Mark Cuban Makes the Key Point

Ken Houghton remembers that Warren Buffett famously groused that he pays a lower percentage of his income in taxes than his secretary. Or the person who will come up with an actual cure for a cancer.

Mark Cuban takes this one step further, pointing out the obvious: if we want to promote investment, “we should tax the trader/speculator more heavily than the investor.[emphasis his]”

When you make the tax rate the same for short-term investment as long-term—and lower than that on income—you create the perverse incentive to taking profits in the short-term, making the “capital” investment equivalent to a Demand Deposit account. If you want to reward capital investment, it needs to be truly treated as capital. Cuban notes:

The government should raises taxes significantly on profits from short term capital gains on the sale of public stocks, indexes, commodities, futures held for 24 hours or less and extend the length of time required to qualify for Long Term capital gains and reduce the tax rate on Long Term gains.

It might be difficult to reduce the already-less-than-minimal tax rate on long-term gains. (Last time I checked, the capital gain on a five-year investment is taxed at 8%.) But it would be no problem at all raising the rate on short-term trades back to where it should be—above that of ordinary income tax rates. And even a budget-balancing approach would leave plenty of room to lower the rate for legitimately long-term holdings.

Cuban makes the connection: one of the reasons the tax incentives need to be moved is the perversion they have made of Corporate Governance:

[Raising taxes on short-term trades and lowering them on long-term investments] will also reward companies that act in the financial interests of long term holders and their employers. I think the impact on the economy would be far fewer layoffs as CEOs find themselves with more shareholders who think long term rather than short term. Believe it or not, there are shareholders who are fine with companies not beating their numbers if the company is making progress towards a clearly defined goal….Taxation can change the focus on public companies and stock trading. That would be a great thing for the economy.

Cuban notes that there is still the major problem of misaligned incentives in Executive Compensation (economist’s version here [PDF, subscription required]):

CEOs…are so focused on marking to market their own personal stock portfolios, they emphasize stock performance over doing the right thing for the company.

Amazingly, this is exactly the problem that standard economic theory claims “professional” management solved. I hope this one makes it into John Quiggin’s book.

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