Rich: Tax cuts mean we don't have to invest as much

The richest Americans are watching President Obama's proposed compromised tax deal closely. Low taxes means they don't have to invest so aggressively, or risk as much, or create so many jobs.

At a recent New York meeting with the investment office of one of America's billionaire families, "we had our lunch at Le Cirque, and the theme of the lunch discussion was the redistribution of wealth in the United States," says John K. Hillman, founder and chief executive of Philadelphia Financial, an insurance investments firm that manages $3.5 billion for 350 family clients.

"Our clients are keenly focused on what is happening to their investment revenues, more than on whether the government is spending its revenues well," he told me. "Old-money families who haven't had to work in three generations (and) who pay a disproportionate share of taxes are very much focused on what capital gains rates are, what ordinary tax rates are, the estate tax."

The estate tax went to zero this year, enabling rich people to die and leave more of their assets to their heirs. Obama wants to reinstate it at a lower rate than in the past. Which shows how complicated it can be to plan for the future, even if you have professional tax and investment advisers at your beck and call:

"If you're trying to do a 40-year plan and you pass away in 2010 and you owe zero estate tax, versus you hang on to January 2011 and you owe 35% estate tax," as under Obama's plan, "that makes it very difficult to do longterm strategic planning." Which doesn't stop people from trying, with generation-skipping trusts and pooled insurance accounts and whatnot. "But no one makes money trying to predict the whims of Congress."

If tax rates go up, won't that force rich people to invest more? "Yes," Hillman told me. "It's hard to make up that money" paid in taxes. "When short term money is paying less than 1%, whether your tax is 15% or 39% becomes a meaningful component of how you plan your investment strategy."

When tax rates are high, savers have to make riskier, more aggressive investments to try to pay them without dipping into principal. When tax rates fall, it's easier to do what people with inherited wealth do naturally: invest conservatively, in passive bonds or other instruments that don't risk capital. Which appears to be where Obama and the Republican-leaning Congress are heading.

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