TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, December 18, 2012

Warren Buffett Knows: Tax Rates Matters

Wall Street Journal op-ed:  Warren Buffett Knows That Tax Rates Matter, by Clifford S. Asness:

There are important questions we need to answer about taxes. How progressive or regressive? How should rates vary on different forms of income? How much of fixing our fiscal problems should come from raising revenue versus cutting spending? I have my opinions and you are entitled to yours. But some basic truths, old fashioned as it may sound, really aren't subject to opinion.

Nevertheless, in an effort to support raising taxes, particularly capital-gains taxes, and to head off the argument that such hikes would be a drag on the economy, billionaire investor Warren Buffett argued in a New York Times op-ed last month that tax rates don't matter to investment decisions. He wrote that if someone comes to you with a good investment idea, no one says, "If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent."

In the field of economics and finance you would be hard-pressed to find something more patently wrong. ...

Mr. Buffett is undoubtedly right that rich people will continue to invest some amount in something regardless of the tax rate (except for a 100% rate!). He's also undoubtedly right that an investment that easily clears all hurdles will likely still be attractive after a small tax increase. But life, and the investment decision, occurs at the margin. Fewer and smaller investments will be made if the after-tax prospects are worse. It's just math and logic, unassailable and commonly accepted regardless of one's political persuasion.

I have great admiration for Warren Buffett as an investor. He has also been smart about minimizing his tax bill. From making sure his profit is in the form of long-term capital gains and not, for instance, dividends, to how he structures his bequests and charitable contributions, Mr. Buffett is perhaps our premiere national example that tax rates and tax structure affect people's investment decisions in a very real way.

Taxes matter. They matter to business and life decisions alike. They matter to the rich and to the poor. They are, or at least they should be, incorporated into nearly every financial decision made. Discussing tax policy without acknowledging this fundamental reality is bizarre. Actually asserting the opposite is willful ignorance.

Tax | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Warren Buffett Knows: Tax Rates Matters: