Corner of Berkshire & Fairfax Message Board

General Category => Berkshire Hathaway => Topic started by: dcollon on August 30, 2011, 04:27:51 AM

Title: WSJ: Buffett's Latest Tax Break
Post by: dcollon on August 30, 2011, 04:27:51 AM
From WSJ Op-ed
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: claphands22 on August 30, 2011, 05:40:06 AM
Was the WSJ always this Fox-Newsie or did they get like this after they were bought by News Corp?

I believe the taxation policy on preferreds has been like this for ages. (Where the tax on preferred dividends is much less than the tax on bond dividends)



Title: Re: WSJ: Buffett's Latest Tax Break
Post by: scorpioncapital on August 30, 2011, 07:15:05 AM
It's a good argument. If not taxing dividends one corporation receives from another is standard policy, why is taxing dividends a corporation pays out to an individual taxpayer any different? After all, this is what Buffett argued in his op-ed, that he should be taxed more on the dividends he receives. But then, why not tax intra-corporate dividends too?
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY on August 30, 2011, 07:46:48 AM
But then, why not tax intra-corporate dividends too?

+1 
 
I have yet to see him advocate a tax that would materially impact him.
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: txlaw on August 30, 2011, 07:52:21 AM
But then, why not tax intra-corporate dividends too?

+1 
 
I have yet to see him advocate a tax that would materially impact him.

Because dividends received by natural persons, as opposed to legal persons, are realized income that is immediately usable for consumption. 

But I don't want to get into this debate again . . .
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: Partner24 on August 30, 2011, 08:22:26 AM
Because it would put an unfair additional layer of taxes.

If I own shares of a business directly and I receive a dividend, there is two layers of taxes (the operating company and me).

If I own shares of a business that own a business, there is three layers. The holding company, the operating company and me. The actual way of not taxing the intercorporation dividends keep neutrality in the system. One tax of the corporation, one tax for the ultimate owner.  If I tax the holding company for the operating company dividends, as the ultimate shareholder, I would get unfairly penalized because of that legitimate additional layer of ownership. You could then nearly say "bye bye" to all conglomerates and holding companies and that wouldn't make sense.

Title: Re: WSJ: Buffett's Latest Tax Break
Post by: txlaw on August 30, 2011, 08:27:34 AM
Because it would put an unfair additional layer of taxes.

If I own shares of a business directly and I receive a dividend, there is two layers of taxes (the operating company and me).

If I own shares of a business that own a business, there is three layers. The holding company, the operating company and me. The actual way of not taxing the intercorporation dividends keep neutrality in the system. One tax of the corporation, one tax for the ultimate owner.  If I tax the holding company for the operating company dividends, as the ultimate shareholder, I would get unfairly penalized because of that legitimate additional layer of ownership. You could then nearly say "bye bye" to all conglomerates and holding companies and that wouldn't make sense.

And what Partner24 said.
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY on August 30, 2011, 08:34:54 AM
You could then nearly say "bye bye" to all conglomerates and holding companies and that wouldn't make sense.

Not the way I would structure it.

I'd give an exemption based on ownership.

In the case of BAC, they own 0% so I'd tax all dividends as normal corporate income.  Berkshire does not own BAC, so it's not double-taxation.  They are separate companies.

However, if Berkshire held a 10% stake in the common, then I'd exempt 10% of the dividend from taxation.  And if they owned 100% (takeover), then the dividends could be enjoyed without any taxation.

Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY on August 30, 2011, 10:08:36 AM
Because dividends received by natural persons, as opposed to legal persons, are realized income that is immediately usable for consumption. 

A consumption tax would most elegantly address that, not an income tax.

I don't see the connection between income taxes and consumption.  Especially when the conversation turns towards coddling the billionaires, who are the least likely to consume their entire income.  One could justify a lower tax rate for them on these grounds.
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: AZ_Value on August 30, 2011, 10:09:45 AM
But then, why not tax intra-corporate dividends too?

+1 
 
I have yet to see him advocate a tax that would materially impact him.

I also think this debate will lead nowhere as generally speaking people have their mind made up on this subject and I am yet to see, on this board or elsewhere, a person engaging in this debate for hours (or days) with this sight set on "Government stay away from my money and don't tax me" and walk away convinced otherwise; or vice versa.

However, I'll say that I find it a bit disingenuous to say that WEB has never advocated a tax that would materially impact him when in his latest Oped he told us that he paid $7M in taxes which represented 17.4% of his taxable income so about $40M and he was giving as an example how the top earners used to pay about 29% on average a couple of decades ago, so we'll safely assume that he is OK paying that much, that would have meant him paying ~$11.6M. All this math is very high level but take into account how many years he's been advocating for fairness and you'll get to some pretty material numbers in my opinion.

Ron
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: Myth465 on August 30, 2011, 10:37:25 AM

I also think this debate will lead nowhere as generally speaking people have their mind made up on this subject and I am yet to see, on this board or elsewhere, a person engaging in this debate for hours (or days) with this sight set on "Government stay away from my money and don't tax me" and walk away convinced otherwise; or vice versa.

However, I'll say that I find it a bit disingenuous to say that WEB has never advocated a tax that would materially impact him when in his latest Oped he told us that he paid $7M in taxes which represented 17.4% of his taxable income so about $40M and he was giving as an example how the top earners used to pay about 29% on average a couple of decades ago, so we'll safely assume that he is OK paying that much, that would have meant him paying ~$11.6M. All this math is very high level but take into account how many years he's been advocating for fairness and you'll get to some pretty material numbers in my opinion.

Ron

Great post.
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY on August 30, 2011, 11:21:05 AM
I'll say that I find it a bit disingenuous to say that WEB has never advocated a tax that would materially impact him when in his latest Oped he told us that he paid $7M in taxes which represented 17.4% of his taxable income

The key word is "taxable" income.

Why doesn't he have more?  Well, it doesn't make sense to pay a dividend and use the proceeds to buy KO in his personal account.  After all, that would raise his TAXABLE income.

Much better to retain the earnings and buy KO within berkshire, where his tax rate is far lower than even the 15% rate that he claims to be too low.

But yes, we both agree that something here is disingenuous.

He speaks of coddling the rich, but he didn't become a billionaire from his taxable income.  So addressing taxable income is laughable -- it's the untaxable income that's made him a billionaire.  Does he even have a billion in his personal account?  No.  Would he still be a billionaire if Berkshire paid a fair amount of tax on it's inter-company dividends?  Yes, he would still be a billionaire, just not a coddled one.

Anyhow, I suppose I'm advocating a corporate income tax on INTER-company dividends, and leaving the INTRA-company dividends alone.
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: txlaw on August 30, 2011, 12:05:26 PM
Because dividends received by natural persons, as opposed to legal persons, are realized income that is immediately usable for consumption. 

A consumption tax would most elegantly address that, not an income tax.

I don't see the connection between income taxes and consumption.  Especially when the conversation turns towards coddling the billionaires, who are the least likely to consume their entire income.  One could justify a lower tax rate for them on these grounds.

The words elegance and tax are not usually used in the same sentence.  It would be much harder to administer a consumption tax than you think, and it ought to be progressive, taking into account the individual or household's ability to consume (i.e., wealth).  The income tax in its current form is a poor proxy for a tax system based on consumption.

The connection between income taxes and consumption arises from the fact that taxes are only due once income is realized.  Realized income is available to use for consumption.  Cash that is locked up in a vehicle like Berkshire is not available for consumption unless shares are sold (generating realized income) or unless one borrows against the value of the shares.  Being able to borrow against the value of financial assets to consume tax-free is a loophole that should be closed.
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY on August 30, 2011, 12:10:12 PM
It would be much harder to administer a consumption tax than you think, and it ought to be progressive, taking into account the individual or household's ability to consume (i.e., wealth).

I agree with you there. 

I would exempt groceries for example, but not restaurant meals.

I would exempt  (a certain reasonable dollar amount of) every car purchased.

etc... etc...

My concern is not whether billionaires are paying the same tax rate as mere millionaires, but rather my concern is that we don't raise the cost of living for the people who can barely get by.  At a certain subsistence level, there should be nothing taxed at all. 

Anywhere I say "should", it can be reasonable to assume I really mean "I believe but everyone has their own opinion".  It's just lazy style, not meant to be pushy.

Cash that is locked up in a vehicle like Berkshire is not available for consumption


It's available, he just needs to hit the "distribute" button. 

I'm not the first one to notice this distinction:
http://en.wikipedia.org/wiki/Holding_company

Berkshire however is not classified as a "personal holding company". I really think though the distinction with what he's got going for himself via Berkshire isn't all that different in spirit.
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY on August 30, 2011, 12:23:29 PM
Here is a decent summary behind the reasons for the special personal holding company tax.  Anyhow, in spirit I believe Buffett has effectively created the same form of tax shelter through Berkshire.


http://wraltechwire.com/business/tech_wire/opinion/story/2458989/

As explained in the Conference Report for the American Jobs Creation Act of 2004, “[t]he personal holding company tax was originally enacted to prevent so-called ‘incorporated pocketbooks’ that could be formed by individuals to hold assets that could have been held directly by the individuals, such as passive investment assets, and retain the income at corporate rates that were then significantly lower than individual tax rates.”

Berkshire was also chosen as his investment vehicle back when the top personal income tax rate was 70%.  He probably never noticed though, right?
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: txlaw on August 30, 2011, 01:01:48 PM
It's available, he just needs to hit the "distribute" button. 

I'm not the first one to notice this distinction:
http://en.wikipedia.org/wiki/Holding_company

Berkshire however is not classified as a "personal holding company". I really think though the distinction with what he's got going for himself via Berkshire isn't all that different in spirit.

So you're saying that Berkshire is somewhat of a "personal holding company" and that Buffett could just use the tax-free/advantaged dividends distributed to it by the holding company's investee companies to buy things for his own personal consumption. 

I suppose that's true.  But that's true of any corporation where there are managers in place.  Managers use companies as ATMS all the time.  But the only way, I think, that Buffett could use the money for his own consumption is to treat that as an expense of the holding company, which could expose him to committing tax fraud if the expense isn't justified.  Of course, you can justify a lot of things under the tax code, and I'm not sure how it works.

Anyways, I don't want to get into the weeds here because you probably know more about the intricacies of the tax code than I do.  The bottom line is that we shouldn't get too caught up in the fact that it's WEB saying that billionaires are coddled.

There are plenty of regular folks who believe that billionaires are being coddled.  Raise taxes on the rich folks, I say.  Class warfare all the way!
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY on August 30, 2011, 01:27:29 PM
and that Buffett could just use the tax-free/advantaged dividends distributed to it by the holding company's investee companies to buy things for his own personal consumption. 

I didn't mean to say that he would use company assets for his consumption.  I meant to say that if the personal holding company tax applied to Berkshire, then he'd likely be paying a dividend because it would make it uneconomic to retain 100% of earnings and purchase passive investments with the proceeds.

One reason (but clearly not the only reason) why he has operating companies is that if he didn't, then he'd be in violation of the personal holding company tax -- it would violate the income test

The PHCT is a tax on “undistributed personal holding company income” of a “personal holding company.”


Let's put this differently:
Would you object to repealing the personal holding company tax for everyone?  If not, why not?   Note that the reason why we have it is to prevent rich people from not distributing their corporate earnings, where the tax rates on corporate passive income is far lower than the tax rates on personal passive income.  Sound familiar?  Anyone we know of that doesn't distribute corporate earnings, and holds the bulk of his passive investments in his holding company instead of his personal brokerage? 

However, Buffett has got Berkshire organized in such a way that he doesn't trip the tax (ownership test and income test), but those thresh holds could easily be tweaked.  For example, you could drop the ownership test to 30% or modify the income test.  One could really crack down on these billionaires who reinvest undistributed earnings in passive investments (which they could just as easily hold in a brokerage account).  This is the very behavior that the personal holding company tax was meant to discourage, but he dances within the lines of that law (meets the ownership test and income test).

Are the ownership tests and income tests too generous?

Or, as I mentioned earlier, my preferred method is just to insure that INTER-company dividends (from passive investments) are taxed as regular income.  That will sure as hell discourage Berkshire as a vehicle for sheltering his passive investment dividends.


Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY on August 30, 2011, 02:27:31 PM
In theory, we have corporations so that we can engage in business without being held personally liable.  Makes sense.  I'm not going to drill in the Gulf of Mexico if I could be held personally liable for the mess right?

So here's the odd thing...

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?
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: txlaw on August 30, 2011, 02:42:03 PM
and that Buffett could just use the tax-free/advantaged dividends distributed to it by the holding company's investee companies to buy things for his own personal consumption. 

I didn't mean to say that he would use company assets for his consumption.  I meant to say that if the personal holding company tax applied to Berkshire, then he'd likely be paying a dividend because it would make it uneconomic to retain 100% of earnings and purchase passive investments with the proceeds.

One reason (but clearly not the only reason) why he has operating companies is that if he didn't, then he'd be in violation of the personal holding company tax -- it would violate the income test

The PHCT is a tax on “undistributed personal holding company income” of a “personal holding company.”


Let's put this differently:
Would you object to repealing the personal holding company tax for everyone?  If not, why not?   Note that the reason why we have it is to prevent rich people from not distributing their corporate earnings, where the tax rates on corporate passive income is far lower than the tax rates on personal passive income.  Sound familiar?  Anyone we know of that doesn't distribute corporate earnings, and holds the bulk of his passive investments in his holding company instead of his personal brokerage? 

However, Buffett has got Berkshire organized in such a way that he doesn't trip the tax (ownership test and income test), but those thresh holds could easily be tweaked.  For example, you could drop the ownership test to 30% or modify the income test.  One could really crack down on these billionaires who reinvest undistributed earnings in passive investments (which they could just as easily hold in a brokerage account).  This is the very behavior that the personal holding company tax was meant to discourage, but he dances within the lines of that law (meets the ownership test and income test).

Are the ownership tests and income tests too generous?

Or, as I mentioned earlier, my preferred method is just to insure that INTER-company dividends (from passive investments) are taxed as regular income.  That will sure as hell discourage Berkshire as a vehicle for sheltering his passive investment dividends.

I haven't read the article you posted about the PHCT, but based on the way you've described it, I might support repealing the PHCT.  I'd have to think about it some more.

It sounds like in certain cases, the tax code essentially forces the individual with the personal holding company to realize the income even if the person would simply plow that money back into investments or productive enterprise.  Perhaps the reason the PHCT is there is because the tax code has drawn a bright line rule, assuming that in cases where it applies, the owner of the personal holding company is more likely than not to use the cash for personal consumption rather than for investment or productive enterprise.

In an ideal world, so long as the capital within the personal holding company cannot be used for personal consumption, I don't see why we would force the owner to realize income.  Put another way, I might support the idea you once had about removing the limits on contributions to tax-deferred retirement vehicles.  Of course, that would have to go hand in hand with instituting a wealth-oriented consumption tax.  Right now the tax code is jerry rigged to be in between a pure income tax and a consumption tax.

One thing is clear from this discussion, smart people like WEB (and Ericopoly) can often find ways to get around the rules put in place by the tax code, and it's almost impossible to close all loopholes because there is very little political will to do so. 
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: txlaw on August 30, 2011, 02:47:42 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. 
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY 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.
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: rmitz 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
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY 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.
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: bookie71 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
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: txlaw 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.
Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY 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).


Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY 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).

Title: Re: WSJ: Buffett's Latest Tax Break
Post by: ERICOPOLY 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.