Suppose that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”
Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.
Makes sense, right? Well--his convenient comparison to a savings account notwithstanding--not to everybody. Being one who advises investors, I entirely reject the notion that taxes don't strongly influence investor decisions. In fact here's a quote from a man who would categorically refute Buffett's assertion--a man who, in many circles, is considered one of the best investors ever (per this article):
If Berkshire, for example, were to be liquidated - which it most certainly won’t be -- shareholders would, under the new law, receive far less from the sales of our properties than they would have if the properties had been sold in the past, assuming identical prices in each sale. Though this outcome is theoretical in our case, the change in the law will very materially affect many companies. Therefore, it also affects our evaluations of prospective investments. Take, for example, producing oil and gas businesses, selected media companies, real estate companies, etc. that might wish to sell out. The values that their shareholders can realize are likely to be significantly reduced simply because the General Utilities Doctrine has been repealed - though the companies’ operating economics will not have changed adversely at all. My impression is that this important change in the law has not yet been fully comprehended by either investors or managers.
Funny thing is, that's the man himself, Warren Buffett, in his 1986 letter to Berkshire shareholders in response to changes in the 1986 tax reform act. My real-world experience suggests that the savvy 1986 Buffett had a much better handle on how investors think than does the generous -- with other people's money -- 2012 Buffett.
And of course he, as does everybody in the raise taxes camp, hearkens back to periods in history where the economy did fine while tax rates were higher. And of course he, like the rest, makes no mention of effective tax rates, demographics, the economic environment, etc.
And to top it all off, he thinks the government should strive to spend what amounts to 21% of GDP and to collect revenue amounting to 18.5%--in perpetuity. In other words, what leads to utter failure on the part of businesses and individuals (spending beyond means) somehow works for government. I think he's been having tea with Krugman. He's in essence proposing that government grab another $400 billion a year from the private sector (where incentives are true), while cutting public sector (where incentives are, let's say, less than true) spending by less than half that amount (his numbers). If he's truly out to support his pals in Washington--I can think of no other reason for this lunacy--he'd do better to educate them. That's assuming he understands better himself.
If anyone knows Mr. Buffett's email address, please forward him this link showing long-term capital gains tax rates and long-term capital gains tax revenue from 1977 through 2007 (2nd chart). Here are some highlights:
1977 LT cap gain tax rate: 39.88%, LT cap gain tax paid: $ 7.9B
1978 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $10.4B
(Tax rate cut 30%, Tax receipts grew 32%)
1981 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $11.9B
1982 LT cap gain tax rate: 20.00%, LT cap gain tax paid: $12.5B
(Tax rate cut 29%, Tax receipts grew 5%)
1986 LT cap gain tax rate: 20.00%, LT cap gain tax paid: $50.8B
1987 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $31.8B
(Tax rate increase 40%, Tax receipts decline 37%)
1990 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $25.9B
1991 LT cap gain tax rate: 28.93%, LT cap gain tax paid: $21.6B
(Tax rate increase 3%, Tax receipts decline 16%)
1992 LT cap gain tax rate: 28.93%, LT cap gain tax paid: $25.8B
1993 LT cap gain tax rate: 29.19%, LT cap gain tax paid: $31.4B
(Tax rate increase 1%, Tax receipts increase 22%)
1997 LT cap gain tax rate: 29.19%, LT cap gain tax paid: $69.6B
1998 LT cap gain tax rate: 21.19%, LT cap gain tax paid: $80.6B
(Tax rate cut 27%, Tax receipts increase 16%)
2003 LT cap gain tax rate: 21.05%, LT cap gain tax paid: $44.9B
2004 LT cap gain tax rate: 16.05%, LT cap gain tax paid: $66.2B
(Tax rate cut 24%, Tax receipts increase 47%)
2005 LT cap gain tax rate: 16.05%, LT cap gain tax paid: $92.3B
2006 LT cap gain tax rate: 15.70%, LT cap gain tax paid: $106.6B
(Tax rate cut 2%, Tax receipts increase 15%)
So, in the year immediately following a cut in the long-term capital gains tax rate, revenue actually rose 5 out of 5 times. In the year immediately following an increase in the long-term capital gains tax rate, revenue actually declined 2 out of 3 times (by $19B and $4.3B). In the only year when revenue increased immediately following a rate increase--a mere 1% increase--it did so by $5.6B.
If Mr. Buffett is sincerely interested in seeing greater government revenue from investors, history offers strong evidence that he ought to be pushing for lower, not higher, capital gains tax rates, or--at a minimum--making the current rates permanent. Or if he's inspired by some backward "fairness" reasoning, he should lobby for the tiniest of increases.