Warren Buffett is making sure no one ever gets as rich as he became — or as ridiculous.
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In case Democrat Buffett wouldn’t take Republican Feldstein’s word for it, perhaps The Oracle of Omaha should listen to Christina Romer, Barack Obama’s former chairman of the Council of Economic Advisers. She wrote, in a paper co-authored with her husband, that “exogenous tax increases have a large, rapid, and highly statistically significant negative effect on output.” And further, “an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.”
And this is Buffett’s prescription for a healthy economy?
(Note for econ geeks: The Romers also specifically say that tax hikes designed to reduce a deficit are exogenous but add that tax increases implemented for that reason may not have quite as negative an impact as other exogenous tax hikes if they have “expansionary effects through expectations and long-term interest rates, or through confidence.” However, since few investors actually believe that raising tax rates will cause our deficit to go lower, as compared to the impacts of spending reductions, my belief is that tax increases to address the deficit fall fully into the Romers’ exogenous category without requiring further clarification. After all, as Milton Friedman told us, “Politicians will always spend every penny of tax raised and whatever else they can get away with.”)
Now let’s look at the 1997 Clinton tax bill, the key provision of which was to lower the top capital gains rate from 28 percent to 20 percent. The bill also raised the estate tax exemption and established Roth and education IRAs, along with other relatively less important provisions.
Buffett asserts that he “has yet to see anyone shy away from a sensible investment because of the tax rate on the potential gain.” This sounds remarkably like the late New Yorker magazine film critic Pauline Kael whose most famous utterance is often paraphrased as “I don’t know how Richard Nixon could have won. I don’t know anybody who voted for him.”
Warren, your anecdotes are not data. So, instead, let’s look at some data:
According to Heritage’s Foster:
In 1995, the first year for which these data are available, just over $8 billion in venture capital was invested. Venture capital is especially critical to a vibrant economy because high-risk/high-return investment permits promising new businesses to blossom, rapidly spreading new technologies and new ideas into the marketplace and across the economy. Such investments, when successful, generate returns to investors that are subject primarily to the tax on capital gains. By 1998, the first full year in which the lower capital gains rates were in effect, venture capital activity reached almost $28 billion, more than a three-fold increase over 1995 levels, and by 1999, it had doubled yet again.
To be sure, the rise of the Internet had a substantial impact on the growth of venture capital at that time, but the development of the Internet to what we know today was certainly enabled by the willingness of investors to take more risk due to a lower penalty for success, i.e. a lower capital gains tax rate.
It wasn’t just investments which were unleashed; the tax cut caused a tsunami of revenue for the federal government along with increasing economic growth.
Again, J.D. Foster: “According to Treasury’s original estimates, the 1997 tax cut was relatively modest, amounting to just 0.11 percent of GDP in its first year and 0.22 percent of GDP by its fourth year. In 1997, the fourth-year effect would be roughly equivalent to a reduction in the overall tax burden of about $30 billion.”
But, as Peter Ferrara pointed out in a 2010 article (which contains many other examples of capital gains tax cuts yielding increased tax revenue), “in 1997, Congress cut the capital gains tax rate from 28% back down to 20%. Despite this almost 30% cut in the rate, capital gains revenues rose from $62 billion in 1996 to $109 billion in 1999. Revenues over the period 1997 to 2000 increased by 84% over the projections before the tax cut.”
Gross Domestic Product growth during the Clinton years was a full 1% per year higher during the four years after the capital gains tax cut than the four years before it. Real wages increased dramatically, as did the value of the stock market. Moreover, the early part of the Clinton years represented a recovery from recession, during which growth should have been faster than it was. And the later part of the Clinton years would typically have been a period of slightly slowing growth following that recovery; instead growth increased following the capital gains tax cut. In other words, the evidence is strong that the 1993 tax hike hurt the economy and federal tax receipts and the 1997 tax cut helped them. And the evidence is conclusive that the 1993 tax hike raised much less money than its supporters predicted whereas the 1997 tax cut brought in a deluge of money after its detractors and the government’s static modelers predicted it would reduce federal revenue.
In short, Buffett’s prescription is economic snake oil at best, poison at worst. Again, recommending higher taxes is easy for him to say, as he earns more in a month than many Americans will earn in a lifetime.
It’s also worth noting that Buffett, who says his $7 million tax bill in 2010 was unfairly low in percentage terms when compared to others in his office, forgets that his long-term investments were (mostly) made with income on which tax was paid when it was earned. This is of course no different than the rest of us who are fortunate enough to be able to make long-term investments. These investments then allow others to create jobs and grow the economy. It’s remarkable how the left talks about capital gains taxes as if the activities which create capital gains are non-productive at best and a form of exploitative class warfare at worst when they are in fact the highest octane fuel for our economic engine.
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