Kansas - The Great Experiment Ends

[Jimmy Higgins]

To quote Bernie Madoff, "I've never heard an investor say 'I'm not going to invest because of the tax rate'." There is no reason to expect a parabola. It could just as easily be a flat line or a series of steps. There is no reason to expect a smooth parabolic line and the real world examples support this.

The tax take most certainly does come into play. It lowers the upside of an investment and thus changes the risk/reward balance. Thus it may cause someone to decide something is too risky.

What is the max tax rate, 40%? So for every dollar from an investment they make, they keep 60 cents, at worst. OMG!

Where is the fucking risk?! The risk is losing the capital, not only keeping 60% of the profit.

 

[Nice Squirrel]

The tax take most certainly does come into play. It lowers the upside of an investment and thus changes the risk/reward balance. Thus it may cause someone to decide something is too risky.

What is the max tax rate, 40%? So for every dollar from an investment they make, they keep 60 cents, at worst. OMG!

Where is the fucking risk?! The risk is losing the capital, not only keeping 60% of the profit.

That was Buffet's point.

 

[jonatha]

The general position of the defenders of the Laffer curve in this thread appears to be that they can't predict what its value will be, and they can't measure what the current value is, but they believe in it anyway.

Seems to me there's a word for that.....

You misunderstand.

What we are saying is that the Laffer curve is true--but meaningless.

Where it fails is that the Republicans presume (on faith, not evidence) that we are to the right of the hump. That's a failure of interpretation, not of the curve itself.

I wonder if you can point me to one of your prior posts in which you use the word meaningless to describe the Laffer curve?

And as I have repeatedly pointed out, the existence of a single hump is not consistent with observed historical fact.

 

[laughing dog]

To quote Bernie Madoff, "I've never heard an investor say 'I'm not going to invest because of the tax rate'." There is no reason to expect a parabola. It could just as easily be a flat line or a series of steps. There is no reason to expect a smooth parabolic line and the real world examples support this.

The tax take most certainly does come into play. It lowers the upside of an investment and thus changes the risk/reward balance. Thus it may cause someone to decide something is too risky.

When losses are deductible, it also reduces the downside as well. When galns are taxed and losses are deductible from income, the tax reduces the both sides - it reduces risk as well as the net return. Hence it is not possible to theorize (or guess) what the effect on investment is.

 

[bilby]

If you truly want to understand economics, there's only one graph you really need:



http://www.smbc-comics.com/?id=3117

 

[Nice Squirrel]

So where is the Chicago School on that graph?

 

[jonatha]

So where is the Chicago School on that graph?

Next to lake Michigan???

 

[Cheerful Charlie]

So where is the Chicago School on that graph?

Somewhere in quadrant III.

Google "Chicago school of economics, failure" for more. Since the collapse of the economy under Bush, lasse faire and low regulation economic dogmas have become examples of failed theories. It all sounds nice but in practice it leaves something to be desired.

http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_chicagoschool.html

 

[Jason Harvestdancer]

Oh boy, now we have people saying "Chicago School" and "Laissez Faire" in the same sentence.

There are three main schools in economics right now, with most of the other schools being derivatives of those three. There's Austrian, Monetarist, and Keynesian.

Austrian is the free market school. It is laissez faire.

The Chicago School teaches Monetarism. It was described by Fisher, and then Friedman became famous for his school by adding all the footnotes. Monetarism is the belief that the government can (directly or by proxy) steer the economy towards some desired state by manipulation of the money supply. This contrasts to Keynesian economics (as a theory and not in practice) which is the belief that the government can steer the economy towards some desired state by manipulation of fiscal policy, deficits and surpluses.

It is obvious how different they are, they use different tools to steer the economy. It's obvious one of them is very similar to Laissez Faire, one of them steers the economy and the other doesn't. Yes, the Chicago School is a failure, but don't lay that failure at the feet of the other schools where it doesn't belong.

 

[Loren Pechtel]

You're looking at whether people will tolerate tax rate, not at what the collections would be from the tax rate.

I'm not exactly certain what the difference is there. Thus, whatever dude.

You in the devil's weed?

Are you figuring that if people are unhappy they will automatically not pay their taxes?

 

[Loren Pechtel]

The tax take most certainly does come into play. It lowers the upside of an investment and thus changes the risk/reward balance. Thus it may cause someone to decide something is too risky.

What is the max tax rate, 40%? So for every dollar from an investment they make, they keep 60 cents, at worst. OMG!

Where is the fucking risk?! The risk is losing the capital, not only keeping 60% of the profit.

You think investments magically pay a known rate of return no matter what???

You have a choice of where to invest:

A: Government bonds paying 4%. Guaranteed, keep it to maturity and your risk is effectively zero.

B: Stock with an expected return of 5% but a variability of 10%.

Lets figure the tax rate is 0%.

The risk-tolerant investor goes with B.

Now lets figure the tax rate is 50%.

Now what's the expected return? (I'm breaking it into only 5 bands, a simplification so I don't have to do it with calculus)

(-5% + 0% + 5% * 50% = 2.5% + 10% * 50% = 5% + 15% * 50% = 7.5%) / 5 samples

That's 2% overall--same as the government bond after tax. Now the investor is going with A since he's getting nothing for taking the risk.

If the tax rate is higher the bonds actually pay a higher return than the stock.

 

[Jimmy Higgins]

What is the max tax rate, 40%? So for every dollar from an investment they make, they keep 60 cents, at worst. OMG!

Where is the fucking risk?! The risk is losing the capital, not only keeping 60% of the profit.

You think investments magically pay a known rate of return no matter what???

Yes, they are magical!

You have a choice of where to invest:

A: Government bonds paying 4%. Guaranteed, keep it to maturity and your risk is effectively zero.

B: Stock with an expected return of 5% but a variability of 10%.

Lets figure the tax rate is 0%.

Let's just stop there.

The risk-tolerant investor goes with B.

Now lets figure the tax rate is 50%.

Now what's the expected return? (I'm breaking it into only 5 bands, a simplification so I don't have to do it with calculus)

(-5% + 0% + 5% * 50% = 2.5% + 10% * 50% = 5% + 15% * 50% = 7.5%) / 5 samples

That's 2% overall--same as the government bond after tax. Now the investor is going with A since he's getting nothing for taking the risk.

If the tax rate is higher the bonds actually pay a higher return than the stock.

I said stop damn it!

If the tax rate on investments was rocketed to a high number, that would restrict high risk investments, not investments. However, no one is saying let's rocket the tax amount, lets just make people making money without doing anything, pay it as if they earned that money at the highest tax bracket (because people need to be rich enough to live off of the interest). That won't quell investment. It may reduce high risk investment, however... the market will adapt.

 

[Nice Squirrel]

What is the max tax rate, 40%? So for every dollar from an investment they make, they keep 60 cents, at worst. OMG!

Where is the fucking risk?! The risk is losing the capital, not only keeping 60% of the profit.

You think investments magically pay a known rate of return no matter what???

If you are a savvy big time investor with access to capital and sound information, you can get a good prediction on return.

 

[Loren Pechtel]

I said stop damn it!

If the tax rate on investments was rocketed to a high number, that would restrict high risk investments, not investments. However, no one is saying let's rocket the tax amount, lets just make people making money without doing anything, pay it as if they earned that money at the highest tax bracket (because people need to be rich enough to live off of the interest). That won't quell investment. It may reduce high risk investment, however... the market will adapt.

The truth hurts, doesn't it?

50% isn't high--people living in high tax states can face a total tax rate that high.

- - - Updated - - -

You think investments magically pay a known rate of return no matter what???

If you are a savvy big time investor with access to capital and sound information, you can get a good prediction on return.

You have a very unrealistic idea of how much information they can have.

 

[Jimmy Higgins]

The truth hurts, doesn't it?

What in the heck are you talking about?

50% isn't high--people living in high tax states can face a total tax rate that high.

A total tax rate? Yeah, and somehow they are wealthy enough to handle it.

 

[Nice Squirrel]

You think investments magically pay a known rate of return no matter what???

If you are a savvy big time investor with access to capital and sound information, you can get a good prediction on return.

You have a very unrealistic idea of how much information they can have.

You'd be surprised what the big investors know. That is how they got big and stay big.

 

[Loren Pechtel]

What in the heck are you talking about?

You telling me to stop with using numbers to illustrate what I was talking about.

So long as the the range of likely results stays entirely positive tax rates have no effect on investment. However, that is not realistic for any sort of equity investment, let alone high risk investment. Since losses are not treated the same as gains high tax rates push investors to low-volatility investments. Bonds, not stocks, especially not venture capital. It's the latter we should be encouraging!

50% isn't high--people living in high tax states can face a total tax rate that high.

A total tax rate? Yeah, and somehow they are wealthy enough to handle it.

It has driven wages way up in those areas--and made them a very bad place to have a low-skill job.

 

[Jimmy Higgins]

You telling me to stop with using numbers to illustrate what I was talking about.

Because you typically never use a hypothetical that has viable value in the real world. Instead of pointing to a study or real math, you just vomit numbers into a post and say 'And that's why storks deliver babies'.

So long as the the range of likely results stays entirely positive tax rates have no effect on investment. However, that is not realistic for any sort of equity investment, let alone high risk investment. Since losses are not treated the same as gains high tax rates push investors to low-volatility investments. Bonds, not stocks, especially not venture capital. It's the latter we should be encouraging!

That is crap. People play gamble all the time. Rich people want to be richer. They won't let their money sit and lose value to inflation.

50% isn't high--people living in high tax states can face a total tax rate that high.

A total tax rate? Yeah, and somehow they are wealthy enough to handle it.

It has driven wages way up in those areas--and made them a very bad place to have a low-skill job.

Yet these states still manage to exist. And typically have the best public schooling and typically are higher tech areas.