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Author Topic: Capital Gains Tax
LetterRip
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Baldur,

I'll answer those questions after I finish answering and responding to the above (may take a couple of days to get it all written down, etc.)

You stated

quote:
So by reducing the benefits of a capital gain you what???? Reduce investment. Whether you say it or not the effect is the same.

What I was responding to was

quote:
You tax capital gains TOO MUCH, you reduce investment.

(emphasis added)

Now we may disagree on what too much is, and we apparently disagree on whether or not those with the largest proportion of wealth are paying 'too much' or 'not enough'. However, the statement you made was not a point of disagreement. We can both completely agree that taxing capital gains too much reduces investment, and yet disagree on what too much is.

The investment level in any one item is its relative/percieved risk and return (among other factors) compared to the risk and return for other investments, as well as desired(percieved) current(future) consumption.

A simple example -

suppose we have three possible investments all of which are the same cost, and all of which have instantaneous turn around, the only risk is taxation, however they each have a different tax rate and different rate of return-

Investment A - 100$ 100% return 10% tax
Investment B - 100$ 50% return 10% tax
Investment C - 100$ 10% return 1% tax

A - 90$ after tax, B - 45$ after tax, C - 9.90$ after tax.

Now then, it is immediately apparent that A gives the greatest return, even though it has a higher tax rate than investment C, and equal tax rate to investment B. Thus we will invest all of our funds in A even though C has a lower tax rate.

What if we increase A's tax rate in 5% increments, then
A after tax: %tax 85$:15% , 80$:20% 75$:25% ... 50$:50% , 45$:55% , 40$:60% ... 10$:90%, 9.90$:91% , 9.80$:92%

Thus A is a better investment than B until the tax on A reaches 55%. And A is a better investment than C until the tax on A reaches 92% !

Of course real investments have variable rates of percieved risk and return, but the tax rate is only important to the extent that
A) determines the desired rate of return and risk
B) leaves capital available for investment
C) discourages transfer of capital from a current investment to a different investment
D) influence borrowing for the purpose of investment

The effect of A, is that it reduces investment in high risk ventures, which requires a subsequently higher percieved return. Of course, if we wish investment in riskier ventures - we could have lower tax rates for those risky investments we wish to encourage. There is little arguement (asside from simplicity of administration...) for a rate to be universal for all capital investments and gains.

We should note that Venture Capital is primarily from corporations, institutions (such as pension funds) and foreing investors. Thus changes in the cap. gains tax will have little impact on VC.

For small businesses and firms the capital comes primarily from freinds and family - I would strongly favor a lower CGT on investments into small businesses and firms.

Those without an annual income over 100,000$ (I think, number could be off a bit... other alternative qualifications are also available...) are (techincally) excluded from investing in many start-up companies (the company can pay a significant fee that allows smaller investors, but most don't...). I would like an alternative method that allows small investors to invest a certain maximum percentage of their savings or income in such high risk ventures. Perhaps a test to ascertain that the small investor is aware of the risk inherent, a certain amount of investment by 'qualified investors' before small investors can invest (improves the odds that it is a legit investment), and a cap on how much the small investor can invest. (Probably need some other qualifiers such as a low debt load...).

The effect of B is highly variable on where the capital investment is coming from, and where it is desired to originate from, and how the taxes are used (ie 'tax recycling', infrastructure investment, investment in competitiveness could all increase the capital available for investment, by reducing capital costs, or reducing costs for companies, by increasing the quality and quantity of human capital, by stimulating growth via goverment spending, by transfering capital from non-citizens to citizens via wealth distribution, etc.)

The effect of C is that it can provide stablity by discouraging capital flight, however, the downside is that it can make investors reluctant to divest of over valued investments. (Or of under-performing investments if they are hopeful of improvement...)

We should note that over half of the involvement in the stock market is from pension funds (and related invesment vehicles) and foreign investors which are unaffected by the the local rate of capital gains tax.

Also, the ability to do stock swaps and asset swaps allows capital liquidity without actual liquidization (and thus taxation). Thus the effects of lock in are typically greatly overstated.

High diffentials between other income taxes and CGT have an opposite lock-in effect, in that it gives corporate4 angers an incentive to retain earnings instead of paying them out in dividends. This is problematic in that if internal investments earn below market rates of return. (Indeed a capital gains cut could hurt the economy via this method...).

The only area that lock-in (of the first type) is a significant concern are small business owners and farms. For those individuals under a certain net worth I would certainly favor lower capital gains taxes on these sales.

The effect of D, is that as the rate decreases, borrowing for the purpose of investment becomes profitable (this is due to the differentials in taxation and loss deduction).

One of the most favored tax shelters in the 1980's was to borrow for the purpose of investing. The interest was fully deductable, so a 50% tax savings was available on each capital gain dollar realized on the borrowed funds. The tax savings were actually much higher due to deferral.

Thus a 5%, 10%, or 20% tax rate increase could drop investment to nothing or have negligble impact. Similarly a reduction by those amounts might stimulate investment, or have little impact.

Empirical studies of differentials in tax rates, show that there is little or no savings elasticity due to even relatively large differences in taxation (ie 10% or more!). The reason for this is that the wealthy are generally fully capitalized, and thus cannot really increase capitalization due to lower rates (except through tax sheltering as above). Those below the middle class must use almost all funds for current consumption and thus are unresponive to changes in the CGT. There are two groups that can be responsive to changes to the capital gains rate. The middle class can have two effects - the 'substitution effect' substitue current consumption now for higher returns and thus higher future consumption. The counter to this is the 'income effect', a lower tax means that investments have a higher average return, thus a smaller amount needs to be invested to maintain the same level of future consumption, ergo increasing current consumption. In practice, the middle class response is actually a wash. The other group, which I'll dub the 'lower upper class' - ie income ranging from about 100,000$ - 500,000$, are somewhat responsive to changes in the capital gains tax, the savings elasiticity, however, is still not terribly significant (.4 or so as I recall?) and the small size of the class means that the impact is fairly limited.

Those who favor CGT cuts have this tendency to refer to a single study done in 1980 on short term elasticities. However, these elasticities are due to timing effects, ie limiting tax liability by making a one time sale right before a tax increase. (The anticipation of the CGT increase change for 1987 caused a six fold increase in CG revenue from taxes in 1986. If Bush wanted to stimulate the economy then he could do so by increasing the CGT).

Of course we also need to realize that the rate could be increased or decreased for some income levels while unchanged for other levels. Ie if we think the poor or middle class are under investing and would be responsive to a change in the rate, then preferentially lower the rate. (I noted a number of promising areas for preferential lowering of rates above.)

There are a vast array of tax policies that would quite likely result in similar investment patterns and equal or superior economic result. Simply because one particular rate is prefered by some individuals over another does not imply that it is the best rate or result in the best economic result.

Another big issue ignored by those who favor large capital gains cuts are differneces in efficiency of capital allocation caused by differential tax rates for capital gains versus other income. (Ie low capital gains means more tax shelters such as the interest shelter above.)

Okay, now back to our 'real' investors. Presumably we want somewhere between the revenue maximizing tax rate and the 'optimum tax rate'. (I would like the US at closer to the revenue maximizing rate until the federal and state deficiets are paid off (ie increases in 'public savings', and then lower it to the optimum tax rate or lower thereafter...). We should also consider the equity/fairness of taxation which I'll save for another post...

Part of the problem with the determining an optimal tax rate, is that there is no single taxation body, and thus the optimal tax rate could not be (easily) implemented. Secondly, investment is based on percieved risk and return, and thus the theoretical optimal tax rate would not neccessarily be equivalent to an actual optimal tax rate (Since investors may be more optimisitic or pessimestic than is rational). Thirdly, the current tax system allows a great deal of 'tax avoidance', thus either the tax avoidance loopholes must be closed, or the tax rate for individuals who can avoid the taxes needs to be taxed at a rate higher than the optimal rate (so that the actual tax paid approximates the optimal rate). Finally, due to the cash flow needs of the individual, no single tax rate will be optimal for all individuals, even if all were 'homo-economicus' (the mythical economic man whose behavior is based exclusively upon the most rational economic decision...), thus we will likely need to segment the tax base and derive an optimal rate for each segment.

Note that if we find the optimal rate and implement it, but do not correct inefficiencies in the rest of the tax system then according to the 'Theory of Second Best', the economy may actally become less efficient.

That said... here is how I would go about deriving the optimal tax rate(s).

First, I would segment the market based on three factors - current and historical amounts of capital investment, historical investment sensitivity to changes in the capital tax rate, actual tax paid (ie the effective tax rate) versus theoretical tax rate if avoidance loopholes were closed.

With the information above, we add that the effective rate of CGT paid for those above the 500,000$ level (we'll exclude inflation for now) is slightly lower than half of the lowest long term rate - ie less than 10% (the majority of that is due to tax deferal and the 'angel of death' effect - Ie no CGT is paid on the income if you die. The effects of other tax sheltering brings the rate to 9ish %) The research I've seen on other classes suggest that they average around the long term CGT rate.

Now inflation - the true effective tax is slightly higher for all classes, since part of the capital gain is due to inflation.

Given that the rich have a substantially lower real rate and have no little elasticity of savings, I would increase the maximum rate to 28%.

I would create a new tax grouping for the 200,000$ - 500,000$ and keep it at the 20% rate.
So, I would propose that the CGT be lowered on individuals with incomes below 500,000$.

I would propose that assests held for less than 8 years allowed a discount for inflation, which reduces the benefits of the 'angel of death' effect, thus encouraging capital gains to be realized by the wealthy while they are taxable. (This is a tax cut for those under 500,000$ and could be equivalent to the 5% tax cut desired by Baldar, since their gains are almost all sooner than 8 years...).

I would institute the methods from above that would help small investors to invest in family/small businesses and in start-up companies.

I would do some serious thinking on how to reduce the lock-in effect on small businesses.

The effects would be that those above 500,000$ would have an effective rate of 14%.

Those below 500,000$ would have an effective rate of 15% or lower.

Investment and income would increase for those in the 30,000$-500,000$ range, investment would stay the same for the higher range (but reduce the amount of tax avoidance), and be largely unchanged in the lowest range.

A quick addition ... I would probably also have the goverment advertise encouraging capital investment. Perhaps as well some brokerage fee free index funds could be made available. This could easily stimulate growth in investment by the middle class and poor.

LetterRip

[This message has been edited by LetterRip (edited October 31, 2002).]


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BoonDockSaint
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I started reading this and then stopped because i remembered you have not read Human Action.
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LetterRip
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From where do you draw your conclusion that I've not read Human Action?

I've read quite a bit of it.

However, I fail to see why it should have any bearing on whether you choose to read my brief essay on the CGT. Why do you think I should have read HA, prior to you reading my essay? If you'd written HA, I could see how you might reasonably expect me to read it prior to you being willing to read my work. However, since you didn't write it, it really should have little bearing.

Now then, if you felt his opinions on taxes were relevant, you might point me to his chapter 'Interference by taxation', give a brief discussion of his key points, and explain why you felt it was relevant, etc. However to dismiss a paper without reading it, simply because you are unaware of what I have or have not read it silly.

LetterRip

[This message has been edited by LetterRip (edited October 31, 2002).]


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BoonDockSaint
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I didn't get any responses on my post about Human Action and last time i talked to you, i recalled that you had not read it. (maybe i was wrong?)

If you would like to have a discussion about Human Action, that would be great, because (as i said in my post) not only have i not been able to find anybody to talk about it with, i haven't found any refutations of praxeological economics.

I will read and respond to your post tomorrow. Am off to a halloween party tonight.


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WmLambert
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LetterRip, per our earlier postings, you mentioned you were going to research the Supply Side University of Jude Wanniski.

Here is an appropriate article that states the premise quite well: The correct tax on capital gains is zero.

quote:
CAPITAL GAINS IN A SUPPLY MODEL

A Statement before the Senate Finance Committee

by Jude Wanniski

Wednesday, February 15, 1995

I can not begin to tell you, Mr. Chairman, how thrilled I am to be before this committee to address the topic of capital gains taxation -- especially having been informed by staff that you had requests for my testimony from both sides of the aisle. As you know from personal experience, I have been a "nagging wife" on the critical importance of this issue for several years, to the point where members of Congress or the Executive Branch cross the street when they see me coming. If you will recall, Mr. Chairman, I had you in my clutches in 1989, in the earliest days of the Bush Administration, at a point where you were dead set against any change in capital gains taxation. I would like to think I had something to do with having you reverse yourself to the point where you are now as persuaded as I have been that there is no single thing we could do in fiscal policy that would energize our economy as much as a lower, indexed capital gains tax.

Since that milestone conversation I had with you in 1989, in Boca Raton, Fla., I've had a further epiphany on this issue, which I will make the centerpiece of my testimony today. It began with a conversation I had four years ago with Alan Greenspan, who told me of his belief that the correct tax on capital gains is zero. His position, which he has since made parenthetically to the banking committees of this body and the other when testifying on monetary matters, is that a tax on capital gains is a tax on the national standard of living. My epiphany was completed a few weeks later, in a conversation with Ted Forstmann, who may well be the most successful entrepreneurial financier of our time. It was Forstmann, now a man of immense wealth who began his career with nothing more than a good education at Yale and a trust fund that provided him $500 a month, who let me in on a secret. Men of wealth, he told me, are not interested in a lower capital gains tax, because their gains are behind them. The people who benefit most from a lower capital gains tax, he said, are those who have no wealth, but aspire to it. Independently of Greenspan, Forstmann told me the correct tax on capital gains is zero. What we are talking about here is the essence of capitalism, which is why this has become the defining economic issue of the Republican Party.

In the kind of capitalism we have here in the United States, people invest in each other. People with capital invest it in people without capital. Old people invest in young people. Rich people invest in middle-class people and the middle class invests in poor people with promise. People in cities invest in country people, and farm people in town people. When all this activity is at a high level, the economy is too.

When Wanniski invests in young Forstmann -- directly or through a bank, a credit union, a stock market, a thrift, an insurance company or a pension fund -- and Forstmann succeeds, I get to share in the fruits of his success. The more successful he is, the more I get in return. If he loses, I lose. Now, if the government tells me that if Forstmann succeeds, I have to pay Internal Revenue a high percentage of my share of his success, I will think twice about making the investment in the first place.

If Forstmann Inc. looks like a sure thing, I might invest in it anyway, but if he does not have a proven track record in business, I will pass and Forstmann, Little & Co., may not get off the ground. I will invest in a blue chip company, or a government bond, or a municipal bond, something safe.

When the capital gains tax is high, riskier investment in the young and the small and the promising, aspiring poor will dry up. People will stick close to home, which they know best. City people will not invest in country people and vice versa. And because there are fewer people able to try for success, there will be less success for the country as a whole.

When the capital gains tax is low, and there are more people encouraged to invest in each other, there is also a lot of employment. People who start a new enterprise with new capital hire helpers, and whether the enterprise eventually succeeds or not, the workers are earning weekly wages and paying taxes -- not only income taxes to the federal government, but taxes of all kinds to state and local governments.

People on unemployment benefits and welfare rolls are employed and begin adding tax revenues to City Hall and the county and the state, instead of living on public welfare.

All of this activity, remember, is occurring because someone with capital -- by which we mean surplus energy, talent and time -- is willing to bet on another person, who is temporarily short of either energy, talent or time or all three. The payoff for success in the venture is called a capital gain. Failure is termed a capital loss.

It's bad enough when the government puts a high tax on capital gain, because the people who lose the most from a high rate are the poorest, the youngest, those at the beginning of their careers, those who are furthest from sources of capital.

But when the government also taxes gains that arise from inflation, not real gains, then the flow of fresh capital from those who have it to those who need it really dries up. If the rate is 28% on a capital gain, but it takes five or ten years for an enterprise to know whether it is a success or not, the investor must consider the inflation rate compounded over those years and add it to the 28%. The rate then becomes confiscatory.

Inflation is a direct result of the monetary or fiscal irresponsibility of government. To penalize participants in the private economy for the mistakes of government seems to me to be the height of arrogance and irresponsibility. In my home state of New Jersey, almost everyone who owns property now has to consider that if they sell that property -- the farm, the home, the business -- they have to pay capital gains tax on what is for the most part an inflated gain.

The price of their property has gone up in the last 25 years, but the value is about the same, in terms of other goods and services that have also risen in price. So they don't sell the property, unless they are forced to sell in distress. The capital is "locked in." It can't be sold to someone who could make better use of the farm or home or business, with the proceeds to the current owner then invested in a new enterprise.

In the entire United States, which is worth about $30 trillion altogether, lock, stock and barrel, about $7.5 trillion -- one quarter of all -- is in value that is pure inflation. The federal government would grab 28% of that if it were sold tomorrow, and state and local governments would grab their pieces too. But because it is almost all "locked in," the government gets almost none of it.

If the government decided tomorrow that it wasn't fair to tax all that inflated gain, it would immediately come unlocked. As it changed hands, governments at all levels would be able to get their share of the real gains. Not only would capital become more efficient, as the economists say. People everywhere would be happier with this great burden lifted from them, economic activity would increase, and governments would find their budgets going from red ink to black.

Imagine you had a race track, where purses were so high for winning races that fine horses came from near and far to enter, and bettors came from near and far to watch and wager on these fine horses. Imagine, then, the government announcing it would tax away most of the purse, and you will quickly see the destruction that is done by the current federal capital gains tax of 28% as it applies to inflated as well as real gains.

This is why both political parties should be dedicated to at least reducing the rate and removing the tax threat on inflated gains. Almost everyone in the country would benefit immediately and for generations to come. The only losers would be those who are now betting on the nation's continued decline and failure.

Why is there such ideological opposition to this idea from the Democratic side? It is because the Democratic Party is the party of security, the party of fairness and compassion and equality. It is like the mother in a family, whose role is to question risky enterprise. The Republican Party must play the role of risk-taker, the traditional husband and father role of enterprise. President Clinton and the Democrats of this committee will naturally be skeptical of ideas that increase the levels of risk-taking in our society. It is up to the Republicans of the committee to persuade them that without risk-taking, there can be no economic growth. I say that again: Without risk-taking, there can be no growth.

All growth is the result of risk-taking, all success is the result of failure. The dynamism of our national economy is dependent upon people who are secure in their wealth, investing portions of it in men and women who have get-up-and-go and a can-do attitude, but no capital. The Majority Leader of the other body, Dick Armey, born in Can-Do, Okla., would eliminate the tax on capital gains altogether in his flat-tax proposal. He is in agreement with Alan Greenspan and Ted Forstmann.

I bring up Congressman Armey at this point of my testimony because of his well-known desire to change the method of scoring capital gains taxation by the Congressional Budget Office and the Joint Committee on Taxation. The reason is not that he would like the computers that do the scoring to be programmed by optimists instead of pessimists. It is rather that they should be programmed by supply-siders instead of demand-siders, as they are now.

In a demand-model, whether Keynesian or Monetarist or a combination of the two, there is no such thing as risk-taking. "Demand" means consumption, just as "supply" means production. All the computers in the legislative and executive branches at the present moment are programmed in the consumption mode, which assumes production is automatic. You have heard the expression many times, "Demand creates its own supply." If all growth is the result of risk-taking and our national policies of public finance are routinely ignoring risk-taking, inevitably all growth will stop.

Can the computers be programmed by supply-siders? Not really. The fact is, risk-taking cannot be converted into mathematical notation. In 1936, the great Princeton mathematician, John von Neuman, one of Albert Einstein's close friends, demonstrated that risk-taking could not be converted into mathematical notation. This meant that economics could not be converted into a mathematical science. It would have to remain a behavioral science. Unhappily, the departments of economics throughout the country, including those at Princeton, chose to ignore Professor von Neuman. This is one important reason why our national economy has become so sluggish, why our national standard of living has been in decline for more than a generation. And here, I quite agree with Labor Secretary Robert Reich when he points to the discouraging decline in real wages over the last two decades. But where Secretary Reich would get us moving again by spending more federal money on training workers for jobs that do not exist, I would eliminate the capital gains tax, stand back, and watch the boom unfold.

Now do not get me wrong. Cutting or eliminating or indexing the capital gains tax is not the magic bullet that solves all problems. It is, as Jack Kemp has been saying for years, "the bone in the throat of the national economy." Unless that bone is removed, no amount of pills or surgery aimed at treating the rest of our body politic will do much good. As long as risk-taking is punished, growth will be smothered.

In 1989, I was invited to Moscow by the central bank of the Soviet Union, to advise them on how to convert to capitalism. The bone in their throat is not excessive taxation, but the absence of a reliable money, which is a prerequisite to a financial industry and a market economy. They took the shock therapy advice of the IMF and are still experiencing economic and political chaos. In my several visits, I would use the following metaphor to give them a feel for capitalism:

Imagine three countries in the world, each of which produces all its GNP by digging holes in the ground. In the first, the workers dig with backhoes, in the second with spades, in the third with sticks. I would ask in which country will the workers have the highest wages. Obviously, the difference is capital. You can take a 25-year-old man in the United States or one in Poland or one in Ethiopia and give them a shovel and they will dig approximately to the same depth in the same amount of time. Capital makes the difference. Secretary Reich can train all our young men to work backhoes, but if all that is available are sticks, the market will pay them the minimum wage.

This, though, is why I would happily support an agreement with the President, to raise the minimum wage at the same time we index and reduce the capital gains tax. Real wages would rise without an increase in the minimum, but if the administration insists on the tradeoff, I would see almost no harm in it. The only serious damage would occur in Puerto Rico, which has its own tax structure, but which is obliged to meet the mandates of our minimum wage law. This could be resolved by suggesting to Puerto Rico that it match our adjustments in capital gains taxation, something I have been trying to get them to do anyway.

These are broad, general observations, Mr. Chairman, as I can only hit high spots in the time I was alloted for a prepared statement. As you well know from my nagging, I could sit here until the cows come home answering questions about this issue. I would be happy to supply the committee with answers to any questions you may have. I would be surprised if you come across a question or criticism that I have not confronted in the last several years. I genuinely believe we will open the 21st century without a tax on capital gains, as we opened the 20th century. The only question is what path we will take to get there and how fast we will travel it. Thank you again for the invitation to testify on this most important issue before this most important committee.


[This message has been edited by WmLambert (edited November 01, 2002).]


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LetterRip
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First paragraph zero content.

Second paragraph we have two arguements from authority 'Alan Greenspan told me... Ted Forstmanm ... said'

Third paragraph is mostly empty, and mostly incorrect. The wealthy mostly invest in the other wealthy - this is to diversify risk, and almost never invest in the middle class. The middle class invest in themselves, the wealthy, or a limitted number of friends. No one really ivests in the poor. There is very little cross investment from between 'citie folk' and farmers and farmers and citie folk. People invest in what they know. The elderly invest in the middle age, not the young.

Paragraph four is a simplified defintion of risk to return ratio. He is stating that with the added risk to him for investing due to taxes it lowers the ratio for this invesment to where it may be marginal.

Paragraph five states he may shift his investment to lower risk investments with known (but lower) returns.

Paragraph six repeats his false assertions from paragraph three (regarding invesment patterns). He also uses the nebulous term 'high', if the CGT were 99% it could certainly be considered high, and he is likely right that it will reduce investment. (Note that I specifically address this in above, a lower capital gains tax for higher risk investments, so even if his assertions were correct, I've already handled this case...)

Paragraph seven uses another nebulous term 'low', 0% is obviously low, but 50% might be for some investors, low is 'that which does not reduce the investors rate of investment in capital investment'. Ignores the fact that a great deal of capital investment is now into foreign markets. So none of the effects he claims benefit any of the US government if the investment if foreign. He then goes on to make a number of 'just so' claims. There is no reason to believe that in our current economy a general decrease in the CGT would increase employment. (As opposed to a target cut...).

Paragraph 8 - Another nebulous term 'people', if two additional individuals are hired due to a cut in the CGT, then the statement is true. Of course he is trying to imply that 'all people' or 'many people' will benefit, but as noted above, that is not the case.

Paragraph 9 - empty statement

Paragraph 10 - Again that nebulous term 'high'. Followed by more disinformation. The young, poor, and 'at the beginning of their carreer' do not recieve capital invesment.

Paragraph 11 - i discussed the effects of inflation. I also noted that the wealthy pay less than half the real rate of CGT even accounting for inflation. He completely misunderstands the effects of compounding and the real implications of inflation. Of course these can be written off if they end up capital loses. His statement that 'the rate then becomes confiscatory' is flat out false.

Paragraph 12 - The first sentence is not entirely correct. Inflation can happen due to any increase in the money supply, thus increased credit card usage, borrowing against assets, etc. all increase the money supply. As do changing regulations on borrowing, changes in the interest rates, and changes in demand deposits. As to inflation and property sales - the individual has generally recieved significant tax benefits from the land throughout its lifetime. Second, CGT on homes is much lower than the CGT on other assets. Third, people buy property and similar assets on long term loans. So a great deal of the price has been paid with an inflated dollar. (If they sell it prior to paying off the loan, then all of that dollar value not yet paid is at current dollars). Fourth, the appreciation in value for a great deal of property has been a real gain, not just inflationary gains. I think I would like a slight change property sold can be discounted for inflation, but only from the point where the property was completely paid for (or slightly more complex deflated at what the payment schedule was.).

Paragraph 13 - a discussion of lock in. I specifically addressed this in my paper. He is incorrect about property values, the real value has increased quite a bit.

Paragraph 14 - of that amount that is inflated, a great deal has been compensated in depreciation, deductions, and other tax benefits. The vast majority of that 30 trillion is 'illiquid', that it is not easily and rapidly liquidable. Also, a significant portion of that 30 trillion is owned by charitys, pensions, the federal goverment, state government, and foreign individuals. So no CGT could be assessed on the sale of those capital assets. Of the remainder we essentially have the majority of homes, and about 30% of businesses (due to the holdings of pension funds and foreign investment which account for about 70% of combined stock ownership in the US. Non privately traded businesses account for a small portion of total in terms of capital value. So he is flat out wrong about the both the causes and effects.

Paragraph 15 - seeing from above, the lock in has little effect. So his makes no point here at all. Capital is already close to maximum efficiency. Some people (ie the wealthy) would certainly 'be happier', of course the long term and short term effects on the government would be extremely negative, and government debt would skyrocket. There would be little or no increase in economic activity and the budget would go from red to even more red.

Paragraph 16 - a false analogy. As long as it is still 'the best game in town' that is where the capital will flow. See my post above for why this is so.

Paragraph 17 - empty paragraph

Paragraph 18 - more bad analogies and appeal to ego.

Paragraph 19 - more empty statements with homolies.

Paragraph 20 - another empty paragraph

Paragraph 21 - yet another empty paragraph. growth is from both demand and risk taking. There appears to be no need for additional incentive for risk taking. Notice his 'if', our national policies and public finance don't ignore the benefits of risk taking, they are all about evaluating risk benefit ratios. So 'if' public finance we're to decided to suddenly no longer risk capital for higher returns, then yes growth would slow. Of course this 'if' has no basis or relation to reality.

Paragraph 22 - An appeal to authority 'one of Einsteins friends'. Wanniski apparently is ignorant of mathematics. Risk is easily expressed in mathematics. As is shown by this link Wanniski is flat out lying here. Neumann did quite the opposite.

quote:
The formal incorporation of risk and uncertainty into economic theory was only accomplished in 1944, when John von Neumann and Oskar Morgenstern  published their Theory of Games and Economic Behavior.

http://cepa.newschool.edu/het/essays/uncert/intrisk.htm

If you do computer science, you are probably more familiar with von Neumann for his theory of cellular automata.

Paragraph 23 - another empty statement

Paragraph 24 - a tangent rather unrelated

Paragraph 25 - an empty paragraph

Pargraph 26 - states raising the minimum wage would be ok if it hapens with a reduction in the CGT

Paragraph 27 - empty concluding paragraph

So, asside from demonstrating his ignorance of economics, his talent for empty rhetoric, that he had nothing worthwhile to say regarding the CGT, and was flat out wrong and/or lying on numerous occassions, what were you hoping to show?

LetterRip

[This message has been edited by LetterRip (edited November 02, 2002).]


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LetterRip
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WmLambert,

I have read much of the material at Wanniskis website. It is generally equally as incompetent as his above speech.

So, rather than reviewing the whole website, I would be happy to have you post articles of his which you think are insightful and then review them as above. I won't do more than one a week though, since his material is largely a waste of time, and I only explain why and how he is incompetent as a public service.

LetterRip


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Baldar
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I would be interested to know your qualifications to make such a judgement LR. For instance:

Do you have any business experience that allows you to see and understand the facts as presented?

Perhaps you are trained in economics, accounting, international business, business in general?

What is your knowledge of economics compared to Wanninski and do your credentials lend to some ideal of superioirty you hold. As an example I am a businessman by trade and deal with the economics of investment on a regular basis. While retired I still consult, which I could not do if my clients did not feel confident in my abilities.

It seems you are attempting to confuse the issue with a great deal of assumptions that are not born out in fact. It really narrow down to the assertion that lower capital gains taxes will induce people to invest in riskier assets, such as corporate shares, thus lowering the cost of capital and making it easier for companies to obtain financing.

Three questions exist within the realm of the capital gains tax:

1-If you believe that such actions will increase investment, then raising the rate is unhealthy to the economy.

2-If you believe such actions do not stimulate investment then of course they should be done away with.

If you believe the latter then you have no issues on this thread, you simply beleive that people will not make investments based on tax consequences (as a businessman I can tell you a great deal of thought goes into the tax consequences of many investments).

If you believe the former to be true, then at what rate does the governments taking of capital investment gains reduce the wish to invest?

Those are very simply questions that rely on data more than speculation. At what rate should the capital gains tax exist or should it exist at all?


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Everard
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You don't have to be an economist to totally destroy that speech as LetterRip did. He took it apart logically, showed the empty statements, pointed out some lies (the Von Neumann link for example), and the false analogies.

Now, if letterrips economics are wrong, that doesn't change the areas where this guy was wrong, where he used bad arguments, or false logic. But, since he used very LITTLE economics in shredding Wanniski, an attack on Letterrips education does nothing other then show you grasping for straws.


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Baldar
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Ev stop being a butthole. My questions still stand, not only on the knowledge (not just education), but also on his logic.
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TomDavidson
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Baldar, that "butthole" comment was TOTALLY out of line.

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Baldar
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Then tell him to stop being one.
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Baldar
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You know Tom, I noticed this puritannical streak you have about the anus, what up with that?
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Everard
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Hrm, if that was me being a butthole... what in heck were you being?
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Baldar
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Call you to task spincter boy.
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Everard
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Call me to task on WHAT baldar?

You asserted that the only people allowed to make comments in a field are specialists in that field, essentially. In other words, you made an appeal to authority. Thats grasping at straws in my book.


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Baldar
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No, my assertion was, by what personal criteria do you make such a judgement. Its not grasping at straws, its an honest question. You will also note I gave experience as a criteria as well as education staw man.

Now what did the straw man need in Oz?


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Paercival
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one of the foundations of this website, from card's perspective, was to make sure that the intellectual elite did not end up running everything
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Baldar
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Ask around, no one here considers me the intellectually elite, I tend to be a bit more bare bones pragmatic. Liberals are the big intellectual elitists, they know what is best for society, hence they should decide for the rest of us. Government is their tool and society's fetter.

My question was based on what experience, educational or otherwise LR had with the matter at hand. As a matter of fact, that was my ver first question (not elitist education) Everard (perhaps based on his own misgivings) asked who I was to ask such a question as to the credential of the critique.


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Everard
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May I present, for your edification, the first criterion for being an ornery american?

"We aren't impressed by your credentials, Dr. This or Senator That. We aren't going to take your word for it, we're going to think it through for ourselves. "


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Baldar
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So what experience has he got straw man? You seem to continually miss that part of my post. Willfully ignorant or simply not understanding?

he, you something like that

[This message has been edited by Baldar (edited November 02, 2002).]


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Everard
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Baldar-
I don't know what experience he has. What I do know, is its VERY obvious to any long time reader of this site, that Letterrip has tremendous research abilities, and uses them well. Until he shows that he DOESN'T understand how to use those resources, I'm willing to concede that if he writes a long post abotu something, he doesn't need credentials... he understands what he's talking about.

Experience is simply another type of credential, and in my view, not any more impressive then objective analysis. In fact, usually less so, as experience is anecdotal evidence, and so not worth very much for describing trends.

I am not ignoring the fact you asked for experience or academic creditials. The fact is, both questions are an appeal to authority.


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Baldar
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I usually listen to someone with experience before I listen to someone without it, don't you? Or do you just want interns to operate on you?
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Baldar
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What is wrong in saying by what authority, experience or otherwise, do you tell me these things, or are they just something you looked up and cobbled together?

If you believe the latter equivalent, I hope you are never audited by the IRS, you would soon learn the difference between tax experience and tax theory.


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Everard
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I listen to whomever appears to know the most, and be honest. If he happnes NOT to have experience in a field, so what? Now, a SKILL is different then knowledge. The best person to hit a randy johnson fastball is not necessarily the same person who can best describe the motion of that fastball, and how to swing in order to effect the greatest liklihood of a hit.

Likewise, the best person to describe economic theory may not be someone who is actively engaged in economic activity. In fact, it probably ISN'T that person.


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Everard
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There's nothing WRONG with asking about authority, but when you challenge someone in an argument about their authority, after they've very effectively dismembered an argument put forth by someone they are in opposition to in that argument, it appears to be grasping at straws. Who CARES what his authority is? He just wrecked the argument behond hope of redemption.
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Baldar
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Your wrong.

So what your saying if someone "sounds nice" you will listen to them. Regardless of their experience. That experience is actually a "detriment" to someone, especially in economics.

Generally the only places "no experience required" works is in MacDonalds and massage parlours. I suggest you rethink an obviously backwards solution.


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Everard
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You're wrong AGAIN.

"So what your saying if someone "sounds nice" you will listen to them. Regardless of their experience. That experience is actually a "detriment" to someone, especially in economics."

No, I'll listen to someone if they get their facts right (wanniski either lied, or was clueless about several things, not the least of which is games theory... something that is fairly important in economics), have logical arguments (as noted by letterrip, much of wanniski's argument is misdirection or empty space). Letterrip almost ALWAYS gets his facts right, and his arguments are always logical. So, given that, I'm willing to listen to him. I don't know as much about his economic knowledge, so I take those portions of his arguments with a grain of salt (especially since I know that I couldn't spot a flaw in his economic thinking as I'm not strong enough in that field to spot those flaws if he were to make them), while paying attention to the logic and the facts presented by both sides. Letterrip clearly wins both of those categories, in such a manner as to make my knowledge of his knowledge of economics irrelevent.

Again, there's nothing wrong with questioning authority... but you questioned his authority to critique someone else, and that sort of appeal to authority is dead wrong.

I certainly don't think you have experience in environmental areas, nor do I think you're educated in those fields, but I don't question you're authority to gripe about the kyoto accords. If I may change roles around here a bit, you are questioning your authority to speak about the kyoto treaty, and I don't think you want to go there.

and, again, experience is anecdotal evidence, and skills are not the same as knowledge. I know how to throw a baseball, and could be an effective coach, but I can't pitch very well. Similarly, I can do multi-variable calculus, but couldn't teach it to save my life.

As to why experience is a bad criteria for making statements concerning that field... if you are actively engaged in an activity, you lose objectivity. You see your own portion, what hurts you and what helps you, and think that those same things must help and hurt everyone else... when that isn't necessarily true. I hate to make a baseball analogy again, but Chipper Jones made a horribly funny comment earlier this year, that fits so appropriately to this topic. He said "Its much harder to find a good outfielder then a good thirdbaseman." Which, of course, is very indicative of the Braves problems over the last few years, but is by no means an accurate reflection of the state of baseball. Likewise, someone who invests heavily could easily say that a zero percent capital gains tax would cause more economic growth... but that may not be an accurate reflection of the economy. It may cause Wanniski to invest more heavily, but thats not the same as everyone investing more heavily causing growth.

Or, to put the above another way, its very hard to see the whole forest when you are one of the trees. Of course, a very TALL tree perhaps could do it. Judging by wanniski's lack of command of the peripherals (game theory, logic, location of investments, etc.) he isn't a very tall tree. He's a shrub.


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Baldar
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quote:
I certainly don't think you have experience in environmental areas, nor do I think you're educated in those fields, but I don't question you're authority to gripe about the kyoto accords. If I may change roles around here a bit, you are questioning your authority to speak about the kyoto treaty, and I don't think you want to go there.

Actually I do. I had to have that experience to wade through the tons of requirements Brazil placed on my company to build a water filtration system that would capture the water and reuse it rather than allow it to waste into the Amazon in Brazil. I can tell you all about percolation rates, sludge usage as fertilizer, environmental performance policies, ionization impact on tropical mediums, aquatic sustainability and general treatment impact studies on the environment. So while I don't have the four year degree in environmental policy, I do have more than a small dose of practical experience, that also includes how to clean up rivers in such areas as Mexico City too or provide safe drinking water in other areas.

Experience is a bit more than anecdotal. Again I ask you, do you see no difference between an intern about to open your heart and say Jarvik? But hey, his knowledge is only anecdotal, and since he is directly involved in the surgury, it might be better for someone who has never performed open heart surgury to give an objective opinion by reading about it in a book.

Large companies don't hire untrained managers who can read books. Your forest for the trees view falls apart in real life.

Skill comes from experience Ev.



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WmLambert
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LetterRip: First paragraph zero content.

Does that include the fact that he was invited to appear before Congress (From members on both sides of the aisle) to speak on the subject upon which you called him incompetent? Since you were not given such a testimonial (re: Wizard of Oz) shouldn't we take your assertions with the grain of salt that you would have us reserve for Wanniski? Remember LetterRip, although I admire your ability to do instant research, you do not have the corner on truth, and your castigation of others are unseemly when your opinion is wrong.

LetterRip: Second paragraph we have two arguements from authority 'Alan Greenspan told me... Ted Forstmanm... said'

You should complete the thought. What Greenspan said was pertinent: "Tax on capital gains is a tax on the national standard of living." Is he also without credibility? And what Forstmann said was also relevent and actually takes your entire presumptive argument up to the next level. "Men of wealth... are not interested in a lower capital gains tax, because their gains are behind them. The people who benefit most from a lower capital gains tax... are those who have no wealth, but aspire to it."

LetterRip: Third paragraph is mostly empty, and mostly incorrect. The wealthy mostly invest in the other wealthy - this is to diversify risk, and almost never invest in the middle class. The middle class invest in themselves, the wealthy, or a limitted number of friends. No one really ivests in the poor. There is very little cross investment from between 'citie folk' and farmers and farmers and citie folk. People invest in what they know. The elderly invest in the middle age, not the young.

You completely missed the point. The pragraph simply stated that people invest in other people. Not that everybody invests in everything. Of course people invest in what they know. Yes, wealthy put their money into big projects. But remember that little projects become big projects with enough investment.

LetterRip: Paragraph four is a simplified defintion of risk to return ratio. He is stating that with the added risk to him for investing due to taxes it lowers the ratio for this invesment to where it may be marginal.

Yes, and he says it so clearly that you can understand it, can't you? I assume you agree.

LetterRip: Paragraph five states he may shift his investment to lower risk investments with known (but lower) returns.

No - he says more, that without his investment the startup company may not succeed.

LetterRip: Paragraph six repeats his false assertions from paragraph three (regarding invesment patterns). He also uses the nebulous term 'high', if the CGT were 99% it could certainly be considered high, and he is likely right that it will reduce investment. (Note that I specifically address this in above, a lower capital gains tax for higher risk investments, so even if his assertions were correct, I've already handled this case...)

See above, not a false assertion. You are using a strawman argument - incorrectly restating what he said, and then arguing your own wrong take on it.

Let me cut to the chase here. Your argument is wrong because you assume the need for revenue to the government above all else. you said: "...we want somewhere between the revenue maximizing tax rate and the 'optimum tax rate'. (I would like the US at closer to the revenue maximizing rate until the federal and state deficiets are paid off (ie increases in 'public savings', and then lower it to the optimum tax rate or lower thereafter...). We should also consider the equity/fairness of taxation which I'll save for another post..."

What then is your answer to someone who doesn't want the government to spend at present levels? Reagan stopped a reneging Democratic Congress from spending more than they promised by not balancing the budget - therefore forcing the Congress to confront the results of their overspending by the increasing debt. Why are any tax dollars coming in for Cap Gains a positive asset? Is there some multiplier effect you are not letting us in on? You never argue that Cap Gains would not benefit from a zero rate, do you? Wanniski never claimed that Cap gains at zero would magically fix a busted economy - but it sure wouldn't hurt.

As for the statement that Wanniski lied about risk-taking being excluded from numerial usage in Economics, per Von Neumann-Morgenstern utility functions to represent preferences over lotteries (game theory?), I will concede the battleground, but give Wanniski the benefit of the doubt. Afterall, from your link: "U(p) = ƒ X u(x)dp(x) as the general analogue of the expected utility decomposition for non-simple probability measures. However, things are not that simple: specifically, the Archimedean axiom is a source of failure in obtaining such a representation. As a result, it is necessary to strengthen and/or supplement it." If that supports or indicts Wanniski, I'm not sure. But since the Polyconomics forums host many advanced mathematicians who have a better handle on this than you or me, I'll defer to their conclusions.


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LetterRip
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Greetings all,

I don't have adequate time to respond at the moment. I've also recieved some thoughtful criticism via email. I'll likely seek permission to respond to some of the criticism here, since the purpose in emailing me was to avoid embarassing me in public. However, I'd much rather others learn from my errors (or not, as they are eventually judged <smile> ) than avoid the minor inconvenience of public embarrassment.

Ev, I appreciate you 'sticking up for me' as it were, but it really isn't necessary.

Baldar, I'm still completing responses to your questions in another thread, plus I'm writing my thoughts on Mises 'Human Action', which I expect might also generate a bit of discussion.

As to your question on my credentials..

Briefly, my most significant formal training is in psychology, biochemistry, and mathematics. I'm self taught fairly extensively outside those fields on most areas of social policy that are of broad and significant importance. (Probably over 30,000 hours now with 3/4ths or so in actual study, the remainder being researching, writing and other misc...).

Some of my views are extremely well developed and have been discussed with experts in the field (patent law, various portions of education reform, environmental science) others, such as economics, are less well developed, and quite likely have many warts.

Since you are basing your views on experience, I would expect that you might disagree with me, and would be interested in your views and why you feel I'm wrong.

However, I do hope you will not reject my thoughts out of hand, although I do expect you to take them with whatever sized grain of salt you feel appropriate.

Similarly I do not feel it is appropriate to reject Wanniski's views of economics out of hand, although his formal training is as a journalist, nor do I feel it is appropriate to reject Bjorn Lomborg's environmental views out of hand although his formal background is political science.

At any rate, it is late, I'm tired, and don't have more time for a response now. I hope that answers your question to your satisfaction.

LetterRip

PS I'm trying to cut back on my Ornery time, since it is becoming a distraction to accomplishing other tasks. However, I do promise to respond to all of the criticisms, even if it is just to conceed defeat <grin> (not likely, but hey, you never know...).


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Everard
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I told greg last night I was going to ignore baldar due to general incompetence on his part. Insert my response here.

Getting back to the interesting portion of this thread...

"Does that include the fact that he was invited to appear before Congress (From members on both sides of the aisle) to speak on the subject upon which you called him incompetent?"

Yes. This isn't content, its an appeal to authority. In this case, the appeal is to congress... something I find rather amusing.

Paragraph two: While what the two economists said is certainly pertinent, its again an appeal to authority, and those don't establish the validity of an argument. What Wanniski is saying is what conservatives get all upset about in environmental or educational matters.

P3: I think YOU missed the point, Lambert, given this portion of P3 " People with capital invest it in people without capital. Old people invest in young people. Rich people invest in middle-class people and the middle class invests in poor people with promise. People in cities invest in country people, and farm people in town people. When all this activity is at a high level, the economy is too." This is relevent because Wanniski needs to show the market isn't dominated by the wealthy, and the only way to do that is to show that those with capital to invest do so in places other then other people with capital to invest.

P4: Everyone agrees. Hurrah. Not a very complex idea, though, and not relevent without other ideas he hasn't managed to establish yet.

P5: Yup, he says it may not suceed. He also says he'll invest in lower return options. However, even WITHOUT a capital gains tax, both of these assertions are still true. In fact, what he's doing here is leading us away from the issue, and trying to establish that risk is greater with a capital gains tax. This is the inverse of what is actually the case, where reward is lower with a capital gains tax. The two statements have significant differences. Wanniski tries to avoid those by writing this paragraph.

P6:Re-read paragraph three, the relevent portion of which is convienently reposted in this post. He DOES assert what Letterrip claims he asserts, and his argument is therefore not a strawman.


The argument about revenue is a different argument entirely.


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Baldar
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Funny, Redskull and I don't view each other as incompetant even though he and I have had the strongest words in this forum.

The problem Everard is that you don't often know what you are talking about so you talk yourself in these little corners. Your lack of life experience reflects in your posts (yes you want someone without experience, forest for the trees thing, uh huh ). Unlike you, I have taken chances with my life out there and been rewarded. Perhaps its envy on your part, you know, little men, little lives.

Its nice to sit and call someone incompetent, its another to judge your own life wanting and striking out at others because of it.

If you cannot speak to the facts I suggest you slink off somewhere and lick your wounds rather than call me incompetent.


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TomDavidson
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"Perhaps its envy on your part, you know, little men, little lives."

Again, Baldar, this is beyond the pale. Shape up, will you?


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Everard
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Funny, Baldar, how you can't read.
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LetterRip
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WMLambert,

thanks for your response. You asked

quote:
Does that include the fact that he was invited to appear before Congress (From members on both sides of the aisle) to speak on the subject upon which you called him incompetent?

Yes, as Ev stated, it is an appeal to authority. Congress gets 'expert' testimony by both established experts in a field, as well as individuals who have notoriety regarding the subject.

quote:
Since you were not given such a testimonial (re: Wizard of Oz) shouldn't we take your assertions with the grain of salt that you would have us reserve for Wanniski?

Absolutely.

quote:
Remember LetterRip, although I admire your ability to do instant research, you do not have the corner on truth, and your castigation of others are unseemly when your opinion is wrong.

Agreed, I feel that my language may have been overly strong, although I've not yet seen evidence to suggest that it was wrong.

quote:
Is he also without credibility?

First, It needs to be noted that his 'appeal to authority' with regards to Neumann seems to have been the opposite of the reality. Ergo, such appeals to authority are highly suspect. However, even if he is correctly attributing.that does not mean that the individuals appealed to are correct. The only value an authority should derive is that when they make a claim that is contrary to your experience or reasoning, you should be give more thought to their reasoning than might be generally warranted by such a statement.

Without the reasoning behind an assertion, the statement must be taken on faith. Now, faith in an expert without the reasoning is more reasonable than faith in a nonexpert without reasoning. However, if there is a well reasoned counter arguement, then one should seek the reasoning behind what was originally only faith. Authorities can frequently have erronious beliefs even in fields that they are acknowledged experts.

quote:
Men of wealth... are not interested in a lower capital gains tax, because their gains are behind them. The people who benefit most from a lower capital gains tax... are those who have no wealth, but aspire to it.

Since the wealthy heavily lobby for a capital gains tax cut, and since the wealthy go to extensive measures to avoid paying capital gains taxes, then the reasoning and conclusion appear to be faulty and contrary to the empirical evidence. Since the assertion is contrary to empirical data the onus is on the individual to supply better and more extenisive empirical data, or to provide sound reasoning as to why the empirical data is flawed (or misinterpreted, etc.).

quote:
You completely missed the point. The pragraph simply stated that people invest in other people.

I disagree. The point appears to be that everybody benefits from a CGT cut, and by extension that everybody is hurt by a CGT.

quote:
Yes, and he says it so clearly that you can understand it, can't you? I assume you agree.

Yep, but it is not particularly profound, and is a very basic concept that the finance committee would be expected to be well acquainted with.

quote:
[Wanniski] says [..] that without his investment the startup company may not succeed.

As Ev noted this is a true statement with a zero CGT as well. However, Wanniski is arguing for a zero percent CGT across the board. Not for just risky(er) investments. Also, the less riskier company that he would have shifted his investment to could now fail since Wanniski is seeking the highest potential return for his risk.

quote:
See above, not a false assertion.

The statment Wanniski made was a false assertion, however, the intent or meaning behind the statement may be subject to interpretation. Ie 'it was a bazillion degrees below zero outside' versus, 'it was cold'. The intent is the same in both cases, but one can be literally true, and the other is understood to be hyperbole.

quote:
You are using a strawman argument - incorrectly restating what he said, and then arguing your own wrong take on it.

It was not intended to be a strawman. My reading of his statement was the 'plain reading' in my opinion. It seems clear from his statements that he was trying to claim a 'trickle down' effect of a CGT cut.

quote:
Let me cut to the chase here. Your argument is wrong because you assume the need for revenue to the government above all else.

'above all else' what? I believe that debts accumulated by the governement on behalf of the people need to be paid off, and that the government going into greater debt is a bad idea. That some form of revenue is needed to pay off those debts.

quote:
What then is your answer to someone who doesn't want the government to spend at present levels?

I would say, absolutely, I agree. I want to cut government spending as well. Lets pay off the debt so we don't have those enormous payments. Cut back on unneeded defense spending, automate wherever possible, and get the government as lean as can be.

I'll address the rest of your arguement later today.

Thanks for your thoughts.

LetterRip


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LetterRip
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quote:
Why are any tax dollars coming in for Cap Gains a positive asset? Is there some multiplier effect you are not letting us in on?

Sort of. There are differential benefits from a CGT, depending on what gain is being taxed, and where the gain is from.

For instance, suppose we have three investors A, B, and C. A has only US capital investments whereas investor B has only foreign capital investments, and C has a 50/50 split foreign and US investment. Let us further suppose that A and B are completely insensitive to the tax rates effect on return, whereas C adjusts his investment portfolio based on the tax rate (thus if foreign investments are taxed higher, he'll invest more in the US, and vice versa...). All three are recieving the same return and have equal risk. Now let us imagine three tax rate scenarios (for illustrative purposes we'll use a extremely high rate of 50%, and an opposing rate of 0%), Rate 1 - 50% CGT that ignores where the investment is located, Rate 2 - 0% CGT that also ignores where the investment is located, and Rate 3 a tax rate of 50% on the foreign investment and 0% on the US investment.

First we note, that for the foreign investment, we have reduced the cost of capital to foreign companies. All taxes on wage gains and company income gains go to the foreign country, increasing the goverments income and efficiency. The increased wage gain and company income increase have a stimulus effect on the local economy. Since most countries are net exporters with regards to the US, this increases the foreign companies competitiveness relative to US companies.

For a dollar invested in the US, we can expect it to have many of the same economic benefits.

Now we look at the effect of government revenue on a country. The increased tax revenue allows it to increase investment in infrastructure,education, and R&D, increasing the competitiveness of its human capital, gaining efficiency for its businesses, and reducing research costs and infrastructure costs to business. It also improves the countries ability to attract human capital, since it can provide and support better quality services and benefits. It also gives the benefits of tax recycling (since the government is generally being paid out to
citizens of that country - this case varies depending on what portion of the military expenditure is going to a foreign government, and how much public debt is held by foreign investors.)

So, the foreign invested dollar taxed at 50% gives all of the benefits of the reduced cost of capital to the foreign country, however, it also gives the benefits to the US of the government revenue. It also reduces the capital available to the foreign investor to invest into the foreign market (and increases via the revenue recycling the capital available for investment into all markets..).

The US invested dollar, gives all of the benefits of the reduced cost of capital to the US and US companies, as well as the benefits of revenue to the US. With the downside that the amount of capital for reinvestment (for this investor) has decreased. However, he should get even greater returns on the capital he does invest from the added efficiences of better quality human capital, cheaper access to R&D, and better infrastructure.

The 50/50 investor is intermediate between the two, but his investment dollar is better favored for US investments. So his capital investment should be reapportioned to favor the US investment.

Now let us look at the 0% option. Now the US government gets no benefit from tax revenue. So it is hurt more by the foreign investor and helped less by the US investor. Also, the US investor is getting little competitive advantages offered by the US compared to what he was getting relative to the foreign investor.

The 50/50 investor has very little additional competitive advantage to invest in the US, and thus he keeps his portfolio at 50/50.

Now let us look at the 50/0 option. Investor A, the price of capital is benefiting the foreign company and government, but the taxation is benefiting the US government.

Investor B, is not being taxed at all, and is recieving all of the benefits of the taxation of Investor A. Investor B is enjoying enormous competitive advantage.

Investor C, realizing the substantial competitive advantage of investing in the US, shifts the majority of his capital investment to the US.

Thus we've clearly established that one capital gains tax, that on foreign investment is of significant value to US investors, and the US in general.

We've also established that not taxing gains made on foreign capital investment actively hurts the US economy by increasing the competitiveness of foreign countries compared to US countries.

Okay, that is enough for now. I'll continue this line of thought later,

LetterRip


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Baldar
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Tom:

Few things irk me more than someone who poses as intelligent and then claims someone else is incompetent as if that were some type of final judgement on high. Of course he's a little man, such action goes a long way to proving it. And if you want to be the "paragon" of civility I suggest you dole our your platitudes equally to all those that break the "pact" you seem set on making in this forum, and stop reserving your judgement for those who do not agree with you.

[This message has been edited by Baldar (edited November 03, 2002).]


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LetterRip
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Another implication of the above is that we should not give a preferential long term rate to foreign capital investments.

A counter to the effect above, is the offshore tax shelter. Essentially, what is done is that the transactions are maintained through an offshore corporation (OC), thus the capital gain is not realized directly, and can be deferred.

Now according to the IRS, the corporation must be for 'a legitimate business purpose', but in practice they are generally formed for the purpose of tax avoidance.
http://www.cfo.com/printarticle/0,5317,6782%7CA,00.html

Here is how the shelter gives benefit, and how it changes investment decisions.

1) Since the OC is not paying capital gains tax, it has no preference to hold stock long term, thus realizes more short term gains. Since the investor can hold the stock of the OC for the period needed to realize the long term gain, the short term gains are treated as long term gains.

2) The OC will have a preference for investment in countries that do not tax (or have a much lower tax) the capital gains realized by the OC, and thus less likely (I think? not sure on this) to invest in US based companies.

So... to combat this, we could do some of the following...

All OC gains recieved by the investor would be taxed at the short term gain rate, greatly reducing the benefit of such a plan. If the trading history of the company is submitted with the tax return then the individual can choose to pay tax as if it were the company. Thus it would be taxed on the gains as the company realized them (with the compounding taken into effect), eliminating the benefits of the tax deferal.

With tax shelters available and not taxed to discourage the tax avoidance, the individuals investment is shifted away from what the rational strategy would be if the shelter did not exist.

LetterRip


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Baldar
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But then investors will not seek to recognize the gain in this country (it is just as easy to convert assets to properties elsewhere as here). In effect there is then less investment in the US and greater investment abroad with the investment being continued abroad because to bring it here would have negative consequences. Heck with the money I will buy into a hotel in Cabo instead of a hotel in the US and use those gains to increase my holdings in Europe. Mexico and Europe both have an increase in their investment from foriegn investors, the US meanwhile has no beneficial effects from the investment, even the currency is effected by such moves. There is no inherent need to bring all the money back into the US if US repatriation taxes are high.
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