1997: How will the change in the capital gains rate affect Berkshire's stock price?
CHRISTINE SHRAM: My name Kristen Schramm (PH). I am from Springfield, Illinois.
I am a proud shareholder of Berkshire Hathaway. In light of the upcoming capital gains tax reduction, do you envision any increased selling pressure, such as buying opportunities for Berkshire stock?
WARREN BUFFETT: That’s a good question, Kristen. We’re proud to have you, too. (Applause)
A very high percentage of Berkshire shares is owned by people with a very low tax basis. So that if I had to guess, I would say that probably 80 percent, at least, of the shares are owned by people whose cost is less than a hundred dollars a share on the A stock.
And that, undoubtedly, contributes to some people’s reluctance to sell, particularly if they’re older, and —
But I think it would probably — it might make less difference than you think. I think most people, if there were a lower capital gains rate, I don’t think it would be a huge change in the propensity to sell the stock.
I would hope, even if there was a zero capital gains tax, that there really wouldn’t be any rush for the exits. It wouldn’t affect my attitude, particularly. But I think it’s perfectly reasonable to assume that as the tax rate goes down, there will be some greater tendency to sell by people with a low tax basis on their shares.
Charlie?
CHARLIE MUNGER: Well, I think the laws of microeconomics and the laws of psychology are such that if you said, “The tax rate will, for one month, go down to zero,” you would have some very dramatic effects in the markets. It’s not going to happen, of course.
WARREN BUFFETT: No. But if you said the tax rate was going to zero for one month, and then going to a hundred percent subsequently, I think you’d get a certain amount of activity. (Laughter)
CHARLIE MUNGER: But then you’d really —
So you could tinker with the tax laws in a way that would cause dramatic market effects. I don’t anticipate any such things happening.
We had something similar back when they — what was it, ’86 — where the tax rate was 20 percent on long-term capital gains. And it was the last year you could liquidate a corporation and not pay gains taxes on appreciated assets that were disposed of in the liquidation. And we got a great flood of liquidations in that year.
So it’s possible to do things to the tax laws that have big market effects. But it gets very unlikely that any such thing is going to happen this year.
WARREN BUFFETT: Yeah. I agree with that.