Investing Curiouscatblog

Category: Taxes

  • Great Advice from Warren Buffett

    Great advice from Warren Buffett. He spoke to students at UTexas at Austin business school and one of the students, Dang Le, posted notes of the discussion online. The internet is great.

    On diversification:

    If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it.

    Great advice. Warren Buffett uses great concentration (little diversification) but you are not Warren Buffett.

    There are $10 billion mistakes of omission that no one knows about; they don’t show up in the accounting. In 1994 we paid $400 worth of Berkshire stock for a shoe company. The company is now worth 0, but the stock is worth $3.5 billion. So now, I’m happy to see Berkshire go down since it reduces the size of my mistake. In 1973 Tom Murphy offered us NBC for $35 million, but we turned it down. That was a huge mistake of omission.
    …
    Getting turned down by HBS [Harvard Business School] was one of the best things that could have happened to me, bad luck can turn out to be good.
    …
    We did an informal office survey by looking at the total tax footprint versus the total income. I earned 46 million and paid a tax rate of 17.5%. My rate was the lowest, the average was 33%, and my cleaning lady paid 40%. The system is tilted towards the rich. The Forbes 400 total net worth has gone from 220 billion to 1.54 trillion, an increase of 7-to-1. You see in legislature that there is lobbying carried on by the powerful over issues such as the estate tax and carried interest for private equity investments. We need to flatten income and payroll taxes, and those making under $30,000 shouldn’t be bothered.

    It is hard to beat reading Warren Buffet’s ideas on investing and economics.

    Related: Buffett on Taxes – The Berkshire Hathaway Meeting 2007 – Buffett’s 2006 Letter to Shareholders – Warren Buffett’s 2004 Annual Report – books on investing

  • 401k’s are a Great Investment Option

    The title of a recent article asks: Are you a sucker to invest in a 401(k)? The answer is an emphatic: No.

    Let’s say you put $10,000 in your 401(k) and invest in a stock-index fund that earns an average of 8% a year. After 20 years it will be worth $46,610. Withdraw the money all at once and you’ll pay $13,051 in taxes, assuming you’re in the 28% bracket, leaving you $33,559 to spend.

    But what if instead you had bought that tax-efficient stock fund outside your plan? Wouldn’t your tax bill be lower? Yes, but that’s the wrong way to look at it. If you skip your 401(k) in favor of a taxable account, you must first shell out taxes on that $10,000, which leaves you with just $7,200 to invest (assuming the same 28% bracket).

    Plus, over the next 20 years, you’ll have taxes on any dividends and gains the fund pays out. Even though you will get a lower 15% rate on your gains when you sell, you end up with $28,950, or about $4,600 less than with the 401(k). A tinier final tax bill can’t make up for having to pay taxes all along.

    This is a very good short simple personal finance article. It explains an issue that might be tricky for some to understand. Those that read it can learn more about personal finance. And it has several points – some of which, I can imagine, might be hard for some to understand. But it does a good job of explaining things simply. And a few points, made well in the article, are often overlooked or under-appreciated:

    tax rates will go up – we are passing higher taxes onto the future by not paying our bills now
    the tax deferral is a huge benefit – often minimized when people discuss the benefits of IRAs
    401(k) employer matches are another huge benefit

    As I have said before, learning about personal finance is a long term effort. If you don’t understand everything in an article that is fine, over the years you want to learn more and more. Hopefully this is a useful step on that journey.

    Related:
    Roth IRAs a Smart bet for Younger Set     – Saving for Retirement

  • Municipal Bonds – After Tax Return

    In the USA Municipal bonds are issued by state and local governments and are exempt from federal tax. Therefor if you earn a 5% yield your after tax return is equal to that of a 7.5% yield if you are in the 33% federal tax bracket (7% * .67 = 5%). One way to invest in bonds is using a mutual fund (open or closed end funds). Right now the tax equivalent yields (compared to other bonds) of muni bonds are higher than normal.

    Muni Bond Funds Offer High Yields, Tax Perks Dec, 2007:

    take a look at closed-end mutual funds that invest in high-quality municipal bonds. It’s easy to find a solid national muni fund that pays a yield of between 5.5% and 6%, with no federal taxes at all. It depends on your tax rate, but that’s the equivalent of a taxable fund that pays 7.5% to 8%.
    …
    With so many defaults going on in the mortgage arena, investors are worried that the insurers won’t be there to back up any munis that might get into trouble. A fair point, but the bond insurers are bolstering their own capital structures to deal with these concerns, and historically, as I said before, defaults in munis are few and far between.

    Why are closed-end muni funds trading at a discount? Typical discounts today are about 10%, which is about as deep as such discounts have ever gotten on a historical basis. The typical discount is half that, or less. Closed-end muni funds sometimes even trade at a premium.

    One explanation for the big discount might be the fact that many closed-end muni funds use leverage, in order to increase the tax-exempt returns they can offer investors. In the current credit crisis, leverage is seen as an inherently dangerous thing.

    In general I find bonds to be a less desirable investment. Especially in the low yield environment recently (and really going back quite a few years). But for diversification some bonds can make sense for certain portfolios. Given the current tradeoffs (risk v. after tax yield) muni bonds certainly deserve consideration. I would shy away from long term bonds or funds (intermediate or short term) but of course every investor makes their own decisions.

    Related: Roth IRA (another good tax smart investing tool) – what are bonds? – Alternative Minimum Tax

  • Politicians Again Raising Taxes On Your Children

    So yet again everyone in Washington DC wants to raise taxes on your children and grandchildren to spend money today. We might be going into a recession because the bubble of financing real estate led to people spending money they couldn’t pay back. So now home construction is decreasing, banks are having trouble meeting within capitalization requirement without huge inflows of capital from abroad, excess housing supply…

    The government has been spending huge amounts of money it doesn’t have for a long time. So what great ideas do our leaders have: put more burden on the children and grandchildren to pay for our spending today. What a sad state of affairs. And almost no-one seems to question this behavior.

    Is the idea that we would go into a recession so remote these leaders never imagined it could happen? No, of course they new it would happen. So what should a country, company, individual do if they know they have some expected event in the future they might want to spend money on? This isn’t really tricky. I would guess many 8 years olds understand the concept. You put the money in the piggy bank for when you will want to spend it.

    If you decide to spend not only all the money you have but borrow huge amounts that will tax your future earnings to pay back your current spending that is your choice (as long as you can find someone to lend you money). But as many parents have told their kids you have to live with the decisions you make. You don’t get to spend your money today. Spend tomorrows money today. Spend your kids money today. And then when, tomorrow comes, just spend all that money all over again. How can a country allow leaders to so transparently tax the future of the country?

    It is a sad state of affairs. The country chooses not to sent aside funds for obvious future needs. Then instead of accepting the hole they have dug for themselves decides to tax their children even more to continue the spendthrift ways. I think we not only need to have politicians actually read the bills before they vote (they refuse to pass such a law) they need to read about the ant and the grasshopper.

    I have no problem with the country choosing to set aside funds to use when they want to try and stave off a recessions (to pay for tax cuts or more spending). I do have a problem with: running enormous deficits every year, raising taxes on our children and grandchildren year after year, and then deciding to raise taxes even more on the future when the obvious happens and perfectly predictable desired expenditures present themselves. The get another credit card school of financial management (that everyone in Washington DC seems to practice) is not workable for a country over the long term. As anyone that has used that strategy personally will tell you – it works for awhile but eventually there are serious consequences.
    (more…)

  • Washington Waste

    Weed It and Reap

    For starters, the Old Guard on both agriculture committees has managed to preserve the entire hoary contraption of direct payments, countercyclical payments and loan deficiency payments that subsidize the five big commodity crops — corn, wheat, rice, soybeans and cotton — to the tune of $42 billion over five years.
    …
    When you consider that farm income is at record levels (thanks to the ethanol boom, itself fueled by another set of federal subsidies); that the World Trade Organization has ruled that several of these subsidies are illegal; that the federal government is broke and the president is threatening a veto, bringing forth a $288 billion farm bill that guarantees billions in payments to commodity farmers seems impressively defiant.
    …
    And the government would not need to pay feedlots to clean up the water or upgrade their manure pits if subsidized grain didn’t make rearing animals on feedlots more economical than keeping them on farms. Why does the farm bill pay feedlots to install waste treatment systems rather than simply pay ranchers to keep their animals on grass, where the soil would be only too happy to treat their waste at no cost?

    Related: Farming Without Subsidies in New Zealand – Washington Pays Grandchildren’s Taxes to Special Interests Today – USA Federal Debt Now $516,348 Per Household

  • Raising Taxes on Future Generations

    A Washington official dares to tell the truth

    Washington is bankrupting future generations. The longer we wait to address the $9 trillion national debt and ongoing annual budget deficits, the more taxes our children and grandchildren will have to pay, says David M. Walker, comptroller general of the United States, head of the General Accountability Office and just about the only public official in Washington these days telling the truth about the country’s fiscal situation. We’re basically taxing future generations without representation (because they can’t vote or haven’t been born), which he says is immoral.
    …
    Walker: The present value of future unfunded liabilities for Medicare, Social Security and other plans is $53 trillion.
    Walker: “You’re supposed to leave the country not just the way you found it, but better prepared for the future. The baby boom generation is failing on that.”
    Walker: President Bush’s Medicare drug plan and the way it was sold to Congress and the public was “unconscionable.” The true, $8 trillion pricetag “was never calculated, disclosed or debated.”
    Walker: The $9 trillion national debt is much more important than the budget deficit. Through the miracle of compound interest on the debt, he says, it will eat up more and more of the country’s resources.

    Right. I keep posting on this because it is very important. To understand economics you need to understand the true shape of the economy. And to manage your investments you need to understand the great risk of a rising debt load (whether it is you personally or a country). Charge It to My Kids – USA Federal Debt Now $516,348 Per Household – Why Investing is Safer Overseas – Lobbyists Keep Tax Off Billion Dollar Private Equities Deals and On For Our Grandchildren – Broke Nation

  • Lobbyists Keep Tax Off Billion Dollar Private Equities Deals and On For Our Grandchildren

    Private- Equity Tax Hike Falters

    Senate Majority Leader Harry M. Reid (D-Nev.) has told private-equity firms in recent weeks that a tax-hike proposal they have spent millions of dollars to defeat will not get through the Senate this year, according to executives and lobbyists.
    …
    In response, private-equity firms — whose multibillion-dollar deals have created a class of superwealthy investors and taken some of America’s large corporations private — hired dozens of lobbyists, stepped up campaign contributions and lined up business allies to wage an unusually conspicuous lobbying blitz.
    …
    Several prominent lawmakers expressed surprise to find that the managers’ profits, known as carried interest, were taxed as capital gains, for which the rate is usually 15 percent. That is less than half the 35 percent top rate paid on regular income.

    Yet another corporate welfare loophole that allows private equity to avoid paying the taxes they owe. What a surprise that the political leaders decide to tax the future generation instead of those paying them huge sums of money today (ok, it is sadly not a surprise that money buys favors in Washington DC). One option to cut the debt passed on to future generations is to cut spending but since spending has exploded over the last 7 years the decision to force our grandchildren to pay instead of paying for it ourselves is something the “leaders” of our country should be ashamed of.

    Federal spending in billions – source: fedspending.org

    year
    		$billion spent
    2000 $1,813
    2001 $2,027
    2002 $2,284
    2003 $2,524
    2004 $2,517
    2005 $2,603
    2006 $2,869*

    * $2,152 actual spending for 3 quarters which is a rate of $2,869 for a full year. 2007 data not yet available.

  • Charge It to My Kids

    In Charge It to My Kids Thomas Friedman makes the correct point that I have made previously (Washington Paying Out Money it Doesn’t Have – Inheritance Tax Repeal). Politicians like to tax your grandchildren to pay for what they are spending today.

    Dana Perino, the White House press secretary, was asked about a proposal by some Congressional Democrats to levy a surtax to pay for the Iraq war, and she responded, “We’ve always known that Democrats seem to revert to type, and they are willing to raise taxes on just about anything.”
    …
    added Ms. Perino. “I just think it’s completely fiscally irresponsible.”

    Friends, we are through the looking glass. It is now “fiscally irresponsible” to want to pay for a war with a tax. These democrats just don’t understand: the tooth fairy pays for wars.

    Huge deficits created by spending tons of money that you don’t have, is just taxing your grandchildren. It is not a sign of being fiscally responsible. It is a spending today and charging it to your kids – which is a bad idea.

    If you want to cut (or not raise) taxes the honest way to do so is to cut spending. It is not honest to claim you are not raising taxes when you spend more than you have and pass on debts. Those debts are just future taxes. Those electing these politicians that just add more and more debt to the future are mortgaging the country. Those debts will come due. That is obvious.

    You can seem to have a free lunch (or free roads to nowhere or whatever other frivolous, or important, spending you want) for awhile (decades actually for a country with a very strong economy) but eventually people will have to pay for the debts the current credit card culture of those in Washington. Those decades of spending what they don’t have might well start causing real pain in the next 10 years, or perhaps such irresponsible behavior can go on several more decades (a strong economy can hide spendthrift habits). but eventually that spending will have to be paid for – either by your children or grandchildren.

    Related: Buffett on Taxes – Warren Buffett on the similar trade deficit (where those in the USA directly, instead of though their elected government) spend beyond their means:

    Making these purchases that weren’t reciprocated by sales, the U.S. necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced.

  • Washington’s Funny Accounting

    Fuzzy Bush math

    There will be lots of celebrating in Washington next month when the Treasury announces that the federal budget deficit for fiscal 2007, which ends September 30, will have dropped to a mere $158 billion, give or take a few bucks. That will be $90 billion below the reported 2006 deficit and will be toasted by the White House and Treasury as a great accomplishment.

    But I have a nasty little secret for you, folks. If you use realistic numbers rather than what I call WAAP – Washington Accepted Accounting Principles – the real federal deficit for the current fiscal year is more than 2-1/2 times the stated deficit.

    What is going on? The same old story. Those in charge of spending the money in Washington like to use deceptive tactics to try and trick people that don’t know any better. For example, if the government incurs a deferred liability to pay $100 Billion dollars in future social security payments this year and invests that money in treasury bonds they act like the government didn’t spend that money. Of course it did, they took $100 billion in social security taxes and spent it to build bridges to nowhere, pay huge corporate welfare payments, other worthless wastes, even worthwhile things etc..

    Related: USA Federal Debt Now $516,348 Per Household – Washington Paying Out Money it Doesn’t Have – Concord Coalition

  • USA Living Beyond Means

    Comptroller Says Medicare Program Endangers Financial Stability:

    What would happen in 2040 if nothing changes? “If nothing changes, the federal government’s not gonna be able to do much more than pay interest on the mounting debt and some entitlement benefits. It won’t have money left for anything else – national defense, homeland security, education, you name it,” Walker warns.
    …
    Asked if he knows any politicians willing to raise taxes or cut back benefits, Walker says, “I don’t know politicians that like to raise taxes. I don’t know politicians that like to cut spending, but I think what we have to recognize is this is not just about numbers. We are mortgaging the future of our children and grandchildren at record rates, and that is not only an issue of fiscal irresponsibility, it’s an issue of immorality.”

    Strong words and I agree, as stated in: Washington Paying Out Money it Doesn’t Have and USA Federal Debt Now $516,348 Per Household.