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Donald McIntyre started his career on Wall Street in 1992 working as an Investment Consultant for UBS Securities. From 1995 to 1999 he worked as a Financial Consultant for Smith Barney and after that started Dineronet.com, a financial portal for Latin America. As founder of Dineronet.com he... More
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Newfination.com
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  • Buffett's Tax Indifference Theory Is Wrong

    Buffett's comments that higher taxes are indifferent when deciding to invest in a business opportunity is wrong.

    If you have a business opportunity that has a certain risk and a return potential of $10 the different levels in taxation play a role in the decision whether to invest or not.

    In a 30% tax environment your net return is $7 and you would balance that with the risk to decide what to do.

    In an extreme scenario, say 60% tax environment, your return would be $4 compared with the same risk of failure.

    Obviously if the risk reward balance is not satisfactory you wouldn't invest in the 60% tax environment.

    I think Buffett doesn't see tax variation as a deterrent to business because he is analyzing a smaller increase from 30% to 33% or 35% and, as he always uses a margin of safety of 20% to 30% that might buffer any risk return imbalance.

    In the macroeconomic context it is clear how tax variations modify economic activity including consumption and investment due to this calculation.

    I an Economy with higher tax burdens entrepreneurship and business innovation and investment tend to decrease.

    Dec 04 7:14 PM | Link | Comment!
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