Why is paying tax later better than now?

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by MemoryOfThatDay

“The archetypal wonderful company—think See’s Candies—grows with minimal incremental reinvestment, compounding the intrinsic value at a high rate while paying out most earnings. Provided that the business continues to earn returns in excess of the required rate of return and sustain its competitive advantage, investors are rewarded for holding wonderful companies for long periods or, as Buffett quips, “[W]hen we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

This allows the investment to compound without paying capital gains tax and is one of the main reasons that wonderful companies appear to be such attractive investment opportunities.”

This reminds me of the advice to look for stocks that gives low dividends because once its paid out gains taxes must be paid, and this is thus undesirable because it takes the decision of ” when to pay tax” away from the investor.

I imagine one of the reasons is expectations of a lower tax future.

Other reasons might be: how earnings turned into dividends are not used for reinvestment/research, how dividends might inflate the stock price and the reverse and from behavioral : how abundance of capital create inefficiencies;it makes management less careful with expenditures, etc.

But in practice, do any of these factors matter?




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