Warren Buffett presents an interesting thought experiment in his latest piece in the New York Times:
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.
I wrote in the past about how the rich make their money and it’s no surprise that the answer is ‘capital gains,’ or, to over simplify, they make their money from returns on investments. These returns are taxed as a much lower rate (currently around 18%) than income tax. Looking at the 400 richest people in America, they made almost half their adjusted gross income from capital gains.
As Buffett posits, even if the tax rates for the “rich” increase, it won’t stop these people from going about business as usual. They’re still going to make investments because, even with an increased tax rate, they’ll be making more money than if their cash was sitting in a bank.
Now, whether or not these people create jobs is a different story1. But I think Warren Buffett is right, and raising the tax rate for capital gains will do nothing but help our economy.
- Some investors invest in small businesses, which have the potential to grow and create jobs. But others, like Bain Capital, instead make money from buying struggling companies and attempting a revival. Sometimes this involves layoffs and lost jobs, sometimes the company grows and does create a few more jobs. But it’s more of a crap shoot, and it isn’t fair to say that these ventures always create jobs (and even less fair to even think that creating jobs is even part of the goal, rather than a bi-product). ↩
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