Larry Fink, the founder and head of the world’s largest asset manager, BlackRock, has made an extraordinary call for wide-ranging tax changes to encourage long-term investment behavior.
Fink, chairman and CEO of the $4.6trn (€4.3trn) New York-listed funds giant, wants to change the behavior of investors “who are renters, not owners”, saying: “We should be using the tax code to change this behavior, not reinforce it.” We have become “mesmerized” by short-term, one-off gains.
Fink’s comments come in a major new series of papers by leading financial industry figures published as part of the Long Term Value Summit in New York, part of the Focusing Capital on the Long Term initiative convened by the Canada Pension Plan Investment Board and McKinsey & Co.
Other notable names who have contributed to the project include former Treasury Secretary Henry Paulson (topic: Short-Termism and the Threat from Climate Change), the New Zealand Superannuation Fund’s Adrian Orr (An Unshakable Belief In the Long Term), Morgan Stanley Chairman and CEO James Gorman (The Long-Term Imperative for Financial Institutions), and APG’s Angelien Kemna (The Impact of Regulation).Fink’s contribution is called ‘Our Gambling Culture’ and looks at how the tax system encourages short-termism. He notes how paying significantly lower taxes for capital gains is predicated on one-year holding periods: “Who really believes a one-year commitment is long term?” The situation was made worse when dividends were changed to count as capital gains instead of ordinary income, leading to buybacks at the expense of re-investment, which Fink calls “robbing the future”.
“We should be using the tax code to change this behaviour”
“But what if we made three years rather than one the holding period necessary to qualify for capital-gains treatment and at the same time brought down the capital-gains tax for each year an investor held, perhaps reducing it to zero at the end of ten years?” BlackRock’s Chairman and CEO suggests.
He adds: “And on the other end, what if we taxed capital gains at an even higher rate than for ordinary income if the stock was held for less than six months? These measures could quickly help to enlarge the population of engaged investors willing to ride out short-term slumps to better position the company for the long haul.”