ERICOPOLY

This is what I was thinking. They are stupid criminals in that they are risking prison time when all they really did was give us outstanding prices at which to go long (with really cheap non-recourse leverage). It's a better crime to just wait for them to serve things up -- they take all the risk, we take most of the upside.

I'm watching this on the 10pm news in Sydney. They are giving the list of destinations where the Tsunami will hit next... it's not ending with Japan it looks like. Evacuations ordered in Hawaii for example.

This is right -- it's a wash before taxes. He doesn't need to buy back shares as a means of getting a tax deferral benefit. For tax deferral he can use his retained cash flow to purchase 80+% positions in more companies. He prefers to diversify the corporation's income anyhow: so rather than trying to boost his % ownership of the existing, he feels more secure to have the added diversification that new bolt-on 80+% acquisitions bring. This is a passive investment vehicle. He only looks for companies that run themselves (nothing to fix and management already in place) -- making new investments with the cash flow (without getting taxed on dividends before reinvestment) is one reason why he wanted a corporate investment vehicle in the first place. He wants to acquire new companies without getting involved in running their operations -- just like you don't have to run companies that you own on a fractional basis. Otherwise, he would get bogged down in the management. So the focus is on passive investment here. His only purpose in doing the buyback in the first place was as an alternative to taking the cash as a dividend. 100% of the alternative (a dividend) will be taxed, but not 100% of the value of the shares sold after the buyback (his cost basis in the shares is not zero -- he does not pay tax on the cost basis of shares he sells). That's my point: It all comes down to the cost basis on the shares sold -- because his cost basis is above zero on the shares, the tax will be less if he launders the dividend via buybacks instead of just paying out the dividend as cash. In my prior post I mentioned that the taxes would only be the same if the share price approached infinity -- this is a reference to what you were taught in Calculus: "take the limit as N goes to infinity". Think about how the Riemann sum was used to approximate the area under a curve using rectangles crammed together -- and to prove the integration (used to precisely compute the area under a curve), it was shown that cramming 'N' number (where N approaches infinity) of rectangles under a curve (where the width of each rectangle approaches zero) and then summing their respective areas will provide you with the area under a curve. Somewhat similar type of thinking here -- as the share price heads towards infinity, the cost basis becomes insignificant (sorry, it's because I was a math major that I used this comparison. I spent much of the time sneaking glances at Danica, so perhaps I didn't learn the subject matter very well; correct me if I'm wrong). Once he has satisfied his need for personal cash flow via dividend laundering (to fund his personal spending), he is free of course to use more of the company cash for more buybacks if he wishes to boost his stake in the company. That's a separate topic though -- that's just about boosting his ownership in the company without taking a dividend in order to do it. "Best strategy for increasing one's ownership" is a separate topic from "extracting cash in a tax-friendly manner via dividend laundering".

When criminals unload something on the black market inexpensively, the buyer runs the risk of losing everything for accepting stolen property. The novel thing about these financial crimes is that there is no such risk to the buyer. They drive the price down for whatever reason and then let others participate in the bounty! They even provide inexpensive non-recourse financing (LEAPS).

Buffett originally paid about 14x when he made his famous $1b investment: http://www.fwallstreet.com/article/24-buffett-coca-cola-1988-now-i-get-it If KO gets to 5x it will either be because they'll be facing a class action lawsuit for knowingly poisoning people (and I wouldn't want to take Coke's side in that one), or it will be a general market panic and other companies will be perhaps selling for 1x or less.

More details: So let's say the controlling shareholder begins with 60% ownership in a $4b company. Here is the loop that repeats every quarter: step 1) The corporation buys back 0.25% of shares every quarter (on an annual basis 1% of shares are repurchased) step 2) At the end of the quarter, the controlling shareholder owns a higher percentage of the company than before. He then calculates exactly how many shares, 'Y', to sell to bring it back down to 60% ownership. step 3) He tells his broker to sell 'Y' number of shares over the following quarter step 4) go back to step 1 That would be a $24m annual income at a $4b market cap. More income when the stock trades higher, less income when it trades lower. He maintains intrinsic value -- his percentage ownership in the company never drops below 60%. The intrinsic value of the company at the start of the prior quarter is X. He owns .60*X. The buybacks at the company make it such that his ownership goes up, but his selling brings it back down to 60% ownership. So, after getting his laundered dividend, he still owns .60*X. Thus, no impact to intrinsic value of his holdings -- but he has his laundered dividend in hand. Oh, I suppose intrinsic value may have gone up over the course of the quarter due to retained earnings and such, but you get the point anyhow -- his ownership of the company is steady-eddy 60%. Sometimes he will sell at higher or lower prices than the prior quarter's shares were repurchased at. It doesn't really matter if in any given quarter the prices are not the same as in the prior quarter. It won't always be higher, and won't always be lower -- over decades of consistent practice this washes out. I suppose a really nit-picky person would say that he loses the time value of money for 3 months -- oh well, I can live with that criticism. In the early years after his 60% takeover he may very well be selling some shares below his cost basis, taking a capital loss with his laundered dividend. That would certainly be the case if I took over 60% of a company -- everyone would be rushing to dump the stock. Over time perhaps he would succeed at growing the company and/or market confidence and the share price would rise, then perhaps his sales would be at 1x, 2x or 3x or 4x or whatever... relative to the cost basis of the shares. Hard to say how long it would take before the dividend laundering advantage gets too watered down. Even when the stock is a ten bagger there will still be a 10% discount on tax bill paid. Once the share price gets exceedingly high (as it tends towards infinity), only then will txlaw be correct in his suggestion that equal tax rates on dividends and capital gains would eliminate the tax laundering scheme. Gather ye rosebuds while ye may, I suppose... Anyhow, my example above explains why I don't get upset when management uses cash to buy back shares at any price. It's cheaper for me (in my taxable account) than when they pay a dividend. Besides, I like to believe that I only own shares at good prices to begin with (and sell when they get expensive).

My mother in law moved her assets over to Wells Fargo after Columbia Bank took over American Marine Bank (local bank that failed). Wells Fargo then proceeded so send her financial documents to our house by mistake -- I opened it without checking the name on the mail, we also do business with Wells Fargo so I just figured it was something pertaining to us. Now we know how much she's got and how it's invested -- unless there are more accounts we don't yet know about. She wasn't very happy with the bank! Bad first experience for her?

Impressive, that's 19.56% annualized.

Jim Rogers believes the commodities bull market will last another couple of years. It looks like he wants to be given a decade in order to predict that gold will hit $2,000. http://www.bloomberg.com/video/67100110/ Of course, I don't put too much weight in what he says. After all, go back to what he said in 1988: "Most stock markets around the world," echoed TV commentator and motorcycle buff Jim Rogers, "are going to go up dramatically ... but no longer than six months, at which point we are going to have a real bear market. I am talking about a bear market that is just going to wipe out most people in the financial community, most investors around the world. And in fact there are many markets I would short but which I will not be short, because I think they will probably close them down."

I saw it argued implicitly, but I don't think you are lying so I must have misunderstood. Anyway, in that post #33 you also said that you are getting warm to the idea that corporate taxes should be lowered. I totally agree with that, it would be good for the country. Of course, you'll have to grit your teeth because it will make the rich far richer as it will speed up their compounding machines. Anyhow, I don't think the growing divide is as much of a problem as the media portrays -- much of it is likely due to demographics.... there are simply more older people around today (baby boomers) and they've had longer to compound, or more years of savings and higher pay in their seniority and experience... that's all. But the generation won't live forever.... it's sort of like the pig in a python analogy -- once the pig gets digested the gap between rich and poor ought to go into decline. The statistic that the average age of millionaires is in the 50s says it all -- the more people you have age 50 or higher, the more millionaires. I don't believe demographics explains the entire story, but I think it is a very significant factor. For individuals, I think we should just have a consumption tax only. Some people would disagree with me on that, but as pointed out I can just put the money in a corporation and effectively have my own consumption tax. So, the idea of it being regressive may be true... but don't we effectively already have it? Okay, yes we already have it (sort of) for the idle rich, but not for the working rich. The idle rich can keep assets in corps, the working rich get hammered. By "working rich" I am talking about people who have high incomes but may not have much in the way of assets (so their tax is proportionally high relative to their means). So even though Buffett is not idle (he works), I would classify him under "idle rich" because his taxable income is a fraction of the true nature of his wealth. So... in summary the theme here is that the working rich can't tweak their taxable income to match their consumption but the idle rich can... and in the spirit of fairness I think the people at the top shouldn't get a lighter tax load here, so the consumption tax would settle this as it would give the frugal "working rich" more take home pay for reinvestment (and we both agree that money intended for reinvestment doesn't need to be taxed for corporations, so why is it different for individuals? Frugality should be cultivated). I think a means of making it up to the people at the very bottom could be dreamed up -- some sort of extra check in the mail or something if monthly income below a certain amount -- to be repaid at year end with filed tax return if a bonus or a raise bumps them up, or with penalties if they lied. For people who don't apply for the monthly grant, then no need to file a tax return. Perhaps just a far simpler method would be to not tax things like toothpaste, diapers, toilet paper, food... in other words what we generally think of as essentials. Going back to something you mentioned prior: You expressed your view that people should be taxed on their personal balance sheet. Effectively it could be implemented similarly to an estate tax yet without the death. That might actually be interesting to think about in a sort of thought experiment... I wonder what taxation percentage rate would be necessary, and do you advocate a progressive balance sheet structure? I mean, would the government ask for a tax equivalent to something like 1% of Buffett's assets annually? Higher rate? Berkshire would have been ordered to pay out an annual cash dividend to fund the taxes. That would have left less cash to reinvest in new fat pitches, so the growth rate would have been somewhat lower in the early years -- later years it doesn't matter because he can't reinvest it fast enough. On that topic, he says he won't pay a dividend because people would be competing with him in reinvesting the dividend, but I suppose he could have paid a special dividend in early 2009 when everything was inexpensive (to buy more WFC or AXP for example where Berkshire's potential ownership is capped by that bank holding company law). Very curious on what the rate would be. But if Berkshire is a $214B corporation today, and if Buffett were taxed at 1% of his net worth, then Berkshire would need to pay out $2.14B a year in dividends. And that would work fine for Berkshire, because they have healthy cash flow. But what about a company in a cash pinch? Their controlling owners would perhaps be faced with selling down their stake in order to pay their bill I suppose... No I certainly don't believe that. However I did joke about it -- you can probably search for the word "jokingly" and you'll find the specific sentence. But I'll save you the time: Cynically, I would jokingly suggest that they've lobbied to have that personal dividend tax put in there just to convince double-dividend-tax-conscious people like you to give them a lower corporate dividend rate within the holding company so they can grow dynastic wealth faster.

Don't forget who you are talking to... just a few posts back I explained that one really needs to acquire a controlling stake in an existing company in order to make buybacks work for tax laundering. To jog your memory, I was referring to why starting my own C corp doesn't work. Pick 60% ownership if that suits you... just don't jump all the way to "wholly owned" -- I didn't. Yes, I said "acquire a holding company", but I figured you'd understand what I meant... I would have not said the word "acquire" otherwise, for it would be far simpler to just start a new C corp (were it not for the dividend laundering thing). Perhaps you are just screwing with me... maybe I should stop taking the bait?

If the company recovers the full value of expected putback claims (nevermind fraud, damages, and other claims) and the split is upheld, which i still view as both likely events, than this company will be several multiples of where it is right now. That scenario will earn you my vote for favorite board poster. I used the recent price weakness to buy.

That's half the truth and I'll show you why. I will use the same tax rate in both scenarios. Scenario A: 1) You acquire a holding company for $100 per share 2) It buys back shares at $200 3) You pay just $35 in tax Scenario B: 1) $200 dividend is paid out 2) You pay $70 in tax Twice as much tax!!!!

You have been naively arguing that the taxes will be collected on the personal income tax return as distributions are paid out. That's true for people who don't have a ton of money already and who therefore need liquid funds, but it's not true of the very rich. They use them differently from how you envision -- they are effectively just an investment account that has a much lower tax rate -- and the tax rate can be driven to zero as they achieve scale. And that's pretty much what we disagree about. I am having a conversation about how the very rich use it as a tax shelter, and you are justifying the tax shelter by saying that the much smaller people take distributions and pay the tax.

No, the Roth 401k isn't dead. I had a Roth 401k at Microsoft up until I left in early 2008. The way for a high income person to get money into a Roth account is to arrange to quit and then get rehired. When you are unemployed, you roll your company plan into a Rollover IRA, then convert that Rollover IRA into a Roth IRA (and pay the tax due). Currently, there is no income limit for conversion into a Roth IRA. So once your rollover is complete, then go get your old job back again! Now, you can either do that every year (quit and get rehired), or do it in batches (like every 10 years or so). Microsoft wouldn't let me roll the company plan while I remained employed -- so quitting and being rehired was the only option. Maybe your company is more flexible, or maybe they are not allowed to by law... I'm not sure why Microsoft was inflexible on that one. This country has some really dumb laws -- I can't believe we can roll into the RothIRA but can't directly contribute to them! The other action I recommend is to max out your after-tax contributions to your 401k -- those will flow into the Roth as well! I always maxed out my after-tax contributions to the 401k -- the tax has already been paid on that money so there will be no tax when converted to Roth IRA, although you'll pay tax on any gains converted. A few months after I quit, they adopted the self-managed 401k plan. So now they have a relatively optimal 401k in place. Of course, they made me suffer from their lack of options for 10.5 years only to give the sweet deal to the new person getting my job.

For whatever reason I didn't see this paragraph the other day. I think I only saw the next successive post. There is little reason to be concerned about triple taxation, LOL, for often not even double taxation occurs because these guys can compound most of their assets in these corporations and the step up in cost basis happens upon their death. So they acquire a company whole, and pay only the corporate income tax. They reinvest the profits from one business to buy the next, totally free of dividend tax. This goes on for decades, and then whoever gets their shares upon death has the step-up in basis and can cash out free of taxes. Can you name a single family that has liquidated and paid out all dividends just to be "fair" to society when on their death bed? That's just not realistic, not even Buffett intends to write any check to the IRS -- it's all going to be free from tax. He will give most of it to the Gates Foundation which is a noble thing and they will help a lot of people around the world, but it's not going to help his secretary with her tax bill. You keep talking about this extra layer of taxation as if a very rich person is actually going to pay it! So you justify their lower tax rate based on the extra layer that never gets triggered. Cynically, I would jokingly suggest that they've lobbied to have that personal dividend tax put in there just to convince double-dividend-tax-conscious people like you to give them a lower corporate dividend rate within the holding company so they can grow dynastic wealth faster. Let's propose an investment structure for the rest of us... okay, how about a special kind of investment account that compounds completely tax free but has a 99% tax on any gains extracted. Then put a rule in there that says upon death the account can be liquidated by the heirs free of tax. I might sucker a few voters into passing such a bill, then I'd use it as a vehicle to compound wealth faster that I intend to pass on to the next generation. You have to stop and think for a minute why I am so impressed with that structure -- yet at the same time I hate paying taxes. There must be something I am seeing that you are not, and now I've layed it out there for you. I read your posts and thus far you've never mentioned the "loophole" that is the step up in basis, which completely obliterates that extra layer of taxation. As long as they have enough money (hundreds of millions) of family money outside of the holding company, they can comfortably lock up their remaining tens of billions within the holding company -- and their families never pay that tax as it passes to their heirs with step-up in basis. Or they leave it to charity... but again, somebody still needs to pay the bill to the IRS, so who are they going to come after? Some of these charities are outside the country, which is terrific for the recipients, but it still leaves open the question of who is going to pay the domestic tax bill? Even in the unlikely event that they do one day liquidate one of these holding companies -- they've had decades of dividend-tax-deferred benefit so a one-time dividend tax on liquidation would be wholly inadequate in terms of recapturing the lost taxation. Pennies on the dollar. If you don't agree, then think about the reason why we like to use IRA accounts for tax-deferred compounding. Let's put it this way, because I think this is a fact we can agree on -- every time Berkshire makes a large wholly-owned acquisition the IRS stops getting dividend tax checks from the prior shareholders. Does the government cut spending to make up for this? Who do you suppose is going to pick up the tab? These are dividend-tax-deferred compounding vehicles only if dividends are actually paid out -- they are dividend-tax-exempt if held until death for passing to heirs. Here is the issue I have with taking the route of setting up my own C corporation: It won't give me one of the key tax features that I've been talking about: I wouldn't be able to launder the dividend by repurchasing shares. Somewhere in the tax code they have a special rule that you need a certain number of outside non-related shareholders before you can buy back shares for capital gains. Somebody on this board pointed this out to me a little while back when I asked whether we could just create for ourselves an investment holding company and buy back shares as a laundered dividend. Imagine laundering your dividend via buying back shares below your cost basis -- getting a tax loss instead of paying tax! That's not terribly likely to last long, but I mention it to remind you that the capital gains tax is only due on the appreciation in the shares. So if future personal capital gains tax is 25% and your cost basis is 1/2 of share price, your effective tax rate is only 12.5%. Much better than a potential future personal 40% income tax rate on dividends. So that's why the suggestion of starting my own C corporation doesn't grab my attention. So, I figure it's relatively hard to get a bunch of unrelated people to put money into a newly minted investment holding company and also agreeing to make me the sole decision maker. This is why I figure the way to go is to find an existing company out there and just take control. Of course, that normally takes a substantial investment of money which is why I'm not going to agree with you that it can be done inexpensively. Perhaps you can find one that you can take over for let's say, $50,000???? Yes, I have more than $50,000 -- but remember this isn't about me, it's about making it fair for everyone. I also think that buybacks go smoother when the corporation is sufficiently large and shares are liquid -- else you may make a tender offer where you are the only one tendering, in which case you will dilute your ownership control of the company. You get the best tax rate on dividends (zero) if you buy the investments as whole companies. Now, when we think of investment portfolios we generally think of diversified ones, and to have a diversified set of wholly owned businesses you need a LOT of money. That's why I said this game works best for the ultra-rich... because they can afford a broad portfolio of wholly owned businesses, and thus their tax bill is lower than the much poorer version that can only afford to buy the shares. No, you don't have to be as rich as Buffett to have a diversified set of wholly-owned businesses, but you have to be a lot richer than me and I'm fairly well off. My point is just that as I get richer these opportunities will finally be viable and if I act on it my dividend tax will go down. I'm not complaining that corporations don't have to deal with higher taxes, I just think everyone should be able to get in on this in a simpler form. Maybe you only want to set aside $100k worth of stocks for the next generation -- why do we need the complexity of a corporation just to show that the dividends are intended for reinvestment versus consumption? It's a bit like using a sledgehammer to drive a nail.

When the facts change ........ We had a real estate crash and a giant oil spill, high salaries are fine when things are well but not when... I also think he learned something from Einhorn, he said he agreed with most everything he said. It would also just be smart to stroke them a bit -- this way you can have a productive conversation with them. It's more difficult to get your point across when you start right out by offending the person.

What percentage is Klarman holding in cash? I want to know to what degree he is walking his talk.

I had never discussed any dollar numbers in the past, up until a few days ago when I mentioned my 2009 tax bill. I regret doing that because I wanted to never discuss the money itself, because we all start with different sums at different ages (some with student loans and whatnot, and different incomes). For example, it isn't how much money that Buffett has that is interesting to people around here, it's his rate of compounding that is interesting. But anyways, when I told my manager I was quiting I had about 30 times my annual base salary. I spend far more than I "need" to. The vacations and such. But my wife still drives the same car, we still live in the same house (although for a moment there I tried to buy a larger one). We pay for house cleaning and landscaping. I bought a hot tub this year. Things like that.

Oh yes, it would be extremely difficult to administer a wealth tax or to tax people on their means, as you suggest. Theoretically, I think society gets jealous of what they can see of the rich lifestyle, not what they can't see. So I believe an individual's private balance sheet doesn't create the unrest, but rather their ostentatious living. People who flaunt their wealth. This is why I favor a consumption tax alone. Besides, if they brought in a tax on wealth I really would just leave the country and head for Australia (at least once my mother in law dies), and the way the tax laws stand today I can get out without paying the "exit tax" because of my dual citizenship since birth. Buffett is mortal like us, but at least he can choose which needy organization gets the money. I gave very little in 2010 (as percentage of my means) because my attitude was that my wealth was already adequately redistributed in 2009 by the government. I gave more in 2009 (as percentage of my means), because I hadn't yet felt the sting of my taxes and had time to stew on it. Now, some people will be stimulated to give even more in order to keep it from the government, but my reaction is to just arrange my papers using my brain (as Buffett does) to keep the government from deciding which "charity" will get it. My current ideas on inheritance are like this (although I haven't acted yet to arrange it) -- give the full $1m or whatever it is into a trust for my children. That $1m is the gift tax exemption that draws down against the inheritance tax exclusion. That $1m by the time I die at age 99 will only be a fraction of whatever the estate tax exemption is in the future. However that $1m will compound much faster than they raise the exemption. But the trust will have rules such that the kids will only be able to withdraw an amount equivalent to the national median house price at age 30. After that, they will only be able to earn an income from it to age 50. That income will be the equivalent of their tax bill on "earned income" -- so if they don't work, there will be no income from the trust. After age 50, I will start to lighten up on how much they can get, so then they can take out a portion of the principle to buy a nice beach house or something and can start drawing a healthy income for retirement. By that age they will have realized that they won't live forever and that they have no second chance at making it back. So I will make some rules such that they cannot withdraw from the fund the whole thing (can't blow it on speculation), and a certain percentage of assets in the fund will need to remain invested in something analogous to an index fund. The theory behind this is that they won't make the same mistake I did in terms of taking a job that they don't really like just for the sake of it paying more -- so if they want to be an art teacher they can go right ahead yet still afford a house and not need to worry about a comfortable retirement.

On how much is enough: It's been interesting to be living on financial assets with everyone constantly chattering about the banking system completely collapsing, the S&P500 going to 250, hyperinflation making the dollar worthless, etc... Fortunately I can send my wife back to work if things get really bad :). I recommend anyone else choosing to retire right before the biggest scare since the Depression had better build the bridge 3 times strong else you'll be a wreck. I've been real lucky to have more than doubled my assets, even though the market is lower and I've spend a lot. Family life: My daughter was two when I quit, and her first two years went by so fast when I was working. But my son was born two months after I retired, and it seemed like those were the longest 2 years of my life. So it's been great. I have this great bond with the kids that I wouldn't have if I worked like I used to. They both ski down the hill now without assistance -- skiing together is so fun. We can go midweek when the lifts are empty. My wife does want me to get out of the house, so I have a room rented in town where I bring my laptop and spend a few hours sometimes. We tell the kids I am "going to work". Well, maybe that will give them a work ethic :D My grandmother is 93, and I question whether this is the last time we'll spend time together (she lives in Sydney). I've taken my family out here 5 years in a row now, as 2006 was the beginning of my exit from work (after my initial big score, I started taking month long vacations in 2006 and 2007). My five year old daughter has spent a month a year here every year of her life! This has been just fantastic for my grandmother, as despite the long distance she is seeing more of my children than of great-grandchildren living in Australia, including here in Sydney! And I am getting good long discussions with her, enjoying her as I never have before. She is 100% mentally intact, thank goodness. I didn't get to know her as well earlier on because living in America, I only saw her every other year or so, sometimes not for 3 or 4 years at a time, and for shorter visits (a week or two). Fortunately, she remembers practically everything -- including what you talked about with her the day before (which is rare in 93 yr old people). I learned while talking to my grandmother last week that my grandfather's aunt was married to a Wehrmacht general (Hans Reichsfreiherr von Boineburg-Lengsfeld). He was commander of 4th and 23rd Panzer divisions (quite literally" "I rode a tank in the general's rank, when the blitzkrieg raged and the bodies stank"). So I told my parents about that and discovered that my father had visited with him in Germany. They say he was very nice. He had been a cavalry officer in WWI so naturally when horses left the scene he was given command of armor. According to my grandmother he was interviewed for a TV documentary about the plot to kill Hitler -- he played a role in the rounding up of the SS in Paris... until word got out when the plot failed they let the SS go again. The SS that were easily captured were not ready to admit their defeat to Hitler and just reported the activity as "exercises", or something or other. Anyhow, that's the family version and I haven't researched it to see if that's really true or not. For example, no mention of his role in the plot is to be found under his description in Wikipedia, and her version is that he was commander of Paris at the time of the plot (also not mentioned in Wikipedia). She knew that he was in command of Panzer divisions, but wasn't aware of his roles in the Invasion of Poland and Barbarossa. So, this gives me something to spend time researching. Anyhow, in short it's been fun. I've caught more steelhead fly fishing in the past few years than ever before in my life -- helps to have time to get a few good trips in. I don't live far from the Olympic Peninsula and that really helps. I can fish midweek when the competition is at work. I'll figure out something to do -- there's been no rush as the kids are still cute and want to spend time with me. Later they will be in school and finding something to keep myself occupied then would be good timing. I've read a zillion books on my Kindle -- so I'd say my education has advanced. People like to ask what I do -- I'm still uncomfortable telling them that I stay home while my money works. The customs officer asked me a second time what I do for a living (I entered "retired" on my customs and immigration form). You are retired? He was like 60 or something -- clearly shaking his head. It didn't help that my contact address was "Palm Beach, NSW". That's one of the wealthiest suburbs near Sydney -- but hey in reality this little cottage is a little dilapidated (built in 1949 by my father and grandfather). My grandmother has a lot of money but she is really tight! The fridge has never been replaced and vibrates the floor!

I also mentioned that you can make unlimited contributions to a tax-deferred compounding vehicle called a "variable annuity". You can literally put billions in them -- there are no contribution limits. So it's not like this is a matter of tax revenue. We already have means in place by which a person like me can earn investment returns without paying one cent in tax for the next few decades. They also are rather inflexible about when you can take your distributions -- penalizing you like an IRA would if you withdraw from the account too soon. But such variable annuities require us to pay heaps of fees to a segment of the financial industry, and none of them have a self-managed option. So is there some fundamental reason why we can't have tax-deferred compounding without giving up a large portion of our gains to the titans of the financial industry? Was the tax code designed in such a way so that if you wish to be left alone by the IRS you must instead pay your pound of flesh to AIG? This is NOT a matter of paying less tax -- we can already do that. But we can't do it while self-managing it. Only if you have enough to swallow companies whole can you self-manage and still have the tax-deferred benefit.

I agree, he is just using his brain. I too deliberately shuffle my things as best I can in order to reduce my taxable gains. He is only my target because he is objecting (publicly and influentially) to people like me who don't own the companies in whole! I could write one of those political cartoons where he's drawn like a fat cat on his soapbox preaching that the people who only fractionally own companies need to be paying more of the tax burden. Then of course , "if this is a game of class warfare, my class is clearly winning" -- throwing one of his quotes right back at him.

I do understand what was told to me in the last few rebuttals since my latest post, but I'm not doing this in order to deliberately be obnoxious. I'm pointing out that if only we were wealthy enough to own companies in whole, we could then ask some lawyers to shuffle the papers in a certain way so that our dividend tax would disappear entirely. I'm using Buffett and Berkshire as the example because I know people will at least pay attention to the discussion, because of how well he is known on this board and because he is so passionate that dividend taxes and such should be raised. My wife's family was well "known" a generation ago as my wife's father was a politician as well as her grandfather. There are family photo albums with Nixon and Eisenhower in there. Today, they have nobody in the family involved in politics. However at various parties that I'm dragged along to I have to be kind to some people who effectively have holding companies that do exactly this -- buy them wholly owned businesses. They're far wealthier than most of us -- by a longshot, yet due to their purchasing power they don't have to bother themselves with dividend taxes if they take profits from one business to reinvest in the next one. Yes, it's because they wholly own the business -- but so what? What arbitrary thing happens when you only fractionally own it that makes your distribution taxable? Folks, these are just inventions of taxation that we've become so accustomed to that we don't even question it, but rather just figure that's the way things ought to be. Yes, it's because of the corporate structure being taxed as a single entity -- but so f**ing what? Once you put all the mumbo-jumbo away, at the end of the day you simply have a tax-deferred compounding vehicle where you can redeploy profits from one business into another without getting taxed as a dividend distribution. And these are effectively passive investment vehicles -- they have professional managers running them. It's only a game that they are allowed to count them as one big corporation and be taxed as such. And look, yes perhaps I too can soon get in on it. That's not the point -- why can't somebody with only $50k get in on it? Why are only the rich the ones who can redeploy capital from one business to the next without taxation? Why is there no vehicle for small people to do the same. These arguments that it's difficult to tease out reinvestment compared to consumption are utter bullshit -- it's simple as pie to create a new investment account exactly as I described. It's so familiar to us already (because of IRA accounts), that it's very easy to see. No, I don't want the corporate taxes to be changed in regards to dividends withing holding companies. Instead, I want us all to have that sweet dividend tax rate -- nothing. Most people don't have the means to take advantage of it -- or if they do (like buying Berkshire shares) it's not quite the same thing at all because they have no control over things like the allocation of profits or timing of dividends out of the holdco if they happen at all.

Here is something you may not have thought of, or at least, this is what really bothers me the most about Buffett's stance on this matter. I believe he is going after the merely rich but not the super rich like him -- once you are super-rich like him, your dividend tax rate actually decreases to zero if you play it right. I'll get to that in the following example: Once you're well into the multiple tens of millions of net worth... perhaps hundreds of millions, (I'm not there yet in either category), you can call up a guy like Harry Long and ask him to locate a company for you that would make a suitable investment vehicle. He then helps you purchase a controlling stake in such a vehicle. Now that you are in control, you direct the company to use it's cash flows to accumulate shares of yet another company that you wish to acquire. Initially, you pay tax on the dividends from these new shares. But ironically, as your ownership stake rises your dividend tax rate actually DECREASES! Finally, you've accumulated enough shares and have enough retained cash flow where you just make a final takeover bid for that new company. You consolidate the newly acquired company and no longer pay any dividend tax whatsoever!!!! So the richer you get, the more of the company you own, the lower your tax rate! And you were saying what exactly about progressive taxation and consumption? You defended the investment holding company saying that it's easy to differentiate between reinvestment and consumption, but how do you explain the phenomenon that occurs where your dividend tax actually goes to ZERO if you are rich enough to purchase entire companies whole? Is that pretty much the most regressive tax code in the books? It has to be! And Buffett prefers to purchase companies whole, so it isn't like this hasn't occurred to him. But he doesn't complain too much about it does he? I've never seen him say anything like "alright, alright, I'll come clean... in all fairness I actually don't pay any dividend taxes at all on BNSF distributions because I'm rich enough to buy the whole thing.". I get what you are saying about his not spending the money from the Wells Fargo dividends -- he can pay a dividend any time he wants however. It's just that he already has so much money outside of his Berkshire holdings that he'd never need to pay a dividend anyhow. And that's fine with me... believe me, that's how I think it ought to be for all of us. And yes, I recognize that Berkshire is a separate legal entity from us individuals. I just think we should ALSO be allowed a "poor man's" (or not so rich man's) version -- we can design a new legal entity by a new name if that's suitable... or just go with what i talked about which is to eliminate the restrictions on IRA contributions (or create a similar type of account as this is of a non-retirement nature). But you know, buying holding companies as investment vehicles is kind of expensive in terms of capital, lawyers and complexity. So my populist suggestion is that if Buffett can have these regressive dividend tax rates in his tax-deferred compounding vehicle, then we all ought to have access to those rates. Due to our relatively smaller means, the simplest thing is these low-overhead accounts I spoke of that are similar in tax-deferred concept and withdrawal taxes to IRAs. You could even have capital gains within them taxed if you like to put them on even keel with how Buffett also must pay capital gains taxes in his vehicle. But just eliminate the dividend taxes in the account as he doesn't have to pay them (due to his ability to acquire whole companies which is a product of his wealth). And then treat withdrawals from the account the same way dividends are treated from investment holding companies. Also, allow us to do buybacks from within the account so that we can launder the withdrawals as capital gains (which Buffett is allowed to do even if he neglects to do so).