I'm campaigning to create a Mount Rushmore of sorts above the freeway in Lafayette -- it would depict major figures of the financial services industry. For the moment, however, the only Rushmore-worthy candidates would be John Bogle, the Vanguard Group founder, and Warren Buffett. The list could be longer, but that's it for now.
I hardly have to dwell any further on Bogle except to point out that Vanguard is unique in its ability to deliver services at a small fraction of what the rest of the industry charges for managing money.
Buffett, on the other hand, came to mind when I read his recent op-ed in The New York Times. He expounded on the need for wealthy people to pay what amounts to a flat tax of 30 percent on everything from $1 million to $10 million, and 35 percent on everything above that amount. He effectively debunks the notion that taxes stand in the way of people who want to invest in businesses.
The column was a direct contradiction of a book I just finished called, "Unintended Consequences: Why Everything You've Been Told About the Economy is Wrong" by Edward Conard -- a former Bain Capital senior manager. The provocative title whetted my curiosity.
Conard focuses primarily on the point that investments in innovation take place to a greater extent when people have lots of after-tax assets that they can risk on innovation. The less after-tax cash, the less they invest in innovation and the middle class experiences an opportunity cost as a result.
Innovation, of course, increases productivity, and the book's charts and graphs indicate that we are far ahead of other countries in this regard -- presumably because our tax rates are lower. To his credit, the writer devotes chapter after chapter of analysis to buttress his central point, and it certainly generates food for thought.
As I finally reached the book's last few paragraphs, however, I read that, "lawmakers could increase the expected payoff for successful risk taking and accelerate the accumulation of equity by lowering marginal tax rates..." And then, "commerce is the salvation of the poor, not charity."
Setting the book aside, I found myself reminiscing about the "nifty fifty." These were the 50 companies spawned in the 1950s and '60s that included innovators like Xerox, IBM, Teledyne, Boeing and Litton, to name a few. How did all these companies thrive while tax rates across the board were more than twice what they are today -- 91 percent at the start of the Kennedy administration? Buffett's opinion piece offers a simple explanation.
He starts by asking what your response would be if someone (presumably like him) suggested a promising investment idea with the advice that, "I'm in it, and I think you should be too." A very unlikely reply would be something like, "Well, it all depends on what my tax rate will be on the gain 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."
In the same vein is the steady drumbeat that taxes are hampering the growth of small businesses taxed at the owner's personal tax rate. Wait a minute. That so-called "Subchapter S" election is the owner's choice and it's done on purpose. Owners want to be able to deduct on their personal tax returns all the money they spend to hire new employees, rent new space, buy computers, drive nice cars, entertain and travel -- in short, a tax deduction for the costs of growing their businesses.
By electing so-called Subchapter S taxpayer status, they get to personally deduct every dime invested in their company's growth. Even their retirement savings are all tax deductible. What they don't get to deduct is the after-tax money they want to spend on homes, boats, second homes, kids' educations, and basic living expenses.
Buffett sums it all up with the words, —...(if) you run into someone with a terrific investment idea, who won't go forward with it because of the tax he would owe when it succeeds, send him my way. Let me unburden him."
Stephen J. Butler is CEO of Pension Dynamics. Contact him at 925-956-0505, ext. 228, or email him at email@example.com.