ERICOPOLY

I was thinking about this $100m that Romney has in his IRA. Should he die today, this is how much it's worth: $60m approximately after the income tax bill is settled. $36m approximately after the estate tax bill is settled. So his "tax shelter" is going to leave 36% for him, and 64% for the US Treasury. And Obama doesn't think that is "fair". Romney is keeping too much! He only gets to keep 36% people! I'd say that's a pretty darned good deal (for the Government) compared to Mr Buffett's secretary.

With the current dividends included, ~20%. They have to go a long way to be in the money. That being said, once they are in, the growth is explosive. We discussed the B warrants previously. My mental model for that is to think of it like you are mortgaging your common stock at a very high loan to value. That explains the very high rate of interest for the money borrowed. There is very high risk of default. Payment in full happens if the stock goes up very high, and partial default occurs if it only goes up part of the way. In the event that payment in full does not happen, they foreclose on your common shares and take your equity as compensation for interest not paid. So that's my mental model for the B warrants.

Insurance is regulated by state. Once I left Washington state, my insurance carrier was allowed (if not required) to drop me. The California carriers interviewed me and said that due to my pre-existing condition (ankle problems) they did not want to insure me. That sounded reasonable though -- I'm not expecting them to insure a chronic injury. So I asked them to design a policy for me that excluded my ankle. You know, so I can have coverage for accidents, heart attacks, brain cancer, etc... etc... They told me it's illegal for them to provide such a policy for me. I am the one asking for it! California state law prevents exclusions. I thought, okay, that's pretty lame. I can't get any insurance at all due to state law.

I had an MRI done on my knee last week. I have a fractured tibeal plateau! The price was $451. The bill said I saved $600 for paying cash (I'm prevented by law from getting insurance in California, so I pay cash). Not sure why health insurance costs so much, but the cash price for an MRI seemed reasonable. price.tiff

So I think the solution is to get a bunch of wealthy Californian investors together to run an insurance company. Similar to how HWIC banded together and bought their first insurer in 1984. The corporate 35% tax rate might look high, but for short term capital gains that's better than paying the higher than 35% tax rate on short term gains at the personal level. It goes well over 40% after adding in California state taxes. Even the long term tax rate is lower at the corporate level. The Californian pays 20% to the US, then pays 13% to the California state treasury, then pays ObamaCare take, that medicare tax, and maybe I forgot something else. In California, both short and long term capital gains tax rates wind up being higher than 35%. And of course the insurer only pays 14.5% tax rate on dividends -- that one is just a no brainer. Later, we buy up entire companies where the tax rate on dividends is 0%. Buffett talks about how they are really just passive investments -- he buys them with management intact and keeps himself out of their business. But technically, under the tax law, they are not considered to be "passive" and thus he doesn't need to keep them within insurance companies.

That's only for the pre-tax contribution. You can contribute unlimited amounts to tax-deferral accounts with after-tax contribution monies where they can be invested in bond funds or stock funds. The name of that is variable annuities. The only advantage I can think of with IRAs over variable annuities is they're a bit cheaper (avoid the annuity company fees) and the pre-tax nature of the contribution. But there's absolutely no cap on what you can contribute with after-tax money (with the variable annuity). Are you trying to say that because the annuity loophole exists, Obama has no right to close the IRA loophole. So Romney puts what's left of his $100m into the variable annuity after it comes out of his IRA. What has Obama accomplished? They'll get $35 million if Romney pays 35% tax, and some obamacare tax stuff on top of that, but he'll still wind up with some $60m or so enjoying tax deferral, just like the IRA. Today's government gets more tax, but a future government gets less. Oh I see, maybe Obama wants to claim his deficit is smaller even though he knows he's just borrowing from the future tax revenue and bringing it forward.

Berkshire compounded book value at 19.7% for 48 years. Had they distributed a cash dividend of 3% on the first of each year, the book value growth would have been 16.7% annualized. That means approximately 72.5% of his unrealized capital gains on his Berkshire stock is the result of not otherwise paying a 3% of book value annual dividend. And 99% of his net worth is in Berkshire. So most of his net worth has avoided the very tax that he wants to raise! That's why I'm calling him out. I pulled that 3% number out of my arse because a lot of companies pay that much and that's the kind of yield lot of investors pay tax on -- and yet Buffett insists their tax rate is too low. Note that's only 3% of book value -- when it traded above book value that would have been a rather low payout yield. So maybe I'm being too generous to Mr. Buffett. Meanwhile he has 99% of his net worth yielding 0% dividend and asks "What can I do to help? How can I pay more Mr. Obama?"

Of course unrealized, undistributed income is not taxed - you haven't made the money! That applies to you and me as well. Are you paying taxes on your BAC gains that you haven't sold even if they are in a non-sheltered account? You sound like you don't quite get the nuance I'm talking about when I say "undistributed income". People long ago thought about the idea of just shoving their assets into corporations, owning their passive investments there, and never getting hit with taxes on the individual level. Then the government cracked down and that law still exists. But Buffett is keeping his passive investments at Berkshire nonetheless because he kept them within the insurance operations (skirting the law). Here it is: The personal holding company tax is imposed on the undistributed income of such corporations at a flat rate. The purpose of the tax is to force the shareholders to distribute the corporation’s income to themselves as dividends so they may be taxed on it at their regular rate of income tax. Read more: http://www.answers.com/topic/personal-holding-company#ixzz2PqjSVu9O How do you set up a personal holding company? Just form a C corp and start investing in passive investments (stocks and bonds). Then cringe when an audit determines that you owe tax due on undistributed profits. You get labeled as a "Personal Holding Company" due to the nature of what goes on. Otherwise, it's just a C corp. It is painfully obvious to me that the government intended to stop people from using their corporations to avoid taxation at the personal level if they are passive investors. They want to keep corporate level protection and benefits for people who are entrepreneurs and take risks. Well, Buffett didn't start Berkshire because he had a product idea that he wanted to go and invest. He bought control of Berkshire at a time when the tax rate was 70% and up until that day he had been only a passive investor. From how I view it, the law wanted people to pay taxes on their passive investments at the personal level. Insurance companies were for people to provide insurance (something the economy needs). Along came a passive investor who found in an insurance company two things of very high value: 1) float 2) a way to protect passive investments from the undistributed profits tax

Then of course I don't see why real estate investors can sell their properties and roll their unrealized capital gains into the next property. That little trick is called the 1031 exchange. My landlord in Montecito is currently dying and won't give me a lease beyond July 2014 because he doesn't want to risk tying up the property for his heirs. He expects to die soon. But he won't sell me the property because he doesn't want to get hit with capital gains taxes. He gets a step-up in cost basis when he dies so his kids get it tax free. But he is holding the property for an economic loss -- not only did he purchase it for more than today's fair price, but he poured money into remodeling it. Then he is renting it to me for negative cash flow. But I found out the real reason why he doesn't want to sell it to me (per his realtor) is that his tax basis is extremely low (a long history of rolling properties along for deferred capital gains via the 1031 exchange technique). Okay, so Obama isn't bitching about this kind of tax-deferral. He cares about IRAs. We can't sell BAC and buy WFC with the proceeds tax-deferred, but Trump can sell one tower to buy the next? Huh? I don't see the logic there. And an IRA just gives you tax deferral without the lawyers and the paperwork. The tax is still due eventually. For my landlord, the tax will never be due. For Trump, the tax will never be due. So Obama goes after the IRA instead. No logic to it except that I probably don't have Trump lobbying for me.

But he is following a long line of tax avoiders doing this, only he is smarter about it (working around the rules). Now, most of us can't do this because of scale. Not easy to acquire an insurance company and all... for the average person, it seems equitable to have a vehicle of tax-deferral such as an IRA. However, the IRA of course has it's problems (such as the tax bill still being due eventually even if you die).

Of course unrealized, undistributed income is not taxed - you haven't made the money! That applies to you and me as well. Are you paying taxes on your BAC gains that you haven't sold even if they are in a non-sheltered account? You sound like you don't quite get the nuance I'm talking about when I say "undistributed income". People long ago thought about the idea of just shoving their assets into corporations, owning their passive investments there, and never getting hit with taxes on the individual level. Then the government cracked down and that law still exists. But Buffett is keeping his passive investments at Berkshire nonetheless because he kept them within the insurance operations (skirting the law). Here it is: The personal holding company tax is imposed on the undistributed income of such corporations at a flat rate. The purpose of the tax is to force the shareholders to distribute the corporation’s income to themselves as dividends so they may be taxed on it at their regular rate of income tax. Read more: http://www.answers.com/topic/personal-holding-company#ixzz2PqjSVu9O

Considering the very few people who meet the 3m criteria, I'm not expecting much "fix" to the economy. What's relevant is the surplus in the aggregate, not the number of people. Either way, it's not a complete "fix" all by itself, it's a step in a certain direction. There are multiple ways that you could be thinking about this, and I chose one of them. I assumed you meant that people would be spending more if they were not encouraged (with tax incentives) to invest for their retirement. However I threw that out as a possibility because if we're talking about the few people like myself, I'm not going to spend more if I can't have a RothIRA. I'm going to spend less because I now realize my net worth won't last as long as I thought it would. So via the wealth effect that Bernanke loves to think about, I'll go into siege mentality and spend less. Now I'm worried my money will compound slower and thus I must reign in spending. I'm serious, the last thing on my mind this weekend is spending more. My level of financial security just fell off a cliff and now I'm worried, ready to put it into lockdown because it changes the perception of my wealth that I was anchored to (and had adjusted my spending to).

Here is a history of the undistributed profits tax, which dates back to 1936: http://www.taxhistory.org/Civilization/Documents/UPT/HST8668/hst8668-1.html And it was to make people like Buffett distribute a taxable dividend so that they could pay personal income taxes. Instead, Buffett figured out a way to structure Berkshire such that he could skirt this law, and then has the audacity to declare that he doesn't pay enough personal income taxes.

We are discussing personal, not corporate taxes. There are no IRAs for corporate taxes. That's the whole point! And I'm glad you see the distinction. He has kept the bulk of his passive investments at the corporate level, and he is not proposing any increase on them. Instead, he only points at the personal level. Now, the tax law tried to stop people like him from doing this. That's what the rules are about the "undistributed profits tax" with regards to corporate taxation. One of the ways to get around this tax is to make sure that your passive investments are deemed a core part of you business. And how does Buffett invest passively in a manner where the passive investments are deemed a core part of the business? Why, insurance operations, of course. Insurers invest their premiums passively, so the tax law can't slap an undistributed profits tax on Buffett. He knows all of this of course, and could have suggested that his insurance companies ought to pay taxes on dividends at a higher rate than the 14.5% that they currently pay. But no, his goal wasn't to address his own taxation level. It was to address what the rest of us pay who haven't cleverly wrapped our passive investments at the corporate level in such a structure as to dodge the rules prohibiting passive investments at the corporate level in order to dodge personal income tax rates.

I was reading Munger's topic on The Art of Stock Picking. He says that Graham's approach of using liquidation value worked because you could easily layoff workers and the working capital belonged to the owners. Today, he says it's different because "the accounting is not realistic because the minute the business starts contracting, significant assets are not there". See page 13 of 18: http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Charlie%20Munger/Charlie%20Munger%20_%20Art%20of%20Stock%20Picking.pdf

The crazy thing is, Bernanke and Obama want people to go into risk assets. But they don't want them to keep the profits. My RothIRA... I should be the poster child for taking risk. Then they want to keep the profit from it. Hmm.... so why is it again that I should go into risk assets?

I am much the same way but nowhere near as bright as Buffett. One thing I have is a terrible memory and I understand that Buffett forgets very little of the numbers he reads in annual reports. So he has eyesight and I'm practically blind. This is one reason why I don't research companies the way he does -- it's very frustrating to read reams of data and to get nowhere in terms of retention. But like anyone with a disability, I adapt and develop new strengths. Such as cheating over the shoulder of people who do the research. Then once they are convinced it's a good investment, I try to reverse engineer why it's a good investment. If it clicks, I invest. But that's long winded for saying I'm a dumb-ass.

I haven't read that article, maybe I should! I got a "B" in my Combinatorics class at UCLA. So I'm familiar with it but I didn't get the top grade. Chess would train your mind well though to practice thinking several moves down the road. I like it but I'm not going to beat a serious and regular player. And professionally I was a software stress tester/programmer. You have data shared between threads, they can both be reading and writing to that data, and you have to coordinate them with locks but do so without having a thread use the lock too much (or they'll all be lined up waiting for the lock). So doing that kind of work for 10 years might also help with this kind of thinking -- especially the bit about multiple threads off doing their own thing and making sure there aren't improper reads and writes. Good mental exercise if nothing else. Probably the software influence was the best because I did it the longest. Multithreaded programming is hard to do correctly. I took a Parallel Computing class at UCLA and that was even harder than multithreaded programming. But my GPA was only 3.2 or 3.17 perhaps (I forget). I didn't even get low honors. I was out of my league and should have been studying something easier.

Per the 2012 annual report, book value has compounded at 19.7% rate for 48 years. Book value at that rate grew from $19 per share to $114,214. Had he payed a 3% annual dividend each year, book value would have grown at 16.7% rate and book value per share would today stand at $31,389. So when you look at his unrealized capital gains (which he will get tax-free at death), keep in mind that 72.5% of his unrealized gains would otherwise have been taxed at least once on the individual level. So take the 20% capital gains rate today, add the ObamaCare tax and the medicare tax, and we get pretty damn close to the $9b figure that Obama thinks is better raised by raiding IRA plans. Somebody's class is clearly winning this class warfare game. Perhaps in a class of his own. EDIT: Oh yeah, I forget that income was once taxed at 70% when Buffett started out and dividends were taxed as income for a very long time. Why am I letting him get away with today's relatively low capital gains tax rate when I figure what he would have otherwise owed to the Treasury? He wants dividends and capital gains to be taxed as regular income. So how about assessing 72% of his net worth as income -- assessed at the highest income tax bracket? That's the way the order of operations works for Romney -- he gets tax deferral of his income and the total bill is paid at the end at regular income tax rates. That would be the apples-to-apples comparison.

Considering the very few people who meet the 3m criteria, I'm not expecting much "fix" to the economy.

Higher p/e as well given the lower risk

That's only for the pre-tax contribution. You can contribute unlimited amounts to tax-deferral accounts with after-tax contribution monies where they can be invested in bond funds or stock funds. The name of that is variable annuities. The only advantage I can think of with IRAs over variable annuities is they're a bit cheaper (avoid the annuity company fees) and the pre-tax nature of the contribution. But there's absolutely no cap on what you can contribute with after-tax money (with the variable annuity).

Yup. This is why Warren Buffett wants to tax my capital gains higher but didn't instead propose a tax on his unrealized capital gains (which is partly due to the earnings that he retains and reinvests to avoid tax rate on dividends at the individual level). Didn't instead propose an increase in tax rates on the 14.5% he pays on his passive dividends through his insurance subs. He wants higher taxes to make things more equitable, but doesn't want to be the one paying them. Only 1% of his assets are in an account where he would be subject to the taxes he proposes. Hey, I've got an idea -- and I'll sound very generous in proposing this and people will applaud me on TV -- how about you tax 1% of my assets at a higher rate, but leave the 99% of my net worth alone? EDIT: His is really a tax-deferral vehicle, just like my RothIRA. Where can I find his tax proposal where he specifies specific method of taxation? Who are the others who will end up paying more taxes at his income level? i.e. who are the others who make $500MM++ in a year that are not capital gains? How would you tax unrealized gains when the gains are fluctuating constantly? What about the answers to my other questions? Buffett proposed a higher tax on capital gains and dividends at the personal level. But the reason why only 1% of his holdings are in investments subject to such taxes is because he never distributes earnings from Berkshire as cash dividends. Instead he retains them as unrealized capital gains. A 3% dividend on his Berkshire shares would be taxed as regular income. Instead, he retains it and reinvests it at the Berkshire level. Thus, Berkshire compounds at an extra 3% annualized rate and that translates to his unrealized capital gains compounding at an extra 3% annualized rate per year. The tax law says that 100% of his unrealized capital gains will be COMPLETELY FREE of tax if he holds it till death. What other questions do you have? I don't recall any.

Romney's tax shelter will be fully hit with income taxes when he dies. When Buffett dies, his tax shelter becomes 100% tax free. This makes absolutely no sense that Obama is getting more pissed about Romney's tax shelter than about Buffett's tax shelter. But then Buffett is a political ally that helped get Obama elected. Maybe Buffett was very calculating about this -- keep your friends close but your enemies closer.

I think I am now officially a Republican. I just need to go and register (formality at this point). Hopefully my vote in the primaries for the most pro gay-marriage and pro secular-education candidate (etc... etc...) will reform that party to something I find far less revolting. It's not a completely broken party, but just needs major renovation.