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Reward real investing, tax the H-E double toothpicks out of traders

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June 25, 2009 – Comments (64)

It's not 100% original (or maybe even 50%), but I like this idea.

“If you buy something -- a stock or a bond -- in the morning, and you sell in the afternoon, the tax probably ought to be 80 percent,” said Gerstner, also a former chairman of Carlyle Group, the world’s second-largest private equity firm.

“If you hold it for six months, maybe it ought to be 60 percent,” Gerstner told Bloomberg Television.

Selling an investment after five years should carry a zero rate “to try to get the incentives for investment to go back to being a true investor and not a trader,” he said.

64 Comments – Post Your Own

#1) On June 25, 2009 at 11:19 AM, JakilaTheHun (99.94) wrote:

I completely agree.  In fact, I blogged about it once here on TMF and got lambasted. 

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#2) On June 25, 2009 at 11:23 AM, saunafool (98.81) wrote:

Agreed.

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#3) On June 25, 2009 at 11:25 AM, MattH42004 (29.79) wrote:

I would love to see this happen, but it probably has zero chance.

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#4) On June 25, 2009 at 11:26 AM, JakilaTheHun (99.94) wrote:

Here was my article:

http://seekingalpha.com/article/124716-promoting-long-term-investment-and-a-solution-to-shorting

Ignore Seeking Alpha's edited title.  Sometimes they do that and it's annoying.  I propose no "solutions to shorting" (whatever that means).

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#5) On June 25, 2009 at 11:32 AM, russiangambit (29.47) wrote:

60% for 6 months? I am outraged, seriously. First, clean up the market, then we can talk about holding long term.  There are so many lies, insider trading, manipulation there. Stock market is very risky. If I don't get rewarded for participating in it, I'll take my chips elsewhere.

The market will be drained of liquidity and it will go nowhere for 20 years. And Congress will have to come up with a real pension plan , not this joke called 401K. That is actually might not be a bad thing.  But our politicans are not thinking this way, they only thinking 1 move ahead when 5-10 moves ahead thinking is required. They will be very surprised when the market tanks.

 

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#6) On June 25, 2009 at 11:45 AM, JakilaTheHun (99.94) wrote:

Russiangambit,

In actuality, the proposal would increase "liquidity" of the market.  The massive amount of cash on the sidelines mostly stays there because big money is analyzing the market from a 'trading perspective' rather than an 'investing perspective'.  So long as people fear the next big downturn, they stay out. 

The whole "liquidity" argument is garbage anyway.  It's based on extremely flawed assumptions about stocks.  Stocks are not random trading vehicles.  They are ownership stakes in a company.  Those companies have assets and produce cash flows (at least the good ones do).  As an owner, you are entitled to your share of that, but due to modern technology, stocks have become a random speculative vehicle rather than 'the ownership stake' they were designed to be. 

If we want a return to functioning markets, it's necessary to eliminate all this junk speculation and make investing about investing again. 

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#7) On June 25, 2009 at 11:49 AM, BradAllenton (31.87) wrote:

Ya, I think it would be a great idea for the government to try to manipulate how long you hold a stock by messing with the tax rate. Not only is this "idea" retarded, but if you rec it you are a retard. By the way the tax on buy and hold is the 50% loss you took from 2007 to now. Saying that you think tax rates should be modified to favor your investment strategy has to be the most childish, bias, thing ever posted on caps. There already is a  short term capital gains tax vs. long term capital gains tax, that shouldn't exist. Oh ya and whoever said, "it probably has zero chance" you are right and for good reason....... because the idea is blown out dumb.

The tax rate for all forms of investment should be the same 1 day, 1year, 1 decade. You shouldn't hope to tax people who understand how to time the market just because you can't. On a similar note, I hope to tax people who are over 6' tall 1000$ per inch, just because I'm dead on 6'. Sounds reasonable.... right?? Grow up and stop being a cry baby about who should be taxed what just because you are sitting on a portfolio full of red.

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#8) On June 25, 2009 at 11:54 AM, portefeuille (99.66) wrote:

It is pretty obvious that the liquidity would be lower under those proposed rules since the average holding time would increase (that is the whole point of that exercise).

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#9) On June 25, 2009 at 11:58 AM, portefeuille (99.66) wrote:

(I am also very much opposed to those proposals. over here they call this the "summer whole" (Sommerloch). Not much is happening so there is a whole in the "news media" that gets filled by rather silly stuff that would never make the headlines in "normal times".)

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#10) On June 25, 2009 at 11:59 AM, Option1307 (30.27) wrote:

Whats wrong with traders, why is their choosen method flawed?

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#11) On June 25, 2009 at 12:00 PM, JakilaTheHun (99.94) wrote:

Portefeuille,

It depends on what you mean by "liquidity".  If you mean that the securities themselves would be less frequently traded, then yes, there would be less "liquidity" under those definitions.  If you mean that the corporations that sell stock on major exchanges would have less access to capital, then I'd say you are incorrect.  There will be more "liquidity" because it will stabilize the market and will bring the idle capital back into the market over time. 

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#12) On June 25, 2009 at 12:03 PM, JakilaTheHun (99.94) wrote:

Option1307,

Nothing's "wrong" with traders.  They are simply taking advantage of a system that, by its design, is encouraging frequent trading and rampant speculation.

However, there is something wrong with the American capital system and it's that people are treated their ownership interests in corporations as if it's nothing more than a speculative trading vehicle.  The American economy has suffered enormously as a result. 

If you want corporate America to straighten out, you have to hold them accountable.  They are never going to be held accountable so long as the people with "ownership interests" only care whether the stock price goes up a little bit in the next three months.

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#13) On June 25, 2009 at 12:14 PM, TMFDeej (99.26) wrote:

I completely agree, Seth.

Deej

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#14) On June 25, 2009 at 12:22 PM, ToddMCTC (31.37) wrote:

@ Jakilthehun - For some one who doesn't have a pick less than a year old and also has several closed out positions of less than a week you talk the talk but clearly fail to walk the walk.

For a moment consider the implications of a large short term trading tax.  Short term trading would be drastically reduced.  Liquidity would likely decline.  The moron who said it would increase has no idea what he is talking about.  What percentage of daily volume is GS High Freq Quant?  Or any High Freq quant for that matter.  What percentage is SAC?   What would it do to market making?  How would you tax market making?  If you didn't it would be a huge subsidy to banks.  (Hell, I would form a bank just to profit from that loophole).  A decrease in liquidity means an increase in risk and as a result an increase in the discount rate for any investment.  This would raise the cost of capital for all firms using public markets.  Please think before you post.

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#15) On June 25, 2009 at 12:29 PM, JtHExperimental (22.74) wrote:

Just another note on the "liquidity" argument I so frequently hear.  There's really no major benefit to having more "liquidity" for highly traded stocks.  In fact, this is a silly definition of liquidity anyway because once a security is already in the market, the company that the security is based off of is not receiving any proceeds from those sales.

The only liquidity that is really important is the "liquidity"avaiable when a company does an offering and those shares tend to be gobbled up by major investors who are not simply "trading" every day. 

The belief that daytraders somehow provide major liquidity for the capital system is beyond silly. No corporation relies on daytraders to raise equity.  (Except for pump-and-dumps).

 

It is true that taxing the hell out of speculative trading would eliminate some volume, but that would not really harm one's ability to cash out their stock.  Yes, there would be less supply, but there would also be less demand.  Moreover, the underlying security has a *real* value based on assets and future cash flows.  If that security is worth $20 per share, it's not as if it's going to get beat down to $3 solely because of lesser trading. In fact, less speculative trading would probably result in the prices being less volatile and hovering a bit closer to their intrinsic values. 

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#16) On June 25, 2009 at 12:33 PM, JtHExperimental (22.74) wrote:

Todd,

Interesting that you are quick to attack one's character rather than their argument.  This suggests that you have weak arguments.  It also suggests that you aren't terribly bright, because, if you bothered reading through the rest of the thread, you would have seen my primary account, JakilaTheHun.  I have a 99.86 rating and have been in the top 100 for quite some time.  This is merely my new account that I'm using because of the 200 pick limit. 

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#17) On June 25, 2009 at 12:37 PM, JtHExperimental (22.74) wrote:

Though, I do admit, I like it when people make "penis mightier" arguments if only because if we follow it to its logical conclusion --- it means that my argument is superior to Todd's merely because I have a higher rating.  My 99.86 rating certainly trumps poor Todd's 98.21.  

Good work, Todd.  

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#18) On June 25, 2009 at 12:51 PM, portefeuille (99.66) wrote:

The only liquidity that is really important is the "liquidity"avaiable when a company does an offering and those shares tend to be gobbled up by major investors who are not simply "trading" every day.

Under the proposed rules those companies would actually fetch less. In the realm of derivatives there are American and European options and the American ones are usually more expensive than the corresponding European ones because the right to exercise them at any time before the expiry date usually has a value greater than zero. A similar effect would make shares worth less and remove participants from the market that do not like to be locked in ...

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#19) On June 25, 2009 at 1:05 PM, Schmacko (48.81) wrote:

"The only liquidity that is really important is the "liquidity"avaiable when a company does an offering and those shares tend to be gobbled up by major investors who are not simply "trading" every day. "

I disagree.  The only liquidity that matters is how easy it is for me to buy or sell my holdings.  I could care less how it affects the corporation being traded.  I would think this proposal would hurt small time individual investors.  If overall trading volume decreases, which this proposal would seem to accomplish, individuals could have a harder time cashing in their holdings in times when they need it.

Increasing the tax rate on intra day trades doesn't really bother me.. cause I don't do it.  Though 80% sounds excessive.  Raising the tax rate to 60% for sales under 6 months though sounds horrible.

Smaller individual investors don't have meaningful says on how companies are run or who is on the board.  You can vote on proxies if it makes you feel good about yourself, but if you only hold a few hundred shares your vote really isn't meanigful.  Major share holders and insitutuional investors hold all the power there.  So you can think you own a piece of a company all you want but the truth is you're probably just along for the ride and have no control in what direction the ride goes.  Personally I don't feel like I should be penalized for wanting to get off the ride early if I don't like where it's headed.  

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#20) On June 25, 2009 at 1:12 PM, JtHExperimental (22.74) wrote:

Schmako,

I can understand your concerns, but my response to your last sentence is simply, "then don't get on the ride before doing your due diligence."  That's exactly why we needed to punish speculative trading.  While we can complain that higher taxes on short-term trading "limit" us, we're ignoring the bigger picture when we say that.

Stock issuances serve a purpose in our economic system.  They allow companies to raise capital and they allow us "consumers" (or investors, as you will) to gain access to the profits of corporations that we might not otherwise have access to. 

I can't see any legitimate function of speculative trading in this system.  Why does it encourage?  The "liquidity" argument doesn't hold up.  You say, less people would be trading, but so what?  There would be less buyers and there would be less sellers.  It evens out.  You are still entitled to the same "proceeds" from the profits of the underlying corporation. 

The problem is that the current system removes us from the original function of the stock markets to begin with.  We need to change that.  This will actually increase the value of equity over time because it will make the markets less volatile and safer.  Investors like safety. 

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#21) On June 25, 2009 at 1:26 PM, portefeuille (99.66) wrote:

This will actually increase the value of equity over time because it will make the markets less volatile and safer.  Investors like safety.

So now being locked in for 6 months increases my safety. That certainly is an astonishing spin ...

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#22) On June 25, 2009 at 1:35 PM, portefeuille (99.66) wrote:

A friend of mine works for VMWare and got some stock options when they went public that were worth over a million USD when the shares reached their all-time high of around 125$ shortly after the IPO. At around that time he told me that he would like to sell them all "right now", but that he had to wait for the lock up period to end. They were practically worthless when it did end. I think he is not such a huge fan of lock ups ...

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#23) On June 25, 2009 at 1:41 PM, NOTvuffett (< 20) wrote:

What if you buy a company with the idea of holding it for years and the management starts making decisions that you think will be harmful?  Why should you be penalized for moving that money into another company that you like?

For that matter, if I buy a company and it has a big gain over the course of a week or two and I think it is overheated, why shouldn't I be allowed to take a profit and reinvest it as I see fit?

I think long term investing should be encouraged, but the graduated reduction in the capital gains tax seems the best idea.

Maybe the short sellers have contributed to volatilty, but on the other hand it has let more cool headed people to pick up bargains.

 

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#24) On June 25, 2009 at 1:47 PM, JtHExperimental (22.74) wrote:

So now being locked in for 6 months increases my safety. That certainly is an astonishing spin ...

Yes.  The underlying value of the equities you are trading in would be less volatile.  You wouldn't have to worry about traders driving down the cost of your securities.  Hence, you would be safer.  

This is hardly a stretch.  The bigger stretch is pretending that speculative trading serves some great function in our capital system and increases "liquidity."  As if a bunch of friggin' daytraders are the people providing some sorta necessary funding that would otherwise not exist. 

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#25) On June 25, 2009 at 1:50 PM, JtHExperimental (22.74) wrote:

What if you buy a company with the idea of holding it for years and the management starts making decisions that you think will be harmful?  Why should you be penalized for moving that money into another company that you like?

You wouldn't unless you made a significant profit off of it.  But then, that goes back to due diligence.  Maybe you should've discovered management's propensities for bad decisionmaking earlier.  In fact, this is the best reason to enact such a proposal like this.  It would force people to actually do some thorough research on what they are buying.  This would then result in capital being allocated more efficiently to the companies most able to create long-term value.

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#26) On June 25, 2009 at 2:00 PM, NOTvuffett (< 20) wrote:

What if there was a management change?  And let's say I had a decent profit of say 10% after a few months, why should the government get over half of my profit?  It was my risk, should be my reward too.  And if I just moved it into a stronger company, wouldn't that be better for the economy?

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#27) On June 25, 2009 at 2:00 PM, portefeuille (99.66) wrote:

Why should the net effect of "traders" be a "driving down" of  "the cost of your securities"? And even if it were, why should I care. The equilibrium is established. Or do they suddenly start their evil rage right after I buy those securities. I am not even sure that volatility would go down. Maybe the nasdaq index reached 5000 in 2000 because of short squeezes, maybe it would have reached 10000 without short sellers, who knows. I think there is no consensus on the net effect of either "trading" or short selling. Maybe someone can furnish some links (actually that is usually my job. oh well ...).

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#28) On June 25, 2009 at 2:05 PM, Schmacko (48.81) wrote:

"(3) Even if you know 99% of all available information about a company that you'd need to know, the other 1% can always completely undermine the 99% that you do know.  Take a look at Satyam (SAY) and Sequenom (SQNM) if you want to know why.  Both companies fit into "the other 1%" category --- SAY was hit by a major fraud and accounting scandal while SQNM was hit by a scandal involving tainted test results.  Obtaining as much information as possible about a company is no guarantee of safety. " -From JakillaTheHunII's intro blog

Despite doing all the due dilligence in the world you admit there is the possibility that companies that look good can unexpectedly crash and burn.  Isn't it nice knowing you can quickly vacate a position in these instances due to how highly liquid the stock market is?  Saying there'd be less buyers and sellers so everything equals out isn't true.  If there's less buyers it's harder to dump a position period.  There are money making opportunities by spotting trends a few months in advance or playing short term drops and pops in an equity and then riding along with those equities as they return to a more normalized price. 

I really think long term buying and holding works better the more money you have to begin with.  Warren Buffet can afford to ride the ups and downs of whatever he holds, cause no matter what at the end of the day he's still rich.  Punishing smaller holders who might not have the capital to constantly dollar cost average back in on big drops and who make money over the course of months and not years doesn't seem like a good idea to me.

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#29) On June 25, 2009 at 2:09 PM, ChrisGraley (29.86) wrote:

The most moronic idea that I've ever heard and it would literally destroy the OTC market, commodities trading, the futures and options markets all in one swoop. I would seriously consider expatriating in that type of tax scenario and I definitely wouldn't invest in the US markets, because they would all be controlled by foriegn investors that didn't have the same silly tax burden.

Good luck in the Market meltdown your hoping for.

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#30) On June 25, 2009 at 2:11 PM, FreundInvesting (29.67) wrote:

ToddMCTC (98.37) wrote: "@ Jakilthehun - For some one who doesn't have a pick less than a year old and also has several closed out positions of less than a week you talk the talk but clearly fail to walk the walk."

Is that a joke, Todd? This is CAPS man, not real life.

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#31) On June 25, 2009 at 2:23 PM, ChrisGraley (29.86) wrote:

However, there is something wrong with the American capital system and it's that people are treated their ownership interests in corporations as if it's nothing more than a speculative trading vehicle.  The American economy has suffered enormously as a result. 

If you want corporate America to straighten out, you have to hold them accountable.  They are never going to be held accountable so long as the people with "ownership interests" only care whether the stock price goes up a little bit in the next three months.

The only thing wrong with the current economic situation is that you have had decades of government manipultaion that strives to make inflation look like growth. This inflation is necessary to keep the growth of government spending at ever increasing levels to pacify the stupid masses that have their hands out because they can't control their own spending. They can't control their own spending because when you adjust their incomes for "true inflation" they are effectively making less than they were in the 1950's but still have an appetite for big screen tv's and the NFL Sunday ticket.

If you think that taxing the investors that keep these bubbles from expanding even faster is a good idea, then you deserve what you'll get in the end. A third world country with a currency that Zimbabwe would laugh at. I personally will be living as a citizen of St Kitts if that particular legislation would ever pass. The tax hit for expatriating would be worth it.

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#32) On June 25, 2009 at 2:52 PM, rofgile (99.43) wrote:

I would support having taxes on short term capital gains.

 

CEO's should not look to raise the stock price this year at the cost of the companies future five years from now.  

 

The CEO problem has led to many financial companies having terrible shenanagans - at the cost of the companies long term health.  Slowing down the buying/selling of equities would return this back to investing.

Its amazing that five years is seen as a long time now, when it used be that people would invest for 10-30 years in companies.  

 

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#33) On June 25, 2009 at 2:53 PM, JakilaTheHun (99.94) wrote:

Despite doing all the due dilligence in the world you admit there is the possibility that companies that look good can unexpectedly crash and burn.  

There's nothing forbidding you from vacating the position.  This is the major flaw behind all the arguments I'm seeing.  They basically amount to 'what if I fail to adapt my behavior to the new reality?'  Well, my answer is that there's nothing that guarantees that you'll adapt your behavior to the current reality.

If you buy a stock @ $20, it goes up to $23, and then you start having concerns, you can still sell it for a profit.  You'll get taxed more heavily, but that's better than losing all your money.    This does not differ in any way, shape, or form from the current reality, except the percentages are larger.

I do not find 'I can buy a crap company and make a quick profit, but I have to pay a higher tax on my ill-informed decision that ended up profitably' to be a very convincing argument. 

 

Isn't it nice knowing you can quickly vacate a position in these instances due to how highly liquid the stock market is?  Saying there'd be less buyers and sellers so everything equals out isn't true.  If there's less buyers it's harder to dump a position period. 

This is complete and total BS. Do you realize how much volume there is for the average security on NYSE?  The belief that removing daytraders and short-term speculators is going to radically inhibit your ability to sell a stock is bogus on every level (unless the company turns out to be crap, in which case, once again, I say you should have done your due diligence). 

You do realize that, up until the mid-90s, many of these short-term speculators did not even exist.  Yet, I never heard of anyone complaining about how difficult it is to sell the stock for a major company in 1983. 

The illiquid argument is BS.  There's no substance to it whatsoever and it completely ignores the entire history of the stock market before 1995. 

 

There are money making opportunities by spotting trends a few months in advance or playing short term drops and pops in an equity and then riding along with those equities as they return to a more normalized price. 

So?  There will be "money making opportunities" by researching companies, analyzing them, and buying the ones that offer the best long-term prospects under the proposed order. 

Once again, these arguments boil down to 'what if I am unable to adapt to the new environment?'  And my response is that there's nothing that guarantees you'll adapt to the current environment. 

I really think long term buying and holding works better the more money you have to begin with.  Warren Buffet can afford to ride the ups and downs of whatever he holds, cause no matter what at the end of the day he's still rich.  Punishing smaller holders who might not have the capital to constantly dollar cost average back in on big drops and who make money over the course of months and not years doesn't seem like a good idea to me.

Actually, small holders are the ultimate buy-and-holders so this critique is flawed, too.  In fact, the average American (i.e. not people like us who sit around reading TMF and investing publications) buys into stocks and holds them for years.  

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#34) On June 25, 2009 at 2:59 PM, JakilaTheHun (99.94) wrote:

You know what's going to happen if a proposal like this succeeds:

There will be a bunch of whiners (as there are in this thread) that say, "I'm not buying stocks.  It's unfair!"  Then sometime in the intervening three to twelve months, they see the more pragmatic investors buying in and making money still and they jump back in. 

The world will not end.  These arguments are ridiculous.  All CGs used to be taxed at over 50% and that was during one of the most prosperous times in American history.  I don't believe we should go back to that structure --- but we should go back to taxing the hell out of short-term speculation and move onto an era where long-term capital gains are taxed at a 5% or lower.

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#35) On June 25, 2009 at 3:21 PM, NOTvuffett (< 20) wrote:

Who are the whiners here? Those that say the short term traders aren't playing fair and should be penalized.

Chris, St. Kitts is sounding better and better, lol.

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#36) On June 25, 2009 at 3:34 PM, devoish (96.55) wrote:

Stuck 5 years into a start-up that needed money? I spent my days fixing cars and my evenings fixing cars and raising kids, not leaning over managements shoulder.

Trust someone else to do it for me?

Give those opportunities away and wait until the company is five years old?

I hate to break the news but "bubbles" are caused by low taxes on the highest earners. If you are making ten mil/per year, the first year you buy a house a car a boat and an Asian bride and pay 3.5mil in taxes. The second year you get seconds. The third year you begin investing for the future and piling 5-7.5mil/year into investments, stock and or real estate.

The moment you have more than you can spend (saving) you are helping build the bubble. If that "more' is extreme, say 350x the lowest earners, you blow an investing bubble.

Want to blow it bigger? Lower corporate taxes and shift them into investing. Want bigger? Allow corporate to not fully fund pensions and benefits so they can reinvest the difference in higher executive pay. Bigger? Divert guaranteed pension funding from secure low interest bonds into 401k's and stocks. And when all that runs out allow the five largest investment banks to lever at 40:1.

Problems? Need another bubble?

Allow temporary exemptions so any new combined investment/savings banks (there used to be five) can transfer federally guaranteed savings accounts into their investment halves to invest in high risk/return equities and assets.

Want more? Allow Federally guaranteed private health insurance acounts to be invested in high risk/reward equities.

Ok, I don't know the last one happened.

Yet.

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#37) On June 25, 2009 at 3:45 PM, russiangambit (29.47) wrote:

Reading through all the comments I realized that we have even bigger problem on our hands. How did the country, which is self proclaimed leader of the free world, came practically to 100% acceptance of using tax as a tool of social engeneering and market control/ manipulation?

Nobody even said, wait, it is wrong to address this problem via taxation. The dicsussion is about whether the tax should be put in or not. Tax was supposed to be used to finance the govenment, not to train humans to behave this or that way like Pavlov's dogs.  

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#38) On June 25, 2009 at 4:12 PM, JtHExperimental (22.74) wrote:

The real crime is that people on here are more concerned about the profits they make while trading rather than the well-being of their own country.  There's no legitimate argument that short-term speculation serves some great societal interest. Russiangambit's argument as to why "it should be taxed to begin with?" 

Well, because:

(A) A corporation is a protected entity for business organization under state law in every single state in the United States and would not exist in a truly "free market"

(b) By buying into a corporation, you are taking advantage of state-offered protection and as such, should be required to fund the state for your activities,

(c) The SEC Acts provide you with rights to knowledge about the corporation's activities via certain filings like the 10-K form and the 10-Q form,

(D) Your transactions and the corporation's transactions are protected and enforced by state and Federal contract law --- so you don't have to hire the mafia to enforce your business deals

(E) Corporations are limited liability entities, meaning you don't have to pay money if it goes under and can't pay its debts

(F) Corporations allow you to pool resources together with other individuals in order to more readily be able to form a business

(G) The purpose behind allow corporations to be protected under law is to protect commerce and promote the general well-being by allowing investors to pool together

(H) Short-term speculation serves no vital function in any of this logic.  

 

I get sick of all the tax whiners and free market fundies.  I hate taxes, too, but if the government spends, we have to pay, and those who are (a) using the most resources and/or (b) abusing the system the most deserve to pay the most. 

 

 

Russiangambit,

Analyse it on another perspective.  Short-term traders aren't realistically paying "corporate taxes" if they are truly profiting of their activities.  

Example:

Company A sells at $40.  Trader buys.  Stock jumps to $44.  Trader sells the same day (6 hours later). 

Company A has yearly before-tax profits of $3.65 per share.   For an investor who held the company the entire fiscal year, they would've paid 35% of $3.65 in corporate taxes before paying 15% in CG taxes.  They bought the stock at $40 and sold at $44, as well, so their total tax burden was about $1.65 per share.

Meanwhile, the trader who bought at $40 and sold at $44 the same day was technically entiteld to his share of the profits during his brief ownership period.  That means, his share of the profits was $0.0025.  He paid 35% of $0.0025 in corporate taxes.  He paid 35% in CG taxes.  His tax burden was about $1.40 and 1/4 cent.  

Why on Earth should the short-term speculator pay less in taxes than the long-term investor who actually realistically could say they had an "ownership interest" in the company? 

 

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#39) On June 25, 2009 at 4:24 PM, russiangambit (29.47) wrote:

Jakila, my point is that taxes are to finance the government and traders are self-employed, they are taxed on their profits. Short-term is already taxed at high rate. Porposed 60% tax rate will mean that traders will pay 60% tax while other self-employed people pay no more than 35% tax.

Regardless, my issue is not with taxes as such but with using tax code to alter market behavior , i.e. push people from short term speculation into long term holdings in this case. But as every other sort of social engeneering it will not work because speculators will simply find another place for their money.

You know where the real issue is? There is too much money sloshing around in the finacial insututions - partially from FED force-feeding banks, partially from 401Ks (I have a big issue with these, but that is another topic) and partially because currently with so much overcapcaity it is not clear where else to put money. We don't need anymore factories, houses or shopping malls at the moment. So money gets parked in all kinds of financial instruments.

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#40) On June 25, 2009 at 4:27 PM, portefeuille (99.66) wrote:

A-G appear to have nothing to do with the comment #37 above by russiangambit on taxes on capital gains.

H is true because "short-term speculation" has nothing to do with "any of this logic" (I guess you mean "the logic" of points A-G by that) and thus obviously "serves no vital function in" it.

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#41) On June 25, 2009 at 5:06 PM, ChrisGraley (29.86) wrote:

Jakilla you can't be serious?

Tax and spend has gotten us to the spot we are in now.

If you are totally confident that the government is better spending your money than you are, then feel free to send them a little extra on every tax return, but stop trying to give them my money.

I'm not against buy and hold. In fact, I will be buying like crazy for the long term when the market hits it's true bottom.  In the mean time I'm focusing on making money where I can, which happens to be in the options market right now. Now lets say I buy an out of the money put and it suddenly gets into the money. Did I speculate? I never speculate with my own money. Can I profit on this with your communistic tax law? Well I could until you hit me with the 80% tax which when added to the round trip commisions make this trade worthless. What did I do wrong? Well I spotted an over-valued company and made money betting that the market will figure it out before the option expires. If the market doesn't figure it out in time, I lose everything, so I make my choices wisely. In the current system at least I make money playing by the rules. You're simply changing the rules because your investment strategy doesn't work anymore and blaming it on me. Can I control the market? No. Did I destroy the economy when I spotted a fraud like DRYS? No. In fact, I'd like to think I did the economy a favor. After all, the CEO of that company has already stated that he can get away with fraud because American investors are stupid and will buy anything. But yet you're determined to make sure I can't make money because it doesn't agree with the preferrred way of "buy and hold" Your way is the only altruistic way of making money after all.

My little $8,000 investment in DRYS puts destroyed the economy after all. I'm just like Goldman Sachs and JP Morgan and manipulate  the economy and deserve 80% taxes and public beatings.

You might want to consider that buy and hold is a bad idea in a down economy until you hit bottom. I know that you believe that we've already hit bottom and I'm the only true reason that you can't make money. After all, that's much easier than admitting that it's the only strategy you know and can make money on or you're wrong about the market.

You are right, there is whining going on in this post, you're just wrong about the person doing it.

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#42) On June 25, 2009 at 5:42 PM, truthisntstupid (93.59) wrote:

I'm with JakilaThe Hun

The market should never have been allowed to degenerate into a gambler's den.  Why don't some of you just go to the casino?

Companies HAVE suffered from this short-term "gotta beat the street est. no matter what"  mentality.  It certainly has encouraged some companies to take actions they once would not have taken if they had the best long-term interests of the company in mind.  

They think they do no damage.  I think they do.  Call me a whiner.  It makes no sense to call me that.  I PROFIT OFF THE VOLATILITY YOU GAMBLERS CREATE!

A stock goes up the least little bit these days and you lemmings go racing for the phone, determined to "take some profits" before too many others do the same thing.  You've all seen that "channel investing" commercial on CNBC too many times.  Maybe it even works for you.  It also works for me.  With so many of you racing to the phone every time there's the least little upward movement in the price, any upward momentum there might have been dissipates and of course you think that proves your point.

It also does me the favor of keeping dividend yields high.  For that I thank you.  You all put a damper on upward price movements and keep dividend yields from falling much.  You all unwittingly make it better for me as a buy and hold dividend investor.  So "whining"  may be a silly thing to call me speaking out and telling you this.

But call yourselves "investors?"   Nonsense.

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#43) On June 25, 2009 at 5:56 PM, prose976 (< 20) wrote:

That's not investing, that's buying CD's or bonds.  There are plenty of places you can do that, where you're penalized for taking your money out too soon.

The majority of "investors" of public companies have essentially no say in how that company is run.  So there is no such thing as "investing' in a company unless you have Buffet-like relationships with the CEO's of those companies.  Trading is the little man's way of making money in the markets.  Lord knows we're never let in on the bottom and the value of our investments are at the mercy of hedge funds, banks and other major market forces.  In a sense, trading levels the playing field, giving the small guy a little control over the value of his/her "investments."

So don't be taking in by the romantic notion that taxing the HE** out of traders to force them to "buy and hold" is somehow going to create a fair game.  The market was never fair and it never will be.  There is too much money at stake, and unless you know the dealer, you probably have some pretty mediocre cards in your hand.

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#44) On June 25, 2009 at 6:12 PM, NOTvuffett (< 20) wrote:

Truth, if the market is a gambler's den, been playing russian roulette too much in the last year, and these fools want to add another bullet.

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#45) On June 25, 2009 at 6:12 PM, devoish (96.55) wrote:

Chris,

Tax and spend has gotten us to the spot we are in now.

Borrow and spend. Twenty five years ago we were sold (we bought) the idea that you did not even have to tax to support spending. Investment into the "free market" and subsequent growth would replace the missing revenues. We have been borrowing while we wait for that dream to come true.

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#46) On June 25, 2009 at 8:25 PM, ChrisGraley (29.86) wrote:

devoish is right, we borrow and spend.

But we still tax more than most countries as well.

The 35% corporate tax rate is among the highest in the world and our personal tax rates are as well and we still can't control the spending to the point that we live within our means.

You don't have to live, work, or do business in the U.S. to be taxed either. You just have to be born here.  We all shop at Wall-Mart because we can supposedly afford the Chinese made goods, but the fact is we've made American labor unaffordable. Not because of wages, but because of entitlements. We need the entitlements, because our government put the average American into desperation to begin with.

Property taxes are unfair on the elderly. Income taxes are (despite popular opinion) unfair to the working man. If you really want to level the playing field, only tax consumption. To be fair to the working man, exclude taxes on housing below the median level, food, and utilities. I have no problem whatsoever paying taxes on my consumption. I consume less of my income on discretionary items than most people. I do it to have money to invest. If you tax me in the above scenario, I'll be ahead because I can manage my own money. So will the rest of the country when they figure out how to succeed. Why do we tax the guy working overtime to feed his family more than if he worked a normal shift? No wonder he chooses welfare as a better option. He's able to be with his family more and they are taking it out of your taxes. If he tries to do it on his own, he's penalized with the government taking more of his money. Is the tax system really supposed to penalize someone for making money? If we instead encouraged making money, wouldn't we be farther ahead?  After all the working man is spending his entire paycheck in either scenario, only in my scenario he gets to spend a little bit to improve the conditions his family lives in. In your scenario, he's forever dependent on the government to tread water.

Capital Gains is a favorite of the liberals because it gives the scenario of haves and have nots. That seems great until you find out that your grandparent that was living off of social security is one of the haves. 

Is the market being manipulated by investors? Yes. But the amount of personal investors that could possibly manipulate it that would be effected by capital gains taxes can probably be counted on 1 hand. The institutional investors are the ones playing havoc with the market and strangely enough, they don't pay capital gains taxes.

All of you brain surgeons that think that more taxes fix everything should realize that we are simply following Britain into irrelevance.  Unless you guys want to colonize some other countries that we can overtax, time is running out.

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#47) On June 25, 2009 at 9:53 PM, QualityPicks (22.24) wrote:

This has to be the first time I disagree with you Seth. The tax rate is not really the issue. A bigger issue is the SEC that does nothing about all kinds of pump and dump schemes, conflicts of interest, insider trading, ponzi schemes, etc. Then you have the government bailing out the investment brokers, rewarding them for all of their extremely risky and unfair behavior.

Also, I believe only the individual/retail trader would be affected. A structured company with tax lawyers like GS, the guys that really affect the markets,  would likely find ways to not pay taxes.

 

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#48) On June 25, 2009 at 10:41 PM, JakilaTheHun (99.94) wrote:

Chris Graley,

"Tax and spend" has absolutely nothing to do with this.  No, I don't believe the government can more effectively spend my money.  That's a completely irrelevant issue, however. 

The issue is that short-term traders are taking advantage of Federal and state services provided to them in order to allow more beneficial business organizations.  Instead of maintaining "ownership interests" under this highly beneficial law, they chose to abuse it, driving up the costs for the rest of us.  

Long-term investors should pay very little in taxes.  In fact, I completely support a CG tax rate in the realm of 1% - 8% for long-term investors, so actual investors will be paying less in taxes.  Only short-term speculators who serve no vital function in the system and abuse it would be paying more.

 

I feel like most of those arguing against me are being dishonest, because I have stated numerous times --- and the original blog states it as well --- that I support lower taxes on true investors.  It's not fair that people who actually use the beneficial protections of the SEC and Corporate formation acts get taxed to death, while we have to pay for short-term speculators who have absolutely no interest in the long-term vitality of American businesses.  Screw them!

If you don't like it, I say tough. Stop speculating and start investing.  

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#49) On June 25, 2009 at 10:42 PM, SkinneeJ (27.86) wrote:

Great!  Impose MORE restrictions on a "free market"...  How about this...  If you buy a house, you have to live in it for 5 years.  If you buy a car, you have to have it paid off before you trade it in or you have to pay a penalty.  If you buy food and put it in your fridge, you must eat all of it before you buy your next meal...  If you don't have 6 months salary in savings, you get to choose between cutting your hand off or 6 months in prison...

Come on guys.  Do you really want to rig the game so that you are FORCED to stay in the market?  It's already hard enough for a private investor to make money in the market.  Now you want to have to choose between preserving your capital from losses versus preserving from taxes.

It won't give you the results that you want. It will just give you one more way to lose money!!!

Oh yeah, and let me drive the NAIL IN THE COFFIN for this argument.  Most mutual funds (and I think even Berkshire Hathaway) strongly discourage "trading" in and out.  In fact, many mutual funds will kick you out if you get in and out within a 6 month period.  Are your long term gains any more stable in those funds???  NO WAY, probably WORSE!!!

You shouldn't worry about short term fluctuations if you are along term investor.  In fact, you can use the volatility to your advantage.

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#50) On June 25, 2009 at 10:43 PM, JakilaTheHun (99.94) wrote:

I don't see a reason to respond to many of the criticisms because they are all dishonest.  No one in this thread has supported "higher taxes" for investors.  The argument is that INVESTORS SHOULD PAY LESS TAXES since they serve a vital function in the economy.  TRADERS SHOULD PAY MORE COSTS, since they don't. 

There is no benefit to daytrading and it shouldn't be rewarded by the Federal government at the expense of everyone else. 

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#51) On June 25, 2009 at 10:45 PM, SkinneeJ (27.86) wrote:

Oh yeah, and by the way...  Why should I get taxed at all on capital gains?  I was already taxed one time on that money!!!  Now, if I take it out, then I get taxed, suffer from inflation in my savings, have to pay gasoline tax at the pump, into the car that I paid taxes on, only to drive up the road to pay taxes on the hotel that I am staying at before I wake up and pay sales tax on the food that I eat...

Please raise your hand if you are for more taxes...  Okay, now get out of here...

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#52) On June 25, 2009 at 10:46 PM, JakilaTheHun (99.94) wrote:

SkineeJ,

You wouldn't be able to "trade" in a truly "free market."  Instead, you would have to get your Feudal overlord or local Mafia henchman to enforce your business dealings.  

Corporations only exist because of the protections provided by state law.  If you want to start speculating on sole proprietorships, which are afforded lesser protections, that's fine.  There is no legitimate reason why you should be able to abuse a law that was created in order to promote legitimate business interests.  

If you like Mafiaoso "Capitalism", maybe you should move to Russia. 

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#53) On June 25, 2009 at 10:48 PM, SkinneeJ (27.86) wrote:

Day traders put money in the market too!!!  That money is used by someone...  As soon as I pull my $1000 out, the "trader" next to me will put his 1000 in...  It all averages out.

Also, how do you figure that it helps corporations to keep you money in longer?  That corporation sold it's stock a long time ago.  You are buying your stock from another trader\investor, etc.

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#54) On June 25, 2009 at 10:52 PM, JakilaTheHun (99.94) wrote:

SkinneeJ, I've already gone over all of this. I'm not repeating it for your sake.

 

Also, you should pay CG taxes on stock because you wouldn't be able to obtain CGs in the first place without state protection.  However, my personal believe is that CGs should be extremely low for investors since they are paying corporate taxes (if they are long-term investors), too.  Short-term speculators don't realistically pay corporate taxes.

In essence, I see speculators as nothing more than welfare abusers.  They should be cut off just like welfare abusers are.  Those of us who choose to legimitately take ownership in businesses should be rewarded by not paying much in tax.

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#55) On June 25, 2009 at 10:59 PM, SkinneeJ (27.86) wrote:

Short term investors usually don't get their dividends either, so the long term investor is getting rewarded in other ways. Maybe you should just thank the short term market timers for giving you good entry points into your long term investments.

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#56) On June 25, 2009 at 11:05 PM, portefeuille (99.66) wrote:

who would have thought that starting with a headline like that this blog post would have the potential for an even more absurd prolongation in the comment section ...

It's sad, so sad
It's a sad, sad situation
And it's getting more and more absurd

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#57) On June 26, 2009 at 1:49 AM, threepaweddog (28.81) wrote:

In actuality, the proposal would increase "liquidity" of the market.  The massive amount of cash on the sidelines mostly stays there because big money is analyzing the market from a 'trading perspective' rather than an 'investing perspective'.  So long as people fear the next big downturn, they stay out. 

The whole "liquidity" argument is garbage anyway.  It's based on extremely flawed assumptions about stocks.  Stocks are not random trading vehicles.  They are ownership stakes in a company.  Those companies have assets and produce cash flows (at least the good ones do).  As an owner, you are entitled to your share of that, but due to modern technology, stocks have become a random speculative vehicle rather than 'the ownership stake' they were designed to be. 

Jakila, 

The first paragraph is fantasy on your part.  If you can point me to research supporting this assertion I'd love to see it.  As for the second paragraph, yes, you are purchasing future cash flow.  Would you care to tell me how "investors" should value that future cash flow in the fluid environment of the macroeconomy.  If UST yields double during the period you're in an onerous taxable "short-term" window, your equity "investment" looks a lot less valuable.  And one would want to trade out of a position if that was forecast.  My bet is the fear of that situation -- the increased cost of liquidity -- would drive investors to the sidelines in droves.

The purpose of markets is price discovery for the purpose of efficient allocation of capital.  Taxing at 80% would destroy price discovery, thus leading to inefficient allocation of capital.  Hugo Chavez can provide a lot of advice if we want to go down that path.

Look at the source of the quote.  Gerstner is an idiot.  He tried to destroy IBM, and he's talking his book at Carlysle.  One real unintended consequence of drawing liquidity from the market would be to drive big money into private equity.  Private equity is not nearly as "company friendly" as raising equity through offerings in the market -- think of the difference between the Buffett GE preferred stock (10% yield) of last fall versus the bank equity raises this spring.

Finally, I haven't seen conclusive evidence that there are negative effects of short-term traders.  To me, this seems like people who have lost money are looking for scapegoats -- for a daily example of that, try reading some Yahoo! Finance message boards (at your own risk, of course). 

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#58) On June 26, 2009 at 4:48 AM, StockSpreadsheet (69.43) wrote:

I think the proposal to tax short-term profits at 50%+ is excessive.

I like the proposal to tax long-term holdings at 5% or less.  As stated above, I already got taxed on my income before I bought the stock.  The company has to pay tax on their income before they can give it to me in dividends or use it to grow their business, (and hopefully increase the stock price).  Therefore, either my taxes should be lower, the company's taxes should be lower or both.  Otherwise, we are taxing the same money twice.

I will say that short-term investors do hurt the economy in one way.  Before a lot of the program trading, internet trading, etc., stocks were normally held for years.  Due to this, company's planning was often based on 10-year plans or other long-term proposals.  With all the short-term trading, a lot of companies long-term plans now plan on what is going to happen in the next three months, (when the new 10Q comes out).  If the results at the next 10Q posting aren't what the market wants to see, then either the shareholders can vote out management, vote for shareholder proposals negative towards management or sell off the stock, (hurting the employees, (who often have a significant percentage of their 401k in company stock, especially if the company match is issued in company stock)).

I would also say that most of the short-term trading is done by institutions, so if you are going to raise the tax on short-term trading, the first place to tax would be the institutional buyers, (like mutual funds).  Lots of mutual funds might want to penalize you for holding their shares short-term, as it forces them to trade more, (buying stocks when you give them your money and then selling stocks when you redeam your shares).  However, a LOT of mutual funds have turn ratios of 100% or more, (meaning they turn over their whole portfolio at least once a year).  It is the institutions, (especially hedge funds and mutual funds), that have the most short-term attitude to the market.  It is this short-term attitude, ("what can the company do for me in the next three months" as opposed to "what can this company develop to make profits over the next 10 years"), that has led to a lot of the problems a la Enron.   

A lot of major developments, (oilsands, hybrid cars, the VCR, etc.), were unprofitable for years due to small volumes and long research times.  If these companies had to always worry about what they could get done in the next three months, a lot of major developments would never have taken place.   

So if you are going to tax short-term transactions, you should start at the institutional level.  That is where you could gain the most benefit to the economy, (in my opinion).  Remember, in most large-cap and even probably most mid-cap stocks, institutional holdings are often over 50% of the stock outstanding.  Therefore, if you want to affect the short-term turnover aspect of the market, go where the turnover is, (the institutional holders), and don't initially bother with the smaller players, (the individual holders/traders of stocks), as they have much less influence on the volume of the major stocks, and much less say in how that corporation operates.

Just my two cents.

 

Craig

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#59) On June 26, 2009 at 8:00 AM, TMFBent (99.81) wrote:

I like the proposal to tax long-term holdings at 5% or less.  As stated above, I already got taxed on my income before I bought the stock.  The company has to pay tax on their income before they can give it to me in dividends or use it to grow their business, (and hopefully increase the stock price).  Therefore, either my taxes should be lower, the company's taxes should be lower or both.  Otherwise, we are taxing the same money twice.

Just a quick point. This line of argument isn't worth much because there's no such thing as income that is taxed once. All our income is taxed multiple times. If you want to make this argument here, you could make the same argument regarding sales tax, state income tax, property taxes, vehicle registration, and on and on. Heck, the revenue your employer takes in on the top line has already been taxed multiple times. Follow the logic back, and declare that anything taxed once should never be taxed again, and you'd have no taxes.

Might seem like a pretty sweet idea, unless you like things like roads, fire protection, laws, and other minor government pork programs.

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#60) On June 26, 2009 at 10:28 AM, portefeuille (99.66) wrote:

Follow the logic back, and declare that anything taxed once should never be taxed again, and you'd have no taxes.

That is not quite how it is. 

--------------------

Value added taxation avoids the cascade effect of sales tax by only taxing the value added at each stage of production. Value added taxation has been gaining favor over traditional sales taxes worldwide. In principle, value added taxes apply to all commercial activities involving the production and distribution of goods and the provision of services. VAT is assessed and collected on the value added to goods in each business transaction. Under this concept the government is paid tax on the gross margin of each transaction.

In many developing countries such as India, sales tax/VAT are a key revenue source as high unemployment and low per capita income render other income sources inadequate. However, there is strong opposition to this by many sub-national governments as it leads to an overall reduction in the revenue they collect as well as a loss of some autonomy.

-------------------- 

(from here)

 

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#61) On June 26, 2009 at 10:57 AM, ChrisGraley (29.86) wrote:

He should be taxed but not me!

My strategy is the only true investment strategy and it helps the economy.

My strategy doesn't work right now, but it's because of him!

His strategy doesn't help the economy! (It does, but I won't admit it)

He should be taxed out of exisitence while my taxes should be lower!

Yada, Yada, Yada.

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#62) On June 26, 2009 at 11:13 AM, portefeuille (99.66) wrote:

If you are not familiar with VAT, this is how it works. Everyone pays VAT (The VAT rate might depend on the type of product for the "final" transaction, i.e. when the "final" consumer buys the product (The final consumer is the one that does not "add value". If he changes his mind and does add value and then sells the product again I guess we have a problem, or rather he might have a problem because he may have paid a reduces VAT that turns out to have been unjustified. whatever ...).). And everyone but that final consumer gets all the VAT that he has paid back (usually once a year). Actually really simple as long as no one is "cheating" (There is a reason why electronic cash registers have become mandatory over here (Even my "local pub" with some 300 ft^2 and maybe 20 "visitors"/day during the week has one (A beer is $1.40 and the "bar tender" is a huge Frank Sinatra fan.).).). Well, if someone cheats it is actually even less complicated if it remains "unnoticed". In that case only the tax revenue is somewhat suboptimal ...

(a recent article on VAT discussions in Germany is here.)

 

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#63) On June 28, 2009 at 5:27 AM, saunafool (98.81) wrote:

I think the whole point of proposals like this is to extend the time horizon of corporate and investor thinking. Over the past few decades, the average time for holding a stock has fallen from a few years to a few months. Corporate compensation plans reward excessive risk taking in the short term.

It's a great game for the winners when they can make their stock go up in price for a few months. Unfortunately, it isn't good for the underlying businesses. So, this isn't the only change needed, but I suspect it is one of them. Another will be claw-back provisions on corporate bonuses and options income so that the fat cats can't stuff themselves then walk away with their cut and let it all fall apart afterwards with no consequences.

As for the rest of the tax code, it is a mess. I'd love to see a flat tax on everything over $40,000. No income tax on anything under that point. No deductions for anything. Throw a national sales tax on top of it, and be done with it.

For those arguing for a VAT system. As a business owner, it stinks. The sales tax model in the U.S. is far easier to manage.

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#64) On June 28, 2009 at 10:08 AM, jdgee2 (< 20) wrote:

Most people I know (Joe Worker types), love the idea of responsible long term investing and like me, it's not their hobby or lively hood. We view it as a long term savings / retirement account. Most of those same folks lost more than 50% of their life savings within a year's time.

A real head-scratcher, but I don't think the above mentioned long term investment programs were distroyed, due to short term traders not paying enough taxes to the government.

I've been short term trading some of my small beans money for about one year now. I look forward to the day when I can get back to a long term investment stragey and feel comfortable about the decision to do so. I dream of a more simple time, when I will no longer have to spend so much of my limited free time watching the fickle stock market gurus, learning about large company mismanagement and government watchdog organizations that chose to look the other way. Still, all that said, I do not support the idea of higher taxes for anyone, for any reason.

Viewing short term traders as impeading the process and/or progress of long term investing, to the point of needing to be butt-spanked with higher taxes is stupid to the point of being suspicious.

Joe Worker types are back to the idea of saving their money under their bed mattress, or in peanutbutter jars buried in the backyard. Some of them know that todays market is viewed by even the more conservative long term investors, gurus and czars, as a volatile trader's market.

(see comment #50): " I don't see a reason to respond to many of the criticisms because they are all dishonest."

(see comment #54): "In essence, I see speculators as nothing more than welfare abusers."

Pretty wild, aye ?

Let's place a penalty tax on welfare abusers first and see how that goes, okay ?

Best Wishes,

Jon

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