I used to think that taxes, being a necessary for a functioning country, were designed:
- to take a share of the economic value created by entities in the economy, representing a kind of pay-back for all the things that the government put in place to make such creation of economic value possible,
- to discourage or encourage certain behavior, and
- to fund the programs and initiatives needed by the nation
I know, I know... I was a dreamer. While it is an ideal, that's not how taxes are designed at all.
In reality, taxes are usually levied along the path of least resistance. Taxes are about re-election. The tax system in America is as much determined by the needs and abilities of the country as a whole as it is by the institutionalism and bureaucracy of the government presiding over it. The last statement is not to say that it's all wrong and has to be abolished or revolted against. It's only to say that the structure of democracy and all the good that is brings comes along with all of the things that are less than optimal.
As such, from the perspective of an investor, tax law is arbitrary. Tax law in the US is mostly centered around income, as opposed to either creation of economic value (not always the same as income) or consumption, which is when you commission society to do something for you.
For investors, there are two major kinds of taxes. Taxes on interest or dividends, and taxes on capital gains. The goal of an investor is neither to maximize pre-tax returns nor to minimize taxes nor both, but to maximize after-tax returns. After-tax returns are determined by (a) pre-tax results minus (b) taxes. That is to say that maximizing this "A - B" equation necessarily means that taxes are disfavored.
There's really no special philosophy here. We simply take taxes as a given and optimize what we do with the presence of taxes in mind.
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