26 September 2012

Money For Nuthin

With all the moaning about the "fairness" of capital gains taxation, it's about time that this endeavor took a look, don't you think? There's both quant aspects and macro aspects.

On the quant side, is: what numbers matter? From the point of those who assert that capital gains is totally unearned income (as opposed to those who get itchy with the word 'unearned'), the bull stock market since March 2009 is the exemplar. Here's what happens.
- you buy shares of CNO (Conseco Insurance, though the name has been changed) in March, 2009 at $.26.
- you ride the rebound to, at least, March, 2010 and sell.
- you sell the shares, which reached $10.18 last friday.
- you pay, modulo other shenanigans, 15%.

That's a gain of $9.92/share, or a bit more than 38 times gain. For which neither you, nor that money, did ABSOLUTELY ANYTHING. One can say, "but my money was at risk. CNO could have stayed down to $.20 or even gone bankrupt." And that's true. You GAMBLED that the person who sold you the stock was stupid to sell so cheap. S/he, on the other hand, gambled that you were a fool to pay so much. NONE of the money went to CNO to run its business. You did nothing more than a horse plunger. You look at historical information. You assessed where CNO's (or whatever company) prospects were going. You looked at the general market. And you read J.K. Galbraith, "Financial genius is a rising market."

There are other forms of capital gains. After much exploration, here is table of the various asset categories reported by the IRS for 2007 (the latest). More than half is purely financial transactions. Gains on residences is, wait for it, 1% of the total. Read that again, 1%.

On the macro side, we have to assert either that the USofA is based on a progressive tax system, or not. If we are, then capital gains, especially with the likes of Bain shifting "income" into "capital gains" deserve no special treatment, particularly given how little capital gain is due to physical investment. It's just a financial manipulation.

Is that so difficult to figure out?

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