Dividend Voodoo

[Silver Hilton]

(From the Washington Post, by Warren Buffett)

The annual Forbes 400 lists prove that -- with occasional blips -- the rich do indeed get richer. Nonetheless, the Senate voted last week to supply major aid to the rich in their pursuit of even greater wealth.

The Senate decided that the dividends an individual receives should be 50 percent free of tax in 2003, 100 percent tax-free in 2004 through 2006 and then again fully taxable in 2007. The mental flexibility the Senate demonstrated in crafting these zigzags is breathtaking. What it has put in motion, though, is clear: If enacted, these changes would further tilt the tax scales toward the rich.

Let me, as a member of that non-endangered species, give you an example of how the scales are currently balanced. The taxes I pay to the federal government, including the payroll tax that is paid for me by my employer, Berkshire Hathaway, are roughly the same proportion of my income -- about 30 percent -- as that paid by the receptionist in our office. My case is not atypical -- my earnings, like those of many rich people, are a mix of capital gains and ordinary income -- nor is it affected by tax shelters (I've never used any). As it works out, I pay a somewhat higher rate for my combination of salary, investment and capital gain income than our receptionist does. But she pays a far higher portion of her income in payroll taxes than I do.

She's not complaining: Both of us know we were lucky to be born in America. But I was luckier in that I came wired at birth with a talent for capital allocation -- a valuable ability to have had in this country during the past half-century. Credit America for most of this value, not me. If the receptionist and I had both been born in, say, Bangladesh, the story would have been far different. There, the market value of our respective talents would not have varied greatly.

Now the Senate says that dividends should be tax-free to recipients. Suppose this measure goes through and the directors of Berkshire Hathaway (which does not now pay a dividend) therefore decide to pay $1 billion in dividends next year. Owning 31 percent of Berkshire, I would receive $310 million in additional income, owe not another dime in federal tax, and see my tax rate plunge to 3 percent.

And our receptionist? She'd still be paying about 30 percent, which means she would be contributing about 10 times the proportion of her income that I would to such government pursuits as fighting terrorism, waging wars and supporting the elderly. Let me repeat the point: Her overall federal tax rate would be 10 times what my rate would be.

When I was young, President Kennedy asked Americans to "pay any price, bear any burden" for our country. Against that challenge, the 3 percent overall federal tax rate I would pay -- if a Berkshire dividend were to be tax-free -- seems a bit light.

Administration officials say that the $310 million suddenly added to my wallet would stimulate the economy because I would invest it and thereby create jobs. But they conveniently forget that if Berkshire kept the money, it would invest that same amount, creating jobs as well.

The Senate's plan invites corporations -- indeed, virtually commands them -- to contort their behavior in a major way. Were the plan to be enacted, shareholders would logically respond by asking the corporations they own to pay no more dividends in 2003, when they would be partially taxed, but instead to pay the skipped amounts in 2004, when they'd be tax-free. Similarly, in 2006, the last year of the plan, companies should pay double their normal dividend and then avoid dividends altogether in 2007.

Overall, it's hard to conceive of anything sillier than the schedule the Senate has laid out. Indeed, the first President Bush had a name for such activities: "voodoo economics." The manipulation of enactment and sunset dates of tax changes is Enron-style accounting, and a Congress that has recently demanded honest corporate numbers should now look hard at its own practices.

Proponents of cutting tax rates on dividends argue that the move will stimulate the economy. A large amount of stimulus, of course, should already be on the way from the huge and growing deficit the government is now running. I have no strong views on whether more action on this front is warranted. But if it is, don't cut the taxes of people with huge portfolios of stocks held directly. (Small investors owning stock held through 401(k)s are already tax-favored.) Instead, give reductions to those who both need and will spend the money gained. Enact a Social Security tax "holiday" or give a flat-sum rebate to people with low incomes. Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets.

When you listen to tax-cut rhetoric, remember that giving one class of taxpayer a "break" requires -- now or down the line -- that an equivalent burden be imposed on other parties. In other words, if I get a break, someone else pays. Government can't deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch. And last week the Senate handed the bill to the wrong party.
Supporters of making dividends tax-free like to paint critics as promoters of class warfare. The fact is, however, that their proposal promotes class welfare. For my class.


The writer is chief executive officer of Berkshire Hathaway Inc., a diversified holding company, and a director of The Washington Post Co., which has an investment in Berkshire Hathaway.

(SH note, and he is also one of the few people in the country who is about as rich as Bill Gates)

© 2003 The Washington Post Company

[Snapset]

WB is also a very smart man. For the life of me, I can't figure out why the President is trying to pass this stinker. It is a loser Economically and Politically. I remain convinced the president is smarter than this. Sure hope I don't end up labeled gullible.

[The Fishing Geek]

I always hear the upper-crust complaining about how they pay a huge tax rate. How is it then that Warren Buffet only pays around 30%? I don't understand.

[Silver Hilton]

Most of his income is likely in the form of long term capital gains on Berkshire Hathaway stock, which have been taxed at 20%, though I believe Bush proposes to reduce the rate on them as well.

[The Fishing Geek]

<sarcasm>Why would a rich, capitalist pig say such things? It boggles the mind. </sarcasm>

[happybrew]

I don't think the tax rate is as regressive as this article makes it out to be. When I file my taxes, the federal government gives me a couple of grand back. The only thing is, I paid nothing. That's right, nothing. It's as if they laughed at my paycheck, told me to keep my taxes, and here's a handout for you too. The first year this happened, I was dumbfounded. I kept doing it over again, thinking I surely must have misread the instructions and biffed it big time. I called my dad, who is an accountant. He looked at it, said it was right. They were giving me money. I don't really believe in getting money I didn't work for, but the only way to avoid this situation would be to either not file, which is against the law, or to falsify my tax return, which would be lying, and against the law. So when I hear about the tax system being regressive, I have to tell you it is contrary to my experience.

happybrew

[Silver Hilton]

Wahll now, bwah, Ah kinda 'spect it's because he thinks it's bad for his business to bankrupt the country. He might also be a responsible, moral and intelligent guy that thinks it's the duty and responsibility of a citizen to contribute towards the well being of the country. But I'm just guessing there.

[Lured In]

Originally posted by Silver Hilton:
(From the Washington Post, by Warren Buffett)

The annual Forbes 400 lists prove that -- with occasional blips -- the rich do indeed get richer.

<font size="2" face="verdana,arial,helvetica">In a related story...the smart also got more intellegent. What did you expect them to do, go broke?

Let's stick with Mr. Buffets analogy and that somehow, Berkshire Hathaway has 1 Billion in cash laying around to start passing out "the Benjerman's". Since we are likely dreaming, I own a .00001% (1/100,000) of Berkshire Hathaway. When this wonderful dividend is payed, I will recieve $10,000. Not a bad paycheck for a guy who chose to invest wisely.

So what's the motivation here? Unless I am off in the broccoli patch, corporate taxes are assessed after dividends are payed. So, a company (like Berkshire Hathaway) who has some cash laying around can reduce their corporate tax liablity, by paying out LARGER dividends. The result is the company owes less money to the government and the stock holder walks away with cash the company may not have otherwise been willing to give up.

Yes, Mr. Buffet gets paid $310 million tax free, but I also get paid $10,000 tax free. The only way the "rich" can get a tax break, is to give the money up for all stock holders, not just the rich stock holders.

[Lured In]

Originally posted by Silver Hilton:
(From the Washington Post, by Warren Buffett)

The writer is chief executive officer of Berkshire Hathaway Inc., a diversified holding company, and a director of The Washington Post Co., which has an investment in Berkshire Hathaway.

© 2003 The Washington Post Company

<font size="2" face="verdana,arial,helvetica">So how much of Birkshire Hathaway does the Washington Post own? 5%? Let's see, the Washington Post (entity, not individual) will get paid $50 Million! :shocked: What do you suppose the Washington Post will do with the money? They could hire more staff (job creation), invest in another company (again possible job creation), or imagine the Post pays dividends to their stock holders (all of them, even the poor stock holders )! WOW! Good thing I own stock in the Washington Post too!

(Do you think Mr. Buffet owns Washington Post stock too? [img]graemlins/eek13.gif[/img] )

[ 05-20-2003, 08:53 PM: Message edited by: Lured In ]

[Silver Hilton]

Originally posted by happybrew:
I don't think the tax rate is as regressive as this article makes it out to be. When I file my taxes, the federal government gives me a couple of grand back. The only thing is, I paid nothing. That's right, nothing.
happybrew

<font size="2" face="verdana,arial,helvetica">Well, Happy, maybe you get a form that the rest of us don't, but I suspect that you're getting overwitheld. The money you are getting back is your money, not ours, unless you're in some fancy tax credit program I've not heard about yet, in which case, can you send me the info?

The tax code is about to be this regressive, if the Senate tax bill is reconciled with the house's. Dividend income will be taxed at a lower level than other income. Capital gains income will be taxed at a lower level than ordinary income (wages, taxes, rents, business income).

More subtly, those who pay payroll tax (most citizens) pay a tax rate that is 15 percentage points higher than owners of capital. If my income is business and investment income, even if you and I are taxed at the same rate, you pay 15 percentage points more than I do (7 and change by you, 7 and change by your employer). So, if you and I both make 50 grand, you pay $7,500 more in tax than I will.

Now, does that seem smart?

[Silver Hilton]

Lured,

Dividends have nothing to do with corporate taxes. They are not a pre tax expense, they are a dispersal of corporate assets. They are often described as a paying out of corporate income, hence the claim of double taxation, but in fact many companies, usually utilities, pay dividends whether or not income was actually achieved that year.

Now, if you get that dividend check, bully for you. I like those checks, too. I just don't think they should be treated any different than the othermoney I make.

Warren's point is simply that there is no difference in economic stimulus between your spending that money and the company spending the money. It isn't like this tax cut is magically creating demand. Which means that the Bushies are either stupid or are deceitful. Your pick. :smile:

[Lured In]

SH... the only real "problem" (although I personally don't consider it such) that I see with this "tax cut" is that it only applies to "stock holders". I see no deceit, no stupidity involved.

IMHO this issue has more to do with one basic principle. Some people think they need to keep more of their own money, some people don't see anything wrong with how much they keep, and still others would be willing to give more to get more from the government.

In my book, just about ANY tax cut is a good one. (That is not to say all tax cuts are wise. )

It is a well documented, that most households pay little or no income tax if they are below the ~40K/year mark.

To back happybrew's statement (while I think your assessment is correct regarding his situation), I know a woman who gets back more in her tax return than she paid in federal income tax. It is part of the EIC program. They are REALLY PAID (via the IRS) for expenses such as care of a child (this is beyond the cost of child care, of which a portion is deductible). So where does that money come from? It comes from you, me and everyone else who really PAYS income tax.

[Flatfish]

Which is more-

10% of 1,000,000
OR
50% of 100,000?

Reagan was right.

Mark and the middle class but willing to work hard if thats what I want to do dog.Maybe I would rather go fishing.

[happybrew]

Actually, I file "exempt". I have nothing withheld, and I make too much to qualify for the EIC. It's the number of dependents (5) that does it. Because I have more than the average number of children, and my wife stays at home, the government has decided that makes me poor (news to me) and qualifies me for a handout I never asked for. That's right, they take your money and hand it to me once a year, whether I want it or not. The State of Oregon, on the other hand, socks it to me, so it ends up being a wash. But I find it odd that the Federal Government can decide that I'm poor and give me money I never asked for because I filled out the forms I am required by law to fill out honestly.

I'm sure it's as you say, SH, regarding the rich, but it's not the "poor" who are paying this but the middle class. They've decided I'm poor, although I live comfortably, and give me a couple of grand every year. It's the strangest thing.

happybrew

[Snapset]

Happybrew ain't making it up, and he is not over withholding. The same thing has happened to me. It is a result of the Per-child tax credit, in combination with the additional tax credit. If you don't total up all your credits available, The good folks down there at the IRS shake their heads, say:"My, my, however do those thrifty folks get by with a houseful of young'uns? Lets give 'em some more money" It is slightly humiliating, but not so humiliating that I don't cash the check.

[Silver Hilton]

Originally posted by northriver1:
Any tax that is reduced or goes away is fine by me. But when it comes to dividends I am not sure why they are double taxed. Isn't once enough?

<font size="2" face="verdana,arial,helvetica">The theory is that dividends are a distribution of corporate income. Since the corporation nominally pays income tax, the dividend is theoretically a payout of post tax income. Therefore, if you as an individual are required to pay taxes on it, you are said to be paying taxes twice on the income.

Most economists agree that taxing dividends paid to inviduals is double taxation, and is mildly a bad thing. The issue with the Bush plan is not the elimination of the tax on dividends, but that fact that other taxes are not raised so that a the deficit is not increased. INcreasing the deficit just means that some other tax will have to be increased in the future, by more than the amount of the reduction of the tax on dividends. This is because when we create a deficit, money is borrowed from the public to make up the difference between what the government spends and what comes in in taxes. If we borrow this money, we have to pay it back with interest. Therefore, creating a dollar of deficit, means that we have to tax a dollar plus interest next year.

The only sane way to cut taxes is to cut spending at the same time. Otherwise it's just like you earning $30,000 and spending $35,000. You can get away with it for awhile, but eventually disaster comes.

[Stratocaster]

One good thing in all this is he didnt get the tax cut he originally wanted, which was what close to a billion? Of course that was probably the plan all along, shoot high then "compromise". On a hopefully higher note, regarding maufacturing plants that export should see an increase in over sea orders due to the weakening dollar, that helps where i work. It will get busy, but at least im working.

[Snapset]

The double taxation term is a smokescreen. A corporation is an artificial entity created to protect the owners (Stockholders) from liability.
Because the Corporation is an entity, it pays its own taxes. To argue that a corporation paying taxes and an individual paying taxes are double taxation is disingenuous semantics and weakens the credibility of anyone who excretes such nonsense. SH, this is not directed at you.

[Thumper]

Originally posted by Silver Hilton:
The only sane way to cut taxes is to cut spending at the same time. Otherwise it's just like you earning $30,000 and spending $35,000. You can get away with it for awhile, but eventually disaster comes.

<font size="2" face="verdana,arial,helvetica">Nope. Cutting taxes invariably stimulates the economy provided that the saved dollars reach the market through increased consumer spending. Tax cuts actually improve tax collections almost without fail. In the Reagan years we saw such an effect, though it was blunted by unrestrained spending on the part of the Democrat-controlled congress. SH significantly oversimplifies the relationships.

In a recession, or emerging from a recent recession, the only proven winning strategy is to cut taxes.

[northriver1]

Any tax that is reduced or goes away is fine by me. But when it comes to dividends I am not sure why they are double taxed. Isn't once enough?

[The Fishing Geek]

Taxes don't "go away". They get reallocated. Otherwise, the government spends money that it doesn't have, thereby causing massive defici....uhhhh...hmm.

[Silver Hilton]

But that's the problem, Jack. Cutting taxes doesn't usually result in significant increased consumer spending, because of the very nature of the tax payment profile. As many have observed, the largest proportion of income is earned at the top end of the income pyramid, so, in most tax cut scenarios, the benefits of the cut go to higher income individuals. These individuals, statistics show, save a higher proportion of their income than lower income individuals, simply because they can. If they are given an additional dollar via a tax cut, that dollar is more likely to be saved than spent. If you are well off, odds are good that you are already buying most of what you want. If you are poor, odds are that you are deferring spending.

Now, that's not necessarily a bad thing. Society needs savings, because those savings turn into investment capital. However, it is not well supported by history that tax cuts stimulate consumer demand.

And you're right, on the topic of deficit spending, I do simplify. These topics fill textbooks, and aren't fully dealt with in 200 word posts. But I would be curious to see how you can defend any notion of infinite deficit spending being a good thing. I also find it curious that you take the Democrats to task for ruining the results of the reagan era tax cut by spending beyond our means, as the republicans do exactly that now. If it was bad then, isn't it bad now?

Actually, I think you simply prove my point - tax cuts are fine, but only if they fit within our spending habits.

[DanS]

In the Reagan years we saw such an effect, though it was blunted by unrestrained spending on the part of the Democrat-controlled congress

<font size="2" face="verdana,arial,helvetica">Are you sure that's how it happened, Jack?

[Thumper]

Originally posted by Silver Hilton:
I also find it curious that you take the Democrats to task for ruining the results of the reagan era tax cut by spending beyond our means, as the republicans do exactly that now. If it was bad then, isn't it bad now?

<font size="2" face="verdana,arial,helvetica">It certainly would be if we were not fighting for our very existence in a war. Let's not forget 9/11. The war against terrorism will be with us for a long time. And that will likely require deficit spending. Hopefully both parties can quit politicking and get on with the business at hand.

[Thumper]

Originally posted by DanS:
</font><blockquote><font size="1" face="verdana,arial,helvetica">quote:</font><hr /><font size="2" face="verdana,arial,helvetica"> In the Reagan years we saw such an effect, though it was blunted by unrestrained spending on the part of the Democrat-controlled congress

<font size="2" face="verdana,arial,helvetica">Are you sure that's how it happened, Jack? </font><hr /></blockquote><font size="2" face="verdana,arial,helvetica">Under the Reagan tax cut revenues increased, as they always do. However spending (under control of the Democrat-dominated congress) unfortunately increased even more. Is that incorrect?

[The Fishing Geek]

Doesn't the President have to sign all legislation passed by Congress?

[DanS]

Is that incorrect?

<font size="2" face="verdana,arial,helvetica">I wouldn't say that's incorrect......just not the whole story.

[garyk]

As to economic stimulus, keep in mind that much if not the great majority of those dividends are automatically re-invested, as opposed to, say, buying more K-Fish or spinner blades at FishermansMarineSupply.

I think the main issue here, is that the president has chosen passive income (dividends)to receive the tax break as opposed to lowering the marginal tax rate on the working class - where you might actually see some increased spending.

[Silver Hilton]

Originally posted by Thumper:
It certainly would be if we were not fighting for our very existence in a war. Let's not forget 9/11. The war against terrorism will be with us for a long time. And that will likely require deficit spending. Hopefully both parties can quit politicking and get on with the business at hand.

<font size="2" face="verdana,arial,helvetica">Historically, presidents have increased taxes to cover the expenditures of a war. This was true, I believe, in the Civil war, and both World Wars, The Vietnam era was characterized by surpluses.

I think it's a bit over the top to characterize the war on terror as "fighting for our very existence". We may have to disagree on our characterization of this war on terror. We have had two incidents that I can recall, the 1993 bombing and 9/11, that have hit American soil. I don't want to have these happen again, and I am sorry for the lives lost. However, I don't see our government tottering as a result. I don't see any risk of occupying forces ever touching our soil. What we do have is some significant level of risk of continuing attack on our people. Sad to say, this is what Isreal has been living with for 30 years. Guess we should get used to it. If we do need to get used to it, and defend ourselves from it for the long term, which looks likely, then we need to budget for it.

I guess I believe deficit spending is appropriate as a temporary measure to bridge a situation where revenue is temporarily down, an emergency exists, and there is a strong liklihood that revenue will recover in order to pay down the accumulated deficit. The US has been accumulating deficit rapidly since the Reagan years (Reagan noted only as a time marker), and Congresses run by both parties seem to show no inclination to ever stop deficit spending. The interest on the debt is now one of the most significant line items in the budget. Interest as a percent of the national budget has climbed from 3% of the budget in 1945 to 11% of the budget in 2001. That can't be good.

I agree with you, however, that I also wish the two parties would quit policking over this, and join forces to get the budget under control.

[ 05-23-2003, 07:26 PM: Message edited by: Silver Hilton ]