The amount I have lying around varies from about 5% of net worth to about -20% (through a 1.25% line of credit), depending on what my short term needs are such as building a new house.

-20% of your net wealth? So you have negative net wealth and positive amount (20%) of it lying around?? Or you have debt lying around?

It was shorthand for saying that sometimes I have cash available and sometimes I tap a low-interest line of credit (up to 20% of net worth). The point is that it's readily available. I don't care whether the source of money needed for short term expenses/investments (< 18 months) comes from cash or the cheap credit line. At this interest rate (1.25%), it's basically like cash. I sometimes use it to pay taxes, which was the relevant point to Draug's question, I think.

Or in other words, if I had an impulse to buy an island about 1/100th the value of Lanai, I would use either cash or the line of credit. :) I wouldn't necessarily sell stocks immediately to do that. I'd wait a few months for some more dividends to come in.

If that wasn't enough to pay for my island, I'd sell some of my stock or other assets. But, of course, I would sell the stocks whose value have dropped (preferably the short term losers) so that I don't have to pay any capital gain taxes. So, I would have short term and long term losses which can be offset against gains and would actually lower my overall tax bill.

And, of course, when I want to donate to the foundation that I control while I'm alive, I donate my most-appreciated stocks without selling them first, thereby not having to pay capital gains taxes on those significant gains. Plus, that donation is tax deductible, thereby reducing my taxes further! In fact, my accountant tells me not to bother donating any more this year because I've already reduced my marginal tax rate to 28% (my effective rate is actually much lower), so better to wait until next year before donating more. This only works so well because I don't earn a wage.

These are the sorts of things Warren Buffett is referring to when he says he has a lower effective tax rate than his secretary.

Correction: the dividends and stock sales I mention above are to pay off the line of credit at some point when convenient (and when most tax-efficient), not to pay for the island up front.

Thank you Numbat. You said what I had been trying to say much more eloquently. As someone who's been through a few accounting courses I know what you've said, but I'm just awful at explaining it to others.