Posted on 11/01/2009 4:57:59 PM PST by dennisw
1.) He can set up a limited partnership, gift the maximum allowable equity stake in it to his children each year, and not pay taxes on it until they need the money later in life and then sell the shares.
2.) He can also donate the shares he needs to live on to a non-profit, church, or university, avoid all of the capital gains taxes, and get a check for the rest of his life as part of a charitable gift annuity, supporting a cause that is important to him at the same time earning guaranteed income for life. The money that would have gone to capital gains taxes instead goes to his favorite church or non-profit. (The mechanics work like this: You donate $900,000 to Acme University and they agree to pay you 5.6% per year for the rest of your life; when you die, the $900,000 gets donated to their endowment or whatever cause you specifically request, so no capital gains taxes are paid. They get the full amount of your stock and you get to earn 5.6% on the full amount, even the part that would have been gone due to taxes.)
3.) He can deposit all of the stock into a regular brokerage account at a firm such as U.S. Trust or Northern Trust and apply for margin borrowing capabilities. He could then take a draw of $1,000 per month ($12,000 per year). Statistically, even if we went into the next Great Depression, he'd never get a margin call, nor would he pay taxes on the shares because he hasn't sold them. This withdrawal rate is 1.333% of assets so if Berkshire grows at 10% on average and inflation is 3%, the account value will actually grow in real terms by 5.667% each year despite the withdrawals and not a penny in taxes. The rate of growth in the margin balance would become a smaller and smaller percentage of the total portfolio
4.) He can find an old, bankrupt company that still exists and had lost a lot of money in investments, buy it for a few thousand dollars, and contribute his shares of Berkshire to the company as contributed capital. He can then sell them in the company, using the tax-losses from the "shell" to shelter his income, paying no capital gains. (This can be complicated because there are a lot of archaic rules, but it can be done by a good accountant that knows the tax regulations like the back of his hand.)
The point is, after the first few hundred thousand dollars in portfolio value, most, if not all, of the options that are available to billionaires are available to the average guy. The thing is, most people don't learn them on their own, whereas the billionaires have people show up to their office saying, "You need to do this." It's all available to Joe Schmoe. He just needs to read or find a great accountant and attorney. They'll pay for themselves in tax savings alone. Or, he can pick up books on the subject matter if he likes that type of reading.
P.S. What I think is great is that 100% of the money has to be given away by the Gates foundation within so many months or years according to the gift document. That means that all of the money that would have gone to Washington is instead going to programs to solve the problems that plague society like poverty, education, etc. I would much rather have the money go there than to Nancy Pelosi's budget. That foundation does amazing work and has probably done more to alleviate human suffering than almost any group in history.
The general point of the article is correct, then. The rich don't pay nearly the tax rate as the working class and middle class for one simple reason: We're rich because we like dealing with money or businesses. This means that, in time, we're likely to have a far better knowledge of accounting rules and tax regulations (or if we don't, have access to world-class advisers that do).
A few seconds ago, I gave a list of four things someone could do to avoid paying capital gains taxes legally and effortless on their investments - and I'm sitting at my desk, drinking coffee, trying to think of what I'd do off the top of my head. In that regard, the article is absolutely correct: Tax increases will always be paid by the middle class because, by definition, the wealthier you are, the better you understand how to structure your holdings for maximum taxable income or asset growth.
You could be a successful business owner making $150,000 per year and it's highly likely that your tax rate is going to be between 40% and 55% depending upon where you live once you've factored in social security, medicare, Federal, state, local, and sales tax. Yet, I could make $150 MILLION running a hedge fund or private equity group and pay a capped rate of 15% due to a special tax provision known as "carried interest". The average guy has absolutely no idea what that is, but the net effect is you're paying 3x more tax on your $150k than I am on my $150 million.
That's one of the problems with the existing tax structure. It was not this way in the 1950s, 1960s, and 1970s. Slowly, Congress has increased the taxes on the middle class to a punishing degree, making upward mobility much more difficult to attain. The problem they have is that if they make the top tax brackets really unattractive, people like me will just move to places like Lyford Cay in the Bahamas and move money around the world like John Templeton. If it becomes too hard to build the kind of life I want in the United States, I'll go to Canada, or Hong Kong, or wherever allows it. This is known as flight of capital (or in the case of knowledge capital, brain drain).
I think you're missing the point of the gripe. The gripe is that Warren has enough holdings to work the system in a way that he pays minimal taxes, but at the same time goes around using his fame to get free camera time pushing higher taxation on the rest of us. He's a douche.
Thanks for all that interesting information. I have read and re-read it a few times. Much appreciated. I don’t have much to say in argument. It must be nice to have mega-bucks and reduce your taxes to the minimum then lecture middle class Americans how good 0bama is. Yeah, 0bama ain’t so bad when he minimally impacts you
I worry that in twenty years, the next batch of young people coming up won't be able to start a company like I did if he permanently alters the nation's tax system. I want to find a way to stop it. I was also posting back in forth in another thread on a religious topic so if I didn't make that clear, I'm really, really sorry.
The whole speech he gave one year at the Berkshire meeting, which most of this was based upon, was about how the total tax rates need to be lowered on the middle class. He gave an example of how he could avoid paying taxes entirely if he wanted to do so yet a small business owner can't and that's a problem. He explained until the burden is lowered on the middle class to the same rate it was back in the 1980's, we're screwed.
If I remember right (it was more than a year ago), he held up a copy of his secretary Debbie Bosnak's tax filings along with a copy of his own and showed that she was paying nearly 2x the percentage of her income in taxes because Congress has slowly taxed the middle class out of existence. He wasn't arguing for higher taxes at all, he was arguing that the increased payroll taxes, alternative minimum tax, and other levies had become a huge chunk of the average person's paycheck or earnings. Find the whole speech online - it's worth watching. Surely someone recorded it.
Lol
Sorry......
I was referring to Warren Buffett as “lecturing the middle class”
My fault. I was not clear
Once again....that post was for Warren Buffett and Obama not you vis avis Obama
*whew!* okay. Thanks for clearing that up!
Cheers!
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