ERICOPOLY

I need to find out what his proposal is for RothIRA mighty quick here. Every extra dollar of gains I accumulate would possibly be taxed in 2014 -- at regular income rates. That would be 50% in taxes! So you know how guys like Klarmann speak of making sure you have like 4 dollars of upside for every 1 dollar of downside? Well, I don't get any tax deduction for losses in a RothIRA, but if my gains are taxed at 50% it really changes the risk/reward math, now doesn't it.

Is this article giving me false hope? 1) Limits RothIRAs to $3.4million (instead of $3million) 2) Says that the cap is reached merely by banning future contributions (but doesn't mention forced withdrawals of excess) The budget’s proposed cap on retirement savings would apply to the total of an individual’s tax-favored accounts including IRAs and 401(k)s. It would be reached by barring taxpayers from adding more tax-free money once the limit is reached. Sponsors of retirement plans and IRA trustees would report each participant’s account balance as of the end of the year.

So anyways, the entire topic needs to be viewed under the framework of after-tax intrinsic value. Shares might be fully valued, but you capture 100% of intrinsic value when you repurchase shares. 45% of intrinsic value is lost to the tax man if you dividend tax rate is 45%. I'm not sure there is much else to discuss -- people are driven by incentives.

Forgot to add... Buffett's dividend tax rate at Berkshire is less than half of his capital gains tax rate. And he has many stocks carrying very low cost basis. So naturally he'd favor capital gains tax ::) Places like Australia tax dividends on KO at twice the rate of capital gains. Probably Canada too (not sure). Buffett's situation is completely reversed. He's paying less than 1/2 on dividends vs capital gains. And he LOVES dividends. Wow :-*

Cui bono? If you are Warren Buffett holding Coca Cola in 1998 and the stock is selling at a stratospheric valuation, it doesn't benefit the long term shareholder (Buffett in this case) if KO initiates a buyback at that valuation. My understanding is: All the intrinsic value that is lost (lost because you spend $1 to buy back stock worth less than $1) from buyback executed at steep levels is completely and proportionately transferred from the company coffers (long term shareholders) to the sellers of KO stock. Since all companies are run under the mandate of maximizing long-term shareholder value, isn't overpriced buyback always ill-fated? Said another way: Buybacks executed at prices higher than intrinsic value benefit short term sellers at the detriment of long term share holders, right? With the benefit of hindsight of course - but if Coca-Cola could have issued new shares in 1998 to raise cash and then turned around and used that amount to buyback the stock in 2000-2001, it would have benefited long term shareholders at the expense of short term shareholders - which is exactly a company ought to be doing. A couple of thoughts: Buffett regrets not selling Coca Cola during the bubble. You only hurt yourself by not selling during bubbles. Management of KO was not the source of his woes -- it was Buffett himself and he admits this. "I merely clucked when I should have walked". - Warren Buffett Berkshire pays 14.5% tax on KO dividends. It does't surprise me that he favors them. Only 14.5% of intrinsic value is lost to the tax man. I'd love to hear his thoughts on buybacks vs dividends if his dividend tax rate were 99%. Somewhere in between 14.5% and 99% lies reality for the rest of us who hold in taxable accounts. An Australian citizen holding KO shares pays dividend tax at 45% rate. Let's raise Buffett's dividend tax to 45% and see what comes rolling off his tongue? After $1 in dividend is paid: Buffett keeps 85.5 cents Australian keeps 55 cents Hmm.... 55 vs 85.5. And which guy did you say favors dividends? Oh right, yes...

Wow, okay, the shortage is far worse now. CheaperThatDirt.com is completely sold out of all 38 special, all 357 Magnum. Most metallic cartridge ammunition. Same with MidwayUSA.com. That really is amazing. I haven't been shooting since I arrived in California and things have become far worse. In Washington State I had a reloading press. I'd purchase new brass, bullets, primers, propellant, and roll my own ammo. That was both, fun, educational, very dangerous, and easy to go shooting without worrying about shortages. But I found some ammo to prepare for the apocalypse. It's in stock!!! http://www.cheaperthandirt.com/product/AMM-8001 This one is really going to hurt, but it's "only" a double rubber ball: http://www.cheaperthandirt.com/product/AMM-8111 This is in stock -- the real thing (buckshot): http://www.cheaperthandirt.com/product/AMM-8491

The author keeps referring to "bullets", but he isn't. He is referring to cartridges. You can purchase bullets here: http://www.cheaperthandirt.com/product/51222 They are in stock and there is absolutely no shortage on bullets. EDIT: Anyhow, Walmart being sold out on ammo is not a new story. This has been going on since 2008/2009 (around the time Obama was elected). I had a hard time finding .357 Magnum ammo at the Walmart near my old home. That was in the summer of 2010. They were almost always sold out, so the manager at the ammo counter took my name and called me when the next shipment arrived. I was there in 10 minutes. Otherwise, you'd have to order online which was doable but lengthy to wait for the shipment.

That article hit on a sore spot for me because they compared IRAs to the Australian superannuation plan. However, after speaking with the Australian Tax Office (the "ATO") they informed me that my IRA is not an "Employer sponsored" plan. Had I kept my Microsoft 401k funds in place instead of rolling them to an IRA, then they would qualify as "employer sponsored". So do you know how they treat IRAs? They called them FIF (Foreign Investment Fund) -- last I checked, they were revising the rules on how they'd tax these. In the past (pending revision), they've treated them as offshore tax avoidance schemes. So what they did is they marked-to-market the value of the IRA and any market gains in the Net Asset Value of the IRA were taxed as Regular Income (45% tax rate) for that year. So even if you held Berkshire Hathaway in that IRA, and never traded it, they'd mark any appreciation as regular income. Even though you haven't even made a withdrawal!!!! And THAT'S the reason why I had to cancel our plans to go to Australia last year. I found out about that at the 11th hour -- we were already making plans with shipping companies, literally!

Berkshire management actively: make decisions on compensation, make capital investments in the operating companies(this is accelerating), help fund aquisitons (this is accelerating), lend money (Clayton et al) and yes, on occasion, intervene managerially when companies go off the rails. Ex. Netjets. I can see nothing but more active management in the future than in the past with the growing pie of the operating companies. True, they keep management intact during the aquisition but that is a refreshing alternative to how PE firms and large corporations do it with M&A. They do it to make BRK a welcoming home for owner-operators looking for a long term partner. None of this is "passive" investment somehow aimed at tax avoidance or class warfare like you are spinning it. Trust me, you are truly preaching to the choir here. I can't for the life of me understand the "passive" vs "active" designation distinction for Mom&Pops who have real estate rentals. The property managers have to be managed. You have to set their compensation. You have to ensure they're actually advertising your rentals as they are meant to be doing. When the property needs a new roof, it's you personally that has to think about it, hire the contractors, etc... etc... There is nothing entirely passive about it. Yet they still managed to make it the law. It however is relatively more passive. It's like a spectrum. Anyways, Buffett is also my hero. I'm just trying to help him pinpoint how "his class" is winning at this class warfare. Raising personal dividend and capital gains taxes won't affect his class. You'd need to have required distributions from holding companies in order to achieve the equality that he is hoping for in the tax code. Otherwise, it's the total return that matters -- the retention of income for capital gains. By criticizing his structure I hope you realize I am just criticizing myself -- I plan to hold shares in companies like his if my RothIRA is taken away. It's the next-best tax sheltering scheme for avoidance of individual taxation.

Don't let a bad apple spoil the cart. It sounds like the rules of the trust merely need reform. Such as the giver gets an income only as a certain percentage of what the charity will get. I had a very wealthy relative that was an heir to a fortune -- Santa Fe Railroad money. My grandmother received an income from a trust, the remainder of the trust went to a variety of charities (such as the University of Chicago). There are still educations funded today with scholarships from the Richter Trust. My relative was ruined by his fortune that he inherited. He was constantly paranoid of women -- who wanted to get close to his fortune. He died alone an old man. My father attended his funeral in Pasadena and the only other attendees where his lawyers, bankers, trust officers, etc... I'm a step ahead of that and have stipulated that they must have earned income -- so they can get a matching payment from the trust. Much like a corporation commonly provides a matching contribution to 401k savings.. This way, they can pursue something they have a passion for (like teaching) and yet still have the cash flow to raise a family and save for retirement. Then there is also disability help -- I don't want them to become wards of the state. Would like to provide a better private facility when they are dying. I'm not done with the planning for how it gets distributed, but I'm doing it in a way to ensure they cannot just be drug addicts sitting on a beach. I'm not going to rob them of their initiative, but I do want them to pursue what they love in life rather than taking a Wall Street job merely because it pays better than being a laboratory scientist. Are you asking me how I know that Berkshire reinvests income rather than distributing it? That's the tax benefit. Trusts have disadvantages because they have maximum income tax rates -- so Berkshire shares are optimal for a trust. That trust is the means by which estate taxes are reduced.

I also appreciate the argument raised that Berkshire pays a higher tax rate. They might purchase a company that paid 25% tax rate, and then suddenly that company is paying the 35% rate that Berkshire pays. However, skating to where the puck is going, during the elections Romney talked about a corporate tax rate of 25% and Obama suggested something more like 28%. Well, both of those tax rates would make the Berkshire structure more and more appetizing to billionaires wishing to avoid higher taxes at the personal level. So who knows, maybe Berkshire will trade at a premium and now is the right time to buy?

I agree with you there. The math is the same no matter where the price point is. The reason why I chose a lofty valuation for the example was to put to rest this myth that dividend are always better than buybacks when valuations are steep. You can't really do any myth busting without testing it in the lab. There is a TV show called Myth Busters that I'm referring to.

Regarding the class warfare, which Buffett opposes, his proposals to raise taxes at the individual level don't hit his class at all! Well, just the 1% of his assets. However he could point out to Obama how the businesses at Berkshire run themselves and thus are essentially passive. He could explain that a required distribution of passive income from his holding company, of say 30% of passive income, would be all that it takes to make it even with the common taxpayer (not his class). That would fix the true class warfare that the billionaires play with their holding companies. Meanwhile, Bufffett could move his Berkshire shares into a charitable remainder trust and the Gates Foundation would still get all of the money. EDIT: I made an error in estimating it to be 30% of passive income. Just lookup the rules for Personal Holding Company to see how it ought to be treated -- that deals with passive investment holding companies.

longinvestor, I'm fully in favor of charitable giving having a tax-free structure that also benefits the giver. That is called a Charitable Remainder Trust. Buffett's structure however is more than just about Buffett. There are many Berkshire shareholders who enjoy the tax benefits but will not be giving to charity. They are in for the free ride. Buffett's contribution to charity at this point is 100% safe. Were they to threaten to rule that BNSF is in fact "passively" owned, he could merely push his shares into the Charitable Remainder Trust. So none of what I propose in any way threatens he charity. But it does threaten the structure. Lastly, I don't want them to change the tax code. I want people to still have these tax-efficient vehicles because I want to use them too. And who knows, maybe I will wind up giving it all to charity when accumulate the wisdom that Warren has (at his age). But as a young man, he was still enjoying the game of building it as am I.

Correct. However one might ask why they still want to hold the shares at 150% of IV. It seems they are missing out on a great opportunity to sell, and why complain if the company is willing to buy?

If XYZ buys back 10% of its stock at a 50% premium to IV, the IV of all the remaining shares decreases by 5%. If I understand you, you prefer this route to dividends with the idea that you're better off for having avoided a dividends tax? Of course, the alternative for capital allocation isn't just dividends. Keeping it simple... The company wants to return $1 per share to you. You own 100 shares. So you are getting $100 returned to you. The company returns it to you by purchasing $100 worth of shares on your behalf at 150% of IV. You in turn sell $100 worth of shares at 150% of IV. The amount of IV they destroyed by purchasing at 150% of IV was entirely recaptured by your sale at 150% of IV. Absolutely no damage to you. In fact, you win by owing far less in taxes.

Let's say IV for the shares is $66 and they buy them back at $100. How much do they buy back? They buy back the equivalent of otherwise paying a $1 dividend per share. You own 100 shares of this stock that you purchased at $100 per share. So you would otherwise be getting a $100 cash dividend on your 100 shares. You would owe $30 dividend tax on your 100 shares at 30% tax rate. But instead we're talking about buybacks: Now, if your cost basis is $100, you owe no tax if you sell 1 share to get your $100 "dividend". If you sell at $101 per share as you suggest, and therefore $1 per share of capital gains tax is due. Then you still sell roughly 1 share to get your $100. So if the capital gains tax rate is also 30%, then you owe 30 cents of capital gains tax. So it's $30 in dividend tax versus 30 cents in capital gains tax. I'd rather pay 30 cents than 30 dollars. Wouldn't you?

Plus, I'm now feeling myself adopting the attitude that I don't even need to contribute to charity given these tax rates. I can just say "Sorry, I've already given at the Treasury". Romney pointed out that his tax rate is really higher than 14% because he tithes 10% to the Mormon church. He called that "charitable" giving. The problem I have with that is I don't want the needy of this country to have to be Mormons in order to get help. Romney in that sense doesn't care about all poor, he cares only about Mormon poor. Well, non-Mormons are American too. So he can't argue that helping out Mormons excuses him from his US tax obligation. But then again, if I ever become destitute I will be motivated to work hard if the alternative were joining the Mormons. Not that there is anything wrong with Mormons, it's just that I don't want to join any church in order to get a bowl of soup. So perhaps Romney's system of giving ensures that only the very needy come knocking for the handouts.

I didn't propose the Federal government provides health insurance. I proposed they regulate it (instead of the states doing it). That's the only way you have a functioning system where you pay insurance and if you get ill the insurer pays for you. That's how the market should work. The insurer should price in risk, and then be on the hook for it if the risk goes bad for them. But Washington state let the insurer drop me as soon as I became a California resident. This means that in Washington state (not DC), they should offer insurance cheaper to Californians who have moved to western Washington. If you look at the statistics, Californians don't last there long because the climate is grey and cold. Thus, they should find Californians to be of lower risk because the are likely to leave the state at a higher than normal rate. And in California, insurers should be allowed to charge less to rich people. They are sure to flee California at a higher than normal rate. So you see, this is dysfunctional when regulated at the state level. It is nonsensical.

Thanks for trying to help. I read a few of the readers comments on the book: quoting from one: There are three important steps to take. The first is converting to a Roth IRA. The next is to carefully choose the correct beneficiary. It must be one person. More than one beneficiary is OK, but it's crucial to set up a new IRA account for each. Be certain that your beneficiaries understand the steps necessary to stretch their IRAs to last the lifetime of their heirs. Some criticisms I have for his advice: 1) He forgot to mention Obama will confiscate it and/or tax you a second time 2) You'll ruin your kids lives if you die too young and they directly inherit your RothIRA when they are 17 years old. Thus you need to leave the money to a trust where you stipulate that they don't get anything until they are at least 40. You can change this later if you live long enough 3) You'll pay taxes twice if you die before 59.5 or if you get divorced before 59.5 and your wife's lawyers take it from you and 4) You get completely bent over by the estate taxes. I literally think of my RothIRA as if every single dollar more I make is really only 60% mine. I told my wife we can think of everything we buy as if it's 40% off sale. The government now pays for 40% of everything we buy (it's now 40% their money on every dollar of future appreciation). This would be different in a taxable account -- I would just shove it into a Crummy trust and 100% of every future dollar owned would be my family's. And every time the market crashes? I could otherwise shove it into a GRAT (Grantor Retained Annuity Trust) where every dollar of appreciation goes to my heirs. Yet I still get the money back that I put in... I get it right back again. You should really read up on GRATs if you haven't yet heard much about them. The Facebook founders are really big on GRATs. They put their pre-IPO shares into them, then had their big IPO, and all of the massive instantaneous appreciation happens outside their taxable estates. But that type of thing isn't what makes the populace mad, because they don't understand anything complex. But they understand IRAs, because it's constantly marketed to them. So they get upset that they have a 64% equity stake in Mitt Romney's IRA that is growing at a blistering pace, and they want to withdraw it immediately and forego all future amazing gains just to piss him off. Cutting off their nose to spite their envious faces.

I can well understand why people don't want the Federal government at all involved with insurance. However leaving the regulation of the insurers up to the states sucks like you wouldn't believe. As I've learned... Once I left Washington, my insurer legally dropped me. So then a private insurer in the next state won't take me. As a nation, we benefit from labor mobility. Sure, I'm not working, but the point still stands. There needs to be a comprehensive thread that ties all of the states together. Unfortunately, I don't know how you do that unless the regulator of the insurers is the Federal government itself.

I used to have a couple of single family homes as rentals. They have different rules for how they tax you based on whether they meet the "active" vs "passive" test. If you were deemed "passive", you were limited in how many of your expenses you could deduct against your other income. To be deemed "passive", you merely needed to hire a property manager. Well... uhh.... how is that different from how a holding company operates? They have managers run their businesses, but that isn't considered "passive"? I just think the very rich mainly have better lobbyists. Do I need to explain the different roles a house and a corporation play in the economy? You could explain to me what the spirit of the Personal Holding Company act is. That's a corporation. Clearly the law intended to discourage passive investors trying to skirt personal income tax rates via the use of holding companies. So tell me how much more important is BNSF to the economy now that it is 100% held? Were it only fractionally held, it is passively owned -- therefore less important to the economy?

I used to have a couple of single family homes as rentals. They have different rules for how they tax you based on whether they meet the "active" vs "passive" test. If you were deemed "passive", you were limited in how many of your expenses you could deduct against your other income. To be deemed "passive", you merely needed to hire a property manager. Well... uhh.... how is that different from how a holding company operates? They have managers run their businesses, but that isn't considered "passive"? I just think the very rich mainly have better lobbyists.

I have next to no doubt that what you talk about is exactly what the appeal was here. Go through Buffett's annual letters to shareholders and over and over again he will repeat himself that these wholly owned businesses practically run themselves, that there is a very small head office, he doesn't spend time thinking about how to run those business, etc... etc... etc... He is practically begging someone to call them passive investments. In which case, Congress could amend the Personal Holding Company rules and hit Berkshire with required annual distributions. In this sense Buffett reminds me of Rumpelstiltskin (excerpt out of Tales From the Brothers Grimm): "I'm smarter than the wind that blows and I'll win at every game, for no one guesses, no one knows that Rumpelstiltskin is my name!" To be a PHC, fewer than 5 people will have to hold more than 50% of the company. I'm aware. I've looked up all the rules before ;) I stand in awe of his approach.

I have next to no doubt that what you talk about is exactly what the appeal was here. Go through Buffett's annual letters to shareholders and over and over again he will repeat himself that these wholly owned businesses practically run themselves, that there is a very small head office, he doesn't spend time thinking about how to run those business, etc... etc... etc... He is practically begging someone to call them passive investments. In which case, Congress could amend the Personal Holding Company rules and hit Berkshire with required annual distributions. In this sense Buffett reminds me of Rumpelstiltskin (excerpt out of Tales From the Brothers Grimm): "I'm smarter than the wind that blows and I'll win at every game, for no one guesses, no one knows that Rumpelstiltskin is my name!"