Buffett's Doublespeak On Taxes

[AquaMan]

The profit amount is taxed twice.

This is different. You said your profit was being taxed twice.

Nonetheless, once the profit is disseminated to the shareholder it represents an increase of value derived from the original amount of their investment. True? The investment is still there, it may actually have increased by the very nature of just aggregating with other investors. You can get it back. So, its taxable.

That is separate from the corporation's activities to take those investments and utilize them to create greater value and paying a tax, which represents the cost of acquiring the privilege of using public resources (that I have a share of) for their private use, which I didn't really get paid for. Jets fly over my house, using my air that I pay for each month and they didn't ask or compensate me for that. I'm sensitive about that since I am being taxed three times for that air, once when I pay my mortgage, once when I pay my taxes for cleaner air and once when the airlines includes it into their fares. 3 times!

Perhaps you would prefer that the corporation pay a higher tax rate so that you didn't have to pay anything at all? I assure you they want to do the converse.

[AquaMan]

Tell me. Is this double taxation?

I agree to provide my truck to my brother who has a scheme to drive to Bixby and load up on vegetables directly from a farmer who is desperate to sell to pay his ag loan. I also pay for his gasoline. We agree to share, 80/20 in any profits he makes. But my brother has to do the picking, take it to the Cherry Street Market, set up a booth and man it, and pay any sales taxes. The sales taxes go toward making sure the bridge doesn't collapse under the weight of the truck, that the roads don't damage the fruit and that the farmer has subsidies or a subsidized loan to help him farm.

Its a success. After all expenses are paid, including taxes, he makes a profit of $1000. I take my truck back and pocket $200 bucks and include it in my 1040 dutifully subtracting out my mileage. Pretty good return for a $20 investment in fuel and still getting my truck back dontcha think? The farmer is happy too. In fact, we decide to do it more often.

Your concept is that I shouldn't have to pay taxes on my $200 and my truck use. You either want the farmer to pay for it all or your brother.

[Conan71]

Again...

Because you are completely avoiding the fact that he has a fiduciary responsibility to the shareholders to find and use every little nook and cranny of the tax code!  As you know, if he didn't, then he would be held responsible to those same.

There is no moral conflict nor hypocrisy when he uses the tax code the way it has been defined that he is required to use it, and also say that it needs fixin'.  Another point in the "as you already know" category.

B-H also has a responsibility to properly calculate and pay the taxes that they owe in a timely manner.  They apparently took some questionable short-cuts.  In the case of the $1 billion plus owed in back taxes, B-H apparently did not use the tax code as required.

B-H doesn't pay a dividend, so I suspect in terms of real value, that B-H shareholders wouldn't have noticed $1 billion in cumulative taxes over a  period from 2002 to 2009 reflected in the value of their shares, so that really weakens the argument about any significant detriment to the value shareholder's expect.  That's roughly $142mm per year for a company with total revenues at or above $100 billion and net earnings averaging around $10 billion over the last 5-6 years.

You do understand that essentially this is money which was properly owed to the government but was not paid in a timely manner by B-H, right?  Do you also realize the millions taxpayers are spending on the enforcement actions to make sure this money was properly accounted for and does get paid?  

[nathanm]

I own part of a company, my profits from that company are taxed at a rate of 35%.  I have the right to participate in corporate governance.  I am only taxed once.  This pays for the public resources this company enjoys.  The remainder of that profit is mine to keep or reinvest in the company.  My real tax rate is 35%.

I also own part of several other companies to varying extents.  I have the right and responsibility to participate in corporate governance for those companies too.  My profits from those companies are taxed at 35%.  This pays for the public resources these companies enjoy.  The remainder of that profit is then taxed a second time at 15% before I can keep or reinvest that money.  My real tax rate is 50%. 

No, your real tax rate is not 50%, unless you're arguing that the company would instantly be worth 35% more if corporate taxation went away tomorrow, which is an assertion that requires evidence. Even among economists, this isn't as black and white as you might wish. Also, if your real personal income tax rate is 35% you need to get a better accountant.

Does a short seller have a negative effective tax rate?

The absurdity of this claim is clearly revealed if one considers capital gains that accrue to short sellers, who pay rather than receive dividends while their positions are open. Following the logic of the argument, one would be forced to conclude that short sellers are taxed at an effective rate of negative 20%, thereby receiving a significant subsidy due to the existence of the corporate tax. The flaw in this reasoning is apparent when one recognizes that asset prices are lower (relative to the zero corporate tax benchmark) not only when a short position is covered, but also when it is entered.

There is no doubt that the presence of the corporate tax depresses the price of equities, but it does so both at the time of purchase and at the time of sale. If there were no corporate tax, dividends and capital gains per share would certainly be higher, but an investor would have paid substantially more per share to acquire his assets in the first place. As a result he would be holding fewer shares for any given initial outlay, and his after-tax income (holding constant the rate paid on capital gains) would not be substantially different.

http://rajivsethi.blogspot.com/2012/01/double-taxation.html

[Red Arrow]

Also, if your real personal income tax rate is 35% you need to get a better accountant.

I saw on TV last week (as I remember) that Buffett's secretary's personal tax rate is between 34% and 35%.  I don't remember the exact number after the decimal point.  In order for this to happen with only ordinary income, she would have to have about $2.2 million in annual income.  Maybe Gaspar is a bit more wealthy than he lets on to be.

[Red Arrow]

Tell me. Is this double taxation? ...

Set your truck up a a corporation.  Let the truck/corporation pay taxes on the $200 and the corporation can then distribute some dividends to you on which you will pay 15%.

[heironymouspasparagus]

How does that work?

I own part of a company, my profits from that company are taxed at a rate of 35%.  I have the right to participate in corporate governance.  I am only taxed once.  This pays for the public resources this company enjoys.  The remainder of that profit is mine to keep or reinvest in the company.  My real tax rate is 35%.

I also own part of several other companies to varying extents.  I have the right and responsibility to participate in corporate governance for those companies too.  My profits from those companies are taxed at 35%.  This pays for the public resources these companies enjoy.  The remainder of that profit is then taxed a second time at 15% before I can keep or reinvest that money.  My real tax rate is 50%.  

Part of the spin is the assertion that your tax rate is 35%.  Your tax rate is only 35% on the amount of income that exceeds $379,000.

http://www.moneychimp.com/features/tax_brackets.htm

Below that is a series of steps - referred to as the progressive tax rate schedule.  You know that - I stated that for anyone who doesn't know how it works.

Your second example just restates the first, then adds 15%.  Probably meant to say dividend income somewhere in there.  If you are talking about a C corporation, then there is a corporate tax plus whatever dividend or capital gains you get.  If your company is a C, then congratulations, you have arrived!  But then you also shouldn't be paying that kind of tax in the first place, 'cause you should be able to utilize the ISO program like Abercrombie & Fitch does - put you back into the 15% zone.

If an S, then you are just trying to deflect, 'cause all the income goes right to your personal return.  And if you are in the 35% bracket for a substantial part of your income, again, congratulations!  You still have arrived!  And again, you should be looking into the ISO features that are possible with an S corporation - more complicated, but still possible.  Puts you back into the 15% zone.

[Conan71]

Part of the spin is the assertion that your tax rate is 35%.  Your tax rate is only 35% on the amount of income that exceeds $379,000.

http://www.moneychimp.com/features/tax_brackets.htm

Below that is a series of steps - referred to as the progressive tax rate schedule.  You know that - I stated that for anyone who doesn't know how it works.

Your second example just restates the first, then adds 15%.  Probably meant to say dividend income somewhere in there.  If you are talking about a C corporation, then there is a corporate tax plus whatever dividend or capital gains you get.  If your company is a C, then congratulations, you have arrived!  But then you also shouldn't be paying that kind of tax in the first place, 'cause you should be able to utilize the ISO program like Abercrombie & Fitch does - put you back into the 15% zone.

If an S, then you are just trying to deflect, 'cause all the income goes right to your personal return.  And if you are in the 35% bracket for a substantial part of your income, again, congratulations!  You still have arrived!  And again, you should be looking into the ISO features that are possible with an S corporation - more complicated, but still possible.  Puts you back into the 15% zone.

Uh, Gaspar is referring to the 35% corporate tax rate, not graduated personal income tax rates.

[Conan71]

I saw on TV last week (as I remember) that Buffett's secretary's personal tax rate is between 34% and 35%.  I don't remember the exact number after the decimal point.  In order for this to happen with only ordinary income, she would have to have about $2.2 million in annual income.  Maybe Gaspar is a bit more wealthy than he lets on to be.

And I bet she also pays 15% on any of her capital gains and dividends as well.  So unfair!

And if Buffett is paying her that much, where's the fiduciary responsibility to shareholders of Berkshire-Hathaway?

[AquaMan]

The current cry is for corporations to not be taxed at all. That means the shareholders take the hit. Everyone incorporates.

If the corporation absorbs all the taxation you can bet the result will be reflected in dividends, share price or both.

If neither pay a tax on their profits  then government slowly suffocates, which leads to lower profitability.

If you merely eliminate or decrease loopholes the tax rate can be lowered for both.

what to do...what to do....

[nathanm]

And I bet she also pays 15% on any of her capital gains and dividends as well.  So unfair!

I still haven't heard a cogent argument as to why capital gains income should be taxed at a lower rate than wage income.

[heironymouspasparagus]

Uh, Gaspar is referring to the 35% corporate tax rate, not graduated personal income tax rates.

As of 2010, it is alleged to be;

http://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States

Or 35% on income over $18 million or so.  (38% from 15 million to 18 million).

[Conan71]

Aqua, I think the take-away from all this is our tax code has become far too convoluted and complicated.  There's no reason a corporation should have to employ a cadre of accountants and attorneys to interpret how much they owe in the first place.  I'm in agreement that getting rid of loopholes would be a great first step.

[heironymouspasparagus]

I still haven't heard a cogent argument as to why capital gains income should be taxed at a lower rate than wage income.

That's because there is none!

[nathanm]

I'm in agreement that getting rid of loopholes would be a great first step.

Unfortunately, Congressional Republicans have decided that loophole closing is a tax increase. Yes, Reagan's tax cuts would be a tax increase in the eyes of this crop of nutters.