Warren Buffett Defends His Secretary

[Packer16]

I believe WEB is letting himself be a symbol of how things work and how things should be changed so that we have a fairer system.  I'm pretty sure he really does believe in the Buffett Rule, though not that putting the Buffett Rule in place will solve our debt problem. 

 

Actually, I'm not sure I have ever heard even President Obama say that the Buffett Rule will be a panacea for our problems, and I don't think it's accurate to say that Obama thinks "you can increase taxes and have little or no meaningful spending cuts."  That's just the way that Republicans spin the President's position because they dislike him so much. 

 

Paul Ryan's plan is simply the wrong policy for the moment.  Frankly, I believe the GOP will lose this round and put up Paul Ryan for president in 2016 -- and Ryan will be a much stronger candidate than any of the current slate of Republicans.

 

If that is the case what meaningful spending cuts has he proposed?  I have seen none other that small changes arond the edges.  You can critisize the Ryan plan but at least it is a plan to begin negotiations.  The Obama & co has not even put togehter a plan to negotitate with and thinks they can carry the day without one.  How rationale is that. 

 

Packer

[zippy1]

Here is another way to look at it.  Let's accept Buffett's math for the moment.  Under Buffett's logic, implementing the Buffett rule (a 30% tax rate on the super-rich) would result in what?  Him paying a 30% rate.  What rate did he state his staff paid?  A range of 33 to 41% and an average of 36%.  So his solution to the gross unfairness in our society is to keep it unfair?  That is absurd.  Even if I accept his analytical logic, his prescription is irrational. 

 

Tim,

 

      It would still be far more fair than the status quote, one would think. 

 

      Are you proposing, instead of what Buffett proposed to move the rate to 30%, to move to 36%, in order for the proposal to be fair?  I am confused by your statement.

 

      Now, you are saying that since the proposal does not raise the rate on the "super-rich" high enough, by your standard, so it is unfair? And even more unfair than the status quo?!

 

      Your line of thought just do not strikes me as logical and self-consistent.

 

      Zippy.

[Tim Eriksen]

Here is another way to look at it.  Let's accept Buffett's math for the moment.  Under Buffett's logic, implementing the Buffett rule (a 30% tax rate on the super-rich) would result in what?  Him paying a 30% rate.  What rate did he state his staff paid?  A range of 33 to 41% and an average of 36%.  So his solution to the gross unfairness in our society is to keep it unfair?  That is absurd.  Even if I accept his analytical logic, his prescription is irrational. 

 

Tim,

 

      It would still be far more fair than the status quote, one would think. 

 

      Are you proposing, instead of what Buffett proposed to move the rate to 30%, to move to 36%, in order for the proposal to be fair?  I am confused by your statement.

 

      Now, you are saying that since the proposal does not raise the rate on the "super-rich" high enough, by your standard, so it is unfair? And even more unfair than the status quo?!

 

      Your line of thought just do not strikes me as logical and self-consistent.

 

      Zippy.

 

I am saying that if Buffett truly believes his argument regarding his taxes and those of his staff that he, if he is consistent and truly seeking fairness, must call for his taxes to be higher than all of them.  So he should be calling for capital gains and dividends to be taxed at a rate of greater than 41%.  I say greater because using Buffett's logic to its ultimate conclusion would also note that it would be unfair to pay the same rate since his annual income is 50 times what his staff's is.

 

Thus his solution to unfairness is just reduced unfairness.  That is wimpy.  The solution to injustice is not reduced injustice.  It is justice.  If he truly believes his position, it is inconsistent on his part to argue anything short of a higher rate for him than his staff.   

[zippy1]

Here is another way to look at it.  Let's accept Buffett's math for the moment.  Under Buffett's logic, implementing the Buffett rule (a 30% tax rate on the super-rich) would result in what?  Him paying a 30% rate.  What rate did he state his staff paid?  A range of 33 to 41% and an average of 36%.  So his solution to the gross unfairness in our society is to keep it unfair?  That is absurd.  Even if I accept his analytical logic, his prescription is irrational. 

 

Tim,

 

      It would still be far more fair than the status quote, one would think. 

 

      Are you proposing, instead of what Buffett proposed to move the rate to 30%, to move to 36%, in order for the proposal to be fair?  I am confused by your statement.

 

      Now, you are saying that since the proposal does not raise the rate on the "super-rich" high enough, by your standard, so it is unfair? And even more unfair than the status quo?!

 

      Your line of thought just do not strikes me as logical and self-consistent.

 

      Zippy.

 

I am saying that if Buffett truly believes his argument regarding his taxes and those of his staff that he, if he is consistent and truly seeking fairness, must call for his taxes to be higher than all of them.  So he should be calling for capital gains and dividends to be taxed at a rate of greater than 41%.  I say greater because using Buffett's logic to its ultimate conclusion would also note that it would be unfair to pay the same rate since his annual income is 50 times what his staff's is.

 

Thus his solution to unfairness is just reduced unfairness.  That is wimpy.  The solution to injustice is not reduced injustice.  It is justice.  If he truly believes his position, it is inconsistent on his part to argue anything short of a higher rate for him than his staff. 

 

If the "wimpy solution" is already so hard to implement with your such vehement opposition, what is the chance of the truly brave proposal to be passed in your view?

 

 

[Tim Eriksen]

Here is another way to look at it.  Let's accept Buffett's math for the moment.  Under Buffett's logic, implementing the Buffett rule (a 30% tax rate on the super-rich) would result in what?  Him paying a 30% rate.  What rate did he state his staff paid?  A range of 33 to 41% and an average of 36%.  So his solution to the gross unfairness in our society is to keep it unfair?  That is absurd.  Even if I accept his analytical logic, his prescription is irrational. 

 

Tim,

 

      It would still be far more fair than the status quote, one would think. 

 

      Are you proposing, instead of what Buffett proposed to move the rate to 30%, to move to 36%, in order for the proposal to be fair?  I am confused by your statement.

 

      Now, you are saying that since the proposal does not raise the rate on the "super-rich" high enough, by your standard, so it is unfair? And even more unfair than the status quo?!

 

      Your line of thought just do not strikes me as logical and self-consistent.

 

      Zippy.

 

I am saying that if Buffett truly believes his argument regarding his taxes and those of his staff that he, if he is consistent and truly seeking fairness, must call for his taxes to be higher than all of them.  So he should be calling for capital gains and dividends to be taxed at a rate of greater than 41%.  I say greater because using Buffett's logic to its ultimate conclusion would also note that it would be unfair to pay the same rate since his annual income is 50 times what his staff's is.

 

Thus his solution to unfairness is just reduced unfairness.  That is wimpy.  The solution to injustice is not reduced injustice.  It is justice.  If he truly believes his position, it is inconsistent on his part to argue anything short of a higher rate for him than his staff. 

 

If the "wimpy solution" is already so hard to implement with your such vehement opposition, what is the chance of the truly brave proposal to be passed in your view?

 

You apparently are missing my point.  The main point is that his analysis is extremely flawed (incorrect).  He actually pays more (in terms of both rate and dollars) than his secretary now and significantly more over a lifetime.  My follow up was that even if I thought his analysis was correct, which I do not, his proposal is not brave, it is weak (or wimpy) since it does not solve the problem (it still results in him taxed less than his staff per his calculations).  Brave solutions solve problems they don't just modestly lessen them. 

 

Yes I have vehement opposition to his argument because it is wrong.  It is not because I do not want to my taxes increased.  I am middle class and think my taxes have been cut too much.  I get too much benefit for too little cost.  I also care in the sense that our government's tax policies should be based on fairness.  I think Buffett's 45% look through tax rate is already higher than his staff and plenty high.   

   

[racemize]

Could you explain the 40% look through tax and compare it to the compensation of his secretary?  i.e., why look through taxes apply to buffett and not his secretary. 

[Tim Eriksen]

Could you explain the 40% look through tax and compare it to the compensation of his secretary?  i.e., why look through taxes apply to buffett and not his secretary.

 

Sure.  Buffett earns money largely from his investments which are largely subject to dividend and long term capital gains tax rates of 15%.  He says he paid 17% of taxable income in 2010, while his staff paid 33 to 41% of taxable income (salary less deductions and personal exemptions).  Buffett counts income taxes and attributes both halves of payroll taxes to the employee to generate his numbers.  It is questionable to attribute the cost of the employer's portion of payroll tax to the employee.  The business owner pays it.  (I would argue that Buffett therefore indirectly pays part of the payroll tax for Berkshire's 160,000 employees).  Since Social Security taxes will be recovered if someone lives to within a few years of normal life expectancy it should really be eliminated from the consideration or Buffett should look at one's tax burden over their whole life not just one year.  Buffett also ignores medical benefits which are untaxed in this country.  These factors inflate his results for his staff. 

 

On his side, he ignores that his dividend and capital gain taxes have already been subject to a 35% corporate tax.  Thus a 15% tax on dividends is really a 45% tax.  So essentially he overstates their taxes and understates his own.  His secretary does not have look-through taxes in this sense. 

 

 

 

 

[RichardGibbons]

But corporations are people, so you're taking the tax from two people and saying it all applies to one!?!  :)

[Tim Eriksen]

But corporations are people, so you're taking the tax from two people and saying it all applies to one!?!  :)

 

I assume you are being facetious since this is the Corner of Berkshire & Fairfax Message Board and not Mother Jones.  Just in case, corporations are organizations of people.  For some reason many in our society actually struggle with this concept.  Personhood is basically a legal concept that allows corporations to enter into and enforce contracts, sue and be sued, etc.  It seems obvious to me, that taxes on a corporation are essentially taxes on its owners.  Why else do some small businesses switch structures due to changes in the differential in tax rates between individuals and corporations? 

[txlaw]

I believe WEB is letting himself be a symbol of how things work and how things should be changed so that we have a fairer system.  I'm pretty sure he really does believe in the Buffett Rule, though not that putting the Buffett Rule in place will solve our debt problem. 

 

Actually, I'm not sure I have ever heard even President Obama say that the Buffett Rule will be a panacea for our problems, and I don't think it's accurate to say that Obama thinks "you can increase taxes and have little or no meaningful spending cuts."  That's just the way that Republicans spin the President's position because they dislike him so much. 

 

Paul Ryan's plan is simply the wrong policy for the moment.  Frankly, I believe the GOP will lose this round and put up Paul Ryan for president in 2016 -- and Ryan will be a much stronger candidate than any of the current slate of Republicans.

 

If that is the case what meaningful spending cuts has he proposed?  I have seen none other that small changes arond the edges.  You can critisize the Ryan plan but at least it is a plan to begin negotiations.  The Obama & co has not even put togehter a plan to negotitate with and thinks they can carry the day without one.  How rationale is that. 

 

Packer

 

Well, now we're getting away from WEB and starting to talk about Obama.  I've been saying that WEB is rational. 

 

I don't want to open up a can of worms, so I'll abstain from defending Obama at this time.

[txlaw]

First I tried to make it clear that it looks like self-love is his motivation, because it does not appear obvious that rationality is the reason.  The main issue is this - Is Buffett actually taxed less than his secretary?  The answer is No.  Not currently when corporate taxes are figured in and certainly not over a lifetime (the whole point of the 2.5% analysis).  If that conclusion is disagreed with, that is what should be debated.  It is not about whether the rise in income for the middle class has stagnated in the last few years.  That is a separate issue from tax fairness.

 

If I come to the conclusion that Buffett is incorrectly assessing the situation, taxed more not less, then I cannot conclude that he is acting supremely rationale.

 

Here is another way to look at it.  Let's accept Buffett's math for the moment.  Under Buffett's logic, implementing the Buffett rule (a 30% tax rate on the super-rich) would result in what?  Him paying a 30% rate.  What rate did he state his staff paid?  A range of 33 to 41% and an average of 36%.  So his solution to the gross unfairness in our society is to keep it unfair?  That is absurd.  Even if I accept his analytical logic, his prescription is irrational. 

 

 

None of that has to do with philosophical/political viewpoint.  It is just objectivity.

 

Okay, you may think that WEB is wrong about the prescription, but to jump to the conclusion that he has is in denial because of his need to be loved is a bit much.

 

But let's talk about the Buffett rule.  The Buffett rule isn't really just about levying taxes on the super-rich.  It's about how we treat labor income versus investment income and about progressivity in the tax code. 

 

Let's talk about two hypothetical individuals: Taxpayer 1 and Taxpayer 2.

 

Taxpayer 1 makes just over $1 million in income from his labor on an annual basis.  He almost certainly pays an effective tax rate well above the tax rate of WEB's secretary, and most likely pays an effective tax rate of over 30% on his realized income.  Income tax and payroll tax.  It might even be the case that his employer's half of payroll tax (if he has an employer) is passed onto Taxpayer 1 in the form of lower wages.

 

Taxpayer 2 makes just over $1 million in income from collecting dividends on his large muni bond portfolio and selling a bit of his LUK, which he has held for a long time.  His effective tax rate is likely well below the effective tax rate of WEB's secretary and  Taxpayer 1.  He pays no tax on his muni interest income, and he pays long term capital gains rates every time he sells his LUK.  He pays no payroll tax.

 

The Buffett rule, as I understand it, has no effect on Taxpayer 1 but makes it so that Taxpayer 2 has his effective tax rate go up to 30%.  Taxpayer 2 still isn't in as bad a tax situation as Taxpayer 1, but his tax burden is now a bit closer to Taxpayer 1, making the system a bit closer to fair.

 

Now, you might say that Taxpayer 2 is suffering because he actually pays a 45% tax rate on a look through basis on his LUK income.  Well, in this particular case, he pays no look through tax because LUK never pays tax. ;D

 

Okay, so maybe using LUK is a bad example.  But what about BAC?  My "look through income" yield from BAC is pretty darn good and will be tax free for a good amount of time, certainly more than a year, which will allow me to get the long term capital gains rate.

 

Or let's take corporate America as a whole.  In aggregate, I suspect the corporate tax rate is actually substantially lower than the statutory rate.  It could even be around 25%, in actuality.  That's not including the use of debt to shelter income, the use of NOLs, and the various credits and subsidies that corporations, as opposed to individuals, can get more easily.  Imagine how the most savviest investors can avoid situations where they are paying more "look through income tax" than they have to. 

 

Or perhaps the corporation Taxpayer 2 owns is an S corporation, where the income is passed through to him.  He pays income tax, but no payroll tax.  No double taxation, no payroll tax.  Not bad at all.

 

Or Taxpayer 2 may simply choose never to sell any of his stake in the corporation, instead watching his look through income (which under your definition could make his actual income well over $1 million) being taxed at 35% or less and never realizing any capital gains income. 

 

The point of the above is to demonstrate that even if we include the investee corporation's income tax in Taxpayer 2's individual income tax rate, we cannot assume that Taxpayer 2 pays an effective tax rate of 45%, especially when we take into account the fact that he can defer the "double tax" by not selling stock or by owning a corporation that retains all earnings.

 

More importantly, why are we even considering the corporate income as Taxpayer 2's income?  He cannot use corporate cash for personal consumption.  Until cash gets distributed to him or until he realizes income through the sale of part of his ownership stake, there is no income.

[Tim Eriksen]

First I tried to make it clear that it looks like self-love is his motivation, because it does not appear obvious that rationality is the reason.  The main issue is this - Is Buffett actually taxed less than his secretary?  The answer is No.  Not currently when corporate taxes are figured in and certainly not over a lifetime (the whole point of the 2.5% analysis).  If that conclusion is disagreed with, that is what should be debated.  It is not about whether the rise in income for the middle class has stagnated in the last few years.  That is a separate issue from tax fairness.

 

If I come to the conclusion that Buffett is incorrectly assessing the situation, taxed more not less, then I cannot conclude that he is acting supremely rationale.

 

Here is another way to look at it.  Let's accept Buffett's math for the moment.  Under Buffett's logic, implementing the Buffett rule (a 30% tax rate on the super-rich) would result in what?  Him paying a 30% rate.  What rate did he state his staff paid?  A range of 33 to 41% and an average of 36%.  So his solution to the gross unfairness in our society is to keep it unfair?  That is absurd.  Even if I accept his analytical logic, his prescription is irrational. 

 

 

None of that has to do with philosophical/political viewpoint.  It is just objectivity.

 

Okay, you may think that WEB is wrong about the prescription, but to jump to the conclusion that he has is in denial because of his need to be loved is a bit much.

 

But let's talk about the Buffett rule.  The Buffett rule isn't really just about levying taxes on the super-rich.  It's about how we treat labor income versus investment income and about progressivity in the tax code. 

 

Let's talk about two hypothetical individuals: Taxpayer 1 and Taxpayer 2.

 

Taxpayer 1 makes just over $1 million in income from his labor on an annual basis.  He almost certainly pays an effective tax rate well above the tax rate of WEB's secretary, and most likely pays an effective tax rate of over 30% on his realized income.  Income tax and payroll tax.  It might even be the case that his employer's half of payroll tax (if he has an employer) is passed onto Taxpayer 1 in the form of lower wages.

 

Taxpayer 2 makes just over $1 million in income from collecting dividends on his large muni bond portfolio and selling a bit of his LUK, which he has held for a long time.  His effective tax rate is likely well below the effective tax rate of WEB's secretary and  Taxpayer 1.  He pays no tax on his muni interest income, and he pays long term capital gains rates every time he sells his LUK.  He pays no payroll tax.

 

The Buffett rule, as I understand it, has no effect on Taxpayer 1 but makes it so that Taxpayer 2 has his effective tax rate go up to 30%.  Taxpayer 2 still isn't in as bad a tax situation as Taxpayer 1, but his tax burden is now a bit closer to Taxpayer 1, making the system a bit closer to fair.

 

Now, you might say that Taxpayer 2 is suffering because he actually pays a 45% tax rate on a look through basis on his LUK income.  Well, in this particular case, he pays no look through tax because LUK never pays tax. ;D

 

Okay, so maybe using LUK is a bad example.  But what about BAC?  My "look through income" yield from BAC is pretty darn good and will be tax free for a good amount of time, certainly more than a year, which will allow me to get the long term capital gains rate.

 

Or let's take corporate America as a whole.  In aggregate, I suspect the corporate tax rate is actually substantially lower than the statutory rate.  It could even be around 25%, in actuality.  That's not including the use of debt to shelter income, the use of NOLs, and the various credits and subsidies that corporations, as opposed to individuals, can get more easily.  Imagine how the most savviest investors can avoid situations where they are paying more "look through income tax" than they have to. 

 

Or perhaps the corporation Taxpayer 2 owns is an S corporation, where the income is passed through to him.  He pays income tax, but no payroll tax.  No double taxation, no payroll tax.  Not bad at all.

 

Or Taxpayer 2 may simply choose never to sell any of his stake in the corporation, instead watching his look through income (which under your definition could make his actual income well over $1 million) being taxed at 35% or less and never realizing any capital gains income. 

 

The point of the above is to demonstrate that even if we include the investee corporation's income tax in Taxpayer 2's individual income tax rate, we cannot assume that Taxpayer 2 pays an effective tax rate of 45%, especially when we take into account the fact that he can defer the "double tax" by not selling stock or by owning a corporation that retains all earnings.

 

More importantly, why are we even considering the corporate income as Taxpayer 2's income?  He cannot use corporate cash for personal consumption.  Until cash gets distributed to him or until he realizes income through the sale of part of his ownership stake, there is no income.

 

I don't even know where you want me to start.  You are throwing a lot out there.  Not everyone will agree with me that is fine.  If either of two basic arguments are true then Buffett's position is wrong: 1) corporate taxes should be included because ultimately they are borne by the investor; 2) if current payroll taxes are going to be included then the future benefits should be as well (which effectively zeros out their impact).  I believe both are true, particularly #2.  The end result if just one is true is that Buffett pays more tax than his secretary.  Thus the question is really do you believe either of the two arguments? 

 

I am not going to try an answer hypotheticals.  I think you know the weakness of the muni bond argument.  If you tax it yields will adjust so it will be a wash to government as a whole.  I guess if having to pay an investor a higher yield that essentially covers their taxes makes some people feel that fairness is achieved so be it.  Seems dumb to me.

 

Yes there are companies that pay little income tax.  I realize that. But we are talking about Buffett not a hypothetical person.       

[ERICOPOLY]

The point of the above is to demonstrate that even if we include the investee corporation's income tax in Taxpayer 2's individual income tax rate, we cannot assume that Taxpayer 2 pays an effective tax rate of 45%, especially when we take into account the fact that he can defer the "double tax" by not selling stock or by owning a corporation that retains all earnings.

 

I pointed out earlier though that under a dividend franking system we could give US corporations the ability to pay tax-advantaged dividends out of after-tax income (so the individual doesn't pay tax twice on the dividend).  The individual would then only pay tax if his personal tax rate were higher than the corporate tax rate.

 

I find it surprising that I've never heard this kind of system discussed anywhere in the US media.

 

Scenario A:

A corporation that pays no tax will be one where the owners need to pay up to the highest marginal income tax on any dividend. 

 

Scenario B:

A corporation like Berkshire that is a good corporate tax citizen (pays up to 35% marginal rate) will be able to distribute tax-advantaged dividends that are not taxed twice (individual only pays tax if the personal income tax bracket is higher than the tax rate paid by the corporation).

 

Pretty straightforward solution to this long running argument.  Perhaps the players aren't actually looking for a solution?  The Republicans likely want a 0% individual tax rate, even if the corporations also paid nothing.  The Democrats likely want to tax the dividends  twice if they can.

[Myth465]

 

 

Pretty straightforward solution to this long running argument.  Perhaps the players aren't actually looking for a solution?  The Republicans likely want a 0% individual tax rate, even if the corporations also paid nothing.  The Democrats likely want to tax the dividends  twice if they can.

 

I think you have figured it out....

[twacowfca]

The point of the above is to demonstrate that even if we include the investee corporation's income tax in Taxpayer 2's individual income tax rate, we cannot assume that Taxpayer 2 pays an effective tax rate of 45%, especially when we take into account the fact that he can defer the "double tax" by not selling stock or by owning a corporation that retains all earnings.

 

I pointed out earlier though that under a dividend franking system we could give US corporations the ability to pay tax-advantaged dividends out of after-tax income (so the individual doesn't pay tax twice on the dividend).  The individual would then only pay tax if his personal tax rate were higher than the corporate tax rate.

 

I find it surprising that I've never heard this kind of system discussed anywhere in the US media.

 

Scenario A:

A corporation that pays no tax will be one where the owners need to pay up to the highest marginal income tax on any dividend. 

 

Scenario B:

A corporation like Berkshire that is a good corporate tax citizen (pays up to 35% marginal rate) will be able to distribute tax-advantaged dividends that are not taxed twice (individual only pays tax if the personal income tax bracket is higher than the tax rate paid by the corporation).

 

Pretty straightforward solution to this long running argument.  Perhaps the players aren't actually looking for a solution?  The Republicans likely want a 0% individual tax rate, even if the corporations also paid nothing.  The Democrats likely want to tax the dividends  twice if they can.

 

Very good plan.  :)

 

Thank you, Eric

[zippy1]

The point of the above is to demonstrate that even if we include the investee corporation's income tax in Taxpayer 2's individual income tax rate, we cannot assume that Taxpayer 2 pays an effective tax rate of 45%, especially when we take into account the fact that he can defer the "double tax" by not selling stock or by owning a corporation that retains all earnings.

 

I pointed out earlier though that under a dividend franking system we could give US corporations the ability to pay tax-advantaged dividends out of after-tax income (so the individual doesn't pay tax twice on the dividend).  The individual would then only pay tax if his personal tax rate were higher than the corporate tax rate.

 

I find it surprising that I've never heard this kind of system discussed anywhere in the US media.

 

Scenario A:

A corporation that pays no tax will be one where the owners need to pay up to the highest marginal income tax on any dividend. 

 

Scenario B:

A corporation like Berkshire that is a good corporate tax citizen (pays up to 35% marginal rate) will be able to distribute tax-advantaged dividends that are not taxed twice (individual only pays tax if the personal income tax bracket is higher than the tax rate paid by the corporation).

 

Pretty straightforward solution to this long running argument.  Perhaps the players aren't actually looking for a solution?  The Republicans likely want a 0% individual tax rate, even if the corporations also paid nothing.  The Democrats likely want to tax the dividends  twice if they can.

 

Actually, this is similar to how Taiwanese tax system works, I think.

[rmitz]

But corporations are people, so you're taking the tax from two people and saying it all applies to one!?!  :)

 

I assume you are being facetious since this is the Corner of Berkshire & Fairfax Message Board and not Mother Jones.  Just in case, corporations are organizations of people.  For some reason many in our society actually struggle with this concept.  Personhood is basically a legal concept that allows corporations to enter into and enforce contracts, sue and be sued, etc.  It seems obvious to me, that taxes on a corporation are essentially taxes on its owners.  Why else do some small businesses switch structures due to changes in the differential in tax rates between individuals and corporations?

 

This is, again, a dramatic oversimplification.  The biggest argument is that corporations make use of and require different (and larger) parts of government overhead than other individuals.  In addition, the *limitation of liability* is key here.  It's not *just* a collection of people.  A collection of people have no additional rights than the sum of their own rights, whereas corporations certainly do.

[txlaw]

The point of the above is to demonstrate that even if we include the investee corporation's income tax in Taxpayer 2's individual income tax rate, we cannot assume that Taxpayer 2 pays an effective tax rate of 45%, especially when we take into account the fact that he can defer the "double tax" by not selling stock or by owning a corporation that retains all earnings.

 

I pointed out earlier though that under a dividend franking system we could give US corporations the ability to pay tax-advantaged dividends out of after-tax income (so the individual doesn't pay tax twice on the dividend).  The individual would then only pay tax if his personal tax rate were higher than the corporate tax rate.

 

I find it surprising that I've never heard this kind of system discussed anywhere in the US media.

 

Scenario A:

A corporation that pays no tax will be one where the owners need to pay up to the highest marginal income tax on any dividend. 

 

Scenario B:

A corporation like Berkshire that is a good corporate tax citizen (pays up to 35% marginal rate) will be able to distribute tax-advantaged dividends that are not taxed twice (individual only pays tax if the personal income tax bracket is higher than the tax rate paid by the corporation).

 

Pretty straightforward solution to this long running argument.  Perhaps the players aren't actually looking for a solution?  The Republicans likely want a 0% individual tax rate, even if the corporations also paid nothing.  The Democrats likely want to tax the dividends  twice if they can.

 

We've had this discussion before, and I have agreed with you on having a dividend franking system.  In fact, my next post in response to Tim was going to be to say that we should have a franking system that moves us more towards a consumption tax.

 

The only caveat is that you have left out one important change that I would institute.  Capital gains should be taxed as ordinary income.

[ERICOPOLY]

The only caveat is that you have left out one important change that I would institute.  Capital gains should be taxed as ordinary income.

 

My only objection is that during periods when inflation is very high this gets illogical (we should in theory only be taxing real income). 

 

The CPI-U is already available -- we could be fair and tax people (regular income rates) only on REAL capital gains.

 

To demonstrate how stupid it is to tax people on inflationary gains, the principal adjustment from TIPS is fully taxed (under present law) as regular income.  So if there is a 100% inflation rate you wind up losing 17.5% of your real principle value -- the yield on the TIPS isn't high enough to reimburse you for this.

 

 

 

[RichardGibbons]

But corporations are people, so you're taking the tax from two people and saying it all applies to one!?!  :)

 

I assume you are being facetious since this is the Corner of Berkshire & Fairfax Message Board and not Mother Jones.

 

Yes, I was.

[txlaw]

The only caveat is that you have left out one important change that I would institute.  Capital gains should be taxed as ordinary income.

 

My only objection is that during periods when inflation is very high this gets illogical (we should in theory only be taxing real income). 

 

The CPI-U is already available -- we could be fair and tax people (regular income rates) only on REAL capital gains.

 

To demonstrate how stupid it is to tax people on inflationary gains, the principal adjustment from TIPS is fully taxed (under present law) as regular income.  So if there is a 100% inflation rate you wind up losing 17.5% of your real principle value -- the yield on the TIPS isn't high enough to reimburse you for this.

 

Wouldn't be opposed to that. 

[Tim Eriksen]

But corporations are people, so you're taking the tax from two people and saying it all applies to one!?!  :)

 

I assume you are being facetious since this is the Corner of Berkshire & Fairfax Message Board and not Mother Jones.  Just in case, corporations are organizations of people.  For some reason many in our society actually struggle with this concept.  Personhood is basically a legal concept that allows corporations to enter into and enforce contracts, sue and be sued, etc.  It seems obvious to me, that taxes on a corporation are essentially taxes on its owners.  Why else do some small businesses switch structures due to changes in the differential in tax rates between individuals and corporations?

 

This is, again, a dramatic oversimplification.  The biggest argument is that corporations make use of and require different (and larger) parts of government overhead than other individuals.  In addition, the *limitation of liability* is key here.  It's not *just* a collection of people.  A collection of people have no additional rights than the sum of their own rights, whereas corporations certainly do.

 

If that is the biggest argument I must be missing something.  I do not see much in the federal government's expenditures that relates directly to corporations.  Sure there is the FDA for drug companies (although tits expenditures may primarily related to consumers) and the SEC for publicly traded companies, etc.  The Department of Commerce is not that big.  Does Microsoft really cost the federal government what it pays in taxes?  If given the choice to be taxed and have limitation of liability or untaxed and have liability, I think many, if not most, would gladly take the untaxed option.       

[ERICOPOLY]

The only caveat is that you have left out one important change that I would institute.  Capital gains should be taxed as ordinary income.

 

My only objection is that during periods when inflation is very high this gets illogical (we should in theory only be taxing real income). 

 

The CPI-U is already available -- we could be fair and tax people (regular income rates) only on REAL capital gains.

 

To demonstrate how stupid it is to tax people on inflationary gains, the principal adjustment from TIPS is fully taxed (under present law) as regular income.  So if there is a 100% inflation rate you wind up losing 17.5% of your real principle value -- the yield on the TIPS isn't high enough to reimburse you for this.

 

Wouldn't be opposed to that.

 

This would of course imply that you could take a $5 tax-loss if you sell a stock today for $10 per share that you purchased for $10 per share ten years ago (if the inflation-adjusted cost basis is $15). 

 

That's very fair.

 

 

[ERICOPOLY]

If that is the biggest argument I must be missing something.  I do not see much in the federal government's expenditures that relates directly to corporations. 

 

Here is the biggest one:

 

The entitlement programs take the burden of pension costs away from the corporations. 

 

Also:

 

Unemployment benefits relieve the corporation of the burden of employing workers while demand is slack.

[txlaw]

The only caveat is that you have left out one important change that I would institute.  Capital gains should be taxed as ordinary income.

 

My only objection is that during periods when inflation is very high this gets illogical (we should in theory only be taxing real income). 

 

The CPI-U is already available -- we could be fair and tax people (regular income rates) only on REAL capital gains.

 

To demonstrate how stupid it is to tax people on inflationary gains, the principal adjustment from TIPS is fully taxed (under present law) as regular income.  So if there is a 100% inflation rate you wind up losing 17.5% of your real principle value -- the yield on the TIPS isn't high enough to reimburse you for this.

 

Wouldn't be opposed to that.

 

This would of course imply that you could take a $5 tax-loss if you sell a stock today for $10 per share that you purchased for $10 per share ten years ago (if the inflation-adjusted cost basis is $15). 

 

That's very fair.

 

Sounds administratively difficult.  Perhaps we do not allow for inflation adjustion and put the risk back on the individual who is earning their income from investment rather than labor.