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Will Higher Short-Term Capital Gains Taxes Encourage Long-Term Planning?

Hillary Clinton made news by reversing a 2008 campaign promise to maintain the long-term capital gains taxes at the 20% set by Bill Clinton, and raise short-term capital gains taxes on wealthy Americans.  Personally, I am not a fan of the philosophy of taxing people with money to grow government, but the reasoning behind this policy struck a positive chord with me.

Will Higher Short-Term Capital Gains Taxes Encourage Long-Term Planning?

Her hope is that this change would encourage reinvestment in the enterprise and more stable employment.  When speaking at New York University in lower Manhattan in July, she said:


“American companies need to break free from the tyranny of quarterly earning reports so they can do what they do best. Real value comes from long term growth, not short term profits.”


The foundation of The Toyota Way in my model is Long-term Thinking , as seen in the figure below.    By that I mean that the leaders of Toyota are more concerned with building a strong, sustainable enterprise for the next 100 years, than this quarter’s performance.  Simply thinking about the long-term is necessary, but not sufficient.  I added to the foundation long-term systems thinking.  The Toyota Way model and principles are intended to represent a system.


Liker’s Toyota Way 4P Model and 14 principles
Liker’s Toyota Way 4P Model and 14 principles


By “system thinking” we specifically mean viewing the organization as a living system, not a lifeless machine.  Parts in a living system are not interchangeable, as they are on a machine.  The human parts require nurturing, development, and a degree of security that they are viewed as a long-term asset worth investing in.  The starting point for Toyota is adding increased value to customers, and the key to doing that is through continuous improvement done by people throughout the enterprise who are treated with respect.


This perspective is shared by great companies, according to Jim Collins’ research.  Great companies are Built to Last Senior leaders see the enterprise itself as their creation, which will be their legacy long beyond retirement. To survive, and ultimately prosper, the enterprise needs to continually adapt through intensively studying customers, anticipating changes in the environment, and coming up with innovative new products and processes.


Nordstrom is one great company that has survived since 1930 based on a model that seems to start and end with exceptional customer service.  Many customers have what sound like wild stories of receiving service well and beyond expectations, such as Nordstrom taking returns on products the store does not even sell.  Employees in enterprises with great service must be empowered to make decisions on the spot about solving customer problems and Nordstrom’s philosophy is captured well in The Nordstrom Way:


“Customer service comes from the heart. Then individual salespeople add their own personal touches, where they create a relationship in which the customer feels as if she is working with a friend, rather than just a salesperson.”


Toyota has tried their own experiment in shifting the focus of shareholder funding from short-term to long-term. Their “Model AA” shares, named after Toyota’s first production car, require a five-year commitment, at which point they can be converted to common shares.  They guarantee return of capital in five years, along with an increasing interest rate that grows annually. Toyota is to issue just over $4 billion worth, which will not be available on the open market. The purpose is to use this stable source of funding for long-term R&D. For example, investing in fuel-cell technology as launched with the Mirai, as the beginning of a 100-year development process. Unfortunately, these shares will only be available to Japanese investors which led to widespread criticism by non-Japanese investors concerned about negative effects on publically-traded shares. Toyota has committed to repurchasing an equivalent amount of public shares to avoid dilution of the stock prices.  The purpose of the Model AA shares is to invest long-term, just as Hillary Clinton is preaching.


Does stable long-term funding mean companies will invest in stable employment like Toyota is famous for?  Will this guarantee that companies will provide exceptional service to customers like Nordstrom?  Obviously the answer is no.  It is, however, a necessary foundation. Innovative funding systems may not be enough, but they seem to be worth exploring.


Dr. Jeffrey Liker is professor of industrial and operations engineering at the University of Michigan and author of The Toyota Way. He leads Liker Lean Advisors, LLC and his latest book (with Gary Convis) is The Toyota Way to Lean Leadership.

    Some opinions expressed in this article may be those of a contributing author and not necessarily Gray.

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