Stiglitz Comments Are Too Broad
Nobel Prize winner, Professor Joseph Stiglitz, provided the following commentary in an interview this morning:
“It’s absolutely essential that we have a fair tax system and one that directs our economic activity to production not to speculation,” Stiglitz, a Columbia University professor, said today in a Bloomberg Television interview on “Surveillance Midday” with Tom Keene. Stiglitz appeared to discuss his new book, “The Price of Inequality: How Today’s Divided Society Endangers Our Future.”
I think that he's on-target with regard to the specific issue of speculation but he goes too far in the title of his latest publication, inferring that a "dividend society" presents a danger to the future of our economic system. I think it's wisest to separate short-term investment speculators from long-term investors in the context of taxation. I generally support the view of Buffett and others who've stated that any investment not carried for more than one year should be subjected to signicantly higher capital gains tax rates than those that are. I'll go a step further and add that carried interest - the share of capital gains kept by hedge fund, private equity, and venture capital managers-- should be considered ordinary income and not classified as a long-term capital gain.
Stiglitz's "Dividend Society" isn't the problem. Patient capital, the long-term equity invested in companies for growth, expansion, and product advancement, has and always will be a vital component of the economic system. Dividends are but a sliver of compensation relative to the capital at risk in most instances. Speculators on the other hand - those who hop in and out of the market - provide far less liquidity benefit than they claim and in a very real sense add much more volatility and uncertainty to the market than is necessary.
That industry which has turned the financial markets into a video game like environment should bear a much higher tax burden than that of patient investment capital. Forcing market speculators to do so would not hurt liquidity and would compensate for the government intervention that is necessary when there is real crisis.