How to invest a billion

David Cay Johnston has a fascinating little piece in Tax Notes, reproduced on the TaxProf blog. He poses the question:

imagine that $1 billion, after tax, was just depos- ited in your account. What would you invest to make your $1 billion grow? And how might taxes affect your decisions?

He starts off with an observation

The first thing you will notice is a severe shortage of opportunities to increase your new wealth

The stock market is lacklustre; retail is contracting; real estate is doomed, and overall, America is awash with capital. But -

Back in 1980 the American Council for Capital Forma- tion had yet to be born, but public debate focusing on a perceived shortage of capital became part of the lexicon. . . . The success of this movement was largely in tax policy and its twin, regulatory policy. Lowered rates on capital gains and dividends, more favorable rules on avoiding recognition of income, and handcuffing tax auditors while drastically reducing their numbers all played a big role in this shift.

All this is taken, today, to raise the spectre of higher taxes on capital causing disaster. It's a nice slogan, which plays well with the tea partiers out there - but because America is awash with capital, it's just not an argument that works.

Minority Leader Mitch McConnell, R-Ky., is among those who assert that raising taxes on the highest-income Americans will do damage, but he only asserts that because he has no evidence.Reports by the Congressional Research Service and the Congressional Budget Office, among others, show that it is more demand that is needed, not continued tax savings for those at the top.

And so what is needed, Johnston goes on to explain, is a tax policy that puts capital back to work.

So how to make capital more valuable? Let us turn here to an observation made in the middle of the 19th century:

Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.

Those words come not from Karl Marx, but from the first State of the Union address given by that most famous of Republican presidents, Abraham Lincoln.

And the way to do that, he goes on:

The way to build demand right now is to work on tax policies that bring balance to our economy. That means hiring more teachers, not firing 300,000 of them. That means increasing real wages, not using government tax and regulatory policies to suppress them. It means raising taxes on those who make the most to get money circulating.

All very sensible. He wrote it with the United States in mind, but it seems equally applicable in many other countries today. And, in a final note of humility, Johnston (who is not connected to TJN) asks for suggestions as to how to act on these insights. JohnstonsTake@tax.org