3 ms·

Let me play devil's advocate. Let's say you are bill gates. You own assets worth of 50 billion dollars. Assuming there is no capital gain or loss and that your

by lubos 16y ago

Let me play devil's advocate. Let's say you are bill gates. You own assets worth of 50 billion dollars. Assuming there is no capital gain or loss and that your return on investment is 5%, you should be making 2.5 billion USD annually. Half of that would normally need to be paid as income tax to government. That's around 1 billion dollars every year. So what you do? You get the best financial advisors and they'll tell you... "move your assets into your own private foundation". this way you won't need to pay tax on your income although to retain tax exempt status, you will need to give away every year at least 5% of your assets. so you will end up paying your "taxes" anyway but it will make you look awesome because now you are doing charity instead of just paying federal income tax like the rest of us. And this is exactly what bill gates has been doing all these years. His foundation is worth 35 billion dollars and he is giving away exactly 5% every year. Up until now they gave away 24 billion dollars (around 1.5 billion a year). I think it makes sense to avoid paying income tax and decide to spend your money elsewhere at your discretion. so let's not pretend these billionaires are better than rest of us.

gnaritas 16y ago
> Assuming that there is no capital gain or loss and that your return on investment is 5% That doesn't seem to make sense, as a return on an investment is a capital gain. > Half of that would normally need to be paid as income tax to government. How exactly do you figure that? You don't pay income taxes on investments, you pay a flat 15% capital gains tax on investment income. I don't see how you think he'd lose half to taxes, it'd be far far less than half. Beyond that, giving away 5% of 35 billion (total wealth) costs a lot more than paying 15% of 2.5 billion (investment income that year), so it's not saving him money on taxes which would only be in the range of 350 million a year given your example. Choosing to spend a billion and a half a year on charity to avoid paying 350 million in taxes doesn't make much sense as a motivation. So I highly doubt that's why he's doing it.
- lubos 16y ago
  income from dividends or when your money sits in the bank earning interest is not capital gain. capital gain is when you buy shares, real-estate etc and market price of these assets increases while they are on your balance sheet. then it's unrealized capital gain and you don't pay any tax on it until you sell it and make it realized capital gain. for simplicity reasons to explain my point, I didn't want to overcomplicate it with capital gains and losses.
  - gnaritas 16y ago
    Yes, but dividends are basically taxed at the same rate or slightly higher 20% as capital gains; they aren't taxed as earned income using the progressive bracket system. So while they aren't technically capital gains, my point stands.
    - lubos 16y ago
      In 1994 when Bill Gates started his private foundation, income from dividends was taxed like regular income. You're right it's 15% right now but don't forget there is new tax law coming into effect pretty much in two weeks that will tax dividends again like regular income.
      - gnaritas 16y ago
        I wasn't aware the new law did that, but I'm pleased to hear it. Now if only they'd do the same with capital gains.
anamax 16y ago
> You own assets worth of 50 billion dollars. Assuming there is no capital gain or loss and that your return on investment is 5%, you should be making 2.5 billion USD annually. Half of that would normally need to be paid as income tax to government. That's around 1 billion dollars every year. You're assuming that gain in wealth translates to taxable income. It doesn't (necessarily). Suppose that you buy $100 worth of microsoft stock and the price rises so it's worth $150 a year later. You don't owe anything on that $50 increase in value. (You don't owe anything until you sell.) However, if you put that same $100 into a bank account and received $10 in interest over the same year. You owe taxes on that $10. I'd guess that a large fraction of BillG's investments are of the form that he doesn't pay taxes until he cashes out, either for consumption or to make different investments. If so, BillG's taxable income can <$100M/year while his wealth is growing by $2.5B/year. I suspect that BillG taxable income was under $5m/year during most of the years while his wealth was exploding (due to the increase in the value of his microsoft stock).
euroclydon 16y ago
You seem to imply the point of the foundation is to avoid paying taxes on the capital interest of great hordes of cash, or at least to have direction over what happens to a portion equivalent to the tax. Okay... but the elephant in the room is the capital itself. Once it's transferred to the foundation, how can it be transferred back, or spent in a personal, non-charitable manner?

by lubos 16y ago

gnaritas 16y ago

> Assuming that there is no capital gain or loss and that your return on investment is 5% That doesn't seem to make sense, as a return on an investment is a capital gain. > Half of that would normally need to be paid as income tax to government. How exactly do you figure that? You don't pay income taxes on investments, you pay a flat 15% capital gains tax on investment income. I don't see how you think he'd lose half to taxes, it'd be far far less than half. Beyond that, giving away 5% of 35 billion (total wealth) costs a lot more than paying 15% of 2.5 billion (investment income that year), so it's not saving him money on taxes which would only be in the range of 350 million a year given your example. Choosing to spend a billion and a half a year on charity to avoid paying 350 million in taxes doesn't make much sense as a motivation. So I highly doubt that's why he's doing it.

lubos 16y ago
income from dividends or when your money sits in the bank earning interest is not capital gain. capital gain is when you buy shares, real-estate etc and market price of these assets increases while they are on your balance sheet. then it's unrealized capital gain and you don't pay any tax on it until you sell it and make it realized capital gain. for simplicity reasons to explain my point, I didn't want to overcomplicate it with capital gains and losses.
- gnaritas 16y ago
  Yes, but dividends are basically taxed at the same rate or slightly higher 20% as capital gains; they aren't taxed as earned income using the progressive bracket system. So while they aren't technically capital gains, my point stands.
  - lubos 16y ago
    In 1994 when Bill Gates started his private foundation, income from dividends was taxed like regular income. You're right it's 15% right now but don't forget there is new tax law coming into effect pretty much in two weeks that will tax dividends again like regular income.
    - gnaritas 16y ago
      I wasn't aware the new law did that, but I'm pleased to hear it. Now if only they'd do the same with capital gains.

anamax 16y ago

> You own assets worth of 50 billion dollars. Assuming there is no capital gain or loss and that your return on investment is 5%, you should be making 2.5 billion USD annually. Half of that would normally need to be paid as income tax to government. That's around 1 billion dollars every year. You're assuming that gain in wealth translates to taxable income. It doesn't (necessarily). Suppose that you buy $100 worth of microsoft stock and the price rises so it's worth $150 a year later. You don't owe anything on that $50 increase in value. (You don't owe anything until you sell.) However, if you put that same $100 into a bank account and received $10 in interest over the same year. You owe taxes on that $10. I'd guess that a large fraction of BillG's investments are of the form that he doesn't pay taxes until he cashes out, either for consumption or to make different investments. If so, BillG's taxable income can <$100M/year while his wealth is growing by $2.5B/year. I suspect that BillG taxable income was under $5m/year during most of the years while his wealth was exploding (due to the increase in the value of his microsoft stock).

euroclydon 16y ago

You seem to imply the point of the foundation is to avoid paying taxes on the capital interest of great hordes of cash, or at least to have direction over what happens to a portion equivalent to the tax. Okay... but the elephant in the room is the capital itself. Once it's transferred to the foundation, how can it be transferred back, or spent in a personal, non-charitable manner?