Thinking Long Term: PART I > Taxes on Dividends and Capital Gains

The other night, when President Obama was giving his Address to Joint Session of Congress, I started thinking on how to reward long-term investors and discourage short-term traders.

Peter Lynch and Warren Buffett have always espoused to think long term. Buy assets and hold them for a long time. Lynch has said that 'you only need-just a handful of really good companies in your lifetime.' Buffett has been an investor in The Coca-Cola Company and The Washington Post for years, and doesn't plan on selling.

I thought Washington Mutual (WaMu) was one of those companies in 1992 when I bought it. But, they became short-term traders while I was long-term investor. Apparently they had changed their philosophy (when they engaged in reckless leverage for short-term profits) and didn't let me know about it until my money was gone.

So, since we can't seem to change the tax code to a postcard size return with a flat tax, I want to change the way taxes on dividends and capital gains are calculated.

Here it goes:
Now these numbers could be tweaked, but you get the idea. (You could have an exemption in the early years if you had to sell your shares to pay for an emergency medical procedure [s], and your net worth was under a certain amount. You could also skew the rates based on a means test.)

If you are a short-term trader, you will pay dearly for it. But if you are a long-term investor, you will be rewarded for thinking down the road, and about more than just yourself.

The effect of this would discourage the short-term trading philosophies that helped get us into the mess we are in now. It would put a premium on thinking long-term. These hedge fund and leverage buyout firm guys who want to buy a company and then flip it would have to think twice.

I bought companies back in the 1990s to retire on, WaMu, Time-Warner, Tyco, WorldCom, etc. But then these monkeys started thinking short-term and severely damaged these companies (which were all good companies at one time).

Now Warren Buffett has enough money that he can dictate what the boards of these companies can do. He can set policies to be long-term. But, a poor shareholder like me, who is just trying to retire, and can only buy a few shares, has no say what-so-ever.

With a zero tax on investments held for 10-years and longer, company managements and boards just might help align themselves more with the little guy, and make decisions based on long-term wealth building, creating and keeping jobs, and making the country better.

Maybe changing the tax code to favor long-term thinking and investment will benefit not only me, and investors like me, but also the nation as a whole?

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