US Flat Tax Rate

[9-10ths_Penguin]

Problem....
When the tax you pay for investing additional money or effort is greater than your
average rate, this is a disincentive to do more because of diminishing returns.

... which disproportinately affects investors in risky or only marginally profitable businesses. As long as the net return minus the tax is more than zero, you'll have investment.

A lot of what you've proposed here really amounts to encouraging or subsidizing risky investment. Take what you said about combining employment and investment income together: that would let people use investment losses to reduce the tax on their employment income. That tips the balance in favour of bad investment decisions more than the current approach, where capital losses only reduce tax on capital gains.

 

[Revoltingest]

For a number of my investments, the return I expect is in the increase in price from when I buy until when I sell and that's it. Not all companies pay dividends to shareholders.

But the company you invest in for capital gains will only increase in value
if other investors expect future dividends justifying the higher price.

 

[9-10ths_Penguin]

But the company you invest in for capital gains will only increase in value
if other investors expect future dividends justifying the higher price.

Not true. Increases in share price can be driven by any factor that affects the valuation of the company (or the number of shares), or by speculation.

In fact, bleeding off company value with dividends can sometimes be an obstacle to share price growth.

 

[Revoltingest]

... which disproportinately affects investors in risky or only marginally profitable businesses.

I don't know what proportions you see, but I see this affecting people in thriving stable businesses.

If a possible investment involves significant risk, then this makes analysis more complex because
of tax treatment of historical & future capital gains & losses. We shouldn't address that here.

As long as the net return minus the tax is more than zero, you'll have investment.

No, it doesn't work that way.
To tie up money in something barely performing doesn't justify the risk; acquisition
effort & cost; ownership overhead effort & cost;or opportunity cost.
The wiser investor has patience to keep cash on hand for when opportunity knocks.

A lot of what you've proposed here really amounts to encouraging or subsidizing risky investment.

I see no subsidy at all.
Or are you taking the liberal view that any money not taken by the IRS is a subsidy?

Take what you said about combining employment and investment income together: that would let people use investment losses to reduce the tax on their employment income.

Yes, because it's fairer.
And this is already allowed to some extent, but with complexities beyond the scope of this thread.

That tips the balance in favour of bad investment decisions more than the current approach, where capital losses only reduce tax on capital gains.

Entrepreneurship has great risk.
This is worth encouraging.

 

[Revoltingest]

Not true. Increases in share price can be driven by any factor that affects the valuation of the company (or the number of shares), or by speculation.

I'll illustrate why you're wrong using Penguin Products (PP) as an example......
PP is selling 10K shares of stock.
It has never paid a dividend, & every investor expects that it never will.
What price per share would you pay?
I wouldn't buy it, because I'd never get a dividend or be able to sell it.

In fact, bleeding off company value with dividends can sometimes be an obstacle to share price growth.

Because the company was profitable enuf that it could issue a dividend, it has value.

Of course retained earnings can boost share price.
But you're wringing an argument by equivocating, & entirely avoiding the fact that value resides
in giving a return on investment. Dividends provide that, & drive increases in share value.

 

[JerryL]

Because most investments involve some risk, the better alternative might be to
park the money until a better day arrives, even if it means a loss due to inflation.
The concept of marginal tax rates driving investment decisions still applies.

I'll agree that there is an ROI at which the risk outweighs the reward.

Of course: higher tax rates actually mitigate risks (because you recoup more money from the declared loss) in addition to dampening rewards.

It's poker. The smart company will declare profits in low tax areas and losses in high-tax areas.

 

[Revoltingest]

Of course: higher tax rates actually mitigate risks (because you recoup more money from the declared loss) in addition to dampening rewards.

This isn't always true because of the asymmetry of taxation regarding income & losses.
Example...
In a declining economy, real estate sold from a portfolio at a loss will generate unusable deductions.
If there are no future capital gains against which to deduct the carried forward losses, then the
deductions cannot be taken (ignoring a de minimis yearly exception). Simply....success is taxed, but
losses aren't deductable.

 

[JerryL]

It has never paid a dividend, & every investor expects that it never will.
What price per share would you pay?

Berkshire Hataway investors are paying $250,000 / share (give or take).

But you're wringing an argument by equivocating, & entirely avoiding the fact that value resides
in giving a return on investment. Dividends provide that, & drive increases in share value.

Except at Berkshire Hathaway. (and Facebook, and Google, and such; but I know you assume those will someday give dividends maybe).

To tie up money in something barely performing doesn't justify the risk; acquisition
effort & cost; ownership overhead effort & cost;or opportunity cost.
The wiser investor has patience to keep cash on hand for when opportunity knocks.

To a point... but we are not simply discussing speculative investors.

Having liquid capital can be a liability for a corporation as it makes them a ripe target for a hostile acquisition.

Yes, because it's fairer.
And this is already allowed to some extent, but with complexities beyond the scope of this thread.

My instinct is to agree; though I wonder if there are not pitfalls I'm simply not considering.

Entrepreneurship has great risk.
This is worth encouraging.

To some extent. A lack of risk adversity has lead to more than one financial meltdown.

 

[JerryL]

This isn't always true because of the asymmetry of taxation regarding income & losses.
Example...
In a declining economy, real estate sold from a portfolio at a loss will generate unusable deductions.
If there are no future capital gains against which to deduct the carried forward losses, then the
deductions cannot be taken (ignoring a de minimis yearly exception). Simply....success is taxed, but
losses aren't deductable.

Agreed on all points. The landscape gets more and more complex as we consider more and more of how theory plays out in reality. It's a danger of clinging too hard to theory.

 

[Revoltingest]

Berkshire Hataway investors are paying $250,000 / share (give or take).

I'm in no position to say whether this is right or wrong.
But you must have a point to make by stating this.
Question.....
Why do you think they'll pay this particular amount?

Except at Berkshire Hathaway. (and Facebook, and Google, and such; but I know you assume those will someday give dividends maybe).

Would you buy a stock which you believed would never pay dividends, or in any other imaginable fashion distribute profits?

Having liquid capital can be a liability for a corporation as it makes them a ripe target for a hostile acquisition.

I can think of worse liabilities than being awash in cash.

To some extent. A lack of risk adversity has lead to more than one financial meltdown.

Are you talking about risk "aversion" or "adversity"?
If the latter, this possible consequence is inherent in taking risks.
Apple has had brushes with death, but the risk was rewarded.

 

[JerryL]

I'm in no position to say whether this is right or wrong.
But you must have a point to make by stating this.
Question.....
Why do you think they'll pay this particular amount?

I will quote John Maynard Keynes on this:

It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." (Keynes, General Theory of Employment, Interest and Money, 1936).

Keynes believed that similar behavior was at work within the stock market. This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value to be.

Would you buy a stock which you believed would never pay dividends, or in any other imaginable fashion distribute profits?

Since I have a 401k tied into an index fund, the answer is apparently "yes".

Are you talking about risk "aversion" or "adversity"?
If the latter, this possible consequence is inherent in taking risks.
Apple has had brushes with death, but the risk was rewarded.

"Aversion". I'm usually multitasking pretty heavily when I post here and should likely take a moment to proof-read.

As a counter to Apple we have "the banking industry of 2007"; much of which did survive, but only due to outside intervention.
IIRC: Apple survived because of an infusion from Bill Gates.

We need some level of risk taking.
That will yield some level of failure.

Too much is at least as bad as too little.

 

[9-10ths_Penguin]

I'll illustrate why you're wrong using Penguin Products (PP) as an example......
PP is selling 10K shares of stock.
It has never paid a dividend, & every investor expects that it never will.
What price per share would you pay?

That depends - what's its valuation and how many shares are there?

I wouldn't buy it, because I'd never get a dividend or be able to sell it.

Of course you'd be able to sell it. Most investors don't have your (rather rare) preference for which companies you want to invest in.

Because the company was profitable enuf that it could issue a dividend, it has value.

That isn't what drives value. Not every profitable company has the cash flow to issue a dividend. And some companies may see more value in rolling revenue back into building the company than paying out a shareholder dividend.

Of course retained earnings can boost share price.
But you're wringing an argument by equivocating, & entirely avoiding the fact that value resides
in giving a return on investment. Dividends provide that, & drive increases in share value.

Return on investment can come in many forms, not just dividends.

You do realize that there are many companies out there that pay no dividends to shareholders, right?

 

[Curious George]

Please see my post #95.
It might fix some misunderstandings.

While this corrects one aspect of a bad idea, it still leaves a bad idea.

It seems you are really focused on beating the tax rate you pay for your income. I understand why you would want to pay less. I can't imagine there are too many people that want less money. But just because something gets you more money doesn't mean it is a good idea. Under the current tax scheme people will pay the same amount of tax on x dollars, regardless of who they are (excluding deductions, credits and exclusions of course).

What problems exactly are you trying to fix?

 

[Revoltingest]

I will quote John Maynard Keynes on this:

It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." (Keynes, General Theory of Employment, Interest and Money, 1936).

Keynes believed that similar behavior was at work within the stock market. This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value to be.

While accurate, the fundamental reason for the average assessment is how much the investment will yield.
If your companies never make a profit which can be distributed to investors, their value will approach zero.

Since I have a 401k tied into an index fund, the answer is apparently "yes".

Your retirement will one extremely meager affair if your investments have no payoff.

"Aversion". I'm usually multitasking pretty heavily when I post here and should likely take a moment to proof-read.
As a counter to Apple we have "the banking industry of 2007"; much of which did survive, but only due to outside intervention.
IIRC: Apple survived because of an infusion from Bill Gates.

Much of the banking industry survived because it didn't need outside intervention.
My banks did just fine.
But 2007 is a complex thing which I've addressed in other threads, & won't do here.
As for Apple, you cannot dismiss its success by naming one of the things it did in order to thrive.
It was still a risk taken which paid off handsomely.

We need some level of risk taking.
That will yield some level of failure.
Too much is at least as bad as too little.

That's rather a truism.

 

[Revoltingest]

That depends - what's its valuation and how many shares are there?

I gave you the number of shares already.
I told you how it would be expected to perform.
You are to calculate the value.
(It's an easy one.)
I'd like to see your answer before proceeding to other issues.

 

[Revoltingest]

While this corrects one aspect of a bad idea, it still leaves a bad idea.

"Bad" is a value judgement based upon our different values.
So we'll have to disagree about that.

It seems you are really focused on beating the tax rate you pay for your income.

You're not addressing the type of tax rate.

I understand why you would want to pay less.

I don't propose that I pay less (in this thread).
Instead, I propose a different tax structure to get the same revenue.

What problems exactly are you trying to fix?

To name just a few.....
- Disincentives to investment & productivity due to high marginal tax rates.
- Unfair treatment of capital gains, ie, taxing phantom gains due to currency devaluation.
- Unequal treatment of different classes of capital gains.
- Non-deductability of capital losses.
- Complexity of the code which creates costly research to address normal tax situations, & uncertainty about compliance.
- Market distortions due to subsidies which create bubbles, eg, primary residences.
- High taxes upon the poor.

 

[9-10ths_Penguin]

I gave you the number of shares already.
I told you how it would be expected to perform.
You are to calculate the value.
(It's an easy one.)
I'd like to see your answer before proceeding to other issues.

I'm not going to play this game with you. Educate yourself:

In the past, the market considered non-dividend-paying stocks to be typically growth companies, since expenses from growth initiatives were close to or exceeded their net earnings. This is no longer the rule since a transformation has occurred in today's modern market: firms have decided not to pay dividends under the principle that their reinvestment strategies will, through stock price appreciation, lead to greater returns for the investor. Thus, investors who buy stocks that do not pay dividends prefer to see these companies reinvest their earnings to fund expansion and other projects which they hope will yield greater returns via rising stock price. Although these are generally small- to medium-cap companies, certain large caps have also decided not to pay dividends in the hopes that management can provide greater returns to shareholders through reinvestment.

What is the incentive to buy a stock without dividends?

Edit: if you don't personally like to buy non-dividend-paying stocks, that's your choice (and Kevin O'Leary would agree with your decision), but if you really think that stocks that don't pay dividends have no value to investors, a quick googling of stock prices should correct your misunderstanding.

 

[Revoltingest]

I'm not going to play this game with you. Educate yourself:

It isn't a game....just a teaching quiz.
I already know the answer.
(Quite a simple calculation.)

What is the incentive to buy a stock without dividends?

Edit: if you don't personally like to buy non-dividend-paying stocks, that's your choice (and Kevin O'Leary would agree with your decision), but if you really think that stocks that don't pay dividends have no value to investors, a quick googling of stock prices should correct your misunderstanding.

I don't appear to be up to the task of explaining why dividends matter,
even at times when companies aren't paying any. But perhaps you
could explain why an investor would buy a stock which is expected to
never pay dividends? There must be some quantifiable benefit which
justifies purchase, & a method of determining the price.

 

[JerryL]

While accurate, the fundamental reason for the average assessment is how much the investment will yield.
If your companies never make a profit which can be distributed to investors, their value will approach zero.

Someone who invested $1k in Berkshire Hataway in 1980 would be a millionaire now. They don't issue dividends. They have been in business since 1965.

Your theory is empirically disproven.

Your retirement will one extremely meager affair if your investments have no payoff.

My index funds, as with the index itself, has continued to rise in value despite a lack of dividends.

For my individual stocks; the dividend revenue has been extremely minor compared to the stock value increase.

Much of the banking industry survived because it didn't need outside intervention.

And much didn't.
And the Paper market nearly collapsed basically all of business as we know it.
And 2/3rds of the American auto industry.
And the housing market became a shambles. Wages stagnated, jobs became suddenly hard to find; and this despite huge efforts by the fed.

All because of risk. As I said: taking too much risk is as bad as taking too little.

As for Apple, you cannot dismiss its success by naming one of the things it did in order to thrive.
It was still a risk taken which paid off handsomely.

I never said otherwise. Indeed: I've directly asserted that risks can offer rewards on several occasions in this thread. Or am I missing your point?

That's rather a truism.

"Too much risk is too much" is a truism. "There can be too much risk" is something I'd hope everyone would agree on.

 

[Revoltingest]

Someone who invested $1k in Berkshire Hataway in 1980 would be a millionaire now. They don't issue dividends. They have been in business since 1965.
Your theory is empirically disproven.

Not disproven yet.
You've carefully avoided addressing why people would buy into such a venture.
Why do you think they do?
(I'm trying to let you figure it out on your own. But if you want to give up, I'll give you the answer.)

All because of risk. As I said: taking too much risk is as bad as taking too little.
.

That is to miss the larger picture of why the crash occurred, & why the same problem looms again.
I've covered it before.
Do you want me to link to or re-post it?