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I think the author is making a small fallacy regarding investments. He assumes that as the capital gains tax rises, investment will fall because the investor w

I think the author is making a small fallacy regarding investments. He assumes that as the capital gains tax rises, investment will fall because the investor will make less money. This seems true for small investors, who might decide to "not invest" their money, and instead find starting their own business will have a higher return than buying GOOG stock. But if I have $1 billion to invest, then I don't have the option of "not investing" that money. It has to sit in stocks, bonds, or some other financial instrument. A higher capital gains tax may change which instruments I choose to invest in, but that money will all still be invested. A legitimate argument against higher capital gains taxes is that really great investors (i.e. the kind you want selecting investments, such as Buffet) will have less money to invest. This would hurt the economy, unless the corresponding good caused by government spending is greater. I think everyone would agree there is a happy equilibrium somewhere. Most rich people think it lies on the side of less taxation. Buffet, in contrast, seems to think that quality investors don't add as much value as they want to believe.

glenra 15y ago
> If I have $1 billion to invest, then I don't have the option of "not investing" that money. It has to sit in stocks, bonds, or some other financial instrument. No it doesn't. I could buy an extensive auto collection. Or a yacht or some paintings. Something that is pretty much guaranteed to depreciate, but at least I'll get some use value out of it in the meantime. (This is why when Britain had top tax rates close to 100%, people bought Bentleys and Rolls-Royces.) When investment is taxed at punitive rates, consumption becomes more attractive.
- festivusr 15y ago
  Buffett isn't suggesting punitive rates, just rates in line with the income taxes that an average working person pays.
- jackpirate 15y ago
  I've three gripes: First, I suspect most mega-rich find investing in all conditions far more enjoyable than anything that money might be able to buy. Second, even if they wanted to buy, it takes time to spend billions of dollars. In the mean time, that money will be put to work in some form of financial instrument. Even if it's only sitting in a bank, the bank will make a more lucrative investment with it. Third, it's not like buying an expensive auto collection is wasted money. That money will be used to build the infrastructure of those companies. This has the same shocking benefits of "pure" investment, although it is probably mildly less efficient.
  - glenra 15y ago
    > First, I suspect most mega-rich find investing in all conditions far more enjoyable than anything that money might be able to buy. Um, why would you suspect that? Do you find investing just to be investing more enjoyable than anything money could buy? Why would the mega-rich be any different? > Third, it's not like buying an expensive auto collection is wasted money. That money will be used to build the infrastructure of those companies. What I had in mind was an antique auto collection of the sort featured in reddit a few days ago. Buying a warehouse full of deusenbergs, corvairs, the taxi from seinfeld and a batmobile doesn't really "build the infrastructure of those companies" Anyway, by that logic wouldn't all consumption be beneficial? Going on a round-the-world cruise builds the infrastucture of the cruise company, right? Heck, pay a prostitute enough and she might buy a house with the income - that also "builds infrastructure"...
    - jackpirate 15y ago
      Um, why would you suspect that? Do you find investing just to be investing more enjoyable than anything money could buy? Why would the mega-rich be any different? I picked my job because it is very enjoyable to me. I would do it for free if I had too. The job of the mega-rich is to invest. They are under no financial pressure (like say a Mexican immigrant) that forces them to take that job. Anyway, by that logic... I totally agree that it's not the best use of the money, and would definitely rather see it invested wisely. At the same time, it's not like the money's just being burned. It adds a small inefficiency into the investment cycle, but apparently Buffet thinks this inefficiency is not as big as most other people do.
- tzs 15y ago
  If you are interested in an auto collection or yachts or paintings, you'd already be buying those. You aren't going to say "Dang...I was going to invest my $1 billion and earn $200 million/year, but these new taxes mean I'll only earn $180 million so screw that--I'm going to quit investing and become a car collector".
  - glenra 15y ago
    It's quite possible for a small amount of additional tax to have a big impact on the expected value of investing. When you invest, you don't know you're going to make a specific positive rate of return; you have to make a guess as to whether the net benefit is positive. Depending on your risk profile, it might just be slightly positive net expected value, in which case adding just a bit more tax makes it neutral or negative. BTW, if you're talking risk-free investment, that's around 2% now, not 20%. So the question is whether to invest $1 billion and earn $20 million. which would be $17 million under the existing capital gains tax (15%), but if you raised capital gains to match income tax rates it'd be less than $14 million. Which doesn't seem like much of a return on a billion dollar investment.

glenra 15y ago

> If I have $1 billion to invest, then I don't have the option of "not investing" that money. It has to sit in stocks, bonds, or some other financial instrument. No it doesn't. I could buy an extensive auto collection. Or a yacht or some paintings. Something that is pretty much guaranteed to depreciate, but at least I'll get some use value out of it in the meantime. (This is why when Britain had top tax rates close to 100%, people bought Bentleys and Rolls-Royces.) When investment is taxed at punitive rates, consumption becomes more attractive.

festivusr 15y ago
Buffett isn't suggesting punitive rates, just rates in line with the income taxes that an average working person pays.
jackpirate 15y ago
I've three gripes: First, I suspect most mega-rich find investing in all conditions far more enjoyable than anything that money might be able to buy. Second, even if they wanted to buy, it takes time to spend billions of dollars. In the mean time, that money will be put to work in some form of financial instrument. Even if it's only sitting in a bank, the bank will make a more lucrative investment with it. Third, it's not like buying an expensive auto collection is wasted money. That money will be used to build the infrastructure of those companies. This has the same shocking benefits of "pure" investment, although it is probably mildly less efficient.
- glenra 15y ago
  > First, I suspect most mega-rich find investing in all conditions far more enjoyable than anything that money might be able to buy. Um, why would you suspect that? Do you find investing just to be investing more enjoyable than anything money could buy? Why would the mega-rich be any different? > Third, it's not like buying an expensive auto collection is wasted money. That money will be used to build the infrastructure of those companies. What I had in mind was an antique auto collection of the sort featured in reddit a few days ago. Buying a warehouse full of deusenbergs, corvairs, the taxi from seinfeld and a batmobile doesn't really "build the infrastructure of those companies" Anyway, by that logic wouldn't all consumption be beneficial? Going on a round-the-world cruise builds the infrastucture of the cruise company, right? Heck, pay a prostitute enough and she might buy a house with the income - that also "builds infrastructure"...
  - jackpirate 15y ago
    Um, why would you suspect that? Do you find investing just to be investing more enjoyable than anything money could buy? Why would the mega-rich be any different? I picked my job because it is very enjoyable to me. I would do it for free if I had too. The job of the mega-rich is to invest. They are under no financial pressure (like say a Mexican immigrant) that forces them to take that job. Anyway, by that logic... I totally agree that it's not the best use of the money, and would definitely rather see it invested wisely. At the same time, it's not like the money's just being burned. It adds a small inefficiency into the investment cycle, but apparently Buffet thinks this inefficiency is not as big as most other people do.
tzs 15y ago
If you are interested in an auto collection or yachts or paintings, you'd already be buying those. You aren't going to say "Dang...I was going to invest my $1 billion and earn $200 million/year, but these new taxes mean I'll only earn $180 million so screw that--I'm going to quit investing and become a car collector".
- glenra 15y ago
  It's quite possible for a small amount of additional tax to have a big impact on the expected value of investing. When you invest, you don't know you're going to make a specific positive rate of return; you have to make a guess as to whether the net benefit is positive. Depending on your risk profile, it might just be slightly positive net expected value, in which case adding just a bit more tax makes it neutral or negative. BTW, if you're talking risk-free investment, that's around 2% now, not 20%. So the question is whether to invest $1 billion and earn $20 million. which would be $17 million under the existing capital gains tax (15%), but if you raised capital gains to match income tax rates it'd be less than $14 million. Which doesn't seem like much of a return on a billion dollar investment.