Sometimes You Really Need a Graph…

April 16th, 2012 at 7:37 pm

Larry Kudlow and I had a debate tonight on whether the Buffet tax, or more broadly, raising tax rates on capital incomes, would have a negative impact on investment.  I said ‘no,’ he said ‘yes,’ and that’s about where we started and ended.

As I’ve stressed in various posts, I take Larry’s point that large changes in cap gains rates, for example, should show up in investment.  But empirically, they just don’t.  You do, as I stressed in the segment, see timing changes around when investors realize their gains, in order to get ahead of the increase or take advantage of a decrease in the rate.  But the investment story just isn’t there in the data.

It’s one of those situations where you really need some graphs.  See the ones in here and here.

I know—we’re all overusing Warren Buffett these days, but here’s what he says about it, and I’d listen to him over a few talking heads, even if one of those heads is mine.

“I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.”

Len Burman agrees.

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6 comments in reply to "Sometimes You Really Need a Graph…"

  1. Blake says:

    The way I see it, trying to have a conversation with people like Larry Kudlow falls into a category well defined by Barney Frank: “Trying to have a conversation with you would be like trying to argue with a dining room table,”. He just does not occupy a fact or reality based world and it pains me to see people like him allowed to be on, let alone host, television shows on a supposed “business news” network.


  2. Robert Thille says:

    I lost a lot of money due to the difference in short-term vs long-term capital gains. I held onto stock I should have sold because I didn’t want to be taxed at the higher rate.


    • Michael says:

      Sure, but someone else gained that money. You can’t compare gambling proceeds such as the ones you describe with actual investment.


  3. azlib says:

    It is becoming increasingly obvious that the low capital gains tax rate is just there so the wealthy pay less income tax. There is simply no economic justification for the lower rate. Income should be treated as income.


  4. Mike says:

    Kudlow’s argument makes no sense. If an investor identifies an opportunity to make money, she is going to take that opportunity, regardless of what the taxes are. If I don’t invest my money because I’m worried about taxes, I make zero dollars. If I do invest, even if there’s a 30% tax, I make considerably more money. Most people I know would prefer more money over no money.

    Mark Cuban has made this point several times, and I think he knows a thing or two about investing.


  5. David A. Spitzley says:

    I think the central problem with the standard “taxes drive down investment” narrative is that it’s based on substitution logic: if you reduce the returns to investment, people won’t invest, but that implies they’ll do something else with it. But investing isn’t like buying grapefruit: if the price of grapefruit rises (or more equivalently to the investment case, your utility gained from grapefruit drops for reasons of taste, health reporting scares, etc.), you’ll buy a close substitute. Investment doesn’t really have a close substitute – if you’re extremely wealthy and have bought the consumer goods you want (after the 20th car they get to be a bit of a bother, and that’s only a few million bucks), what else are you going to do with your surplus funds but buy productive assets?


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