You can't escape taxes, but you can gain an advantage by legally delaying their payment.
That is a model that legendary investor Warren Buffet exemplifies, and it is one of several broad lessons on how investors can profitably think about taxes that Tocqueville Asset Management founder Francois Sicart offers in a letter to shareholders.
Sicart shines a light on Buffett's tax practices — made all the more noteworthy by the outspoken billionaire's frequent advocacy for higher taxes on the wealthy — but not before urging investors to abandon a counterproductive propensity to escape taxation.
The instinct for tax avoidance has been well honed by a history of wars, invasions and confiscations that has long conditioned people to hide their wealth, "preferably in another country," Sicart writes.
Europeans particularly, when not hiding their wealth from rapacious Nazis or in fear of a Soviet invasion, had to worry about the tax-grabbing depredations of the welfare state.
Such fears generated flourishing global tax havens that were fully legal or at least tolerated.
Sicart's purpose in writing about taxes is to advise the newly wealthy who might be thinking in terms of tax avoidance that resistance to taxation today is futile.
The sagacious fund company founder — who has been managing money since 1969 — first appreciated the tax landscape's changing dynamics in 1981, when IBM introduced its personal computer.
"It occurred to me that the odds had shifted and bank secrecy was doomed," Sicart writes of the PC's large databases, which would very soon give way to the massive information processing of today's Internet age.
The other key turning point was 1989, when the member states of the Organization of Economic Cooperation and Development (OECD) began formally sharing financial data as a means of combating money laundering and terror financing — cooperation that eventually led to "multilateral and bilateral tax treaties that have practically eliminated banking secrecy in most countries," he writes.
Thus, from a recent past in which hiding wealth was either not a crime or a tolerated act that was in any case hard to discover through existing technological means, wealthy investors today must come to grips with the fact that hiding from the taxman is now impossible.
"In a world where the taxman is not only increasingly sophisticated, but also better informed and connected to colleagues worldwide, aiming for zero or minimal tax has become a fantasy that could eventually prove costly," Sicart writes.
That is not merely the result of tax treaties that require financial institutions to respond to tax authorities' specific requests but, more significantly, because such exchanges of information are now automated.
The Tocqueville Asset Management founder thus suggests wealthy households — particularly those potentially subject to taxation in multiple jurisdictions — would do better to concentrate on choosing where to be taxed rather than imagining they can achieve financial privacy.
