Income and wealth inequality
jeffhandy said:
Theoldtimer said:
Sorry for not being more clear. The price of a stock is composed of two components, the earnings per share (sometimes complicated by whether the earnings in all or part are distributed as dividends or not), and the expected future value of the stock. Both of these analyses should be on an after tax basis to assess the net value. So, if the IPO purchaser pays 15% in capital gains when selling the stock after holding it the prescribed period, but the buyer of that share has to pay 35% in tax when that buyer in turn sells the share, then the value for the second buyer is reduced by the difference in those tax rates. Thus, the second buyer will pay less for the share than they would if the tax rate were 15%. So, the first buyer then knows that when he/she buys the IPO, they will get a lower price for the stock when they sell it than they would if the tax rate were the same for all buyers. Since the first buyer knows that the future value of the IPO is lower, the price the first buyer is willing to pay is lower, and thus the returns that the IPO is going to get from issuing the shares will be less, and thus the price of capital for the company increases. I know it is long and complicated.
Does that help?
One problem with your theory, the tax is only paid on the gains so it will not really change the value of the stock. In reality, this would encourage people taking a risk on new invest versus sinking their money in the older tried and true securities. This would help fund new business and additional money in the market which would drive the economy. When I invest in apple, no further money is used for business investment. When I buy stock for an IPO of a start-up company, a new company is benefited and competition is fueled.
Uhm - not my theory, although it could probably presented much better than I presented it. But again I think I have not been very clear or I think you would have seen what I meant.
Part of the price of the stock is based on its future growth - its gains. Of course how much it is going to grow and how probable that growth is, is a guess, but if you buy IPO's, you know what I mean. That was the subject of a lot of press stories during the tech bubble when companies that had yet to make a profit were selling for high numbers. Everyone was betting that the stock value would increase and they would get strong gains.
So the higher tax on the gain reduces the value of the gain. That reduced value runs through the pricing life of the stock. I am sorry I still don't think I am doing a good job of this. But that is the way the market works. Of course, errors are made all the time. All the models used to be based on the buyer and the seller having perfect information. Now we have algorithms that introduce error, but that is another subject. If I had a more current education I could suggest an economics text, but I am coming up short there too.
Reading this I can see why I am not explaining this very well. It has been a long time since I was in school. Anyway, who knows, maybe your plan would work after all.
Tom_Reingold said:
@terp, there is probably a better term than natural monopoly, but even if you came up with one, it wouldn't negate the relative merit of the idea. It's not perfect, but it has some use, or at least, it did.
Some roads are privately owned. The GSP and NJ Turnpike are two examples. For the most part, I don't like the idea. Public funding for roads was invented in London centuries ago because each homeowner set the level of the road to match the level of his home, so the road was stepped. It's another example of optimizing for the individual at the population's expense. I can't say the GSP and NJT are disasters, though, so it works to a degree.
I think I've taken us off the track. While, things like private roads are studied by scholars, it is not something that most people will entertain. Thus, you get mired down in these discussions and you get inane comments from people in the peanut gallery. I will simply say this: Because something is commonly done in one way does not mean that is the only way things could work. I don't ever expect us to have a privately run road system. However, that doesn't mean that something like that couldn't work. I mean sometimes different solutions are worth considering. It's not like things are running perfectly.
Regarding our roads, it would seem that we've paid for roads like the GSP and NJT many times over. You would think these roads were paved in gold for what people pay to drive on them. What do these people think? It's the Florida Turnpike?
Theoldtimer said:
Good points, and I agree with most of them (so of course, that makes them good). Not sure what you mean by "the financialization of the economy", but it is certainly true that the anticipation of growth has dramatically increased the multiple of earnings some companies sell for. So much so, that as you say, it is all out of line with current profits.
As for the interest rates being so low (even after today), there was no other choice since we no longer use fiscal policy to combat recession. We only use monetary policy and in my personal opinion the Fed has done a fabulous job of getting us out of the recession without the help of fiscal policy.
I too felt the bailout was unfair, but also very necessary. In my mind that brings us back to monopoly discussions - the banks as Bernie says, need to be broken up, and Glass Steigle (sorry about the spelling) needs to be reinstated. Another long discussion in that statement, I am sure.
Finally - yes the economics of education are all screwed up too! Some world we are living in!
Essentially, the financialization of the economy is referring to the increased importance of financial vehicles in the current economy over the last 40+ years. During this time credit has increased in importance at the expense of saving. Households increased debt to maintain living standards as wages have not kept up with inflation in this system. Financial investment has increased in importance at the expense of capital investment. We've seen the source of profits in non-financial firms come more from finance, as they derived a growing proportion of their overall income from financial sources by financing the lease or purchase of their products(See GM/GMAC).
The Financial system has grown way more rapidly then the real economy. I used to have this chart, which I can't locate, that showed the percentage of transactions that don't involve an actual good or service. It basically is a hockey stick that starts in the 1970's. Instead, I'll just share the debt chart below. I don't know about everyone else, but that does not look like a sustainable trend to me. That leads us to the discussion of recessions.
On fiscal policy, I'm not really sure what people think should be done there. Our governments already have healthy debt levels. We did have fiscal stimulus coming out of the financial crisis. One was focused on the financial sphere, and one was focused on infrastructure. The Federal Reserve has done a great job of kicking the can down the road. Alas, I fear that our problems are just getting worse(again see the chart). I'm not sure when, and lord knows they are able to keep things going for longer than I ever anticipate, but there will be a dislocation.
I think we would be better off letting the economy adjust. And unfortunately, this means that we need a nasty recession. Our economy has allocated resources in some really odd ways. We have really high asset values. Do we really think that given the recent performance of the economy that Equities, Bonds, Real Estate, Art, etc. should all be near all time highs?
I also don't think Glass-Steagall really had much to do w/ the Financial Crisis. None of the big firms that fell like Bear Stearns, Fannie/Freddie, AIG, Lehman would have been affected by Glass-Steagall. The Banks got into trouble largely by making bad investments. We can talk about regulations, but we had many regulations that provided incentives to increase leverage. One of which was extremely loose monetary policy by our Central Bank. I'm glad that's behind us. :-|
Theoldtimer said:
Tom_R said:
Theoldtimer said:
Tom_R said:...
However, as long as we're discussing capital gains and taxes thereon:
Why is a person who actually invests money in a company taxed at the same rate as the person who buys shares in the open market?
The first person is actually providing capital to the company. The other person is looking to make some $$$ on the vicissitudes of the market; in which transactions, the company gets nothing tangible.
Maybe, just maybe, if we gave the actual investor in the company a skate on taxes, we'd maintain, or increase genuine investment activity.
The person who buys in the marketplace; they do provide market liquidity so maybe we give them some break on taxes for long term investments (however defined).
The short-term investor; tax them at ordinary income rates.
Just some food for thought.
What say you?
TomR
The problem with your proposal is that if only the first investor were taxed at a lower rate, then the resale value of the shares would be lower, and thus the original value of the shares would fall because resale was less valuable, and that would make it more expensive for companies to raise capital. I think we could close the loophole on "carried interest" and still incentivize investment in companies.
I fear that I am not following your argument.
Do you think that the Facebook IPO purchasers would have cared whether the selling shareholders were going to pay 15% on their gains, or nothing at all?
Please elaborate on your point.
TomR
Sorry for not being more clear. The price of a stock is composed of two components, the earnings per share (sometimes complicated by whether the earnings in all or part are distributed as dividends or not), and the expected future value of the stock. Both of these analyses should be on an after tax basis to assess the net value. So, if the IPO purchaser pays 15% in capital gains when selling the stock after holding it the prescribed period, but the buyer of that share has to pay 35% in tax when that buyer in turn sells the share, then the value for the second buyer is reduced by the difference in those tax rates. Thus, the second buyer will pay less for the share than they would if the tax rate were 15%. So, the first buyer then knows that when he/she buys the IPO, they will get a lower price for the stock when they sell it than they would if the tax rate were the same for all buyers. Since the first buyer knows that the future value of the IPO is lower, the price the first buyer is willing to pay is lower, and thus the returns that the IPO is going to get from issuing the shares will be less, and thus the price of capital for the company increases. I know it is long and complicated.
Does that help?
I fear I'm still missing the point of your argument; and I have read your subsequent posts.
Let's try to make it simple enough for me to understand; using Facebook as an example.
Facebook (the "Company") took about $6.5 Billion out of it's IPO.
The remainder of shares sold in the $16-18 Billion IPO came from then extant shareholders. The people, and firms, who had pumped capital into the Company.
I suggested above, that we might treat genuine capital investment at a more favorable tax rate than we treat open market investors. (I.e., the people and firms which provided the Company the ways and means to develop a product seemingly worthy of public market support, in the open market; as opposed to those who buy shares in the open market, but provide no capital, or little, to the Company).
I repeat my previous query: "Do you think that the Facebook IPO purchasers would have cared whether the selling shareholders were going to pay 15% on their gains, or nothing at all?"
In my opinion, the Company's IPO was sold on buzz. But, then again, it's shares are trading at close to triple the share's offering price, less than four years later.
What say you?
TomR
Well, I agree that they would not care. But their view of the future value of the Facebook stock would have been, or at least should have been reduced. Lets say I bought Facebook for $100 and expected it to go to $200, so I bought it. Lets say it did go to $200. Suppose the second buyer bought it from me expecting it to go to $300, and suppose it did go to $300. A smart investor is going to think about the tax impacts of that growth. So, if both buyers pay 15% taxes, then the the IPO buyer sells the stock for $200 and pays $15 dollars in taxes, for a net profit of $85. The second buyer pays $200 and the stock goes to $300 and paying 15% gets a profit of $85. The second buyer who pays a tax of 35% gets a profit of $65, or 20% less. So for the second buyer to get the same value as the first buyer got, they would pay But both the 15% taxed buyer, and the 35% buyer, have taken the same risk. Lets say that the risk price for Facebook is 15%. Then the future value of the Facebook stock will be discounted such that the 15% tax rate and the 35% tax rate are equalized. In other words, the second buyer would pay less than $200. They would pay $162 dollars rather than the $200 the first buyer anticipated. Otherwise they would invest in an IPO rather than buy my stock. So, I know that the future value of my stock is not $200, but only $162. So, for me to make the same $85 profit, I would pay $77 rather than $100 for the stock. Thus, for the company issuing the IPO to get the same amount of capital, it would have to issue more stock. The capital has become more expensive.
Did that help? I know I am not very good at these explanations. I am sorry about that.
sac said:
bramzzoinks said:
I do. But if you hold Microsoft stock - no tax. But if you sell Microsoft stock and by an equal amount of Apple - tax. It makes no logical sense.
If you donate that appreciated Microsoft stock to charity you don't pay tax and neither does the charity.
Just sayin' ...
Are you implying that it would be better if the gift to charity was REDUCED by tax (presumably capital gains)? Or perhaps, you are highlighting the fact that Congress has made a policy decision with respect to taxation of appreciated assets gifted to charity.
Tom_Reingold said:
@theoldtimer, what are your feelings about what Bernie Sanders says about the problem of income and wealth inequality? He makes a lot of sense.
Investment is choosing a winner. Society invests in some things and not in others. How do we avoid making choices? Should we invest equally in wholesome farming and cyanide laced food? The possibilities are endless.
It used to be a good idea to give oil companies tax breaks so they would invest in drilling and refining so we could have the energy to do our work. It's not a good idea any more. As it is, they get subsidies on top of the massive profits they make.
Are you aware that the more oil (and natural gas) that is produced by the US and Canada results in the weakening of OPEC's control over the US. US oil independence reduces the likelihood that the US will start or initiate future wars in oil producing middle east countries. I believe that this is a substantial benefit.
RealityForAll said:
Tom_Reingold said:
@theoldtimer, what are your feelings about what Bernie Sanders says about the problem of income and wealth inequality? He makes a lot of sense.
Investment is choosing a winner. Society invests in some things and not in others. How do we avoid making choices? Should we invest equally in wholesome farming and cyanide laced food? The possibilities are endless.
It used to be a good idea to give oil companies tax breaks so they would invest in drilling and refining so we could have the energy to do our work. It's not a good idea any more. As it is, they get subsidies on top of the massive profits they make.
Are you aware that the more oil (and natural gas) that is produced by the US and Canada results in the weakening of OPEC's control over the US. US oil independence reduces the likelihood that the US will start or initiate future wars in oil producing middle east countries. I believe that this is a substantial benefit.
The same would be true for promoting more fuel efficient alternatives to petrol products. And this would be more sustainable. But unfortunately, the oil companies wield too much influence in the U.S.
"While, things like private roads are studied by scholars, it is not something that most people will entertain. Thus, you get mired down in these discussions and you get inane comments from people in the peanut gallery."
Went should a stupid idea get anything but inane comments?
How about this: if Donald Trump were to buy the Atlantic City Expressway, would he be allowed to set up checkpoints to make sure Muslims couldn't drive on it?
terp said:
I think I've taken us off the track. While, things like private roads are studied by scholars, it is not something that most people will entertain. Thus, you get mired down in these discussions and you get inane comments from people in the peanut gallery. I will simply say this: Because something is commonly done in one way does not mean that is the only way things could work. I don't ever expect us to have a privately run road system. However, that doesn't mean that something like that couldn't work. I mean sometimes different solutions are worth considering. It's not like things are running perfectly.
Regarding our roads, it would seem that we've paid for roads like the GSP and NJT many times over. You would think these roads were paved in gold for what people pay to drive on them. What do these people think? It's the Florida Turnpike?
I agree that we have to question ways we have always used. They aren't necessarily bad, but they aren't necessarily good. I'm sure we sometimes conclude that we should leave things as they are, but that shouldn't be an assumption.
The thought that those private roads ought to be paid for by now does come to mind. But I haven't seen the financial statements of that authority. For all I know, what's what it takes to keep a road going, so to speak. I suppose it doesn't get some subsidies that public roads get, so this might be exposing a fact that is normally hidden from us. Are those roads more efficiently run than public roads or less efficiently? I don't know!
Tom_Reingold said:
terp said:
I think I've taken us off the track. While, things like private roads are studied by scholars, it is not something that most people will entertain. Thus, you get mired down in these discussions and you get inane comments from people in the peanut gallery. I will simply say this: Because something is commonly done in one way does not mean that is the only way things could work. I don't ever expect us to have a privately run road system. However, that doesn't mean that something like that couldn't work. I mean sometimes different solutions are worth considering. It's not like things are running perfectly.
Regarding our roads, it would seem that we've paid for roads like the GSP and NJT many times over. You would think these roads were paved in gold for what people pay to drive on them. What do these people think? It's the Florida Turnpike?
I agree that we have to question ways we have always used. They aren't necessarily bad, but they aren't necessarily good. I'm sure we sometimes conclude that we should leave things as they are, but that shouldn't be an assumption.
The thought that those private roads ought to be paid for by now does come to mind. But I haven't seen the financial statements of that authority. For all I know, what's what it takes to keep a road going, so to speak. I suppose it doesn't get some subsidies that public roads get, so this might be exposing a fact that is normally hidden from us. Are those roads more efficiently run than public roads or less efficiently? I don't know!
There are a lot of roads (highways really) being built by public/private partnerships these days, in which the private company (usually a consortium of E&C companies) finance and build the highway and in return get a license to collect tolls for some specified number of years (usually 20 to 30).
Theoldtimer said:
Well, I agree that they would not care. But their view of the future value of the Facebook stock would have been, or at least should have been reduced. Lets say I bought Facebook for $100 and expected it to go to $200, so I bought it. Lets say it did go to $200. Suppose the second buyer bought it from me expecting it to go to $300, and suppose it did go to $300. A smart investor is going to think about the tax impacts of that growth. So, if both buyers pay 15% taxes, then the the IPO buyer sells the stock for $200 and pays $15 dollars in taxes, for a net profit of $85. The second buyer pays $200 and the stock goes to $300 and paying 15% gets a profit of $85. The second buyer who pays a tax of 35% gets a profit of $65, or 20% less. So for the second buyer to get the same value as the first buyer got, they would pay But both the 15% taxed buyer, and the 35% buyer, have taken the same risk. Lets say that the risk price for Facebook is 15%. Then the future value of the Facebook stock will be discounted such that the 15% tax rate and the 35% tax rate are equalized. In other words, the second buyer would pay less than $200. They would pay $162 dollars rather than the $200 the first buyer anticipated. Otherwise they would invest in an IPO rather than buy my stock. So, I know that the future value of my stock is not $200, but only $162. So, for me to make the same $85 profit, I would pay $77 rather than $100 for the stock. Thus, for the company issuing the IPO to get the same amount of capital, it would have to issue more stock. The capital has become more expensive.
Did that help? I know I am not very good at these explanations. I am sorry about that.
I am still not understanding.
Your reference to the second buyer realizing a $100.00, gain and paying 15% in taxes; and the second buyer paying 35% on that same $100.00, gain causes me great confusion.
I presume that the problem is mine, and should you decide to not pursue this conversation, no offense will be taken.
The point I had tried to make was that we might give a more favorable tax treatment to those who actually make a capital investment in a developing business; as opposed to those who trade in the open market - whether it be buying some shareholder's stock in an IPO, or trading in the secondary market.
In any event, thanks for making me think a bit.
TomR
RealityForAll said:
sac said:
bramzzoinks said:
I do. But if you hold Microsoft stock - no tax. But if you sell Microsoft stock and by an equal amount of Apple - tax. It makes no logical sense.
If you donate that appreciated Microsoft stock to charity you don't pay tax and neither does the charity.
Just sayin' ...
Are you implying that it would be better if the gift to charity was REDUCED by tax (presumably capital gains)? Or perhaps, you are highlighting the fact that Congress has made a policy decision with respect to taxation of appreciated assets gifted to charity.
The latter.
Tom_R said:
Theoldtimer said:
Well, I agree that they would not care. But their view of the future value of the Facebook stock would have been, or at least should have been reduced. Lets say I bought Facebook for $100 and expected it to go to $200, so I bought it. Lets say it did go to $200. Suppose the second buyer bought it from me expecting it to go to $300, and suppose it did go to $300. A smart investor is going to think about the tax impacts of that growth. So, if both buyers pay 15% taxes, then the the IPO buyer sells the stock for $200 and pays $15 dollars in taxes, for a net profit of $85. The second buyer pays $200 and the stock goes to $300 and paying 15% gets a profit of $85. The second buyer who pays a tax of 35% gets a profit of $65, or 20% less. So for the second buyer to get the same value as the first buyer got, they would pay But both the 15% taxed buyer, and the 35% buyer, have taken the same risk. Lets say that the risk price for Facebook is 15%. Then the future value of the Facebook stock will be discounted such that the 15% tax rate and the 35% tax rate are equalized. In other words, the second buyer would pay less than $200. They would pay $162 dollars rather than the $200 the first buyer anticipated. Otherwise they would invest in an IPO rather than buy my stock. So, I know that the future value of my stock is not $200, but only $162. So, for me to make the same $85 profit, I would pay $77 rather than $100 for the stock. Thus, for the company issuing the IPO to get the same amount of capital, it would have to issue more stock. The capital has become more expensive.
Did that help? I know I am not very good at these explanations. I am sorry about that.
I am still not understanding.
Your reference to the second buyer realizing a $100.00, gain and paying 15% in taxes; and the second buyer paying 35% on that same $100.00, gain causes me great confusion.
I presume that the problem is mine, and should you decide to not pursue this conversation, no offense will be taken.
The point I had tried to make was that we might give a more favorable tax treatment to those who actually make a capital investment in a developing business; as opposed to those who trade in the open market - whether it be buying some shareholder's stock in an IPO, or trading in the secondary market.
In any event, thanks for making me think a bit.
TomR
Yes, I got your point, and I like your intent. I am sorry if I was not clear enough to make my point. The big picture is that the resale value affects the original price because resale is a major reason for purchasing the stock in the first place. While some people may hold stock for their lifetimes, most stock is meant to be traded. In fact, most is purchased and owned by funds, who constantly trade. I agree that the intent is really to incentivize the investor to give money to the company, and not to a secondary buyer. So, I will try again - thanks for your patience. In theory the price of a stock has two components - the dividend (best to think of it as distributed, though most are not) and the future value of the stock for resale. So, if you can get a 2% return in the safest investment (usually viewed as 30 day US treasury bonds - which are now where near 2%, of course) then you would want something more than that to invest in stock, since stock is more risky. So, lets say that 5% would entice you from a current return perspective. Then the question is what happens to the value of that stock over time. Stocks go up and down, obviously. So, if you thought that the future value of that stock would be less than what you paid for it, then you would want to add something to that 5% return, to make up for the fact that the future value will decline (or the reverse if you thought the stock value would increase). So, those values are calculated after tax. So if you are taxed 14% (capital gains) if you are the fist buyer, but 37% (normal income, at the max) if you are the second buyer, the second buyer is going to discount the return in the future value of the stock (assuming the stock will grow in value) by the difference in those tax rates. Thus the demand for the stock by second buyers is reduced by the impact of the difference in those tax rates.
Did that help at all?
Tom_Reingold said:
My wife and I just saw the movie The Big Short. I recommend it.
I am looking forward to seeing it.
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One problem with your theory, the tax is only paid on the gains so it will not really change the value of the stock. In reality, this would encourage people taking a risk on new invest versus sinking their money in the older tried and true securities. This would help fund new business and additional money in the market which would drive the economy. When I invest in apple, no further money is used for business investment. When I buy stock for an IPO of a start-up company, a new company is benefited and competition is fueled.