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Obama's Warren Buffet? Tax

by russ_watters
Tags: obama, warren buffet tax
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John Creighto
#19
Oct6-11, 11:39 PM
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Quote Quote by WhoWee View Post
A high growth company may experience a negative cash flow - high growth doesn't necessarily indicate earnings. However, the stock price may increase in response to the expectations of future earnings. If the company requires debt to fund basic operations - the stock price may not rise.
What do you think a reasonable way to tax companies with high growth and low earnings?

My proposal would be to not distinguish the tax for individuals on capital gains and income and simply let them write off any tax the company already paid.
WhoWee
#20
Oct7-11, 12:04 AM
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Quote Quote by John Creighto View Post
What do you think a reasonable way to tax companies with high growth and low earnings?

My proposal would be to not distinguish the tax for individuals on capital gains and income and simply let them write off any tax the company already paid.
First, I'm not certain of the business structure you have in mind (closely held private corp/LLC, a quasi-public corp, a public corp, etc.) - the tax strategy might vary by type.

A high growth public company may have a wide distribution of shares, no earnings, cash from an IPO, and an increasing share value. If the individual shareholder sells their shares at a profit - they will pay taxes on the capital gains - there are no taxes paid by the corporation on this transaction.
John Creighto
#21
Oct7-11, 02:02 PM
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Quote Quote by WhoWee View Post
First, I'm not certain of the business structure you have in mind (closely held private corp/LLC, a quasi-public corp, a public corp, etc.) - the tax strategy might vary by type.
Perhaps but you’ll have to justify to me why we should treat different business structures differently.
A high growth public company may have a wide distribution of shares, no earnings, cash from an IPO, and an increasing share value. If the individual shareholder sells their shares at a profit - they will pay taxes on the capital gains - there are no taxes paid by the corporation on this transaction.
This is exactly my point. In this type of instance, the corporate taxes are small compared to the capital gains tax. Thus there is an incentive for companies to grow quickly when there is a perceived market for growth. However, this type of rapid speculative growth helped to fuel the dot com bubble which resulted in a tremendous loss of wealth and an over capacity that lasted for a decade. As a consequence I think that a company should not be able to deduct investment interest payments from their income if the market capatilization of the company increases by as much or more than the amount they are trying to deduct.
WhoWee
#22
Oct7-11, 03:31 PM
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Quote Quote by John Creighto View Post
Perhaps but you’ll have to justify to me why we should treat different business structures differently.


This is exactly my point. In this type of instance, the corporate taxes are small compared to the capital gains tax. Thus there is an incentive for companies to grow quickly when there is a perceived market for growth. However, this type of rapid speculative growth helped to fuel the dot com bubble which resulted in a tremendous loss of wealth and an over capacity that lasted for a decade. As a consequence I think that a company should not be able to deduct investment interest payments from their income if the market capatilization of the company increases by as much or more than the amount they are trying to deduct.
Perhaps I should clarify?

When a company goes public (IPO) their shares are sold to the public and the cash (after broker and other fees) is used to capitalize the corporate entity. At this point, the company has exchanged equity/ownership for capital and the investor now owns a share(s) - professional fees are paid on the transaction and to prepare filings. These fees for legal, accounting, and investment banking services might be $100,000 or $millions. Please note, the company may not even be in operation or have employees - there is no profit on this sale of ownership - the purpose is to inject money into the company to fund growth and operations. This step is comparable to an operating partner finding a partner that agrees to invest cash into a business - the money is deposited into the business account. The more cash raised in an IPO - the lower the need for debt funding.

Back to the corporation that has gone public - the shares (if not restricted or issued to insiders) may be traded on the listed exchange at any time by the investor. If the shareholder paid $8.00 per share and sells for $9.00 - the investor makes $1.00 per share and the company earns nothing. Depending upon how the shares are held, the company may need to update their database of owners (an administrative expense) the first investor no longer owns a share and the new investor now has ownership. If the share is sold for $5 the initial investor loses $3.00 and again - nothing but a database adjustment for the company - no profit or loss.

If the company earns an operating profit, the company will pay income taxes on the earnings. The owners are not taxed on these earnings. However, if the corporation pays a dividend - the shareholders will be subject to taxation on the amounts received.
loseyourname
#23
Oct12-11, 12:04 AM
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Quote Quote by CAC1001 View Post
The other thing I am wondering is if Buffett is really talking about dividend taxes when he talks about his income. His actual income is only around $100K a year, the majority of his income is from the dividends his company, Berkshire-Hathaway, pays out each year, or capital gains (I would think most from dividends though). If so, this is a bit misleading, because a corporation is already taxed at the corporate tax rate (its profits are taxed at the corporate tax rate; the top marginal corporate tax rate is 35%). For owners of a company, the shareholders, if they are paid via dividends, then after the corporation that they own pays the corporate tax rate, they the shareholders then must pay a dividend tax rate. The dividend tax rate used to be tied to the income tax rate, but now it is tied to the long-term capital gains tax rate, which is 15% (0% for people in the bottom ordinary income tax brackets).
Berkshire-Hathaway has never paid a dividend. That's one of the reasons Buffett pays so small a percentage of his income in taxes. The vast bulk of his Haig-Simons income (consumption plus change in net worth) isn't even realized in a given year. It's not like he's selling class A shares all the time to turn his wealth into cash, especially considering he's a notoriously tight spender who doesn't live lavishly. Also, Berkshire-Hathaway has been receiving huge amounts of its own income from the terrific deals it has gotten on preferred stock as it has acted as a private sector de facto bailout fund. Corporations can exempt 70% of their dividend income received from other corporations so that they pay nowhere near the 35% corporate rate. Combine that with the ability to selectively sell off losing investments even when market capitalization has increased and then carry forward the losses into years that a profit is earned and they may not be paying any taxes at all.

You can think what you want of Buffett's politics, but he's not blowing hot air here. He knows the true economic incidence of tax burden that he bears. He's not miscalculating or forgetting the double taxation of corporate income distributed to individuals.
mege
#24
Oct12-11, 12:58 AM
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Quote Quote by loseyourname View Post
Berkshire-Hathaway has never paid a dividend. That's one of the reasons Buffett pays so small a percentage of his income in taxes. The vast bulk of his Haig-Simons income (consumption plus change in net worth) isn't even realized in a given year. It's not like he's selling class A shares all the time to turn his wealth into cash, especially considering he's a notoriously tight spender who doesn't live lavishly. Also, Berkshire-Hathaway has been receiving huge amounts of its own income from the terrific deals it has gotten on preferred stock as it has acted as a private sector de facto bailout fund. Corporations can exempt 70% of their dividend income received from other corporations so that they pay nowhere near the 35% corporate rate. Combine that with the ability to selectively sell off losing investments even when market capitalization has increased and then carry forward the losses into years that a profit is earned and they may not be paying any taxes at all.

You can think what you want of Buffett's politics, but he's not blowing hot air here. He knows the true economic incidence of tax burden that he bears. He's not miscalculating or forgetting the double taxation of corporate income distributed to individuals.
But by your own explaination, he's an exception to the rule. The general statistics for overall taxation by income don't line up with his claims.
WhoWee
#25
Oct12-11, 08:11 AM
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Quote Quote by loseyourname View Post
Berkshire-Hathaway has never paid a dividend. That's one of the reasons Buffett pays so small a percentage of his income in taxes. The vast bulk of his Haig-Simons income (consumption plus change in net worth) isn't even realized in a given year. It's not like he's selling class A shares all the time to turn his wealth into cash, especially considering he's a notoriously tight spender who doesn't live lavishly.
Isn't it a contradiction to label him "a notoriously tight spender who doesn't live lavishly" - then cite Haig-Simons?
mheslep
#26
Oct12-11, 12:31 PM
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Regardless of what is assumed here about what Warren Buffet does or does not understand about double taxation or sheltering corporate income, the facts about the company he founded, Berkshire-Hathaway are these:
That is just the tax paid by BH. Buffet also owns large shares in dozens of other companies, 13% of Amex, 9% of Coca Cola, etc.
WhoWee
#27
Oct12-11, 12:53 PM
P: 1,123
Quote Quote by mheslep View Post
Regardless of what is assumed here about what Warren Buffet does or does not understand about double taxation or sheltering corporate income, the facts about the company he founded, Berkshire-Hathaway are these:
That is just the tax paid by BH. Buffet also owns large shares in dozens of other companies, 13% of Amex, 9% of Coca Cola, etc.
mheslep - IMO - regardless of how many $Billions in taxes paid you can attribute to Buffet - the folks who think he should pay more will ignore the facts.
turbo
#28
Oct12-11, 01:23 PM
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Let's back up a bit, please. Many wealthy people earn their income through capital gains, which can be declared and taxed at the whim of the holder. Let's say that Investor does well with some holdings, and takes some risks on others. If (s)he loses on the others, (s)he can liquidate some of assets that gained value and pay NO taxes. Even if they had to liquidate some gaining assets with no offsetting losses, they would still pay far less tax than the average wage-earner. The myth that the "job-creators" are under attack is just that. A myth. The wealthy hold all the cards.

Full disclosure: For the last 5 years that I was employed, I was easily in the top 2% of wage-earners in the US. The Buffet tax would not even have been a blip on the radar for me, since it is a proposed increase in the marginal tax. There is some urban myth that the more money you make, the more you pay in taxes. That resonates with sheeples with little education. Unfortunately, there is no remedial taxation education that informs people that as you push into a higher tax-bracket (Yay!) the taxes that you pay on earlier income do NOT increase. Only the taxes on the higher income.
WhoWee
#29
Oct12-11, 01:28 PM
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Quote Quote by turbo View Post
Let's back up a bit, please. Many wealthy people earn their income through capital gains, which can be declared and taxed at the whim of the holder. Let's say that Investor does well with some holdings, and takes some risks on others. If (s)he loses on the others, (s)he can liquidate some of assets that gained value and pay NO taxes. Even if they had to liquidate some gaining assets with no offsetting losses, they would still pay far less tax than the average wage-earner. The myth that the "job-creators" are under attack is just that. A myth. The wealthy hold all the cards.
my bold

I guess the "whim" part comes into play when the investor decides to hold or sell?
mheslep
#30
Oct12-11, 02:32 PM
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Quote Quote by turbo View Post
Let's back up a bit, please. Many wealthy people earn their income through capital gains, which can be declared and taxed at the whim of the holder. Let's say that Investor does well with some holdings, and takes some risks on others. If (s)he loses on the others, (s)he can liquidate some of assets that gained value and pay NO taxes.
Only if they had NO net gains. That tax would you have paid on losses?

...The wealthy hold all the cards.
...They certainly pay most of the taxes.
mheslep
#31
Oct12-11, 02:34 PM
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Quote Quote by turbo View Post
There is some urban myth that the more money you make, the more you pay in taxes.
That myth happens to be a fact. You mean the rate does not increase on the income below the bracket.
russ_watters
#32
Oct12-11, 05:22 PM
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Quote Quote by turbo View Post
There is some urban myth that the more money you make, the more you pay in taxes....

...as you push into a higher tax-bracket (Yay!) the taxes that you pay on earlier income do NOT increase. Only the taxes on the higher income.
So.....according to the second part, the more money you make, the more you pay in taxes. So the first part of your post is wrong....right?
loseyourname
#33
Oct12-11, 06:54 PM
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Quote Quote by WhoWee View Post
Isn't it a contradiction to label him "a notoriously tight spender who doesn't live lavishly" - then cite Haig-Simons?
Why? I didn't say he should be taxed on unrealized capital gains. I don't realize most of my own capital gains in any given year and certainly don't want to be taxed on them, either. If it was up to me, there wouldn't be a capital gains tax or a corporate income tax at all (maybe keep the punitive short-term rate to discourage day-trading and encourage true corporate governance and owners that care about long-term performance). I cite Haig-Simons simply because it's the best indication of one's ability to pay.

But I still think there's something to his general sentiment that the percentage one pays of actual realized income should not decrease as you earn more. It doesn't for wage and salary earners, but our tax system as it stands is severely tilted in favor of owners (you could make a good argument that no one would buy preferred stock at all if not for the corporate-to-corporate dividend loophole, for instance, which is just individual taxpayers subsidizing the borrowing costs of corporations).

I get that we want to encourage people to invest and take risk, but our tax code also allows people to shelter a whole lot of what they earn without using that money the way the tax code intends if you want to take a charitable interpretation of the intent. Why exempt municipal debt interest from personal income tax, for instance? It's meant to subsidize infrastructure development at the city and state level, but the full area under the demand curve to the left of the equilibrium rate is wasted money in excess of just straightforwardly transferring tax revenue from the federal government to municipalities, rather than giving rich people another way to earn income without being taxed and encouraging cities to borrow more money than they would otherwise be able to. I don't necessarily support a straight punitive wealth tax like some uber-AMT to make sure millionaires aren't paying less than secretaries, but get rid of some of these deductions. Hell, get rid of mortgage interest deduction. It's my own personal largest source of avoiding taxes, but it's still economically stupid. We want to figure out who to blame for the housing collapse and want to talk about Fannie and Freddie guaranteeing loans and bond-raters misjudging MBS risk. What about the government paying half your mortgage in the first few years? What do you think that does to demand and the rate of price appreciation? How do you think that encouraged the creation of initial interest-only ARMs?
WhoWee
#34
Oct12-11, 07:14 PM
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Quote Quote by loseyourname View Post
Why? I didn't say he should be taxed on unrealized capital gains. I don't realize most of my own capital gains in any given year and certainly don't want to be taxed on them, either. If it was up to me, there wouldn't be a capital gains tax or a corporate income tax at all (maybe keep the punitive short-term rate to discourage day-trading and encourage true corporate governance and owners that care about long-term performance). I cite Haig-Simons simply because it's the best indication of one's ability to pay.

But I still think there's something to his general sentiment that the percentage one pays of actual realized income should not decrease as you earn more. It doesn't for wage and salary earners, but our tax system as it stands is severely tilted in favor of owners (you could make a good argument that no one would buy preferred stock at all if not for the corporate-to-corporate dividend loophole, for instance, which is just individual taxpayers subsidizing the borrowing costs of corporations).

I get that we want to encourage people to invest and take risk, but our tax code also allows people to shelter a whole lot of what they earn without using that money the way the tax code intends if you want to take a charitable interpretation of the intent. Why exempt municipal debt interest from personal income tax, for instance? It's meant to subsidize infrastructure development at the city and state level, but the full area under the demand curve to the left of the equilibrium rate is wasted money in excess of just straightforwardly transferring tax revenue from the federal government to municipalities, rather than giving rich people another way to earn income without being taxed and encouraging cities to borrow more money than they would otherwise be able to. I don't necessarily support a straight punitive wealth tax like some uber-AMT to make sure millionaires aren't paying less than secretaries, but get rid of some of these deductions. Hell, get rid of mortgage interest deduction. It's my own personal largest source of avoiding taxes, but it's still economically stupid. We want to figure out who to blame for the housing collapse and want to talk about Fannie and Freddie guaranteeing loans and bond-raters misjudging MBS risk. What about the government paying half your mortgage in the first few years? What do you think that does to demand and the rate of price appreciation? How do you think that encouraged the creation of initial interest-only ARMs?
my bold

I'm glad you made this point as most everyone can relate. The problem with eliminating such a "loophole" is the decision to borrow (and loan) may have been based (partly) on this legal deduction.
cristo
#35
Oct13-11, 03:25 AM
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Quote Quote by turbo View Post
There is some urban myth that the more money you make, the more you pay in taxes. That resonates with sheeples with little education. Unfortunately, there is no remedial taxation education that informs people that as you push into a higher tax-bracket (Yay!) the taxes that you pay on earlier income do NOT increase. Only the taxes on the higher income.
As Russ points out, this is a contradiction!

What do you mean about "no remedial taxation education"? I don't know about the US, but taxation is similar here, and it's not as if the tax process is a black box: it's quite clear the rates of tax that individuals are required to pay, given their salary.

Why would you expect people earning over some threshold to be taxed a higher rate on their entire earnings? Surely that discourages people from working hard and succeeding.
DoggerDan
#36
Oct14-11, 03:03 AM
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Quote Quote by cristo View Post
Why would you expect people earning over some threshold to be taxed a higher rate on their entire earnings? Surely that discourages people from working hard and succeeding.
Most countries tax folks on a sliding scale, that is, x% below X, y% below Y, and z% below Z.


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