to help other families hang on to their businesses. (Berkshire Hathaway's corporate headquarters in Omaha did not return phone calls asking for comment.)

Buffett is known for his philosophy of "value investing": buying stocks or businesses at prices below their intrinsic value and patiently waiting to reap returns. In short, he hunts for bargains. And one thing the estate tax does, say experts, is create bargains of well-run family businesses that are sold to avoid estate-tax problems. This is because the tax hits all assets--so if a family has most of its net worth in a business, it must quickly sell that business to satisfy the tax. And these businesses--many of which are the very "Main Street" businesses the Left invokes when inveighing against chains such as Starbucks and Wal-Mart--are often sold substantially below their market value. "If a family is forced to sell as a result of the death of the founder, so that you've got a 50 percent estate tax due nine months after death, that naturally depresses the price," notes Harold Apolinsky, an estate-planning attorney at the Birmingham, Ala., law firm of Sirote & Permutt. "When you're forced to sell to fund the tax, there's more of an opportunity for the buyer to negotiate a lower price."

In Buffett's career, this opportunity has come many times. Take his acquisition of the Buffalo Evening News (now the Buffalo News) in the 1970s. His biggest acquisition up to that time, the newspaper became very profitable, and a stepping stone on Buffett's journey from multimillionaire investor to multibillionaire titan of industry. But--according to a just-published history of the Buffalo News--the paper would likely never have gone up for sale had it not been for the estate tax. In From Butler to Buffett: The Story Behind the Buffalo News, a book that features a foreword by Buffett, the paper's former managing editor, Murray Light, writes that the previous owner "had repeatedly rejected the advice of her attorneys that she take steps to minimize the tax consequences that would occur upon her death." Kate Butler was the widow of the founder's son; the paper had been in the family since 1873. According to Light, Butler had repeatedly been warned by her lawyers that if she failed to get rid of some of her assets before she died, "a 'fire sale' of the paper would result to satisfy the estate taxes." But Butler "stubbornly refused this advice and when she died in August 1974, the family agreed with the estate that the News should be put up for sale."

Buffett, referred to the impending sale by his friend, the late Washington Post owner Katherine Graham, didn't exactly pay a "fire sale" price for the paper; he plunked down $32.5 million. But, as Buffett biographer and Wall Street Journal writer Roger Lowenstein has noted, by the late 1980s the News would be earning more than $40 million each year. In an interview, former editor Light notes that the paper likely would have been kept in the family for at least another generation had it not been for the estate tax.

Fast-forward to the 1990s: Buffett has his eye on the fast-food chain Dairy Queen. He goes to the board of International Dairy Queen Inc., makes an offer and is rebuffed. Then a strange sort of luck comes Buffett's way: In 1997, Rudy Luther, a Minnesota auto dealer who owns 15 percent of the company stock, dies. His children need to sell the stock to pay off estate taxes, Luther's son tells the Minneapolis Star Tribune. Fearful that the sale of such a high volume of shares could massively drive down the stock price, the Dairy Queen board approaches Buffett to buy the Luther family's shares. All or nothing, Buffett says, according to the Star Tribune's account. So the board foregoes a bidding process and agrees to Buffett's price. The deal is eventually approved by a majority of shareholders, though not without at least one lawsuit and several protests from shareholders and fund managers who feel the shares are worth more.

In the past few years, Buffett has kept on buying up family businesses. Among them are R. C. Willey Home Furnishings and Ben Bridge Jeweler; with both businesses, the family's desire to avoid the looming estate tax played a big part in the decision to sell. In his 1995 letter to shareholders, Buffett noted that the owner of R. C. Willey, a Utah business with eleven retail stores, approached one of Buffett's managers about selling "for estate tax and diversification reasons." Buffett continued: "We quickly agreed on a number, and found our chemistry to be perfect." The Seattle-based Ben Bridge Jeweler, then consisting of 63 stores in western states, also found just the right "chemistry" with Buffett in 2000, after Ed Bridge--grandson of Ben--was diagnosed with a sudden illness. Ed Bridge was in his early 40s, not the typical decade where extensive planning is done in preparation for the estate tax; but, according to the Seattle Times, he feared that his death would force the family to sell the business, and that a new owner would restructure the firm and leave many longtime employees out of work.

In Seattle, the Bridges have long been known for their charitable giving and civic leadership; their virtues, and those of other owners of family businesses, are ones that Buffett skillfully works to his advantage in negotiations. "I think that we probably could have received 20% more from [another buyer] than we got from Berkshire," Ed Bridge told Fortune in 2001. "But I also think we would have destroyed the business if we had gone that way." Fully recovered, Ed is now running the business with his cousin Jon Bridge as a subsidiary of Berkshire Hathaway. Buffett lets the previous owners of Ben Bridge Jeweler and the other businesses he has acquired stay on as managers and run their businesses semi-independently, although he does insist that they send excess cash to Berkshire Hathaway. Given the dire potential effects of the estate taxes, many of the business owners, like the Bridges, are grateful to Buffett. "When Warren Buffett bought it, it eliminated a problem for us," Ed Bridge's 79-year-old uncle, Herb Bridge, says in an interview.

At the time of the sale, Herb Bridge was angry that the government was forcing his family into this situation by levying this double tax on a lifetime of work. "I think it's immoral for a government to demand that amount of money from a family-owned business," he told the Seattle Times in 2001. But now Bridge says that after being personally lobbied by prominent Seattle resident Bill Gates Sr., an ally of Buffett's in the fight against Bush's repeal, he has changed his mind. "As time went on I realized I didn't mind paying the estate tax," he says. He goes on to embrace the mantra of estate-tax supporters about how the tax promotes meritocracy and prevents "imperial families."

Whatever the merit of the arguments for and against the tax, the indisputable fact is that Buffett will have to pay more, in many instances, for the businesses he buys if Bush is reelected and succeeds in his goal of repealing the estate tax. Even Andrew Kilpatrick, who has written admiring books about Buffett's career, says that because of the tax, "Berkshire's getting the benefit that maybe the whole deal went down a bit cheaper."

ANOTHER WINDFALL

Is Buffett supporting the estate tax out of self-interest? The Buffalo News's Light, who mostly praises Buffett's tenure as owner of the paper and considers himself a friend, says with a chuckle: "One thing you have to know is that Warren Buffett is not a dumb man. He knows where he's going, and he knows how to get there. He's honest, he's candid, he loves newspapers, but he's certainly not going to do things that are not beneficial to him and to Berkshire Hathaway."

And buying businesses is not the only way this smart man is planning to make money off the estate tax. Buffett is expanding his life-insurance holdings: An investor group led by Berkshire Hathaway has bought the life-insurance and investments division of the Seattle-based insurance firm Safeco. On Safeco's website, the company advertises "business life" policies, which it describes as "special life insurance programs that can help you continue your business after the death of a key employee or help your heirs pay estate taxes without selling your property."

Policies like Safeco's--to help families cope with the estate tax--are a growing part of the life-insurance business, into which Buffett has made forays in recent years. Life-insurance policies help families hold on to their assets by providing liquidity to pay the tax and by sheltering some items from taxation. But this protection doesn't come cheap. Business owners have to pay over a number of years what they think the estate will eventually be worth, plus hefty fees to the insurance companies. And since it's hard to estimate what a business will be worth at the time of an owner's death, policyholders frequently must pay far more over the years to the insurance company than what their heirs will owe in taxes, according to Dena Battle, legislative-affairs manager for the National Federation of Independent Business.

If the estate tax were repealed permanently under the schedule President Bush has set--when he signed the phaseout into law in 2001--there would be no need for these insurance policies. The money spent on these and other forms of estate planning could be used to create jobs, expand businesses, and, according to some economists, produce more total tax revenue for the government. But this would cause the restructuring of what conservative seniors' activist Jim Martin calls "a cottage industry that has become a big business"; and, like Buffett, many members of that industry aren't taking the death of the death tax lying down.

When Bush came into office, life insurers formed the Americans for Sensible Estate Tax Solutions (ASSETS) coalition to fight his phaseout plan, and there is plenty of evidence the industry is still lobbying to derail the repeal behind the scenes. Syndicated columnist Robert Novak recently reported that Frank Keating--formerly Republican governor of Oklahoma, now head of the American Council of Life Insurers--supports keeping the estate tax, making Buffett-like arguments about not having "a class system in this country."

Buffett has taken other policy positions that coincide with his financial interests. He has crusaded for more regulation of derivatives, which he has called "financial weapons of mass destruction." Derivative dealers frequently compete with providers of traditional commercial insurance--including companies owned by Berkshire. And Buffett's sudden concern about the trade deficit and advocacy of protectionism comes at a time when Berkshire is entering the textile industry, with acquisitions such as Fruit of the Loom, Ltd., that would be hurt by foreign competition.

None of this is to say that Buffett doesn't seriously believe in the positions he is advocating--just as the Bush supporter quoted in the Washington Post article was probably expressing a sincere belief when he said that he backs "less government" and "more individual freedom." But the Post didn't take his word for it, and showed instead how he benefited from a particular EPA policy change. The interests of Post shareholder Buffett and the other so-called progressive billionaires deserve the same scrutiny. To borrow the Post's phrasing, the media need to explore the "subtle intricacies" of the relationships between politicians who support big-government policies and the businessmen who benefit from them.

Mr. Berlau writes for Insight magazine, and is a former Washington correspondent for Investor's Business Daily.