ERICOPOLY

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).

I believe what you're talking about was a proposal that would have diverted personal payroll taxes into tax-deferred investment accounts in return for giving up future Social Security benefits. Nope. That's not what I'm thinking of. I'm thinking of something completely unrelated to Social Security. I agree with what you say that monkeying around with Social Security to turn it into investment accounts is the wrong approach for the reasons you cited. I swear he proposed this, but perhaps I'm remembering incorrectly, but what I remember is that at some point he proposed a savings vehicle where we could make unlimited contributions at any time, it compounds tax-deferred, and we can withdraw money at any time. Gains withdrawn would be taxed as income. So, with no mistake, you only pay taxes when you intend to spend money. Very simple to administer -- they already have a system for calculating how much of your withdrawal is actually gains versus return of capital... it's called the IRA account. Very clean. People can't spend their money without paying tax, but only pay tax on what they intend to spend. The benefit of tax deferral is that taxation doesn't get in the way of trading decisions, so you don't get inefficient allocations of capital merely for tax avoidance reasons.

It appears like that on the surface when compared to operating companies. But really Berkshire is a passive investment operation -- just ask Buffett, he says that he hardly ever interacts with the other managers of the subsidiaries. Does he therefore make the case that these are merely passive investments: Sees, GEICO, Burlington Northern??? I mean, if it's passive then why isn't it taxed that way? I believe the way Berkshire gets taxed is the earnings of the wholly owned subs are consolidated and he then pays tax. Okay, yes in that respect the incremental subsidiary he acquires gets taxed at 35% rate because of the already extreme level of earnings within Berkshire. However, when he takes the post-tax earnings out of Burlington Northern to deploy in a new purchase -- he pays absolutely ZERO on that extraction of profits. That extraction of profits is a dividend. But when an ordinary individual takes earnings out of an investment via a dividend, he wants us to get hit at regular income tax rates! Fine then... let's be fair -- he needs to pay ordinary corporate tax rates when he takes money out of Burlington Northern. That would put him on an even platform with the rest of us. Look, my soon-to-be 35% tax rate on dividends is a double-tax on the post-tax dividends being paid to me. That's on top of whatever the company already paid! Yet Berkshire's maximum tax rate is 35%, and there's no prior round of tax on it. So nice try, Berkshire does not pay that much tax -- at least not compared to the little people who have no such fancy tax shelter.

I am increasingly thinking that if companies were to just pay out as much as possible and not try to retain earnings for some future "deep discount" buyback then your typical mom and pop investor would earn higher returns. The low or nonexistent level of dividends likely serves to reinforce the myth that these are only pieces of paper that bounce around. Combined with a market crash, you have the recipe for buy high/sell low. More importantly, when you retire you draw down your 401k. When it doesn't pay enough income you need to sell some shares. It's only when you are very wealthy that you can live entirely on dividends. The more they pay out, the less likely you will be caught selling undervalued shares to fund your living. So ironically, I think it's the small folk that get hurt the most when companies just sit on the cash rather than pay it out. So cutting the dividend tax to zero would therefore allow companies to boost their payout ratio to the maximum and therefore the little unsophisticated people would do better and benefit by higher investment returns.

That's another example of a tax that would hit the rich but not him. I am also fairly good at proposing ways to fix the deficit without it meaningfully impacting me -- maybe I should have my shot on CNBC too. Look, the amount I paid a year ago in taxes for 2009 (as a % of my total net worth) is equivalent to the government confiscating not only all of his non-Berkshire assets, but some of his Berkshire shares as well! He's not telling the media stories like that! Instead he gets into these insignificant arguments about how he pays less income tax % than his secretary -- and hiking the income tax would still leave it that way, because most of his income is not paid out by Berkshire! Equity investing is just taxed incorrectly. Much of our dividends and capital gains are intended for reinvestment -- same as in a corporate holding company like Berkshire. The simplest fix would be to tear up the tax code completely and just have a national VAT or sales tax -- tax consumption directly. If txlaw's argument is that Berkshire shouldn't be taxed on what is intended for reinvestment, then the same ought to apply to all of us -- not just those of us rich enough to have a controlling stake in an investment vehicle. The government already recognizes via the tax code that capital gains on real estate shouldn't be taxed in situations where the capital will be reinvested in more real estate, provided you fill out the right paperwork and reinvest the money within a given window of time. What in the world is so different about taking a gain on an equity and reinvesting it in another -- why no such equivalent tax deferral?

It would be interesting to ask him how he'd feel about keeping social security in place but eliminating contribution/withdrawal restrictions for IRA accounts. Were I to place money on his answer, I'd figure he'd say something about how the rich need to pay more taxes, not less.

I'll tell him why, if he pretends to really not know this. Go back and look at the history of the S&P500 past 80 years or so. Dividends paid accounted for most of the real returns, right? There, that's why. So called capital "gains" are substantially just nominal gains. Somewhat like return of "real" capital. They are not really gains, for the market as a whole. Now, to prevent people from gaming it (retaining earnings like Berkshire does) they have a capital gains tax that meets you in the middle. An effort to raise it to income tax rates would need to be justified by some sort of "real" adjustment to the cost basis. Australia tried that for a while but in the end just figured it's roughly 1/2, so now their cap gains I believe are 1/2 of the income tax rate.

I don't think that's it. He had the opportunity to get behind Bush's "personal savings account", but he spoke out against it rather (as I recall). The personal savings account would have allowed us to compound our investments tax-deferred and our gains would only be taxed when we withdraw them for consumption. Basically, similar to IRA accounts but without the restrictions on contributions and withdrawals. He might mean well, and he might not realize he does it, but he effectively says that the rich don't pay enough tax yet he has picked the very vehicle that best shelters himself from these taxes! Conveniently, he neglects to speak out against what shelters his dividends and instead proposes to raise the tax on mine! That's why he pisses me off -- there are many reasons why I admire him overall, but on this issue it's rather appalling.

I said so many similar things prior to 2006. Actually, I was sort of still a little bit on board until 2009. Have you guys ever heard of a product called a "variable annuity" -- a few years ago I looked into some offered by Fidelity. They are basically some weird tax shelter where your money compounds in a bond, equity, or blended mutual fund tax-free just like an IRA. There is absolutely no contribution limit -- you can put millions into them I figure. Then the withdrawal rules are similar to regular IRA accounts -- your money is taxed as regular income upon withdrawal. The trouble with such funds for me was the lack of choice -- none were offered with the Fairholme Fund for example. But this of course got me to thinking... why is it okay to put hundreds of millions of bucks compounding tax-free in a variable annuity, but not if you self-manage the investments in the account? I mean, these "personal savings accounts" with unlimited contributions were effectively the same thing, but without the huge expenses that these variable annuities charge and Bush's proposal provided the option to self-manage the account. Do you figure the industry titans that sell these variable annuties and earn these usurious fees lobbied pretty hard to block the self-managed alternative?

And as he never points out, why does Berkshire pay less dividend tax than individuals? Better, why does he ask for the individual dividend tax rate to be raised but not the rate that Berkshire pays?

I think we have varying degrees of what we consider "academic". While I consider it entirely practical (and economically rewarding!) to just sell a little bit of stock to offset the buyback, and in doing so come out ahead after taxes, others consider this academic. Maybe it's because I paid $720,000 about a year ago to the IRS for my 2009 tax bill. After that experience I will do anything I can come up with (legally) to prevent a recurrence of that. Once we get past the next couple of years, I fully expect my dividends to push me into a tax rate nearing 40%, despite having 44% of my money in a RothIRA. Something non-academic needs to happen, and it drives me insane to think this could easily be avoided through the dividend-laundering program known as stock repurchase plans. Buffett of course has the opposite motivation -- Berkshire is taxed higher on capital gains than on dividends. Out in the real world (not in these academic discussions), these buyback programs on a quarterly basis are typically very small (as percentage of outstanding shares), and bubbles (periods of overvaluation) tend to be relatively brief (only a few years at most except for that 1 in 100 years bubble we just went through). And of course everyone arguing against me is doing so on the behalf of others -- somewhat like altruistic pro-bono debate mercenaries. None of you guys would ever be caught dead holding overvalued stock in the first place.

Good post. I've been thinking more and more about my own retirement recently (though i am in my 30s), and would be perfectly happy living a modest life free of work. I thought i would share my family's experience to show the money one might need to retire comfortably (which of course is relative). My father (who passed away about 12 years ago) retired at 39. He was an mechanical engineer (and a stockbroker in his younger years). He passed away at 72 years of age. So he lived nearly half his life in retirement and traveled religiously for vacations during retirement to remote cheap locations like Central America for many months at a time. (Great memories). My mother has never worked since she married my father many years ago. --With the background out of the way... I manage her retirement money for her now and she is now 63 and perfectly healthy. She has raised 4 kids and put them all through college and graduate/law school (not leaving any of us with any student debt upon graduating), in what i would consider a very comfortable upbringing. She has a net worth of approximately $1.4 million now in investments (currently about 50% in mostly dividend paying equities and the rest in fixed income & cash) and a home worth about $300,000 which is a great modern 4 bedroom home (in the South that amount can buy a great home). So her net worth is $1.7 million including residence. She has no mortgage, and no debt. She takes about 4 vacations per year usually lasting about a week (or three) each time, and lives an extremely comfortable life without any need to worry about having enough money. Soon she'll be receiving social security that would add about $20,000/year to her annual income, which she really doesn't need, because that 1.4 million is more than enough to live her comfortable life in retirement, doing all the things she wants to do. How did you view work after a childhood of not witnessing your father going to work? I only ask that because I left the workforce two months before my son was born and my daughter was two at the time. They are now nearly 3 and 5. Some in the family have a theory that somehow they will be damaged by not seeing me routinely "go to work", but as for now I believe they benefit from having two parents with time to spend with them.

Got it, you were quoting Rosenberg. I guess I don't understand why he brings up the prices of bonds, asking what it tells us. One might have said in 2006 that the price of bonds told us that collapse in demand was not coming, and then one could say today that the price of bonds suggests no coming growth in demand. Why would we bolster an argument today using bond prices after learning how poorly the current predicament was forecast by bond prices before the collapse happened? If bond prices are set by the crowd, then why is the respected economist asking the crowd what to think? The crowd is probably also following what Rosenberg is saying, given that he is one of the thought leaders. So it's sort of a circular reference in a way between Rosenberg and the crowd. I just don't get it -- it sort of completely ignores the pithy wisdom about how the market is there to serve, not to instruct. You are correct in how you described what the earnings of the S&P500 are telling us. However when I asked the question I meant to refer to the PRICE, but I wasn't explicit. The price of course is a factor of future expectations, not just current. It was brought up to state that one can either say the crowd expects continued relative fair weather (S&P500), or one can say the crowd expects more misery (the bond market) -- I think he was cherry picking the bond market to bolster his views... I doubt it was an accident that he neglected to mention the S&P500.

This seems like more of a moral argument for buybacks (CEO as an implicit financial advisor). It's also beating around the bush. If the CEO is supposed to somehow guide investors, then why don't we expect him to say "we don't think the shares represent good value at this time", and just leave it at that. Sometimes the direct approach is overlooked. As my grandmother told me a few days ago "why make something simple when it can be made complex". We were chatting about the bureaucracy of my getting my Australian passport renewed at the time. Of course, one of the guarantors that I found had a lovely comparison between bureaucracy and a rhinoceros: you can't get around it and you can't offend it. Is the CEO the rhinoceros?

I only wish I could be his editor. He spends a lot of ink to say that buying cheap is better than buying dear -- well, "duh" Mr Lampert.

We take lower returns so that others can have more? This reminds me of my tax bill.