How Washington Really Redistributes Income
online.wsj.com
online.wsj.com
The real ripoffs of the young generation:
* The cost of education caused by free-flowing credit to students
* Housing price inflation by foreign and domestic cash investors, mortgage tax deductions, 30-year mortgages, federal reserve actions creating asset bubbles (not US exclusive, in fact the problem is worse in commonwealth countries like Australia thanks to negative gearing and lack of property taxes)
* Obscenely low taxes on wealth and capital gains
* Absurd amount of defense spending
Young people also bear responsibility to: * Manage money better
* Live within means
* Encourage discussion of serious issues like those above on social media without being labeled as "crazy" for doing so; stop sharing useless BuzzFeed garbage and burying yourselves in Instagram all the time.
* Stop going so far in debt for clearly useless degrees and then wondering why the world is so unfair when you can't make money with it
* Don't glorify urban living to a fault, blowing money at bars for binge drinking well after college, spending too much on rent to be in a "trendy" area. You shouldn't have an iPhone, iPad, and MacBook and spend $1500/mo to live with 4 roommates, latte for breakfast ($4), buy all your lunches ($10), get dinner at the Whole Foods hot bar ($15) when you make $40k, then complain when you're 30 with a negative net worth!
No one making $40k a year is spending $1500 on rent. This is such a yuppie NYC/SF perspective. Try sitting in actual $40k shoes for a second.
The only large demographic shift I can see happening in American politics is if the GOP sheds its anti-immigrant elements and embraces a browner base than it currently enjoys. Immigrants tend to be more entrepreneurial, more distrustful of government, and more socially conservative than the average American, and so it would be a good fit if the GOP can shake the veiled racism expressed by many of its louder members.
The Republican demographic skews older than the Democrats. I would have thought the younger demographic would be more inclined to support sensible reforms of social security, like converting it to a basic income for everyone eligible to vote.
The Republican platform is heavily tilted towards their core demographics: the old, white, and rich. Until that changes, their demographics will remain as they are.
Making noises about helping the young is meaningless when you turn around and pass Medicare Part D, another entitlement enjoyed by the old and paid for by the young. Oh and, while we're at it, let's slash tax rates for the rich, because they really haven't gotten a fair shake in America.
The combination of Bush' tax cuts and entitlements simply burdened the young even more direly than they already had been. The Ryan budget that Romney was forced to adopt was worse still: the apotheosis of "more subsidies for the old and rich and fuck the young and poor".
As I said, until the GOP abandons their crusade against the young and poor (who are essentially synonymous), they will continue to be the party of the old and rich. The reason Democrats enjoy such overwhelming popularity with the young is not because the young are married to Democratic policies, but because the alternative is even less palatable.
As to "privatization"-style reform, I think the theory was that the sorts of instruments available would have better long term yields than Treasuries (I'm actually rather skeptical of this). Higher yields would mean less future budgetary obligation, and you have to start somewhere, no? At the same time, the government could skim some of that excess off the top and use it to replace some of the redirected SS revenue. Yes, you would certainly also have to take money out of general revenue for a generation or two to cover the transition and/or any market swings, but money from general revenue is provided by our still (post-Bush tax cuts) highly progressive income tax, rather than a regressive payroll tax.
As for health care costs, all America has to do is copy literally any other rich country's health care system. They all cost half as much or less per capita.
This sounds incredibly smug, and it's not helpful.
It completely ignores the cultural and political hurdles that are involved.
That being said, our current health care system is broken and needs to be addressed. I'm not convinced ObamaCare is a good solution, but at least the issue is being tackled.
[1] http://www.pbs.org/newshour/rundown/2012/10/seven-factors-dr...
Medicare is definitely a problem that needs to be fixed with more health care reform so we're no longer paying double what every other first world country pays for health care per capita. Social Security is fine for current and future generations. Means testing for either of them is idiotic, unless your goal is to kill them slowly by converting benefits for everyone to a welfare program.
He is trying to distract people from worsening income distribution that benefits 1%-ers like himself with sleight of hand to make a class war look like a generational war.
If he really gave a shit about the economic plight of young people he'd be talking about solving the student loan clusterfuck.
That story is based on 2009 research: http://www.jstor.org/stable/25548144?seq=2
Admitting that gerrymandering isn't the problem puts the solution further out of reach, unfortunately. Generational change is slow and painful.
But the article does make good points of self selected voting districts resulting from people moving in and out of communities.
1 simply denies that the opposing party should be able to represent itself in the democratic process but 2 is simply bizarre. No one is going to help their opponents pass their agenda on the basis that if they don't the other party will cause the economy to collapse. If that worked, the Soviet Union would have threatened to start a nuclear war anytime they wanted something and would expect the United States to back down.
The line of reasoning that validates such a tactic is just totally bizarre. Even if you can get some type of leverage over the other party you will never get enough concessions to justify the economic damage. Economic damage occurs in the present while entitlement spending cuts occur in the future. Even if the economic damage is minimal it seems quite a stretch to assume that statutory changes today are the only way to stop a future congress from overspending. This hypothetical future congress would be perfectly capable of cutting spending on its own.
Social Security: he is probably right. The most obvious social security system (ignoring welfare) is that you save money yourself, or the government saves it for you, and you get it back when you retire (this is Australia's system). Some clever economists figured out that since the total value of everything produced for the rest of time is infinite, you can make every generation better off by having each generation "borrow" from the next one. This results in the US PAYG (pay as you go) system where our generation is taxed to pay the last generation. PAYG allows people to receive a higher rate of returns on their "savings" than the market would provide. However, because demographics aren't growing at constant rate like in mathematical models used to justify PAYG, this is extremely expensive. This is how I interpret his statements about boomers who expect our generation to pay a higher tax rate than they did.
In short: demographics broke the PAYG model and so it's reasonable that current retirees get less than they might have expected under the original promises of the social security system.
On capital gains tax: he is wrong. If all capital gains were people investing in the stock market at arms length, then capital gains should be 0% because they are just a way to shift money forwards in time. A person who invests has more money in the future, but it is worth less to them because it is in the future. The reason we tax capital gains is that some kinds of capital gains are really income in disguise, like people who own 90% of a company and do a lot of work to increase its value. This should be taxed at the income tax rate.
So the current system is a hack, putting the capital gains tax between 0% and the income tax rate. But it is not a subsidy for people who have more wealth, it is a subsidy for people who can disguise income as capital gains.
Of course, a flat lower rate for long-term capital gains results in them being under taxed compared to other income; a simpler and fairer solution is to tax capital gains as normal income in the year realized, but to allow taxpayers to optionally recognize gains (or, really, any income) for tax purposes in advance of realizing it.
The reason is that all person B did, was exchange consumption in year 1 at the market rate, for consumption in year 2. The fact that they got to consume more in year 2 wasn't because they were particularly advantaged in being able to save more than person A, but rather because they preferred to spend more later than earlier.
Economically speaking, interest earned is not income.
Now for other kinds of capital gain, it is generally considered that people earn some compensation for risk (again, not income) plus some small premium (the "equity premium") that might possibly be considered income.
Economically, neither interest earned nor payment recieved from the sale of goods and services in an efficient market is a gain, but if you define income in terms of economic gains then nothing but rents extracted via market inefficiencies and outright gifts are income.
I added my own comments on why we do tax capital gains, because I prefer real life to theory.
One of the most basic principles in economics is that the taxation of capital income is inefficient. Taxes on interest, dividends, and capital gains represent a sort of “double taxation”, of wage income.
http://www.economist.com/economics/by-invitation/guest-contr...
Teaching anything that has "should" in it (other than the norms of the scientific method itself) in a science class, which economics purports to be, is wrong, plain and simple. Economics profs that are abusing their position to teach their personal policy preferences and conflating them with the science of economics are the kind of thing that gives economics, and the other social sciences, a bad name.
But, in any case, it is not any kind of economic theory (basic or otherwise), its a policy preference. Real economic theories deal with the behavior of economic systems, not preferences for how government should interact with them.
Obviously, real economic theories combined with value assumptions can inform policy preferences.
> I added my own comments on why we do tax capital gains
Which are also wrong, and seem to be an attempt to rationalize the crackpot "theory" from the class you TA'd with your misunderstanding of how capital gains are taxed (which seems to mistake the way long-term capital gains are taxed for how all capital gains are taxed.)
The real reason capital gains are taxed the way they are is because they viewed as income, so short-term capital gains (earned over a period of one year or less holding the asset) are taxed as normal income, and long-term capital gains are taxed at a lower rate based on the observation that, in a system with progressive taxation on annual income, taxing income earned over a period longer than a year as normal income in the year the gains are realized would result in that income being overtaxed.
There's also certainly a school of thought that capital gains should be taxed preferentially so as to encourage activities that produce capital income, from those who think that favoring those activities has desirable effects. This seems to be far more common (among people in general, and economists in particular, than the crackpot "capital gains aren't income" idea you taught), but, still, it isn't an economic theory, its a political preference (and many notable economists disagree with it.)
The reason we do NOT tax capital gains (and shouldn't) at a much higher rate is that to some degree you want investment in the future and also "that some kinds of capital gains are really income in disguise" - ie. that not all wealth creation is appropriately valued through trade (or appropriately timed).
But, what he is saying might be workable. I am curious to know how much additional revenue the government would raise by taxing capital gains at normal income rates vs. how much they'd lose by not taxing corporations.
Anybody have a reliable source on that?
Because, in some respects, C-corps would then become more like S-corps, in that a significant amount of untaxed income would flow through as dividends to shareholders where it would now be taxed at the normal income rate.
I have no problem believing that tax collections would increase by taxing capital gains as income and removing the corporate tax. And it would certainly be more fair than the current setup, with corporate taxation's terribly regressive incidence. The only kink is that they would have to have foreign investors paying income tax in the US, which might be hard to accomplish.
The net effect of greatly increasing tax rates on long-term capital gains is that risky long-term capital investments that may take a long time to pay off, such as tech startups, become much less attractive. Expected returns matter a lot to investors, and factors like taxation rates, inflation, risk, and liquidity factor into that calculus.
Eliminating corporate income taxes would actually encourage companies to realize and distribute profits to shareholders in ways that would generate substantial tax revenue from the individual shareholders, so I don't see it as much of a loss. At a minimum it would eliminate a lot of the incentive to engage in complex financial structuring games to minimize the amount of double taxation shareholders are faced with.
Only problem with this is the growth stocks, how long was Microsoft making a profit before it started paying dividends?
I believe the US government would be fine playing the long game by dropping capital gains tax, but I don't believe they have the stomach for the short term loss of revenue.
Of course. I used the generic term "capital gains" as a stand-in for "long-term capital gains", since the latter is the one that realizes the different tax treatment and is thus relevant to this discussion.
My apologies for not being clearer there.
>Eliminating corporate income taxes would actually encourage companies to realize and distribute profits to shareholders
I agree. I think this can be a "healthy" behavior change as a result of tax code changes.
Still, I would be curious to know how much the additional individual tax revenue would serve to offset the loss of corporate tax revenue. On the face, there would seem to be a gap--one that may be filled by a simultaneous increase in the long-term capital gains rate.
I'm sure this info is available. Just need to stop being lazy!
Some respects yes, but not in one important aspect: With an S-Corp, the income must flow on an annual basis.
If you removed C-Corp taxation, there would be no reason to have an S-Corp. You can just leave the net gains in the C-Corp (tax-free!) and take it out whenever you want.
There are essentially zero theoretical arguments that support taxing capital gains at the same rate as ordinary income and many economists have found that a 0% tax on capital gains is the least distortionary. (see the Chamley-Judd Result).
The U of Chicago economist who developed this formulation and espoused the introduction of the income tax in the U.S. had somewhat different policy objectives for the tax than current economists. See: http://taxprof.typepad.com/taxprof_blog/files/Duff.pdf (p. 6-11).
How this relates to a definition of income that some guy wrote in the 20s or 30s isn't relevant.
Many economists do believe that we shouldn't tax capital gains, and they might be right. But it's also true that the income tax was conceived as a progressive measure to reduce income inequality and shift the tax burden to the families of wealthy industrialists like Carnegie and Rockefeller. A theory that exempts capital gains from the definition of "income" is plainly inconsistent with those purposes.
So I stand by my original point, which is that capital gains are income and so long as we have an income tax, should be taxed as such. There are compelling arguments that consumptive taxes would be more efficient, but efficiency isn't the only policy concern in play.
There are, of course, many other considerations that should be taken into account when designing a tax code. And you're free to argue that those other considerations are more important than efficiency.
But you aren't actually doing that. You're just pointing to the name of the thing and declaring that because of the words being used a specific system must follow. That's what I mean by word games.
Take corporate income tax, capital gains tax and taxation of dividends.
The entire concept of corporate income tax is completely nonsensical for international corporations because they don't need to do much more than rearrange their books and they can report the bulk of their profits in a lower tax jurisdiction, which is what all of them do and there is almost nothing you can do to stop them if you insist on taxing "profit" but allowing profits to be taxed non-uniformly based on international tax jurisdiction. Which means that "corporate income tax" in practice means "tax small and medium sized corporations at a much higher rate than large international corporations." Which is obviously totally inane, so lets get rid of corporate income tax, right?
At this point you've just handed the rich a trivial method of deferring taxation of dividends indefinitely. Instead of issuing profits as dividends at all, corporations can hold the capital internally which causes share price appreciation, and have stock splits as necessary to keep the share price from getting out of hand. Then the shareholder pays no taxes until the shares are sold, which can be put off indefinitely. The disadvantage is that you have a corporation that makes e.g. iPads which holds more cash than they can possibly have a productive internal use for, so they end up investing it perhaps quite inefficiently in sectors of the economy outside of their expertise because doing so is more profitable than issuing dividends and causing shareholders to incur massive taxation. Which is naturally what we see the corporations frequently doing when they have a de facto lack of corporate income tax through tax avoidance.
So you say, fine, corporate income tax sucks and taxing dividends doesn't work, but at least we can really stick it to them with capital gains tax when they sell the shares, right? And now you have a different problem, which is that you're making shares inalienable. If you own a million dollars of shares which you bought for a thousand dollars, you're not going to sell the shares if selling them causes you to lose half of your capital to taxation, even if the stock is clearly under-performing the market. Which causes huge market inefficiencies because capital is tied up in under-performing businesses which can't be sold without incurring significant tax liabilities. There is a trivial way to solve this, which is to allow stockholders to defer capital gains tax when they sell one investment only in order to change what they're investing in by purchasing another investment. But the result is a "weird" tax -- it isn't a capital gains tax anymore, what it really is is a consumption tax with a different rate for spent income derived from investments if the "capital gains" rate isn't set at the earned income rate. Certainly not what most people think of when they discuss a capital gains tax, and on paper allowing investments as a deduction would cause it to not generate nearly as much tax revenue (though it may in practice given tax avoidance).
So all of that is quite irritating if you're trying to extract tax revenue from corporations and the wealthy. The problem is, at bottom, that taxing something discourages that thing and you don't want to discourage investment.
The remaining major tool in the tax box is a normal consumption tax. The problem there is that it's obviously regressive -- the less money you make, the larger a portion of it you have to consume rather than invest, so taxing consumption will cause the rich to pay an unavoidably large amount of taxation (unless they intend to stop buying cars and mansions and air travel), but will disproportionately also tax those less fortunate who must spend a higher percentage of what they make.
As far as I can tell the best solution is to get rid of all taxes other than a consumption tax, and then deal with the fact that consumption taxes are regressive by combining it with a basic income which you can make arbitrarily progressive by increasing its size. This has the additional advantage that the basic income can subsume the plethora of programs like social security which impose arbitrary constraints which (like "retirement age") or are "need based" which, if you consider the programs as a form of negative taxation, turn out to be preposterously regressive because the marginal tax rate of increasing your income and thus becoming ineligible for the programs can approach or even exceed 100%.
The "problem" with flat consumption tax + basic income is that it takes all the horse trading out of the equation, removes all the tax loopholes and pork and treats everyone equally regardless of their lobbying strength, even though you can make it as progressive as you like. K-Street will not be a fan. Everyone else probably should be though -- anyone want to explain how I'm wrong?
I suppose it's true that you can't change the slope of the effective rate curve beginning at a particular income level as you can with a progressive income tax, but it seems to me the reason for wanting that in the income tax case is in an attempt to emulate the curve you're already getting with flat tax + basic income without having to complicate things by having a progressive income tax with a continuous marginal rate curve.
Much of your post reminds me of the oft-repeated fallacies regarding the supposed "massive" effects that taxation have on behavior. Sure, there are some, but I believe predictions and discussion regarding those effects to frequently be greatly exaggerated or completely unrealistic.
>Instead of issuing profits as dividends at all, corporations can hold the capital internally which causes share price appreciation...
Corporations would still have strong incentive to pay dividends. Dividends are a more direct means of providing participation in the company's success (i.e. distributing profits) than stock appreciation (which is obviously a function of many other factors, including psychology). Solid dividends can thereby drive demand for the stock, and hence its price.
Shareholders might say, "Don't give me an increase on paper. Give me a payment on my current holding, while I maintain that holding". This is especially so if, as you say, shareholders are more reluctant to sell shares and trigger a larger personal tax event. However, again, I think the latter prediction is generally overstated.
The short is that each company is still competing for shareholders. Accruing cash well-beyond what the company can deploy to grow revenue is not in the interest of the company or its shareholders.
This is part of the fallacy around taxation and how it drives behavior. Companies aren't just going to start doing things that are bad for them (e.g. making bad investments), simply to avoid taxation. And, they won't withhold the dividend simply to prevent shareholders from incurring a tax event. This is profit that is being distributed to shareholders, just as now. No one is coming to take the investors' previous wealth (as is often implied). These taxes are simply deducted from what is otherwise a "windfall".
>The problem is, at bottom, that taxing something discourages that thing
Yes, but again, I believe that many give too much weight to the degree to which it discourages, as well as to its "distorting" effects overall. People do not choose to opt out of investment (or profit-taking) altogether due to taxation. If I have a million dollar gain on a thousand dollar investment, then sure I'm going to cash out at some point. This, of course, is already happening on a regular basis. Even if you take half of it, it's still a massive gain. And, what else I'm going to do with it? Hold it on paper forever where it has zero value? That's not rational.
Yes, I'd wish there were no taxes (just as we wish there are no income taxes), but we are still going to work and invest to maximize our return, given the current environment.
You're basically questioning the efficient market hypothesis. If a corporation or investor can save $50M in taxes by spending $45M rearranging their affairs, they're making a $5M profit to do it. Which they tend to not want to leave on the table.
> Shareholders might say, "Don't give me an increase on paper. Give me a payment on my current holding, while I maintain that holding".
Again, you're claiming that shareholders will want to act irrationally. There is mathematically no non-tax difference between issuing a dividend and using the same money to have a share buy-back combined with a stock split, except that the latter allows shareholders to choose whether they want more stock value or cash right now, which when you consider the tax implications really means choosing whether to pay any taxes right now.
> This is especially so if, as you say, shareholders are more reluctant to sell shares and trigger a larger personal tax event.
That doesn't make any sense. If a shareholder wants cash then they can sell that portion of their shares and the tax event would be smaller than receiving a dividend in the same amount if capital gains and dividends are taxed at the same rate, because the capital gain would have the price originally paid for the shares deducted from the taxable income rather than taxing the full amount.
> The short is that each company is still competing for shareholders. Accruing cash well-beyond what the company can deploy to grow revenue is not in the interest of the company or its shareholders.
Then explain the multi-billion dollar cash hoards held by most large successful corporations.
> Companies aren't just going to start doing things that are bad for them (e.g. making bad investments), simply to avoid taxation.
They don't make intentionally bad investments. But they can make bad or less good investments than the real parties in interest (the actual owners of the capital) would do if the money was under their direct control -- just not so much worse that it's worth losing half the money to the tax man.
> This is profit that is being distributed to shareholders, just as now. No one is coming to take the investors' previous wealth (as is often implied). These taxes are simply deducted from what is otherwise a "windfall".
I'm not sure why that should make the investors want to pay it any more.
> If I have a million dollar gain on a thousand dollar investment, then sure I'm going to cash out at some point.
Not necessarily. You might just hold onto it until your kids inherit it, which is what so many of the people you most want to tax because they have so much money are doing.
> This, of course, is already happening on a regular basis.
But not as much as it would if there weren't as many taxes on it.
> And, what else I'm going to do with it? Hold it on paper forever where it has zero value?
It has not zero value. You can take a loan against it and then deduct the interest on the loan from your taxes. Holding ownership of a company's stock may allow you to control the company and e.g. give cushy jobs to yourself or your buddies, or build cool stuff and change the world, etc. These are not zero value things.
>You're basically questioning the efficient market hypothesis...
No, I'm not. Your example is specious. If you posit an overly-simplistic scenario that allows Company X to easily save $5M, then of course they will do it. Anyone would agree that's just rational behavior. What I am saying, however, is that many (including you) opine that individuals/corporations will suddenly begin to engage in completely irrational or counter-productive behavior because, you know, taxes.
>There is mathematically no non-tax difference between issuing a dividend and using the same money to have a share buy-back...
Except that the net income that flows to me is greater as a shareholder. If corporations want to maximize shareholder value (and hence drive demand/stock price up), then paying dividends is certainly one means of doing that. If I can effectively earn that dividend while continuing to hold the underlying stock as it continues to appreciate in value, then when I finally cash out, I will have earned more while also enjoying the use of the money (dividends) along the way. This is irrespective of tax consequences. Many "rationally-acting" shareholders recognize the appeal of dividends. Perhaps this is why, for instance, dividends have contributed to at least 45% of the total return of stocks in the S&P 500 since 1926.
>That doesn't make any sense. If a shareholder wants cash then they can sell that portion of their shares and the tax event would be smaller than receiving a dividend...
Sure, it makes sense. For one, with dividends the shareholder still retains the underlying asset vs. by selling portions of his stock. This discussion is off-track though. You're correct that the tax treatment is the same but my initial point with dividends was to simply refute your assertion that companies might suddenly stop paying "dividends at all" because, taxes. Instead, I provided an example of rational, "healthy" behavior that might result from tax changes. This vs. the typical knee-jerk overstated response that "any taxes are evil and will cause otherwise rational people to suddenly and completely lose their minds".
>Then explain the multi-billion dollar cash hoards held by most large successful corporations
I don't get your point here in the context of this discussion. Companies frequently accrue cash when profitable and they haven't allocated it for re-investment, acquisitions, etc. Depending on the company and degree, this may or may not be desirable, as it may well-represent an under-utilization of resources. But, your initial implication was that companies will hold on to cash simply to avoid taxation, as if they'd do so even in light of investment or other opportunities.
This is the kind of thinking to which I am taking exception. It attributes to actors these completely irrational behaviors that are supposedly generated by the tax code.
>But they can make bad or less good investments than the real parties in interest
Sure, anything can happen. But, this is a huge leap on pure conjecture. The company is going to do what it thinks best, given the environment, period. There are a whole host of influencing factors. It's an unrealistic overstatement to say that they will suddenly become irrational because, taxes.
>I'm not sure why that should make the investors want to pay it any more.
That's a trite response. Obviously, people don't enjoy paying taxes. The point is that the other end of the argument overstates the "damage" caused to the investor psyche by taxation. And, that overstatement is an important part of assigning this outsized behavioral effect to taxes overall. It's as if there's now zero-benefit to investing or even that it's actually punitive to do so because, taxes.
>Not necessarily. You might just hold onto it until your kids inherit it...
Sure. But, your example implied that I'm ready to cash out but simply (and automatically) won't to avoid taxation. My point, again, is that's overstated. Will the tax event impact my calculus? Sure. But, it's far from automatic.
>It has not zero value. You can take a loan against it and then deduct the interest...
If you know of a way to do this as a personal investor, please share!
The bigger point though is that you're moving the goalposts. If you are holding the stock for other reasons (company control, etc.), then that's a different calculus. You're probably not interested in cashing out irrespective of the tax scenario. I was following the thread you'd started, that essentially assumed that people who are ready to cash out won't do so simply to avoid taxation.
And I think you are underestimating how much it does drive behavior. Rational economic actors will do what they can to avoid costs, including taxes, right up to the point where the cost of avoidance measures exceeds the cost being avoided. When you impose a significant tax rate (e.g. 25-50%), you make it rational to spend significant effort on tax avoidance, all of which is wasted resources that could have been put to some other more productive use.
> What I am saying, however, is that many (including you) opine that individuals/corporations will suddenly begin to engage in completely irrational or counter-productive behavior because, you know, taxes.
Nonsense. The behavior is completely rational -- it's just massively inefficient. Companies will spend several million dollars to build a "presence" in Ireland or Bermuda or wherever else. They will hold wealth off shore rather than repatriating it. Companies do such things because it is less expensive than the taxes they're not paying. It is completely rational to do that, even though it would be "irrational" otherwise.
> Except that the net income that flows to me is greater as a shareholder.
No it isn't, that's what I'm saying. Let's put some numbers into it. Suppose the company has 100,000 outstanding shares valued at $100 each at the beginning of 2000. They do well from 2000 to 2010 and make ten million dollars in profits, so now their shares are worth $200 and the company has ten million dollars in cash on hand. Let's go through what they can do with the ten million dollars.
First, they could issue it as a dividend. So you get a $100 dividend and now instead of having a $200 share of stock you have a $100 share of stock and $100 (because you can't get something from nothing -- having issued the dividend the stock value goes down because the company has less cash on hand), a total value of ~$200. Now all the stockholders have to pay tax on $100/share, even the ones who just use the dividend to buy more stock because they like the company.
An alternative is for the company to buy back some of its own stock. So the company buys back ten million dollars worth of outstanding shares. All the shares continue to be worth ~$200/share (because even though the company has less cash on hand after the buyback, there are now that many fewer outstanding shares, so each remaining share represents more of the company). At this point the stockholders who tendered their shares in the buyback don't pay taxes on the money they receive, they only pay tax on the difference between what they received for the shares and what they paid for them (which no matter what it was will have been less than the full amount). Now you may object that you don't want to sell your shares, you just want the profits as cash, so I'm going to explain how this is the same thing. The company is transferring the same percentage of its total value to the stockholders either way. If they pay a dividend, you get the money, and you own the same percentage of the company that you did originally. If you tender that percentage of your shares to the company in the buyback, you get the money, and you own the same percentage of the company that you did originally (because you own fewer shares of a company that has fewer outstanding shares) -- but now you pay less in taxes, and stockholders who don't want any cash right now don't pay any taxes. And the company can do a stock split so that you end up with the same number of shares you had originally, so that you can do this again and again without ever having to sell the last share. So there's that.
But let's go to one other alternative: Instead of transferring cash directly to the stockholders at all, the company holds the cash as some kind of securities (stock or bonds or what have you) held by an offshore subsidiary. The stock price continues to be worth $200, because the originally $100/share company is still (indirectly) holding ten million dollars of securities. But now they don't have to pay corporate income tax on the money, because the profit doesn't belong to the U.S. subsidiary, it belongs to the subsidiary in the place where there is no or minimal corporate income tax. If they repatriated the money so that they could buy back stock or issue a dividend they would have to pay 35-40% of it to the tax man. So instead of getting $100 (before you pay your own taxes) you would get $60 (before you pay your own taxes), which is quite a loss. So instead they can just keep holding the money offshore and do a stock split. So you bought a share for $100, the company earned money so that the share is now worth $200, then they do a stock split so that you have two shares each worth $100. If you want cash you can sell a share and get $100 (instead of $60). If you want to avoid taxes then you keep the shares. This is effectively the same result as with a buyback. It isn't irrational, it's just inefficient. And now as a side effect you can't buy stock in "Apple" anymore, you have to buy stock in "Apple + a large pile of unrelated market securities chosen and held offshore by Apple executives." That's bad, but it's what the tax system causes to be rational, because the alternative (losing some 35-40% of your profits to Uncle Sam) is "worse."
> If you know of a way to do this as a personal investor, please share!
The usual method is to take out a mortgage loan, either on your house or by buying some kind of rental property. It's obviously a lot easier for business entities.
Your whole premise seems to be that if taxes don't produce some kind of irrational fury in an overwhelming majority of the taxpayers then the consequences must be negligible and we shouldn't worry our heads about it. A thing can cause economic consequences that are Very Bad without causing panic in the streets or mass casualties.
For example: the Fed stealing purchasing power - by devaluing the dollar - from the poor who can least afford to lose it, and giving it to middle and upper class home owners in the form of trillions worth of housing bailouts (by buying up toxic mortgages and dramatically reducing inventory; bailing out Fannie, Freddie etc; using QE to hold down interest rates and thus keeping mortgage rates artificially hyper low - all of which have massively and completely artificially increased the value of housing assets).
And that doesn't even touch on the trillions in stock market value that has been re-inflated by the Fed's policy of intentionally creating asset bubbles to fake a wealth effect (again). Most of the people benefiting from all this money chasing risk are the middle class and the rich, and they're disproportionately boomers.
Of course, then comes the (at least) equal but opposite reaction.
Only interesting thing about it is that he's trying a message he hopes will resonate with young people.