February 17, 2012

John Bogle on Taxes: Praise for Obama; Raise Capital Gains

Often at odds with the modern fund industry he helped create, Bogle’s comments ran counter to vehement opposition from managers and trade groups over raising taxes

John Bogle seen here at the John C. Bogle Legacy Forum in January. John Bogle seen here at the John C. Bogle Legacy Forum in January.

Vanguard Group founder John Bogle spoke with Bloomberg Television's Betty Liu Thursday at the Bloomberg Link Portfolio Manager Mash-Up conference in New York.

As usual, Bogle had plenty to say, noting that lower tax rates for certain types of gains earned by private equity firms are "ridiculous" and "I'm arguing for the capital gains rate taxable as ordinary income."

Often at odds with the modern fund industry he helped create, Bogle’s comments run counter to vehement opposition from investment managers and trade organizations over raising taxes on dividends and capital gains from the current 15% rate to the average 35% ordinary income tax rate. The issue is expected to be increasingly prominent as the country heads into election season later this year.  

Bogle has been a vocal critic in recent years of what he sees as Wall Street greed, a failure to put clients first with a fiduciary standard and a lack of due diligence in new product development. At the John C. Bogle Legacy Forum, held in New York in late January in his honor, Bogle said “the silence of the fund [managers] remains deafening” when it comes to not only keeping fund costs and turnover low and not attempting to time the market, but in putting investors first. He also said there was a “crying need for a fiduciary standard” in the industry.

Bogle on the private equity industry:

"I wouldn't confuse [Blackstone Group’s] Steve Schwarzman with an indexer. He may own a diversified list of stocks but it's not going to look anything like the index. And then of course, you deduct the monumental, outrageous fees, on which they pay very low taxes.… Ridiculous." 

"Look, I would think most people in this room would say that there should be no tax rate that is lower than the earned income tax rate that people earn by the sweat of their brow or the burrows of their brain. That should be the regular tax rate. I think that there are a lot of good arguments out there for having a higher tax rate on capital gains, in particular short-term capital gains…. What is the explanation for the tax break for gambling?" 

"I am arguing for a capital gains rate taxed at ordinary income. I'm also arguing for a premium tax and maybe even a transaction tax that will slow down trading.… Why would you give a lower tax rate to other than the people working every day than you to on people who are, to a large extent, gambling on Wall Street?"

On higher taxes for the wealthy:

"There's something that I don't like about "soak the rich." I say, equalize the sources of income, but given the income distribution, or maldistribution, in this country, you are doing the same thing. I think it's a better platform to consider where the income comes from and how it's earned and we'll tax everybody at least equality … I would also put in because there are a lot of people, the lower 99%, who own investments in the hope of building a retirement plan. I would say, just for the fun of it, top of head, maybe give them the first $10,000 or $25,000 of capital gains and dividends tax free. Is that soaking the rich or helping the poor to accumulate retirement? They happen to be the opposite sites of the same coin."

 On which presidential candidate has the best tax policy:

"I'd say the Obama plan to the extent that I understand it. Everybody knows deep down that carried interest is a technical fraud … I am a lifelong Republican, but unfortunately to ruin the sentence, I am what I would call an Abraham Lincoln or Teddy Roosevelt Republican, and they are a vanishing breed. But I think that we will eventually have to come back … I don't see anything from any of the other candidates, when you do the math, whether it's Herman Cain–that just simply doesn’t work. The Romney plan, I have no idea what the Gingrich plan is, and Santorum, no comment.

"As a general policy, equalize the taxes, raise the taxes on capital gains. He may not have to raise the taxes on people who earn more than $250,000 because he's going to pick up so much on the capital gains change. Again, I want to emphasize that this has nothing to do with capital formation … I look at this position as just simply logic, with maybe a touch of concern for our fellow human beings who aren't doing as well as we are all doing."

On the hedge fund industry:

"First of all, they come and go at an astonishing rate. I have no reason to believe that the hedge fund averages from Credit Suisse or wherever, are fair representation of what happens … I think what it is is some ghastly combination of greed and hope and a belief that the past is prologue.  If we haven't had enough of that, if we don't learn enough … even the very good

managers over time in the mutual fund industry, Bill Miller is a great example and I have a lot of respect for him, but he had a lot of bad years after a lot of good years.  That is always what happens in this business …. Bill Miller, from beginning to end, 18 to 20 years, is average. That is not so bad. He almost beat the index."

On hedge fund managers he admires:

"There are a number of hedge fund managers that I greatly admire.  One is Steve Galbraith at Maverick, one is Cliff Asness at AQR … they've done well in the past … look at the character of the management and make sure you know what they're doing. There's not 1,000 managers that I'm madly in love with, mutual fund or hedge fund."

On equities:

"In the case for equities, my view is a very simple one. That is, in the long run, the fundamental things apply as time goes by. And that is the case for equities is based on today's dividend yield, your entry level dividend yield, and the earnings growth that follows that. I call that fundamental investing."

On ETFs:

"I am skeptical of the way they are being used. ETFs are the greatest marketing innovation thus far in the 21st century. What we should be looking at is are ETFs the greatest investment innovation of the century? Are they the best thing for investors? And the evidence is overpowering that they are not." 

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