WATCH Warren Buffett on Charlie Rose Today 8/16

[boont]

How they don't pay.

"Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as "carried interest", thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they'd been long-term investors."

I understand the "carried interest" bargain but not the second. Is there a tax avoidance by buying "stock index futures". How does that work? Don't get it.

Buffet's point is not that raising taxes on the rich will raise huge sums. That's not the point. The point is fairness. Fairness has always had a firm position in our whole legal/ social structure. Current tax law has thrown fairness out the window.

 

[nvestysly]

Continuing the Tax Reform Discussion...

Charlie Rose continued the tax reform discussion on the show last night (today at lunchtime for me). Hey, I'm retired - I get to watch TV during the day if I want.

Charlie Rose - The Debate over Tax Reform

The three member panel bring up several interesting points. One idea is to shed more light on the idea that tax breaks/incentives for corporations and individuals are actually government spending. For those on the side of the fence who want reduced spending - this is a good way to reduce spending. For those on the side of the fence who want to raise revenue -elimininating "tax expenditures" raises revenue. Per the B-S proposal these changes are included in the Zero Plan (maybe it's called the Zero Option). Regardless, it seems like conservatives and liberals both get what they want.

Lots of other good points to ponder. Consider watching the episode.

 

[scrabbler1]

Nvestysly, the show will air here in NY on PBS at 1:30 local time, in about 5 minutes. I look forward to watching it.

Gone4Good, good post above, your last one before mine. I read it the way you intended it.

 

[Gone4Good]

Regardless, it seems like conservatives and liberals both get what they want.

Econmists have long known that there is little practical difference between having the government send out a check to mortgage holders and giving those same folks a tax deduction.

In days where rationality ruled "common ground" (not compromise, of course, but common ground) could be found in this area. Cutting 'tax expenditures' seems to work equally well for those who want to cut spending and those who want to raise revenue. But rather than agree that everyone agrees, we've recently redefined 'raising revenue' through any mechinism (even one that looks identical to spending cuts) as a tax increase and signed pledges to never, ever do that. So there really isn't any common ground here after all.

 

[nvestysly]

Playing Together in the Sandbox

I like that phrase - common ground. President Obama has used that phrase several times in recent years (or a similar phrase). Other politicians have similarly sought out mutually beneficial efforts. Unfortunately, I think you're right about our current situation - seemingly nobody wants to play well together in the sandbox.

I'll be starting on a new letter-writing campaign soon - asking our recently appointed supercommittee to consider what I think are reasonable solutions to our economic troubles. Maybe Warren Buffett has started the conversation and we can make some progress.

 

[haha]

I understand the "carried interest" bargain but not the second. Is there a tax avoidance by buying "stock index futures". How does that work? Don't get it.

I won't comment on your political/moral views, but the taxation of gains on futures contracts has remained unchanged for many years. 60% of the gain is assigned to long term cgs, 40% to short term cgs, regardless of how long the position has been held. Typically, much less than one year.

Ha

 

[Texas Proud]

+1

Strongly agree with all three points.

Obama's speech writers would be doing him a favor if they'd stop putting in so many references to "Billionaires" and "corporate jets" when he's advocating for the tax increases to start at $200k single and $250k MFJ. Maybe the $200k/$250k is the best level to start jacking up the rates. But why keep trying to sell that as only impacting Billionaires and corporate jet owners? It's insulting that they think we're that dumb. I'm glad Buffet was clear that he was referring to the "Super Rich."

First off... I do not like Obama....

But, his speaches were about two different things... when they were extending the Bush tax cuts he did not want them to go to people who made over $250K... so that is what he talked about...


The last was with the debt ceiling increase where he wanted some more revenue, so he was trying to get some very specific tax breaks reduced which were aimed at billionaires and corporate jet owners...

 

[Texas Proud]

Charlie Rose continued the tax reform discussion on the show last night (today at lunchtime for me). Hey, I'm retired - I get to watch TV during the day if I want.

Charlie Rose - The Debate over Tax Reform

The three member panel bring up several interesting points. One idea is to shed more light on the idea that tax breaks/incentives for corporations and individuals are actually government spending. For those on the side of the fence who want reduced spending - this is a good way to reduce spending. For those on the side of the fence who want to raise revenue -elimininating "tax expenditures" raises revenue. Per the B-S proposal these changes are included in the Zero Plan (maybe it's called the Zero Option). Regardless, it seems like conservatives and liberals both get what they want.

Lots of other good points to ponder. Consider watching the episode.

I do tend to agree that a dollar tax credit is the same as a dollar check when you talk about spending.... I can not figure out why taking away the tax credit is considered a tax increase and taking away the check is lower spending.....


Deductions on the other hand are not quite the same when it comes to 'spending'.... as a dollar deduction for someone might only be worth 15 cents when it is worth up to 40 cents for someone else... (heck, for some it is not worth a penny if you do not itemize)...

 

[Texas Proud]

Econmists have long known that there is little practical difference between having the government send out a check to mortgage holders and giving those same folks a tax deduction.

In days where rationality ruled "common ground" (not compromise, of course, but common ground) could be found in this area. Cutting 'tax expenditures' seems to work equally well for those who want to cut spending and those who want to raise revenue. But rather than agree that everyone agrees, we've recently redefined 'raising revenue' through any mechinism (even one that looks identical to spending cuts) as a tax increase and signed pledges to never, ever do that. So there really isn't any common ground here after all.

As mentioned in my last post... there is a difference since the deduction is worth a different amount to different people...

My itemized deductions only go above the standard every two years... so taking away a deduction does not affect me that much (unless you change the standard deduction).... but taking away a credit hits me dollar for dollar in the pocketbook... IOW, the $1K per child tax credit IS like the gvmt sending me a check... the mortgage interest or charitable deduction is not...

 

[Gone4Good]

As mentioned in my last post... there is a difference since the deduction is worth a different amount to different people...

The government cuts different social security checks to everyone too. So what?

If, instead of the mortgage deduction, the government sent everyone a check determined by a formula using AGI and the amount of mortgage interest paid, it would be a spending program. Nobody would ever doubt that.

The only difference between that and the deduction is that many of the folks who gnash their teeth today and demand offseting tax cuts to eliminate the mortgage deduction would be willing to eliminate the checks without any needed offset.

P.S. It occurs to me that such a spending program would never pass appropriations; one that increase payments to people as mortgage size and individual income increases. "Hey, congratulations. I see you got a raise and borrowed more money against your house. That means the government is going to send you an even bigger check this year!" It is a pattently absurd way to spend money. But as part of the tax code, it's simply a mortgage interest deduction.

 

[clifp]

I won't comment on your political/moral views, but the taxation of gains on futures contracts has remained unchanged for many years. 60% of the gain is assigned to long term cgs, 40% to short term cgs, regardless of how long the position has been held. Typically, much less than one year.

Ha

I am pretty sure you are correct they have been that way for many years but it is reasonable to ask why. Very few future contracts are held for a year as Buffett says most are probably only held for days or evens minutes. One of the rationales for long term cap gain rates was to encourage long term investments.

By and large future contracts are bought and sold by professional traders and few companies using them as hedges. I am pretty sophisticated investor, and the only time I bought futures contract was in stock market simulation class for business school that was all about derivatives. Why not raise revenue by treating them the same as any other asset, if you hold the position for a year you get a long-term gain less than a short-term gain or loss?

 

[haha]

I am pretty sure you are correct they have been that way for many years but it is reasonable to ask why.

I am not a why guy, but in this case I can tell you why. I remember when this change was contemplated, I think during Reagan's term but I am not certain of this. There was a less favorable proposal on the floor, and the futures industry screamed bloody murder, and this is what came out of it. It as an obscure element of the tax code, and I believe it just managed to fly under the radar, perhaps until Buffett started his campaign to make life harder for the rich.

Anyway, the rich aren't making any unreasonable requests, but like anyone else, they just...

I Want a Little Sugar in My Bowl - YouTube

Ha

 

[boont]

Capital

To call the greatest capitalist of our time a socialist, now that is funny.

 

[Lancelot]

I always watch Buffett to see if he's losing his edge. In this interview, though, he seemed to be a bit hypercaffeinated.

I noticed that as well. (hyper reference...)

Still got the edge though, IMHO

 

[M Paquette]

To call the greatest capitalist of our time a socialist, now that is funny.

I suppose it depends on how one defines "socialist". If we define it as "annoys Fox newsreaders," then I suppose he is...

But realistically, there's no need to tax the job creating billionaire class. Mr. Buffet's proposal would raise 'only' 750 billion in new revenue over ten years. We know that's just chump change. To raise some real revenue, we need to go where the headcount is. Yeah, that 50% of the population that doesn't pay federal income tax, and even picks up credits that cover some payroll tax.

It turns out that there are some 1.5 trillion in assets held by that bottom 50% that don't pay taxes. They can kick in half to help their country. That gets us 750 billion, so there's no need to raise on the billionaires. It's not like these people can't afford it. They're really well off compared to folks in rural Sierra Leone, for example. Heck, 90% have refrigerators, 25% even have dishwashers.

Tax the poor. It's the patriotic thing to do!

 

[eridanus]

By and large future contracts are bought and sold by professional traders and few companies using them as hedges. I am pretty sophisticated investor, and the only time I bought futures contract was in stock market simulation class for business school that was all about derivatives. Why not raise revenue by treating them the same as any other asset, if you hold the position for a year you get a long-term gain less than a short-term gain or loss?

There's no such thing as holding (most) futures contracts for a year or more. People trade the front contract, which expires quarterly. In fact, I'm not even sure there is a contract out a year from now for the big index futures (and if there is, it's way off of market price).

Unless someone is playing a long term futures options, such as a Dec 2013 oil or gold contract, it's always short-term.

 

[clifp]

There's no such thing as holding (most) futures contracts for a year or more. People trade the front contract, which expires quarterly. In fact, I'm not even sure there is a contract out a year from now for the big index futures (and if there is, it's way off of market price).

Unless someone is playing a long term futures options, such as a Dec 2013 oil or gold contract, it's always short-term.

Ok I am little confused cause looking at the CME website I see plenty of contracts for gold, oil, corn, wheat and the S&P 500etc that expire in Dec 2013 or even 2014 and 2015.


So somebody who is using the contracts for hedging a future expense like airline or locking in a future price for his crop like farmer, should be entitle to get long term capital gain treatment if they held the position for more than a year. Below that they should be paying short-term capital gains which is taxed the same as wages.

 

[eridanus]

Ok I am little confused cause looking at the CME website I see plenty of contracts for gold, oil, corn, wheat and the S&P 500etc that expire in Dec 2013 or even 2014 and 2015.


So somebody who is using the contracts for hedging a future expense like airline or locking in a future price for his crop like farmer, should be entitle to get long term capital gain treatment if they held the position for more than a year. Below that they should be paying short-term capital gains which is taxed the same as wages.

There's no traffic for the S&P other than the near quarter. SPX Dec 12 has a bid but no trades yet. SPX Dec 13 sits at close 1089 and the market is at 1134; it hasn't traded for a while either.

Yes, hedging contracts, and in particular commodities futures, might be held long-term. I believe hedging already receives special tax treatment (more so than the 60/40 rule). At the very least, hedging can ignore mark-to-market tax rules.

 

[FIRE'd@51]

What Buffett fails to mention when talking about stock index futures is that the 60/40 treatment applies to losses as well, which in certain situations can be detrimental. Furthermore, he fails to mention that there is a year-end mark-to-market on an open futures position, so you can't avoid the tax if you have a gain or push it into the next year (unlike a stock where you pay no tax until you sell). All in all, IMO, the tax treatment is more fair than Buffett makes it sound.

 

[clifp]

What Buffett fails to mention when talking about stock index futures is that the 60/40 treatment applies to losses as well, which in certain situations can be detrimental. Furthermore, he fails to mention that there is a year-end mark-to-market on an open futures position, so you can't avoid the tax if you have a gain or push it into the next year (unlike a stock where you pay no tax until you sell). All in all, IMO, the tax treatment is more fair than Buffett makes it sound.

Fair points. However, the fact remains the a commodity trader making $300K (I guess it is possible that some make this little) pays a lot less income tax than a doctor or bank executive making $300K. I'd argue that traders activity is far more similar to getting a paid a salary than it is investing like is (generally) done on this forum, so I'd argue that their taxes should be the same as a salaried worker.

 

[eridanus]

What Buffett fails to mention when talking about stock index futures is that the 60/40 treatment applies to losses as well, which in certain situations can be detrimental. Furthermore, he fails to mention that there is a year-end mark-to-market on an open futures position, so you can't avoid the tax if you have a gain or push it into the next year (unlike a stock where you pay no tax until you sell). All in all, IMO, the tax treatment is more fair than Buffett makes it sound.

He also didn't mention that any losses can be carryback losses. For example, the trader makes $300k in 2007 and loses $100k in 2008. With futures contracts, the 2007 tax return is amended to show a $200k gain. The IRS sends a check. This makes unnecessary the $3000 loss limit to earned income (of course, there might not be any earned income for a trader).

 

[chinaco]

I am glad that Buffet stepped up.

But his comments and those of the other CEO will not likely change the near term outcome.

Ultimately, the voters will speak in about 15 months. I believe there will be a large voter turnout.

I doubt the majority will vote for more of the same. One of the parties is going to be neutered. There will be a unification of power for the next two years.

 

[GregLee]

I doubt the majority will vote for more of the same. One of the parties is going to be neutered.

Naturally the majority will not vote for divided government -- for one thing, that option won't even be on the ballot.

 

[haha]

Naturally the majority will not vote for divided government -- for one thing, that option won't even be on the ballot.

You must be using a different ballot from me.

Ha

 

[GregLee]

You must be using a different ballot from me.

I just have to guess at what you mean by this, since there is no "divided" option on the ballot. Do you count a split ticket as a vote for divided government? And do you think we have divided government now because a majority voted split tickets in the past?