Actually, Taxing Capital Is A Great Idea

As the 2020 presidential candidates increasingly talk about raising taxes on the wealthy, it seems like every day a new, well-paid talking head comes out of the woodwork to try and convince us all why this would somehow, actually, be a bad thing. The latest act of mental gymnastics comes to us from Lee Ohanian, an economics professor at UCLA, who desperately wants working Americans to believe that taxing wealth at the same rate we tax work would be a disaster for our country.

One could reasonably expect a professor at a prestigious university to have a well-reasoned, practical argument grounded in plenty of evidence. 

If there is an argument like that against taxing wealth, however, it’s certainly not in Professor Ohanian’s op-ed. The lackluster logic he uses to reach such a wild and potentially dangerous conclusion merits a rebuttal.

Professor Ohanian takes aim at billionaire investor Warren Buffett for his pro-tax stance,  first accusing him of hypocrisy, saying:

“Buffett has exploited all tax benefits to minimize his tax payments, including unrealized income offsets. Buffett does this by transferring the income growth in his assets into price appreciation of Berkshire Hathaway stock, which is the corporation that he runs. The tax is not due until the stock is sold.”

Here’s the problem with that: Mr. Buffett has not transferred anything. He (and for full disclosure, like me) is an owner of stock in the Berkshire Hathaway corporation. In both his case and mine, much of our wealth lies in our company stock. Berkshire Hathaway has done very well under Mr. Buffett’s leadership, so our stock has grown in value over time. Both of us get money to live on by occasionally selling some of our stock, and paying taxes on the proceeds of those sales as directed by law. Those taxes are assessed at a far lower rate than taxes assessed on people who work for a living. My federal income tax rate, for instance, is around 20%. This is, unfortunately, perfectly legal, and the Patriotic Millionaires have made equalizing the capital gains rate a key part of our tax reform work – but Professor Ohanian’s characterization of this as a deliberate transfer to avoid taxes is ridiculous. It’s the tax code itself that’s ridiculous!

Additionally, Mr. Buffett and I are far wealthier than would otherwise be the case thanks to the tax cuts passed in late 2017. Thanks to that bill, Berkshire Hathaway saved approximately $29 billion on taxes it had already accounted for in previous years under the previous corporate tax rate of 35%. When the Trump administration turned around and slashed that rate to just 21%, the company suddenly didn’t owe about a third of the tax liability that was already on its balance sheet, just like that.

Though the Trump administration is always keen to tout how this ludicrous change to our tax code incentivized new investment, they could not have possibly incentivized any actions which took place prior to 2017. Essentially, Warren Buffett’s company bought a bunch of things before the tax code changed, depreciated them for tax purposes faster than they were written off for financial accounting purposes, and then – poof! – the federal government slashed the tax rate and told Berkshire Hathaway it no longer owed about a ⅓ of its taxes. Let’s be clear on this, Professor Ohanian. This is the government’s own, absurd doing. 

Professor Ohanian goes on to say:

“If Buffett’s recommendation were implemented, the U.S. economy would decline, capital would move abroad and the costs would be borne by workers.”

While I question the premise that Professor Ohanian is more qualified to say what investors will do than is Mr. Buffett, I should note that both investors and workers have had options to move for years, and they haven’t! Investors invest and build businesses in places where people have money to spend and governments provide infrastructure and amenities that make consumers and workers want to live their lives and spend their money. Within the United States, entrepreneurs are most often starting exciting new businesses in New York and California (high tax states) and not in Kansas (a low tax state). As much as Professor Ohanion would like to tell you otherwise, there’s a lot more that matters in investment and business decisions than tax rates.

Finally, Professor Ohanion goes on to state:

“Investors have required a fairly constant after-tax return. As tax rates rise, they reduce investment until the required after-tax return is restored. “

This is just pure nonsense. Reducing investment will patently not increase the after-tax return. Speaking as an investor, trust me on this: no one has ever said  ‘I have a million dollars to invest, but since I’ll have to pay a 30% tax on my profits, I would rather keep it all in cash in my dresser and earn zero more dollars rather than investing it and keeping 70% of the profits.’ This is completely out of touch with the reality of investment. 

So, in my capacity as an investor and interested party in correctly identifying the many, multi-faceted problems in our economy, here’s my advice to Professor Ohanian: perhaps next time you feel the need to state your opinion in a national outlet, it might be wise to get your facts straight first.

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