Author Topic: WSJ: Buffett's Latest Tax Break  (Read 7894 times)

ERICOPOLY

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Re: WSJ: Buffett's Latest Tax Break
« Reply #20 on: August 30, 2011, 03:16:46 PM »
Why encourage (via the tax code) passive investments to be held by corporations (this low rate on preferred stock dividends for example)?

It's not like you need the protection of corporate laws within which to make a passive investment.

In the case of the oil driller, there is a public good (we need oil).  But in the case of the corporation that is just buying passive investments, what is the public good?  Why are we protecting them through the corporate tax code?

Is the low rate just applicable to the insurance company subsidiary? 

If so, then I suppose the reason is that the insurance industry as a whole takes on risk in return for the chance to earn a profit on passive investments after losses. 

I don't know enough about how this deduction works.

No the lower rate on dividends is for all C corporations.  The tax code actually attempts to do what I advocated regarding INTER vs INTRA dividends.  Only, by still making it overly generous (10.5% is the highest rate, which is 70% lower than the corporate income tax rate) it does not deter the desire for billionaires to hold their passive investments within their corporations.

Once you own too much of the C corporation (personal ownership test) or have too much of the C corp's earnings coming from passive investments (income test), you trigger the "personal holding company tax".  There are some exceptions, like if you have an insurance company where the primary operations of the business necessitate high amounts of passive income from bonds for example.

A person with a few million bucks can't just go out and make a C corporation as others told me to do earlier this year.  Were I to try that, I'd be slapped with the personal holding company tax for not distributing the earnings as a taxable distribution.

Back when the income tax was 70%, people just started C corporations and sheltered their passive income in the corporation.  This is why the personal holding company tax was invented.  I suspect Berkshire is somewhat of a throwback from those days.

Personally I believe corporate structures are to promote a public good -- to enable people to engage in oil drilling for example.  Avoidance of personal income tax is not a public good.  And corporations (for all I can tell) do not bring anything to the table in terms of holding passive investments, except the lower tax rate.  Having billionaires shelter their income in such a way that brings no public good didn't fly with the people that backed the personal holding company tax.

I believe is why some people have offshore corporations -- I'm pretty sure the personal holding company tax doesn't apply to offshore corporations.  So once the loophole was closed for onshore C corporations, people just brought them offshore.  Sure, they'll get hit when they bring the money back onshore, but they don't have to bring it back onshore is my guess (because they have so damn much of it onshore already).

Bringing them back onshore (legalizing them again) might just raise the overall tax revenue.  After all, it's not like you can't have one today, you just have to have it offshore.
« Last Edit: August 30, 2011, 03:26:56 PM by ERICOPOLY »


rmitz

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Re: WSJ: Buffett's Latest Tax Break
« Reply #21 on: August 30, 2011, 04:19:40 PM »
Bringing them back onshore (legalizing them again) might just raise the overall tax revenue.  After all, it's not like you can't have one today, you just have to have it offshore.

This is incorrect.  Whether a corporation is onshore or offshore makes no difference. 

http://www.irs.gov/businesses/small/article/0,,id=106572,00.html

ERICOPOLY

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Re: WSJ: Buffett's Latest Tax Break
« Reply #22 on: August 30, 2011, 04:27:47 PM »
Bringing them back onshore (legalizing them again) might just raise the overall tax revenue.  After all, it's not like you can't have one today, you just have to have it offshore.

This is incorrect.  Whether a corporation is onshore or offshore makes no difference. 

http://www.irs.gov/businesses/small/article/0,,id=106572,00.html

I don't see any reference to the personal holding company tax in that link.  Can you just quote the reference for me? 

I can't even find the word "holding" on that page using the search feature.

EDIT:  However, I can't find the reference either that backs up what I said.  I may have scrambled things in my head, but I swear the ruling for the personal holding company tax on undistributed earnings was just for domestic holding companies.  Could very well be wrong, won't be the first time my memory has failed me.
« Last Edit: August 30, 2011, 04:57:04 PM by ERICOPOLY »

bookie71

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Re: WSJ: Buffett's Latest Tax Break
« Reply #23 on: August 30, 2011, 04:37:53 PM »
My understanding was the phc tax originally came about to keep individuals from incorporating and accumulating money at lower tax rates within a corporation, thus the stock ownership and "passive"income provisions.  A lot has changed but here is wikipedia's take on it

http://en.wikipedia.org/wiki/Holding_company#Personal_holding_company
Always remember, Pigs get fat and hogs get slaughtered.

txlaw

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Re: WSJ: Buffett's Latest Tax Break
« Reply #24 on: August 30, 2011, 04:59:30 PM »
A person with a few million bucks can't just go out and make a C corporation as others told me to do earlier this year.  Were I to try that, I'd be slapped with the personal holding company tax for not distributing the earnings as a taxable distribution.

Back when the income tax was 70%, people just started C corporations and sheltered their passive income in the corporation.  This is why the personal holding company tax was invented.  I suspect Berkshire is somewhat of a throwback from those days.

Personally I believe corporate structures are to promote a public good -- to enable people to engage in oil drilling for example.  Avoidance of personal income tax is not a public good.  And corporations (for all I can tell) do not bring anything to the table in terms of holding passive investments, except the lower tax rate.  Having billionaires shelter their income in such a way that brings no public good didn't fly with the people that backed the personal holding company tax.

Haha, I should have known that you'd done the research on that.

It does sound like Berkshire was a nice way for WEB to avoid the much higher personal income tax rates that his dividends would have been subject to had he been forced to realize that income back when he took the helm. 

However, the question remains whether you believe that there should be any investment vehicle to defer tax for the individual?  Forget the fact that the corporate form is in some cases being used to defer the realization of personal income for the mega rich in a way not accessible to the mere rich or the normal schmuck.  I always thought you were an advocate for a no-limit savings/investment account that could compound tax free so long as you did not tap the account for consumption. 

Essentially, this would be going even more towards a consumption tax.  I would support this so long as the consumption tax were progressive in the way that I envision.

Regarding whether or not "passive investments" made by corporations should be treated less favorably than productive enterprise investment: when you say "passive investments," I take it you really mean investments that have nothing to do with the business in which the corporation is engaged, rather than investments where the corporation is an investor that exerts no control over the business?  Passivity in an investment, in and of itself, shouldn't be discouraged.  A corporation that makes a strategic (but passive) investment in a new enterprise, for example, within its business mandate (or circle of competence) shouldn't be penalized for being an OPMI. 

Additionally, where a corporation derives most of its income from its real business, it's not clear to me that we should penalize them for holding financial assets that are unrelated to their core business.  That would effectively force corporations to either hold cash or only hold government securities when they keep a capital buffer.  It's really when the unrelated investments become the core profit center of the business that the problem arises.

Of course, the obvious way to get around this would be for your corporation to be an insurance company, where the mandate in and of itself is to make secondary market debt and OPMI investments!  Hello FFH.

In any case, while I agree that it may be unfair that the tax code treats billionaires better than millionaires or thousandnaire, that has nothing to do with the policy position that WEB is advocating.  Yes, I suppose WEB's credibility can be questioned. 
 
BUT that doesn't change the real arguments surrounding whether the tax code should be more fair.  Criticizing WEB as a proxy for criticizing the policy he supports is like saying that the environmental policies that Al Gore advocates are wrong because he flies around in a jet plane or owns a mansion.

ERICOPOLY

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Re: WSJ: Buffett's Latest Tax Break
« Reply #25 on: August 30, 2011, 05:25:38 PM »
However, the question remains whether you believe that there should be any investment vehicle to defer tax for the individual?  Forget the fact that the corporate form is in some cases being used to defer the realization of personal income for the mega rich in a way not accessible to the mere rich or the normal schmuck.  I always thought you were an advocate for a no-limit savings/investment account that could compound tax free so long as you did not tap the account for consumption. 

I'd prefer it if we could all put after-tax dollars into an investment account where it could be left compounding tax deferred until withdrawn. 

I'm just beating on old Warren because he holds himself out as if he is voluntarily raising his tax bill for the good of the nation...  but hey, I can see that over 90% of his look-through dividends are taxed lower than my present 15% rate.  Any idiot can see that Warren isn't discussing the main source of his dividends, and that he is the one pulling the levers on when that dividend gets paid (if ever).


« Last Edit: August 30, 2011, 05:54:33 PM by ERICOPOLY »

ERICOPOLY

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Re: WSJ: Buffett's Latest Tax Break
« Reply #26 on: August 30, 2011, 05:54:52 PM »

when you say "passive investments," I take it you really mean investments that have nothing to do with the business in which the corporation is engaged, rather than investments where the corporation is an investor that exerts no control over the business?  Passivity in an investment, in and of itself, shouldn't be discouraged. 

I'm not sure where exactly I'd draw the line.  But certainly KO is a passive investment for Berkshire.  Curiously, if they held a KO bond they'd pay 35% tax rate on the income, but the equity dividend is taxed at only 10.5%?

I don't want to discourage passivity -- I just don't think it should be a lure for tax sheltering behavior.  If Berkshire can pay 35% tax on income from a bond, why can't it pay 35% tax on the BofA income?

The reason why I even mention the word "passive" was to insinuate that it's not income from operations -- a subsidiary is not considered a passive investment, even though it may be passive for all intents and purposes (Buffett says he only acquires businesses with management intact that run themselves).  So I suppose I'd give him a free pass on those dividends so as not to make conglomerates impractical.

Thus, even my suggestion to raise taxes up to normal corporate rates on common stocks dividends doesn't solve the whole problem as Buffett has achieved the scale to just swallow up whole entire companies (thus avoid my "passive" tax proposal).  But hey it's a start... he can't buy all of BofA -- and he has to pay a huge premium for takeovers so it's not all a free lunch (like the BNSF premium he paid).


ERICOPOLY

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Re: WSJ: Buffett's Latest Tax Break
« Reply #27 on: September 26, 2011, 02:48:57 PM »

However, the question remains whether you believe that there should be any investment vehicle to defer tax for the individual?  Forget the fact that the corporate form is in some cases being used to defer the realization of personal income for the mega rich in a way not accessible to the mere rich or the normal schmuck.  I always thought you were an advocate for a no-limit savings/investment account that could compound tax free so long as you did not tap the account for consumption. 


I don't know if you remember, but originally when we talked about this back in Feb/March I swore that Bush himself had proposed such accounts (nobody agreed that he had).  That proposal is where I got the idea from (it was never my idea).

Anyhow, I was looking for something else today (I was searching for how much people are actually contributing pre-tax to retirement plans), but instead ran across the following:

https://www.cbo.gov/doc.cfm?index=5151&type=0&sequence=3

Pay attention to the description of the LSA proposal:

The President's budget includes a proposal that is designed to both consolidate and expand the current system of tax-free savings accounts for retirement and other purposes, such as education. Two new kinds of accounts would be created: retirement savings accounts (RSAs) and lifetime savings accounts (LSAs). The RSA would function in some ways like a Roth individual retirement account (IRA)--that is, taxes would not be deferred on contributions, as they are for contributions to traditional IRAs, but the interest that the accounts earned would accrue tax-free. In contrast to Roth IRAs, however, RSAs would be available to all workers (and their spouses) regardless of income; they would also have higher limits on contributions and allow penalty-free withdrawals at a slightly earlier age. The proposal would eliminate further tax deferrals for IRA contributions.

Like the RSAs, the proposed lifetime savings accounts would face tax treatment similar to that governing Roth IRAs. However, unlike Roth IRAs or RSAs, LSAs would be open to everyone, regardless of age, income, or employment status, and participants could withdraw funds at any time for any reason. Taxpayers could also use LSAs to consolidate other savings plans, including Coverdell education savings accounts and qualified state tuition plans.