What tax law loophole is Buffet referring to?
A Section 1256 contract is any: Non-equity options include debt options, commodity futures options, currency options, and broad-based stock index options. A broad-based stock index is based upon the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index). 60% of the capital gain or loss from Section 1256 Contracts is deemed to be long-term capital gain or loss and 40% is deemed to be short-term capital gain or loss. What this means is a more favorable tax treatment of 60% of your gains. http://www.tradelogsoftware.com/tax-topics/futures/ It's a really wierd rule (arbitraty 60% designation, so broad, etc), but section 1256 contracts get preferential tax treatment and that's what Buffett's talking about.
"The first article you link clearly refers to Warren Buffet and doesn't, in regard to taxes, refer in any way to Berkshire Hathaway. The second article you link is titled, ""Ways Professional Traders Can Save Big At Tax Time."" Berkshire Hathaway is not a firm primarily engaged in trading. It is engaged in investing in companies that it feels offer long-term growth and appreciation. In some cases, their investment is in the entire company; in others, a very large percentage of its total capitalization. Trading, on the other hand, involves buying stocks, bonds, futures, etc. for near-term resale, ideally at a profit. Stock speculation is a risky and complex occupation because the direction of the markets are generally unpredictable and lack transparency.  As has been mentioned above, we are confident that Berkshire Hathaway use every technique at its disposal to reduce its tax burden. I am confident, as well, that they spend considerable effort and expense to be certain that they are never discovered making errors in their tax returns." The difference is when the companies can make their own loop holes via  legislation that they propose and get passed.  You can make a law that only effects only one company or circumstance.  Apple could sponsor a law that allows a 5% tax rate on companies that run digital downloads, sell over 5 flat screen devices, incorporated in Northern California and named after a fruit. "That's a very clear explanation, thanks! So a few additional things if anyone will humor my curiosity...  1. By ""one-time"" tax, does that mean a company that has, say, $5B overseas could bring that back into the US and just be taxed $500M, then keep the remaining $4.5B?  2. Could a company choose a percentage of their overseas money to transfer into the US? Like, only bring in 8% of that $5B ($400M) and be taxed $40M, while keeping all the rest outside the US? Or would it be mandatory to bring it all over?  3. Would most companies just start that same practice of routing to tax havens again after this tax is implented?" No one pays 35%, due to the loopholes. Effective tax rates (what they ACTUALLY pay) are lower for major corps than most individuals.   &gt; Does it not make more sense to lower the corporate tax rate while reducing loop holes etc... to make the American corporation more competitive.   This makes sense, but people put those loopholes in there to help themselves and they'll fight to keep them. It's such a mess of tax code. "I believe that an understanding of the taxation system can help to understand our place in it, and how that impacts each of our personal finances. I will try to remain unbiased here but this is a somewhat subjective question, so please bear with me if you disagree on any point. Some of these tax savings are well-advertised, and can be used by many people, such as tax credits for mass-transit passes which exists in some countries. But some of these tax savings are things you never heard of before, until it winds up on the news. Why do some people seem to get tax savings that you and I cannot get, and why do those people always seem to have so much more money than us? A simplistic answer can show this in three parts: (1) The source of one's income; (2) Transaction costs; and (3) ""tax loopholes"". Tax savings occur proportionately to one's income, and if the savings apply to investment income, they occur proportionately to one's wealth. If someone living paycheck to paycheck with a minimal amount in a bank account ""saves tax on investment income"", they might reduce their taxable interest from $50 to $0. That's because they simply don't have any other investment income to reduce. All of their income comes in the form of employment, which is typically very hard to save taxes on. Most governments have a very firm grasp on the taxation of employment income, because it is a huge proportion of income in the country (and therefore has the largest amount of tax associated), and because it is very straightforward (work for someone = employment income). A more cynical person than I might point out that investment income is earned by the very wealthy, who can afford to lobby for politicians to pass favourable investment income laws. Even very straightforward tax saving opportunities may cost money to enable. The simplest example would be: if a tax saving opportunity is so complicated that an average person can't understand it themselves, then an accountant, lawyer, or banker will need to be the one to explain it. And that can cost you money. If your tax isn't so much to begin with, then the transaction costs to achieve the tax savings could be higher than the tax savings themselves. For example, most countries have tax savings / deferrals if you start a corporation. These rules typically exist to promote investment in the local economy. But someone who earns $10k in a side-business might not be able to afford the $3k in incorporation costs just to save $2k in taxes. The more income and wealth you have, the more these transaction costs become worthwhile. I'm going to generally define ""tax loopholes"" for the purposes of this answer as something where a somewhat arbitrary situation allows for taxes that a layman would consider unfair or unexpected. This often occurs with good intentions but poor legislation - the government tries to provide a benefit to a deserving group or to promote an activity, but ends up allowing another group to take advantage.  For example in Canada, there existed until a few years ago tax saving rules about passing on wealth to children at lower tax rates, only when a close family member is near-death [setting up a 'testamentary trust' between a grandparent and a grandchild could in some circumstances allow that trust to be created with additional 'tax brackets', meaning more income would be taxed at a less-than top tax rate before being distributed to the grandchildren].  The rules were put in place with the idea that ""oh gee, a family member has died, and the dang ol' family is grieving so hard they can't distribute the wealth to the next generation for a few months on account of all the crying. We should make it so that the estate is taxed like a person, and if they earn only a little income, they have a low tax rate, and they only get taxed at the full rate if they have a lot of income"". Seems reasonable enough, but if a family is ready to pass on wealth at the same time as someone is nudging the bucket with their foot, a morbid discussion with your lawyer and accountant could set your children up for life with forever reduced taxes on massive inheritances.  In the case of the Panama / Paradise leaks, tax savings are due to all 3 of the above: Those who have massive wealth (and therefore earn the majority of their income from investments instead of employment) can afford the transaction costs associated with taking advantage of specific ""tax loopholes"". The simplest example of which is just that income earned in a foreign country might have a lower tax rate than income earned domestically. This is often a result of ""cracks"" in the foreign tax treaties between countries, which exist generally to promote business between countries and prevent double-taxing individuals who need activity in both countries for whatever reason. Take for example the ""Apple loophole"". Apple has operations around the world. Some activity occurs in low-tax jurisdictions. Apple reports a high percentage of the value of R&D as being associated with those jurisdictions. Those branches in low-tax jurisdictions charge the high-tax branches (such as the US) with fees for use of their valuable research. So much of Apple's income is reported in those foreign jurisdictions. It won't be taxed in the US until Apple ""repatriates"" the cash back to the US. Until then, the cash sits in the foreign jurisdiction, accruing less tax. This and similar rules can be used by individuals wealthy enough to hold corporations in foreign jurisdictions with low tax rates. How each particular rule / ""loophole"" works will depend on the nature of a specific case - tax law is complex, and the rules between countries are even more so. These foreign tax loopholes are closing every year. It is getting harder and harder to hide money offshore, and it is getting less and less likely that you will be able to find a country with juuuust the right loopholes for your own offshore wealth. These types of news leaks will only help to expedite those changes." "&gt; A corporation should be taxed based on where it does business and not where the corporate headquarters are located.  But... but.. that's the whole point of the inversions. The US government tries to claim taxes on income from revenue generated overseas. So right now if BK repatariates it's overseas earnings, the US government will double dip beyond it's fair share and tax already taxed revenue just because it was taxed by non-US governments. All BK is doing is moving their headquarters to to a more business friendly economy that doesn't do similar double dipping. That way when they repatriate overseas money they are not being forced to pay taxes unjustly like they would be in the US. They will still pay taxes in the US for earnings in the US, they just won't pay US taxes on earnings foreign earnings.   I don't think you Americans get just how fucked up and hostile your tax structure is. It has nothing to do with ""fair share""." "The scenario you mention regarding capital gains is pretty much the core of the issue. Here's a run-down from PolitiFact.com that explains it a bit. It's important to focus on it being the tax rate, not the tax amount (which I think you get, but I want to reinforce that for other readers).  Basically, most of Buffett's income comes from capital gains and   dividends, income from investments he makes with the money he already   has. Income earned by buying and selling stocks or from stock   dividends is generally taxed at 15 percent, the rate for long-term   capital gains and qualified dividends. Buffett also mentioned that some of the ""mega-rich"" are hedge fund   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."" We don't know the taxes paid by Buffett's secretary, who was mentioned   by Obama but not by Buffett. Buffet's secretary would have to make a   high salary, or else typical deductions (such as the child tax credit)   would offset taxes owed. Let's say the secretary is a particularly   well-compensated executive assistant, making adjusted income more than   $83,600 in income. (Yes, that sounds like a lot to us, too, but   remember: We're talking about the secretary to one of the richest   people in the world.) In that case, marginal tax rates of 28 percent   would apply. Then, there would be payroll taxes of 6.25 percent on the   first $106,800, money that goes to Social Security, and another 1.45   percent on all income, which goes to Medicare. The secretary’s overall   tax rate would be lower than 28 percent, since not all the income   would be taxed at that rate, only the income above $83,600. Buffett, meanwhile, would pay very little, if anything, in payroll   taxes. In the New York Times op-ed, Buffett said he paid 17.4 percent   in taxes. Thinking of the secretary, it gets a little complicated,   given how the tax brackets work, but basically, people who make   between $100,000 and $200,000 are paying around 20 percent in federal   taxes, including payroll and income taxes, according to an analysis   from the nonpartisan Tax Policy Center. So in this case, the secretary's rate is higher because so much of   Buffett's income comes from investments and is taxed at the lower   capital gains rate. Here's Buffet's original Op-Ed in the NYT for those of you that aren't familiar." "I believe that is the purpose of write-offs aka ""loopholes"", to save people money on their taxes.  The tax code is an incentive system, right now there are huge incentives for corporations to organize themselves in odd ways to avoid taxes. If we restructure the tax code, the behavior will change. No sense in blaming companies for playing by the rules." Why would such a large discount make business sense to the restaurant? The legit reasons could be;   Or can I assume that the restaurant is trying to avoid leaving a paper trail so that they could avoid paying tax? The illegal reasons could be; Q: If I call a tail a leg, then how many legs does a dog have?   A: 4. You can call it whatever you want, it's still a tail. The scenario is nonsense. There is a quid pro quo, the waitress served the customer and he tipped her. A $7 tip on a $24.47 check. He was generous, but misguided if he thought that this note would let the tip go untaxed.  And even though the article you link is fresh, the author has the gift threshold incorrect. This year it's $14,000, and has been so since 2013.  A cute story, and unlikely to be an issue for $7, but the IRS would take notice if this idea gained any traction.  Two references - If Gifts Are Not Income, Why Tax Gratuities? From the Tax Court Files: Is That Money a Gift or Income? "&gt;Taxes make money disappear from the economy.  But those taxes are used to pay for labor, in most cases.  The state workers that fix the roads are paid with tax money. As are all the supplies and equipment, for example.  I think I understand the debt bit - If I buy a house and default on it, that money is ""gone"", but the house remains to be sold by the bank later.  Only the interest is really missing, right?" This is the point of the article. Somehow a company which is so successful has, for tax purposes, such a razor thin margin. So their taxation clearly isn't in keeping with its actual ability to pay, passing along the burden to other businesses and individuals. "Why would you give them the money and borrow it back?  If you didn't give it to them in the first place you wouldn't need to borrow!  It makes no sense at all. It USED to have a different use--as a tax dodge.  You would buy ""life insurance"" for a low amount of coverage and way overfund it.  Let the money grow and in your later years you would ""borrow"" against the extra value you had built up in the policy.  Since this was a loan rather than a payout it wasn't income.  When you died the tax liability went poof. Thus so long as what you had to pay in life insurance + the inefficiency of the insurance company was less than the tax rate it was a good deal. Congress closed this loophole a long time ago by prohibiting too great overfunding." "I can't find any specific loopholes listed there that he plans to close.  The only use of the word is  &gt;Meanwhile, loopholes favor those with the best lobbyists. If we close loopholes and lower the tax rate, the American people and corporations will win.  which is the same generic stuff he's been saying all along.  I'm guessing from your name ""optiontrader"" you know a lot more about this than I do so if there's something in there that I'm missing please point me to it." Most inversion and tax sheltering deals like this are structured whereby their US division sends any profits to their offshore division as intellectual property licensing payments, or some form of financial instrument like inter-company loans, and the interest payments just so happen to be about as large as the US profits in that particular year.  Every time rules have been proposed to try and limit these sorts of arrangements, either they get killed in congress or additional loopholes are discovered and the same behavior continues.