Should we own something small wholly or own something big partially

Warren Buffett likes to buy high dividend paying companies and turn them into private companies. Then he stops distributing dividends from  these companies. In that way, he doesn’t have to pay tax on dividends. How much is the difference with and without dividend tax?

Suppose a company has constant earning every year. The dividend payout is 6% of asset value. Suppose the dividend can be reinvested with the same level of return. Suppose the initial value of the company is 1 billion. What is the final value of the investment with and without dividend tax, after 40 years? Assume the dividend tax rate is 25%.

With tax the final value is

1*(1+6%*(1-25%))^40 = 5.82 billion

Without tax the final value is

1*(1+6%)^40 = 10.29 billion

Wealth level without tax almost doubles that with tax.

Sometimes, Buffett traded part ownership of a company for a whole subsidiary. For example, he once traded some stocks of P&G for the whole of Duracell, a subsidiary of P&G. Since Duracell becomes a private company, Buffett doesn’t have to pay dividend. With few exceptions, almost all public companies at mature stage have to pay dividends. Otherwise, investors would be very uncomfortable to hold a company that never distribute dividends. But one doesn’t have to pay dividend if it is private. In that way, one saves a lot of taxes, which can be understood as part of the transaction costs.

In general, should we own something small wholly or own something big partially? The above example shows that it is more profitable to own something small wholly. In that way, you don’t have to pay inevitable transaction costs that are associated with shared ownerships. Similarly, should we put more effort to our families or engage in more external activities? Should the tax and regulatory system encourage small family businesses or large corporations? Currently, complex regulatory systems deter small companies from entry and protect established large companies from competition.