"The welfare of humanity is always the alibi of tyrants" - Albert Camus

Thursday, October 13, 2011

Dumb Quote of the Week

“People who make money with money are getting taxed at a far lower rate than people who make money by their own labor,” -- Warren Buffet (in an interview with CNN Money)

It goes to show that having made billions does not mean your intellectual capability is any higher than a logical thinker who ponders issues before sticking his foot in his mouth!

Mr. Buffet and other progressives out there: Once again, if anything, capital gains from equity transactions should not be taxed at all as in most of the developped world.  Capital gains taxes on equity gains represent double taxation on capital formation.  The reason is that they are taxed at corporate level.  A government can choose to tax either the value of an asset or its yield, but it should not tax both. Capital gains are literally the appreciation in the value of an existing asset. Any appreciation reflects merely an increase in the after-tax rate of return on the asset. The taxes implicit in the asset’s after-tax earnings are already fully reflected in the asset’s price or change in price. Any additional tax is strictly double taxation.

Got it?  I very much doubt it!


Sinan Unur said...

Warren Buffett's letters to Berkshire Hathaway shareholders are instructive on how much thinking goes in to avoiding taxes. Here is one example from 2000:

But there’s also a powerful financial reason behind the preference, and that has to do with taxes. The tax code makes Berkshire’s owning 80% or more of a business far more profitable for us, proportionately, than our owning a smaller share. When a company we own all of earns $1 million after tax, the entire amount inures to our benefit. If the $1 million is upstreamed to Berkshire, we owe no tax on the dividend. And, if the earnings are retained and we were to sell the subsidiary -- not likely at Berkshire!-- for $1 million more than we paid for it, we would owe no capital gains tax. That’s because our "tax cost" upon sale would include both what we paid for the business and all earnings it subsequently retained.

Contrast that situation to what happens when we own an investment in a marketable security. There, if we own a 10% stake in a business earning $10 million after tax, our $1 million share of the earnings is subject to additional state and federal taxes of (1) about $140,000 if it is distributed to us (our tax rate on most dividends is 14%); or (2) no less than $350,000 if the $1 million is retained and subsequently captured by us in the form of a capital gain (on which our tax rate is usually about 35%, though it sometimes approaches 40%). We may defer paying the $350,000 by not immediately realizing our gain, but eventually we must pay the tax. In effect, the government is our "partner" twice when we own part of a business through a stock investment, but only once when we own at least 80%.

Clever? Yes. Legal? Presumably. Out of reach most people. Definitely.


Buffett is irrelevant as far as I am concerned. He is a tool of Obama, nothing more.