Well something drastic needs to be done to break the market's addiction to short-term profits.

thomps: it's an interesting idea and would help combat the shortsighted view of wall street, but wouldn't it create all sorts of inefficient market valuations by heavily penalizing people for selling but not for buying?

This. Selling (including short-selling) is important for market pricing.

What happens when someone buys AAPL and discovers a few hours later that Jobs is undergoing a liver transplant? Should he sell now, eating the 80% tax? Wait 6 months, hoping Jobs' surgery is successful, so he has a slightly lower tax? Sell a couple of years down the line and hope Jobs continues to outlive his disease?

Institutional investors who can afford the tax payments will have it easier than small investors who can't. That's not what should be encouraged.

thomps: it's an interesting idea and would help combat the shortsighted view of wall street, but wouldn't it create all sorts of inefficient market valuations by heavily penalizing people for selling but not for buying?

Yeah, but I think that's part of what he wants. He wants capital invested more than it is in movement.

I think.

The problem with this idea-- and every other idea like it-- is that this would create a stratified culture where those who's five-year terms were just about up would want short-term profits, whereas those who had just invested would want long-term profits, all other things being equal, and investors acting only to maximize their own gain.

That's not necessarily a bad thing, nor is it a good thing; it's definitely different. It might substantially change investment culture to prefer long-term investment.

I like reverse-progressive taxation, that lowers taxes every year you hold the asset. But it doesn't get rid of the incentive to focus on short-term gains, it just promotes that to the fifth rather than the second year of investment.

It would be a very interesting experiment.

EatHam: Everyone pays the same capital gains tax.

Actually, that's not true. The bottom tax brackets pay 0%, and the middle and upper brackets pay 15% on long term capital gaina.

EatHam: Well, he would likely have lost money, making that 80% tax nothing.

Not if everyone else had to go through the same thought process. It sets up a Prisoner's-Dilemma-like situation: everyone loses if everyone sells, but it's in everyone's best interest individually to sell now.

thomps: reverse progressive taxation based on length of holding would be interesting, but i would like to see it modified by market cap or some other growth/size metric. otherwise i think it would severely hinder the ability of small growing companies to raise funds through equity because the high risk to investors would be compounded by barriers to exit.

Agreed completely. The problem is if you make it a market cap thing, you get gaming the system by splitting divisions of the same company into smaller ones in order to gain from market cap laws.

There's probably a good set of numbers to use to minimize that kind of behavior while still providing incentives to hold onto stock. If it wasn't 80-0, but instead something more modest, like 40-15, with a market cap or other "size" exception for small companies to allow them equity, it might be a reasonably good way to promote long-term investment.

And again, I'd like to advocate ending corporate personhood, which would help to put severe barriers against companies getting 'too big'. As well as just being gosh-darn the right thing to do.

thomps: well, it seems like you answered your third paragraph with your first. big companies would have to weigh their economies of scale against their ability to adequately raise capital and many might decide to split up by operating group.

also, after rtfa, it seems gerstner is actually proposing something along the lines of what you mentioned - 80% would be for day traders, 60% for 6 month holders and on down the line.

I think part of that represents a CEO angry at having to, every day, check what the stock market has done, and upset at having to talk about the stock price every day. If you are a CEO with a long-term plan-- and I think he was-- it must be irksome as all hell to feel that tug and pull of the day-traders and all the other short-termers. I'm not saying he's not right, but I am saying that the perspective of a CEO must be even more negative about day-traders than mine.

Another thing I'd like to see penalized-- or at least not 'incentivized' is money-trading. Investment into companies is an actual investment in product, or service, or some-farking-thing. Investment into dollars or Euros does nothing except in the most abstract way to achieve anything good economically; the best defense of it is that it pumps money into a country that's doing well, but that's weak-sauce.

There's a lot of ignorance out there about what 'investments' are, about what 'capital' is. To me, money is really only capital when it's at work.

EatHam: By that I mean that capital gains are not directly related to mortgages or children or whatever, any more than anything else is.

Yes, but the capital gains tax rate only benefits those for whom it is lower than their income tax rate. If your income tax rate is lower than your capital gains tax rate, the capital gains tax rate benefits you naught.

So, the capital gains tax benefits those who are wealthy far more than it does those who are poor or middling, even overlooking that the poor do not tend to encounter capital gains tax due to their lack of capital.

GAT_00: That...doesn't seem like a terribly good idea. How about no...Zero percent tax on corporate taxes could never be acceptable.

First of all, this is about capital gains tax.

Second of all, zero corporate tax is fine, if coupled with taking away corporate personhood. In fact, it's desirable. It helps to disengage corporations from politics.

Obdicut: GAT_00: That...doesn't seem like a terribly good idea. How about no...Zero percent tax on corporate taxes could never be acceptable.

First of all, this is about capital gains tax.

Second of all, zero corporate tax is fine, if coupled with taking away corporate personhood. In fact, it's desirable. It helps to disengage corporations from politics.

Plus it would mean that the regulatory agencies could go after the people in the corporation instead of taking the corporate entity to court. The person who ordered the chemicals to be dumped in a lake would go to jail.

Bored Horde: Plus it would mean that the regulatory agencies could go after the people in the corporation instead of taking the corporate entity to court. The person who ordered the chemicals to be dumped in a lake would go to jail.

This can happen now. If a corporate officer knowingly commits a crime, they can still be criminally prosecuted. There is no barrier to criminal prosecution of individuals in a corporation.

There is, however, a barrier to civil prosecution of those individuals, and, moreover, huge barriers to prosecution of the corporation itself.

Removing corporate personhood does not mean the corporation as a legal entity disappears; it is only about removing the rights accorded to individuals from that corporation.

thomps: i think currency trading has its place - keeping the currencies efficiently valued and eliminating arbitrage opportunities. but short-term runs on currencies can be deathblows to already struggling economies, so i don't know what the answer is there.

And it makes a similar barrier to investment in developing countries to the one on small companies, but with an exaggerated, cyclical, and feedback supported effect: nobody will invest in Farkedoveristan because the government is instable, so the economy is terrible, causing government instability, etc.

Of course limited currency speculation wouldn't fix this, it'd be a tiny part of fixing that.

thomps: yeah this is really frustrating. a lot of the bigger companies have started to take internal steps to combat this, like not releasing quarterly earnings estimates and putting longer vesting-horizons on their stock options to actively push a culture of long-term management. it's hurt them in the markets transitionally, but i think in the end it will attract a less fickle quality of investors and hopefully lead to stronger companies.

I do believe that there are investors that fit this model; however, most of them that currently exist, I believe, exert their power more through private companies than public ones. Take Valve-- very, very good company, solid long-term strategies, and still private. Since there's no obligation for companies to be public, I think a lot of the long-term investors use private investment as their main expression of capital-- by that I mean that even if they invest more money in the stock market, they don't expect the companies to believe their long-term interests. With the private companies, they can have more of a relationship. This is speculation from a relatively unprivileged position, though.

EatHam: but I don't believe that there are any cases where your income tax rate would be lower than your cap gains tax rate

In the US, currently-- and for most of recent history, absolutely true. Sorry for confusing the issue.

What I should have said is that the capital gains tax rate being lower than income tax really only matters if you are paying any substantial amount of tax anyway. If you have zero tax liability-- which is true for many poor people, and many middling people who have the right combination of loans/mortgage/etc.-- then the comparative tax rates don't do jack for you.

There's a word for that, I forget what it is. The phrase version would be "Tax benefits only benefit those with tax liability, and proportionally benefit those with greater tax liability, both as a percentage and as an absolute amount".

And again, that's leaving aside that the poor and middling tend not to have any capital to invest in things that result in capital gains tax being applied, anyway.

Tax every stock transaction $0.01 per share.

timmy_the_tooth: Tax every stock transaction $0.01 per share.

Penalizes companies with a low per-share price. Companies can modify their share price by splitting or combining. Bad idea.

Obdicut: timmy_the_tooth: Tax every stock transaction $0.01 per share.

Penalizes companies with a low per-share price. Companies can modify their share price by splitting or combining. Bad idea.

Doesn't your second comment negate your first?

timmy_the_tooth: Doesn't your second comment negate your first?

No. To restate:

That would create a condition that penalized companies with a low per-share price. Since companies can modify their per-share price, the main effect this would have would be to cause companies to combine shares and produce shares of higher per-share value.

The effect would still be felt, though softened, and still penalize smaller companies. When a company's share price had dropped, that rule would penalize investment into that company, versus investing into it when its share price was higher-- which is kind of the opposite of what you want to do.

EatHam: Anyway, you can't get much lower of a rate than zero, so other than paying people to invest, I'm not sure what else you could do.

That's not my point. My point is that capital gains tax benefits the wealthy, by any set of comparative metrics, more than it does the poor or the middling.

EatHam: I think you would be surprised at the people who have assets which would result in cap gains tax.

No, I wouldn't be. Thanks for assuming ignorance, though-- that's always a winner in any conversation.

EatHam: But anyway, even if they don't, I'd put them in the not applicable category - if they aren't using cap gains anyway, what's the difference to them?

So if we give people a seven million dollar tax cut if they purchase a luxury yacht, what would that matter to anyone who wasn't buying yachts, since they aren't using yacht tax anyway-- what's the difference to them?

thomps: it could create a condition to incentivize a birkshire hathaway strategy of refusing to split stocks in order to attract only more long-term investors.

I always thought that Buffet strategy was half-philosophical (to attract long-term investors) and half sheer PR (most expensive stock, it's at the head of every list, etc).

EatHam: Really? I kind of was when I found it out. Over 50% of households file tax returns with capital gains on them every year.

Here's why that's a stupid and misleading statistic to use. Please read, and hopefully it'll inform your future use of that statistic-- if your goal is intellectual honesty, that is, rather than propaganda.

Link (new window)

EatHam: That's one way of putting it. The other way would be that capital gains tax rates benefit those who invest more than those who do not.

Of course. It benefits those who make money through investment over those who make money through labor. That's not strictly a wealthy/poor-middling divide, but it largely is.

And specifically, it also benefits those who make money through investment. Which means you have to have enough capital that you're not dependent on the money at any point for actual needs.

EatHam: I'm not even really sure what you are arguing here.

In reference to capital gains tax, I'm arguing that capital gains tax being lower than income tax values investment income over labor income, which I find distasteful, to say the least. It also benefits the wealthy over the middle class and the working poor, which I find unhealthy for society.

In reference to long-term vs. short-term investment, I feel that we have far too much emphasis in our economic system and business philosophies on short-term returns, and that that should also be addressed.

These two things coincide when talking about adjusting the time-restriction on capital gains taxation.

R.A.Danny: Fixed

There's no proof that benefiting a corporation benefits its employees, at all. There's no correlation between company fiscal health and employee fiscal health. Unless I misunderstood you.

R.A.Danny: More tax revenue.

Less, you mean.

thomps: there's definitely a pr aspect to it. i think it also creates an air of elitism in belonging to an exclusive club. i grew up in omaha and valeted at a lot of the annual meeting events. there were a lot of people there that just owned one share so they could come and hang out a the woodstock of capitalism every year.

I'd heard of that phenomenon but wasn't sure it was real. Thanks for confirming.

I think my gramma owned some shares, which means my parents do now. Unless they sold it.