Obama to cap tax-preferred retirement accts to $3MM

[ERICOPOLY]

I think the underlying argument is really about "Don't tax me, tax somebody else."

 

 

Yup.  This is why Warren Buffett wants to tax my capital gains higher but didn't instead propose a tax on his unrealized capital gains (which is partly due to the earnings that he retains and reinvests to avoid tax rate on dividends at the individual level).  Didn't instead propose an increase in tax rates on the 14.5% he pays on his passive dividends through his insurance subs.

 

He wants higher taxes to make things more equitable, but doesn't want to be the one paying them. 

 

Only 1% of his assets are in an account where he would be subject to the taxes he proposes.

 

Hey, I've got an idea -- and I'll sound very generous in proposing this and people will applaud me on TV -- how about you tax 1% of my assets at a higher rate, but leave the 99% of my net worth alone?

 

 

EDIT:  His is really a tax-deferral vehicle, just like my RothIRA.

 

Where can I find his tax proposal where he specifies specific method of taxation?

 

Who are the others who will end up paying more taxes at his income level? i.e. who are the others who make $500MM++ in a year that are not capital gains?

 

How would you tax unrealized gains when the gains are fluctuating constantly? 

 

What about the answers to my other questions?

 

Buffett proposed a higher tax on capital gains and dividends at the personal level.

 

But the reason why only 1% of his holdings are in investments subject to such taxes is because he never distributes earnings from Berkshire as cash dividends.  Instead he retains them as unrealized capital gains.

 

A 3% dividend on his Berkshire shares would be taxed as regular income.  Instead, he retains it and reinvests it at the Berkshire level.  Thus, Berkshire compounds at an extra 3% annualized rate and that translates to his unrealized capital gains compounding at an extra 3% annualized rate per year.

 

The tax law says that 100% of his unrealized capital gains will be COMPLETELY FREE of tax if he holds it till death.

 

 

What other questions do you have?  I don't recall any.

 

[Guest valueInv]

"2, The IRA is an Individual Retirement Account - it is an account where the govt. relaxes its taxation to help individuals save for their retirement"

 

Exactly, so that one does not end up being a parasite of society. The question is why putting a cap at $3 million? Is that enough? Is that going to be properly adjusted for inflation? What about people that are single or that have a significant other with a very generous pension plan or one with none at all isn't that discriminatory? If you live longer isn't that cap creating issues in your late years to have enough funds left?

 

 

Where do the contribution limits to retirement accounts come from? Are they enough? How about SS? Is that enough? For a person living in the Bay Area or NYC?

 

He is going to try to address the mainstream population not edge cases like you and me. 

 

"3, Lets flip the question around. You are in Obama's shoes. You have to deal with the large debt load and the deficit. What would you do?"

 

Resign. Let someone in who can inspire and lead the country to greatness instead of taking it to pieces with such proposals. Do some common sense fixes such as eliminating real tax loopholes and raising the retirement age on safety net programs which are not earned by people but, given to them by the goodness of society and strangers. If they want more or better then they know what they have to do.

 

Cardboard

 

Who is better than him?

 

The piecemeal effect is because Washington is set up like a football game where they have to fight for every inch. They are going to lose some and then get some by the opposition. People before Obama played that game and so will people after him too. Even Lincoln played the same game.

 

They are trying to eliminate real tax loopholes but haven't always succeeded(Carried interest, anyone?). The IRA is current one they're trying to eliminate. My guess is that they'll fail in this one too.

[Packer16]

Maybe the question of whether his tax deferral is a tax dodge (even after death) can be added to the questions to ask Buffet at his annual meeting.  It will be interesting to see if he would answer.

[Guest wellmont]

the most obvious loop hole to attack is carried interest. yet it's still standing. thanks to the lobbyists and do nothing congress.

[ERICOPOLY]

Where do the contribution limits to retirement accounts come from? Are they enough?

 

That's only for the pre-tax contribution.

 

You can contribute unlimited amounts to tax-deferral accounts with after-tax contribution monies where they can be invested in bond funds or stock funds.

 

The name of that is variable annuities.

 

The only advantage I can think of with IRAs over variable annuities is they're a bit cheaper (avoid the annuity company fees) and the pre-tax nature of the contribution.

 

But there's absolutely no cap on what you can contribute with after-tax money (with the variable annuity).

 

 

[ERICOPOLY]

You are right Buffet is doing the same thing as Romney just in a different way (Cap Gains versus IRA) (form over substance).  If he really wanted folks to pay a higher tax rate he would donate a portion of his wealth to Uncle Sam as if he earnied the investment income as ordinary income as an example instead of playing the games wealthy folks do.

 

Packer

 

Per the 2012 annual report, book value has compounded at 19.7% rate for 48 years.  Book value at that rate grew from $19 per share to $114,214.

 

Had he payed a 3% annual dividend each year, book value would have grown at 16.7% rate and book value per share would today stand at $31,389.

 

So when you look at his unrealized capital gains (which he will get tax-free at death), keep in mind that 72.5% of his unrealized gains would otherwise have been taxed at least once on the individual level.

 

So take the 20% capital gains rate today, add the ObamaCare tax and the medicare tax, and we get pretty damn close to the $9b figure that Obama thinks is better raised by raiding IRA plans.

 

Somebody's class is clearly winning this class warfare game.  Perhaps in a class of his own.

 

 

EDIT:  Oh yeah, I forget that income was once taxed at 70% when Buffett started out and dividends were taxed as income for a very long time.  Why am I letting him get away with today's relatively low capital gains tax rate when I figure what he would have otherwise owed to the Treasury?

 

He wants dividends and capital gains to be taxed as regular income.  So how about assessing 72% of his net worth as income -- assessed at the highest income tax bracket?  That's the way the order of operations works for Romney -- he gets tax deferral of his income and the total bill is paid at the end at regular income tax rates.  That would be the apples-to-apples comparison.

 

 

 

[JSArbitrage]

To put it differently, I made a wager with the government.

 

They wanted the tax on my IRA paid in 2010 so badly, that they agreed to give me a deal.  If I paid the taxes in 2010, they'd consider it payment in full for all future tax liability.

 

That benefits them because a dollar today in times of crisis is worth more than a dollar in 40 years when many of today's taxpayers (otherwise footing the bill) would be dead.

 

The bet they made is that my RothIRA would grow at just an average rate.  And averaged across all accounts in the population, that is probably true.

 

Now they are selectively reneging on that bet and just the very select few who did far better than average now will be taken a second tax swipe at.

 

So not only did they get their tax bill early, they are now depriving me of the future returns on that tax bill.

 

Thus I'm damaged by their reneging on the deal.  Had I just refused the offer to do the conversion, no less than 3 years ago, I would be bitching a lot less because I could have invested that tax bill in things like BAC to help pay the tax due on the gains the account has made since then.

 

So, a lesson in doing business with the government.  Only 3 years ago they lifted the income restrictions on RothIRA conversions!  The wanted us to do this conversion in the post-crisis, post-bailout world.  Now, bait and switch.

 

I am hoping you learned your lesson from this.  The government will sing whatever siren's song it needs to sing to get oversight over your wealth.  If the world plays out the way Prem, or heaven forbid, Bass thinks it will play out, this small tweak is the least of your worries.  Think Cypress-like decisions in G7 countries.  Remember, last time the US paid down a debt to GDP ratio of this magnitude, it required marginal tax rates of 90%. 

 

You could wake up tomorrow with the announcement that all 401K/IRA accounts are subject to a 5% tax, effective immediately. 

[Kiltacular]

3, Lets flip the question around. You are in Obama's shoes. You have to deal with the large debt load and the deficit. What would you do?

 

If I'm in Obama's shoes, I'm not worried about getting extremely wealthy or about retirement at all.

 

It's funny (in that perverse way that it can be), I see people in the last 10 or 20 years talking about people like Romney or the Bush family and their wealth and how they got it.  But, no one talks about how the Clinton (and his family) or Al Gore went into politics with very little wealth and, since Clinton's presidency, both have become extraordinarily wealthy.  I mean, HUGE numbers.

 

Now, would you rather have someone enter the presidency with extreme wealth or would you rather have the trend be that AFTER you become president you become extremely wealthy?

 

If those are the two options, the answer seems self-evident.

 

I think Ericopoly has realized that he -- like many others here I'm sure -- are in that dead zone of wealth... there is no one that "feels" for your predicament and no one lobbying on your behalf.  There is no one protecting your interests or even working for them.  Packer mentioned during the election that he was surprised there wasn't more protest from people making $250,000 per year that were being called "rich" when instead they were just the ones being soaked (or something to that effect -- he's more eloquent about how he put). 

 

You ain't even close if you've got wife and couple kids and are actually also trying to build wealth.  You've got to live like you make $80k if you actually want to build wealth and aren't expecting to do 50%+ per year on your investments.

 

These people -- and I'm one of them (high 7 figures net worth), "rich" person's salary -- are in the sweet spot to be taxed to the extreme.  There are enough of us that we can be soaked for some serious cash that can help with "austerity" but there aren't enough of us that we have any power and we don't have enough wealth to hire lobbyists and to play the big boys' game -- like the big hedge fund and PE guys do with getting carried interest protected or having our business protected with subsidies or trade quotas, etc., etc.

 

Meanwhile, our taxes are enormous and not just in dollar terms but in PERCENTAGE terms.

 

We pay full freight for everything -- education costs for kids (no loans for you), deductions taken away (you're rich) -- see the AMT, etc., etc., etc., etc.  Many people talk about how those in places like Sweden or Denmark pay higher taxes (though I don't think they do if you're making good money in states like New York or California or New Jersey) -- but humor me.  My understanding is that people in those countries don't need to pay $40 to 60,000 per year for each child's college education -- it takes half a million in pre-tax earnings  to cover each kid.  There are no loans or scholarships (for academic achievement, as there once was) for people in these groups.  PAY UP (and subsidize everyone else -- "you're rich").

 

If you're trying to get into Ericopoly's zone, be forewarned, you've got to add another zero to the net worth before you're safe.  Everything is stacked against preventing you getting to where Ericopoly is now and, when you get there, you'll find you're still not safe.  They're coming for your money -- unless you never want to use it.  But then, what's the point of trying to get somewhere that you can never enjoy?

 

This, I think, is what Cardboard is getting at.  When enough people realize that even hitting it big isn't big enough, the idea trickles down to future generations: "Even if you 'make it' you're still not even close."

 

I tend to agree that this eventually has a perverse impact on society.

 

But, long ago I realized that no one cares.  No one sympathizes with your "plight".  No one (aside from a few vocal people on this board apparently) sees the problem this scenario creates.

 

I long ago realized this -- people just think you're bitching and start talking about 'bad karma' [lol] and I long ago realized there is little to do.  Keep your head down -- aside from the occasional post on an anonymous message board -- and carry on.  But, to listen to the folks that talk about "fair share" with some kind of moral authority -- ugh...they're killing the golden goose (or geese, as the case may be)...and future generations will realize it. 

 

Why try really hard when you need to hit 10 home-runs in a row to get anywhere but, if you do nothing [no matter your skills], you can have as many children as you like and have a "good" life in the U.S.  Really, who are the 'losers' in this scenario?  People don't need to be really bright for these ideas to take hold.  Why try hard when just getting in the right herd is good enough?

 

The answer, of course, is don't.  And, once that's the answer, we're on our way to implosion.

 

I pretty much guarantee people in Greece and Cyprus, etc., aren't talking about the "gender" rights and "the environment".  Those concerns become laughable once the rich stop paying taxes.

 

I hope to see this change because I care about those issues and don't like the impact that these policies I'm seeing are likely to have on peoples' concern about important social issues.

 

Perhaps I'm overly concerned about the trend.  I'm not particularly concerned about myself but I just don't like the trend.  The pendulum does tend to swing back the other way just when it seems to have gone hopelessly too far.  Then again, there are many places, societies and times where it never does swing back -- it just tears off from its mooring.

 

/rant off

 

 

[ERICOPOLY]

The crazy thing is, Bernanke and Obama want people to go into risk assets.

 

But they don't want them to keep the profits.

 

My RothIRA... I should be the poster child for taking risk.  Then they want to keep the profit from it.

 

Hmm.... so why is it again that I should go into risk assets?

 

[Guest valueInv]

 

Buffett proposed a higher tax on capital gains and dividends at the personal level.

 

 

We are discussing personal, not corporate taxes. There are no IRAs for corporate taxes.

 

 

But the reason why only 1% of his holdings are in investments subject to such taxes is because he never distributes earnings from Berkshire as cash dividends.  Instead he retains them as unrealized capital gains.

Because he can compound those gains at close to 20%. His shareholders are better off because he retained those gains and continued to compound them.

 

The tax law says that 100% of his unrealized capital gains will be COMPLETELY FREE of tax if he holds it till death.

It is a moot point for him since he has pledged most of his wealth to charity.

 

What other questions do you have?  I don't recall any.

Repeat:

 

1, If you feel that its unfair that Buffet is taxed less than you despite having much higher gains and wealth, Buffet and Obama are in complete agreement with you - they both want to raise his taxes. You should ask the Republicans on why they blocked it.

 

2, The IRA is an Individual Retirement Account - it is an account where the govt. relaxes its taxation to help individuals save for their retirement. As the name suggests it was not created to help people enrich themselves, not created to help people donate to charity and not created to help people pass money to their kids. What you are saying is that you want to use a vehicle created for one purpose for those other ones. That is not the mandate of the IRA. In fact, they should have structured the IRA like a FSA, if you don't use it, you lose it, that way you don't abuse it. 

 

3, Lets flip the question around. You are in Obama's shoes. You have to deal with the large debt load and the deficit. What would you do?

 

[Guest valueInv]

Where do the contribution limits to retirement accounts come from? Are they enough?

 

That's only for the pre-tax contribution.

 

You can contribute unlimited amounts to tax-deferral accounts with after-tax contribution monies where they can be invested in bond funds or stock funds.

 

The name of that is variable annuities.

 

The only advantage I can think of with IRAs over variable annuities is they're a bit cheaper (avoid the annuity company fees) and the pre-tax nature of the contribution.

 

But there's absolutely no cap on what you can contribute with after-tax money (with the variable annuity).

 

Are you trying to say that because the annuity loophole exists, Obama has no right to close the IRA loophole.

[ERICOPOLY]

Buffett proposed a higher tax on capital gains and dividends at the personal level.

We are discussing personal, not corporate taxes. There are no IRAs for corporate taxes.

 

That's the whole point!  And I'm glad you see the distinction.  He has kept the bulk of his passive investments at the corporate level, and he is not proposing any increase on them.

 

Instead, he only points at the personal level.

 

Now, the tax law tried to stop people like him from doing this.  That's what the rules are about the "undistributed profits tax" with regards to corporate taxation.  One of the ways to get around this tax is to make sure that your passive investments are deemed a core part of you business.

 

And how does Buffett invest passively in a manner where the passive investments are deemed a core part of the business?  Why, insurance operations, of course.  Insurers invest their premiums passively, so the tax law can't slap an undistributed profits tax on Buffett.

 

He knows all of this of course, and could have suggested that his insurance companies ought to pay taxes on dividends at a higher rate than the 14.5% that they currently pay.

 

But no, his goal wasn't to address his own taxation level.  It was to address what the rest of us pay who haven't cleverly wrapped our passive investments at the corporate level in such a structure as to dodge the rules prohibiting passive investments at the corporate level in order to dodge personal income tax rates.

[meiroy]

 

Valueinv makes a great point about the purpose of this vehicle, which is simply to encourage the people to save for their old age. That's about it. It's like how for most people it's better to buy an apartment than invest because they would probably just waste their money on something instead of saving it. And the highlight here is on common people because those that know all the tricks can do it in some other way.

 

It could also be just a neat political weapon, because if the reps oppose it the dems will fire back with some ad showing 100m in the account of that guy, the one that lost. Maybe the dems figured out they have to start being proactive about finding ways to prevent the reps from blocking everything for political reasons and the hell with the american people.

 

 

[ERICOPOLY]

Here is a history of the undistributed profits tax, which dates back to 1936:

 

http://www.taxhistory.org/Civilization/Documents/UPT/HST8668/hst8668-1.html

 

And it was to make people like Buffett distribute a taxable dividend so that they could pay personal income taxes.

 

Instead, Buffett figured out a way to structure Berkshire such that he could skirt this law, and then has the audacity to declare that he doesn't pay enough personal income taxes.

 

 

 

 

[Guest valueInv]

Buffett proposed a higher tax on capital gains and dividends at the personal level.

We are discussing personal, not corporate taxes. There are no IRAs for corporate taxes.

 

That's the whole point!  And I'm glad you see the distinction.  He has kept the bulk of his passive investments at the corporate level, and he is not proposing any increase on them.

 

Instead, he only points at the personal level.

 

Now, the tax law tried to stop people like him from doing this.  That's what the rules are about the "undistributed profits tax" with regards to corporate taxation.  One of the ways to get around this tax is to make sure that your passive investments are deemed a core part of you business.

 

And how does Buffett invest passively in a manner where the passive investments are deemed a core part of the business?  Why, insurance operations, of course.  Insurers invest their premiums passively, so the tax law can't slap an undistributed profits tax on Buffett.

 

He knows all of this of course, and could have suggested that his insurance companies ought to pay taxes on dividends at a higher rate than the 14.5% that they currently pay.

 

But no, his goal wasn't to address his own taxation level.  It was to address what the rest of us pay who haven't cleverly wrapped our passive investments at the corporate level in such a structure as to dodge the rules prohibiting passive investments at the corporate level in order to dodge personal income tax rates.

 

Are you saying that BH is set up just be a tax shelter for Buffett? That he had no other reasons to set it up that way? That he bought insurance companies not for float and leverage but for tax potation?

 

Or is it the other way round? That the tax benefits are just a side effect?

[Guest valueInv]

Here is a history of the undistributed profits tax, which dates back to 1936:

 

http://www.taxhistory.org/Civilization/Documents/UPT/HST8668/hst8668-1.html

 

And it was to make people like Buffett distribute a taxable dividend so that they could pay personal income taxes.

 

Instead, Buffett figured out a way to structure Berkshire such that he could skirt this law, and then has the audacity to declare that he doesn't pay enough personal income taxes.

 

Of course unrealized, undistributed income is not taxed - you haven't made the money! That applies to you and me as well. Are you paying taxes on your BAC gains that you haven't sold even if they are in a non-sheltered account?

[ERICOPOLY]

Here is a history of the undistributed profits tax, which dates back to 1936:

 

http://www.taxhistory.org/Civilization/Documents/UPT/HST8668/hst8668-1.html

 

And it was to make people like Buffett distribute a taxable dividend so that they could pay personal income taxes.

 

Instead, Buffett figured out a way to structure Berkshire such that he could skirt this law, and then has the audacity to declare that he doesn't pay enough personal income taxes.

 

Of course unrealized, undistributed income is not taxed - you haven't made the money! That applies to you and me as well. Are you paying taxes on your BAC gains that you haven't sold even if they are in a non-sheltered account?

 

You sound like you don't quite get the nuance I'm talking about when I say "undistributed income".  People long ago thought about the idea of just shoving their assets into corporations, owning their passive investments there, and never getting hit with taxes on the individual level.  Then the government cracked down and that law still exists.  But Buffett is keeping his passive investments at Berkshire nonetheless because he kept them within the insurance operations (skirting the law).

 

Here it is:

 

The personal holding company tax is imposed on the undistributed income of such corporations at a flat rate. The purpose of the tax is to force the shareholders to distribute the corporation’s income to themselves as dividends so they may be taxed on it at their regular rate of income tax.

 

Read more: http://www.answers.com/topic/personal-holding-company#ixzz2PqjSVu9O

[ERICOPOLY]

But he is following a long line of tax avoiders doing this, only he is smarter about it (working around the rules).

 

Now, most of us can't do this because of scale.  Not easy to acquire an insurance company and all...  for the average person, it seems equitable to have a vehicle of tax-deferral such as an IRA.  However, the IRA of course has it's problems (such as the tax bill still being due eventually even if you die).

[Guest valueInv]

Here is a history of the undistributed profits tax, which dates back to 1936:

 

http://www.taxhistory.org/Civilization/Documents/UPT/HST8668/hst8668-1.html

 

And it was to make people like Buffett distribute a taxable dividend so that they could pay personal income taxes.

 

Instead, Buffett figured out a way to structure Berkshire such that he could skirt this law, and then has the audacity to declare that he doesn't pay enough personal income taxes.

 

Of course unrealized, undistributed income is not taxed - you haven't made the money! That applies to you and me as well. Are you paying taxes on your BAC gains that you haven't sold even if they are in a non-sheltered account?

 

You sound like you don't quite get the nuance I'm talking about when I say "undistributed income".  People long ago thought about the idea of just shoving their assets into corporations, owning their passive investments there, and never getting hit with taxes on the individual level.  Then the government cracked down and that law still exists.  But Buffett is keeping his passive investments at Berkshire nonetheless because he kept them within the insurance operations (skirting the law).

 

Here it is:

 

The personal holding company tax is imposed on the undistributed income of such corporations at a flat rate. The purpose of the tax is to force the shareholders to distribute the corporation’s income to themselves as dividends so they may be taxed on it at their regular rate of income tax.

 

Read more: http://www.answers.com/topic/personal-holding-company#ixzz2PqjSVu9O

 

How do you set up a personal holding company?

[ERICOPOLY]

Then of course I don't see why real estate investors can sell their properties and roll their unrealized capital gains into the next property.  That little trick is called the 1031 exchange.

 

My landlord in Montecito is currently dying and won't give me a lease beyond July 2014 because he doesn't want to risk tying up the property for his heirs.  He expects to die soon.  But he won't sell me the property because he doesn't want to get hit with capital gains taxes.  He gets a step-up in cost basis when he dies so his kids get it tax free.

 

But he is holding the property for an economic loss -- not only did he purchase it for more than today's fair price, but he poured money into remodeling it.  Then he is renting it to me for negative cash flow.

 

But I found out the real reason why he doesn't want to sell it to me (per his realtor) is that his tax basis is extremely low (a long history of rolling properties along for deferred capital gains via the 1031 exchange technique).

 

Okay, so Obama isn't bitching about this kind of tax-deferral.  He cares about IRAs. 

 

We can't sell BAC and buy WFC with the proceeds tax-deferred, but Trump can sell one tower to buy the next?  Huh?  I don't see the logic there.

 

And an IRA just gives you tax deferral without the lawyers and the paperwork.  The tax is still due eventually.  For my landlord, the tax will never be due.  For Trump, the tax will never be due.

 

So Obama goes after the IRA instead.  No logic to it except that I probably don't have Trump lobbying for me.

[ERICOPOLY]

Here is a history of the undistributed profits tax, which dates back to 1936:

 

http://www.taxhistory.org/Civilization/Documents/UPT/HST8668/hst8668-1.html

 

And it was to make people like Buffett distribute a taxable dividend so that they could pay personal income taxes.

 

Instead, Buffett figured out a way to structure Berkshire such that he could skirt this law, and then has the audacity to declare that he doesn't pay enough personal income taxes.

 

Of course unrealized, undistributed income is not taxed - you haven't made the money! That applies to you and me as well. Are you paying taxes on your BAC gains that you haven't sold even if they are in a non-sheltered account?

 

You sound like you don't quite get the nuance I'm talking about when I say "undistributed income".  People long ago thought about the idea of just shoving their assets into corporations, owning their passive investments there, and never getting hit with taxes on the individual level.  Then the government cracked down and that law still exists.  But Buffett is keeping his passive investments at Berkshire nonetheless because he kept them within the insurance operations (skirting the law).

 

Here it is:

 

The personal holding company tax is imposed on the undistributed income of such corporations at a flat rate. The purpose of the tax is to force the shareholders to distribute the corporation’s income to themselves as dividends so they may be taxed on it at their regular rate of income tax.

 

Read more: http://www.answers.com/topic/personal-holding-company#ixzz2PqjSVu9O

 

How do you set up a personal holding company?

 

Just form a C corp and start investing in passive investments (stocks and bonds).  Then cringe when an audit determines that you owe tax due on undistributed profits.  You get labeled as a "Personal Holding Company" due to the nature of what goes on.  Otherwise, it's just a C corp.

 

 

It is painfully obvious to me that the government intended to stop people from using their corporations to avoid taxation at the personal level if they are passive investors.  They want to keep corporate level protection and benefits for people who are entrepreneurs and take risks.

 

Well, Buffett didn't start Berkshire because he had a product idea that he wanted to go and invest.  He bought control of Berkshire at a time when the tax rate was 70% and up until that day he had been only a passive investor.

 

From how I view it, the law wanted people to pay taxes on their passive investments at the personal level.  Insurance companies were for people to provide insurance (something the economy needs).

 

Along came a passive investor who found in an insurance company two things of very high value:

1)  float

2)  a way to protect passive investments from the undistributed profits tax

[Guest valueInv]

1, why is Buffet on a crusade to increase other people's taxes?

2, how much of his gains are unrealized vs realized and undistributed?

[ERICOPOLY]

1, why is Buffet on a crusade to increase other people's taxes?

2, how much of his gains are unrealized vs realized and undistributed?

 

Berkshire compounded book value at 19.7% for 48 years.

 

Had they distributed a cash dividend of 3% on the first of each year, the book value growth would have been 16.7% annualized.

 

That means approximately 72.5% of his unrealized capital gains on his Berkshire stock is the result of not otherwise paying a 3% of book value annual dividend.  And 99% of his net worth is in Berkshire.  So most of his net worth has avoided the very tax that he wants to raise!  That's why I'm calling him out.

 

I pulled that 3% number out of my arse because a lot of companies pay that much and that's the kind of yield lot of investors pay tax on -- and yet Buffett insists their tax rate is too low.  Note that's only 3% of book value -- when it traded above book value that would have been a rather low payout yield.  So maybe I'm being too generous to Mr. Buffett.

 

Meanwhile he has 99% of his net worth yielding 0% dividend and asks "What can I do to help?  How can I pay more Mr. Obama?"

[Kiltacular]

Along came a passive investor who found in an insurance company two things of very high value:

1)  float

2)  a way to protect passive investments from the undistributed profits tax

 

I have next to no doubt that what you talk about is exactly what the appeal was here.  If you pull up what was happening to personal tax rates between the late 60's and early to mid 70's with personal tax rates, it fits.  Moreover, Buffett has acknowledged that he was a big beneficiary of the carried interest rule while running partnership.  The rule only has a big benefit if the spread between cap. gains taxes and personal income taxes is large.  I wonder, did the tax law changes in the late '60's or '70's change in such a way that rates on personal income were converging or did converge with personal income tax rates.

 

Interesting subject.

 

Edit (adding info.):  Take a look at the rates for capital gains at this link.  Buffett closed the partnership in the late 60's.  Just after that, rates on capital gains went way, way up. This turned out to be just the time to move from the carried interest structure of his partnership to the "own my investments inside an insurance company" structure he then pursued.  Perhaps just a coincidence ;D 

 

http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=161

[ERICOPOLY]

Where do the contribution limits to retirement accounts come from? Are they enough?

 

That's only for the pre-tax contribution.

 

You can contribute unlimited amounts to tax-deferral accounts with after-tax contribution monies where they can be invested in bond funds or stock funds.

 

The name of that is variable annuities.

 

The only advantage I can think of with IRAs over variable annuities is they're a bit cheaper (avoid the annuity company fees) and the pre-tax nature of the contribution.

 

But there's absolutely no cap on what you can contribute with after-tax money (with the variable annuity).

 

Are you trying to say that because the annuity loophole exists, Obama has no right to close the IRA loophole.

 

So Romney puts what's left of his $100m into the variable annuity after it comes out of his IRA.

 

What has Obama accomplished?  They'll get $35 million if Romney pays 35% tax, and some obamacare tax stuff on top of that, but he'll still wind up with some $60m or so enjoying tax deferral, just like the IRA.

 

Today's government gets more tax, but a future government gets less.  Oh I see, maybe Obama wants to claim his deficit is smaller even though he knows he's just borrowing from the future tax revenue and bringing it forward.