The value of deferral
http://www.valuewalk.com/2016/08/how-warren-buffett-used-deferred-taxes-to-make-twice-as-much-money/
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“In economic terms, the liability resembles an interest-free loan from the U.S. Treasury that comes due only at our election…
Imagine that Berkshire had only $1, which we put in a security that doubled by yearend and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time. At the end of 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250. Not bad. If, however, we made a single fantastic investment that itself doubled 20 times during 20 years, our dollar would grow to $1,048,576. Were we then to cash out, we would pay a 34% tax of roughly $356,500 and be left with about $692,000.
The sole reason for this staggering difference in results would be the timing of tax payments. Interestingly, the government would gain from Scenario 2 in exactly the same 27:1 as we – taking in taxes of $356,500 vs. $13,000 - though admittedly, it would have to wait for its money."
No wonder his favorite holding period is forever
http://www.valuewalk.com/2016/08/how-warren-buffett-used-deferred-taxes-to-make-twice-as-much-money/
"
“In economic terms, the liability resembles an interest-free loan from the U.S. Treasury that comes due only at our election…
Imagine that Berkshire had only $1, which we put in a security that doubled by yearend and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time. At the end of 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250. Not bad. If, however, we made a single fantastic investment that itself doubled 20 times during 20 years, our dollar would grow to $1,048,576. Were we then to cash out, we would pay a 34% tax of roughly $356,500 and be left with about $692,000.
The sole reason for this staggering difference in results would be the timing of tax payments. Interestingly, the government would gain from Scenario 2 in exactly the same 27:1 as we – taking in taxes of $356,500 vs. $13,000 - though admittedly, it would have to wait for its money."
No wonder his favorite holding period is forever
