Economics, Pethokoukis

Why Warren Buffett is wrong about taxes

Business magnate Warren Buffett and his wife Astrid Menks arrive for a State Dinner held in honor of Britain's Prime Minister David Cameron and his wife Samantha at the White House in Washington March 14, 2012. REUTERS/Benjamin Myers

Business magnate Warren Buffett and his wife Astrid Menks arrive for a State Dinner held in honor of Britain's Prime Minister David Cameron and his wife Samantha at the White House in Washington March 14, 2012. REUTERS/Benjamin Myers

Warren Buffett has recently suggested that tax rates don’t matter when making investment decisions. Clifford Asness of AQR Capital Management respectfully disagrees (via the WSJ):

Consider how every business-school student, investment banker and investment analyst on Earth has been taught to choose whether to invest in a specific project or company. You make a spreadsheet (a napkin will do sometimes). You put in your best guess of the future cash flows, and you discount those cash flows back to the present at some required rate of return you believe reflects the risk entailed. Of course, opinions about the future cash flows and the proper discount rate can vary widely, but the essential methodology is ubiquitous.

Now here’s the kicker: Nobody who pays taxes and has ever done this exercise has failed (while sober) to use after-tax cash flows in this calculation. Somewhere in the spreadsheet there is a number, say 20%, or 28%, or a Gallic 75%, representing the taxes you’ll pay on the assumed cash flow—and you only count the amount you’ll get after paying this tax. If you turn the tax rate up high enough, projects or companies that looked like good investments become much less attractive and vice versa. Mr. Buffett is undoubtedly right that rich people will continue to invest some amount in something regardless of the tax rate (except for a 100% rate!). He’s also undoubtedly right that an investment that easily clears all hurdles will likely still be attractive after a small tax increase. But life, and the investment decision, occurs at the margin. Fewer and smaller investments will be made if the after-tax prospects are worse. It’s just math and logic, unassailable and commonly accepted regardless of one’s political persuasion.

12 thoughts on “Why Warren Buffett is wrong about taxes

  1. “Now here’s the kicker: Nobody who pays taxes and has ever done this exercise has failed (while sober) to use after-tax cash flows in this calculation. Somewhere in the spreadsheet there is a number, say 20%, or 28%, or a Gallic 75%, representing the taxes you’ll pay on the assumed cash flow”

    None of us will face this quandary.

    Slow morning, huh, Jim?

  2. The idea is the most important aspect in the kind of analysis Asness lays out — demand that is not being met or not at a price given the economies of X. Corporations would not be sitting on $1 trillion in cash if such ideas abounded. Asness also skips the part about subtracting a risk-free rate of return from expected ROI. That return today is negative in real terms. Corporations are paying for the privilege of doing nothing.

    • The op-ed makes it clear that some investments will be made at almost any tax rate, but that the important analysis is at the margin, where those projects that are not super-winners, but winners none-the-less at one tax rate, are not at a higher tax rate.

      But throw your childish insults around instead of thinking.

      • Piss off.

        Do you really want to see what investment is? It’s not quant investment like Asness. Asness trades, he doesn’t invest. The problem with Cliff is he doesn’t understand the difference between a numerator and a denominator when it comes to discounted cash flow.

        Real investment in equipment and software. Those low cap gains rates during the pathetic Georgie Porgie investment era enabled a plethora of carried interest for Asness but piss poor investment for the economy. The correlation between low cap gains tax and high investment is bullshit.

        • Asness’s firm is an investment manager with low turnover and paying ordinary income taxes (I see mainly mutual funds and long only stuff)

          But just lie little leftist, it is what u people do. You learn words like carried interest and repeat them wrongly like moronic children.

          All the man said is taxes matter AT THE MARGIN unlike what Bufett the left wing liar said to support his left wing buddy no matter what the truth. Do you disagree, AT THE MARGIN? You will avoid question.

          Truth hurts huh comrade.

  3. BUFFET SAYS TAXES DON’T MATTER WHEN IT COMES TO MAKING INVESTMENT DECISIONS ???????????????????

    I wonder if the SAGE ever heard of the MUNI-BOND MARKET?

    MUNI BONDS are all about taxes–that’s the only reason why this market exists. How could this phony hypocrite never have heard of the the trillion dollar muni market?

    Has Buffet ever heard of the PREFERRED STOCK dividend tax exemptions when the preferred stock is purchased by another corporation?

  4. Of course tax rates matter when making investment decisions. Buffett is doubling down on his insane decision to back Obama. This economy stinks, and Obama and liberal policies are the reason.

  5. It seems to me that taxes matter quite a bit. Maybe when you are the second richest American, you can afford to invest in a pet project that has little-to-no post-tax NPV, but for the rest of us who invest for future consumption (retirement planning, for example), taxes do matter.

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