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Watch What Warren Buffett Does, Not What He Says

4:16 PM, Nov 26, 2012 • By ADAM J. WHITE
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In fact, as he explained in his 1986 letter to investors, changes in the 1986 tax reform act posed a specific threat to certain investment decisions:

If Berkshire, for example, were to be liquidated - which it most certainly won’t be -- shareholders would, under the new law, receive far less from the sales of our properties than they would have if the properties  had been sold in the past, assuming identical prices in each sale. Though this outcome is theoretical in our case, the change in the law will very materially affect many companies. Therefore, it also affects our evaluations of prospective investments.  Take, for example, producing oil and gas businesses, selected media companies, real estate companies, etc. that might wish to sell out. The values that their shareholders can realize are likely to be significantly reduced simply because the General Utilities Doctrine has been repealed - though the companies’ operating economics will not have changed adversely at all.  My impression is that this important change in the law has not yet been fully comprehended by either investors or managers.

That last point is key: When taxes change, would-be investors will certainly change their decisions about where to direct capital, even "though the companies' operating economics will not have changed adversely at all." Buffett saw this clearly in 1986, with respect to Berkshire's own investment decisions; it's hard to believe that Buffett no longer believes that today, with respect to private investors.

Now, none of this is to say that the capital-allocation effects of tax changes ultimately require the nation to forego tax reforms that would increase certain tax revenues. But it certainly is one consideration that must be kept in mind. When Buffett and others simply assert that tax increases don't affect investment decisions, they're whistling past the graveyard.

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