Much of the management behaviors decried in Cringley's article are due to the way the Stock Market works today.
The original idea behind stock was as a way for the company to get money to grow. The stock buyer was counting on getting an annuity - the dividends of the stock. As a result, the upper bound on the current value of the stock was set by the interest rate and the dividends the company paid out - if the interest rate was 10%, and the stock paid $1 in dividends per year, then if the stock cost less than $10/share it was undervalued. If the stock cost more than $10/share, you would do better to invest your money in a bank.
Thus, stock holders were looking at the long term - what is the company doing to increase the dividends?
But then people noticed that if they could make a short-term change in the expected return on the stock, the current value would move. Thus, they began to change the short-term operations of the company, to change the estimated dividends (and thus the current price of the stock), then SELL and move on.
Thus stocks became trading cards, and the current era began. Buy into a company, manipulate the stock price, sell, repeat. (OK, PROFIT! there, I said it, you don't have to.)
Now, consider this - What if the capital gains tax worked like this: If the gain is realized in less than 6 months, then the gain is taxed at 90%. If the gain is realized in 6 months to 1 year, then the gain is taxed at 75%. If the gain is realized in 1 year to 5 years, then the gain is taxed at 50%. If the gain is realized in more than 5 years, then the gain is taxed at 0% (i.e. not taxed).
Now, consider these scenarios: You buy into an IPO, sell when the stock peaks a month later, sell. You get nailed for 90%. Since that is the case, there would be MUCH less demand for the stock, and it wouldn't shoot up so much.
You buy into a company, manipulate the stock price by gutting it, and pop that golden parachute a year and a day later. You get nailed to the tune of 50%. You are STILL discouraged from these games.
You buy a house. Five years later, you move from Silly-con Valley to Wyoming, and from a $500,000 house to a $250,000 ranch. You pocket the $250,000, since it isn't taxed.
I was watching a show several years ago on PBS, wherein a representative of the Federal Reserve was debating a person who's position was "The Fed should just leave the damn interest rates alone and let the market correct itself." The Fed guy said "But we have all this information, and it would be wrong for us not to provide feedback to the system".
When he said "feedback to the system" I had an epiphany - I am an electrial engineer, control systems are something I've studied at length. Unlike an economist, engineers are trained in mathematical tools to examine systems for stability. One of the things that will make a system unstable is too much lag from stimulus to feedback response - it's called "phase margin". The economy has a very LARGE phase lag - making a change to interest rates today will not take effect tomorrow. Also, there is "gain margin" or frequency response - the higher the frequency response the faster the system will react, but too much will cause oscillation. Systems with a large phase lag need to have a very low bandwidth, or they will oscillate. What my proposed cap gains tax would do is reduce the bandwidth of the system by reducing the gain at high frequencies.
Now, you can apply a simple check to my proposal - who will it piss off? The Republicans won't like it, since it prevents the very sort of short-term market manipulation that makes money for fatcats. The Democrats won't like it, because it allows middle-class folks to make money long term (so they can retire without relying on the government for assistance).
And I assert that anything that pisses off both the Republicans and Democrats cannot be a bad thing.
I now have a new respect for my profession (well, once I actually find a job). Everyone said "electrical engineers can do anything" and today you proved it.
Your control system model of the economy is dead on. After all, what isn't a control system? Economic systems have gains, oscillations, inertia, delays....
Interesting that you phrase it "cap" gains tax. Because essentially you would be implementing a lowpass RC filter with a capacitance dumping high frequencies to ground (the bottomless pit of taxes).:-)
Sounds like a really interesting way to look at economics. Maybe someone should write a book about it.
People have been studying the economy as a "mathematical system" for decades. Goog "econometrics" or "economic model" and see what you get. Mathematical models of the economy have advanced far beyond what engineers normally use in the design of normal circuitry (and this is me speaking as an actual electrical engineer). Some of the best mathematical minds today are working on analysis of economic systems, since engineering and physics have gotten so simple. Besides - you can make a lot of money if you do it right:-).
A graduate econometrics course is a class that gives economists the willies but which most EE or physics undergrads could sleep through. Yes there have been phsycist who have said, "gee, I have a bag of tools which would be useful in studying the market", as have there been EE's, but as far as policy is concerned they have had no influence. Why? Because the overwhelming majority of economists couldn't tell an eigenvalue from their assholes.
Interesting ideas. However, you'd need to fix the Alternative Minimum Tax rules as well for this to work.
When you exercise (buy) incentive stock options, you incur a tax based on the value of the stock at the time you exercise them. Unfortunately, the amount of this tax does not change, even if the value of the stock changes.
As an analogy, suppose you buy a car for $1000, but the fair-market value for that car is $11000 at that time. If cars were taxed the same way that incentive stock options are taxed, you would then owe tax on the difference between the value and the price at which you bought it. For this example, let's assume the tax is 30%, so you'd owe 30% tax on the difference ($10000), or $3000 in taxes.
Now, let's suppose that by the end of the year, the fair-market value for the car has changed to $1. You would still owe $3000 in tax on that car. Strange but true: you'd owe $3000 in tax on a car worth $1 for which you paid $1000.
This is the Alternative Minimum Tax at work.
As far as I know, the only way to avoid this Alternative Minimum Tax, is to SELL the stock (or, in this example, the car) before the end of the tax year in which you bought it. If you do sell before the end of the tax year, then any profit you make is taxed as income. If you don't sell before the end of the year, then it's too late -- you owe the tax even if you sell it later.
This is what happened to stocks in the year 2000. Everyone who had exercised their options were forced to sell their stock to avoid being stuck with an impossible tax burden. I imagine that this is one big reason why the market crashed.
How do I know this? Because I'm one of the idiots who did NOT sell his stock by the end of the tax year (I didn't understand the AMT as well as I do now, and didn't believe that the tax law could be so broken). As a result, I now owe over $140000 in tax for stock that is worth about $2000. As a result, I will be in debt and paying every penny I earn to the IRS for the next 10 years. And when I sell the stock, I'll get taxed on it again. Sad but true.
So, I like the idea of the BFT (Big Fat Tax) on people who dump their shares early; but you'd have to repeal/fix the Alternative Minimum Tax as well so that people are not forced to dump their shares, and people like me are not sent to the poorhouse.
I'm very sorry to hear of your plight with the AMT.
I was smart, and sold all my stock options as same day sales - thus avoiding AMT - but getting bent over by having been taxed as income. I agree 100% that AMT is the most boneheaded idea, and actually discouraged people from buying and holding, and was largely responsible for the dotcom crash. Absolutely every person I know at my former place of employment had to do the same thing.
Fortunately, I had a few extra thou laying around, and when I left, I cashed in and bought a buttload of my options when the price had hit rock bottom, very near my option price. In a few years, these may be a nice addition to my retirement. Unless some other diabolical tax law is devised to fuck us all up the ass.
I sympathize with your theory here about a rivision to the capital gains tax to prevent abuses. We used to have a tax system that was oppressive against capital gains in the 1970's, and it brought capital investment to a standstill.
I agree that the current system is flawed, as stock ownership is no longer regarded as giving a small loan to a company. Yet, we still need a way for small company's with an uncertain future to tap capital when necessary. I fear that if short term gains are not allowed, many of those with money will have little incentive to invest.
Personally, I am not too worried about any of that stuff. I believe the rule of business should be caveat emptor. There will be abuses, but I don't think the cost of those abuses is greater than the cost to society in lost capital...
Its a sad fact, but going all the way back to the jews forced to live on the island Ghetto in Venice till now, society has always had a tense relationship with those who have money and are willing to lend it. We can rant and rave, but we need their money.
Well, I've got the engineering degree and all, but I also studied a decent amount of economics. Trust me on this - at the high end of economic modeling, there is a lot of math and complex systems analysis - more than many EE problems. Most any investment bank will have a number of different models they put to work analyzing data and spitting out competing answers. They know all about feedback and what they think various input does to the complex systems underneath the world economy.
Unfortunately, your proposal takes much of the liquidity out of the real estate, stock, options, and commodities markets. Much like Ralph Nader's proposal to tax every share purchase a small fraction of a penny (i.e if there are 6 billion shares traded a day, and we tax each share 0.1 cent, we can make 6 million bucks a day for the gov't).
The US relies on "short-term market manipulation" to set a fair price for equities in the market.
As it is, you pay less capital gains on stocks you hold for a year and sell to the feds. If you lose money, you can take a deduction of your ordinary income - but only if you didn't repurchase the stock in the next thirty days.
There are some economists and market watchers who feel that capital gains shouldn't be taxed at all, which is an entirely different argument. As a general rule of thumb, the less taxes on capital gains, the better the market performs - one of the legacies of Reaganomics.
Yes, the banks run a great deal of modeling, but does the government? Remember, the banks have something to lose, and something to gain, but the goverment doesn't.
As for removing the liquidity of real estate, stock, options, and commodities - is that such a bad thing? If you want liquid, invest in liquid items like certificates of deposit. Besides, a stock would only be not liquid for five years (assuming you refuse to take the 50% hit) - if you are planning for your retirement, you would just start liquidating your older stocks first.
Promptness is its own reward, if one lives by the clock instead of the sword.
Much of this is because of the Stock Market (Score:5, Insightful)
The original idea behind stock was as a way for the company to get money to grow. The stock buyer was counting on getting an annuity - the dividends of the stock. As a result, the upper bound on the current value of the stock was set by the interest rate and the dividends the company paid out - if the interest rate was 10%, and the stock paid $1 in dividends per year, then if the stock cost less than $10/share it was undervalued. If the stock cost more than $10/share, you would do better to invest your money in a bank.
Thus, stock holders were looking at the long term - what is the company doing to increase the dividends?
But then people noticed that if they could make a short-term change in the expected return on the stock, the current value would move. Thus, they began to change the short-term operations of the company, to change the estimated dividends (and thus the current price of the stock), then SELL and move on.
Thus stocks became trading cards, and the current era began. Buy into a company, manipulate the stock price, sell, repeat. (OK, PROFIT! there, I said it, you don't have to.)
Now, consider this - What if the capital gains tax worked like this:
If the gain is realized in less than 6 months, then the gain is taxed at 90%.
If the gain is realized in 6 months to 1 year, then the gain is taxed at 75%.
If the gain is realized in 1 year to 5 years, then the gain is taxed at 50%.
If the gain is realized in more than 5 years, then the gain is taxed at 0% (i.e. not taxed).
Now, consider these scenarios:
You buy into an IPO, sell when the stock peaks a month later, sell. You get nailed for 90%. Since that is the case, there would be MUCH less demand for the stock, and it wouldn't shoot up so much.
You buy into a company, manipulate the stock price by gutting it, and pop that golden parachute a year and a day later. You get nailed to the tune of 50%. You are STILL discouraged from these games.
You buy a house. Five years later, you move from Silly-con Valley to Wyoming, and from a $500,000 house to a $250,000 ranch. You pocket the $250,000, since it isn't taxed.
I was watching a show several years ago on PBS, wherein a representative of the Federal Reserve was debating a person who's position was "The Fed should just leave the damn interest rates alone and let the market correct itself." The Fed guy said "But we have all this information, and it would be wrong for us not to provide feedback to the system".
When he said "feedback to the system" I had an epiphany - I am an electrial engineer, control systems are something I've studied at length. Unlike an economist, engineers are trained in mathematical tools to examine systems for stability. One of the things that will make a system unstable is too much lag from stimulus to feedback response - it's called "phase margin". The economy has a very LARGE phase lag - making a change to interest rates today will not take effect tomorrow. Also, there is "gain margin" or frequency response - the higher the frequency response the faster the system will react, but too much will cause oscillation. Systems with a large phase lag need to have a very low bandwidth, or they will oscillate. What my proposed cap gains tax would do is reduce the bandwidth of the system by reducing the gain at high frequencies.
Now, you can apply a simple check to my proposal - who will it piss off? The Republicans won't like it, since it prevents the very sort of short-term market manipulation that makes money for fatcats. The Democrats won't like it, because it allows middle-class folks to make money long term (so they can retire without relying on the government for assistance).
And I assert that anything that pisses off both the Republicans and Democrats cannot be a bad thing.
Re:Much of this is because of the Stock Market (Score:1)
Well, this depends if you want your idea to be aplicated or not
This reminds me the 'Tobin' tax, that looks to be just a good idea, but is also this kind of good ideas that piss off 'Capitalist nobles'
Well
Re:Much of this is because of the Stock Market (Score:4, Interesting)
Your control system model of the economy is dead on. After all, what isn't a control system? Economic systems have gains, oscillations, inertia, delays....
Interesting that you phrase it "cap" gains tax. Because essentially you would be implementing a lowpass RC filter with a capacitance dumping high frequencies to ground (the bottomless pit of taxes).
Sounds like a really interesting way to look at economics. Maybe someone should write a book about it.
I launch a meme onto the 'net... (Score:1)
and hope my point people will get....
Re:Much of this is because of the Stock Market (Score:2)
Re:Much of this is because of the Stock Market (Score:1)
Re:Much of this is because of the Stock Market (Score:1)
- former economist and now electrical engineer.
Re:Much of this is because of the Stock Market (Score:3, Interesting)
When you exercise (buy) incentive stock options, you incur a tax based on the value of the stock at the time you exercise them. Unfortunately, the amount of this tax does not change, even if the value of the stock changes.
As an analogy, suppose you buy a car for $1000, but the fair-market value for that car is $11000 at that time. If cars were taxed the same way that incentive stock options are taxed, you would then owe tax on the difference between the value and the price at which you bought it. For this example, let's assume the tax is 30%, so you'd owe 30% tax on the difference ($10000), or $3000 in taxes.
Now, let's suppose that by the end of the year, the fair-market value for the car has changed to $1. You would still owe $3000 in tax on that car. Strange but true: you'd owe $3000 in tax on a car worth $1 for which you paid $1000.
This is the Alternative Minimum Tax at work.
As far as I know, the only way to avoid this Alternative Minimum Tax, is to SELL the stock (or, in this example, the car) before the end of the tax year in which you bought it. If you do sell before the end of the tax year, then any profit you make is taxed as income. If you don't sell before the end of the year, then it's too late -- you owe the tax even if you sell it later.
This is what happened to stocks in the year 2000. Everyone who had exercised their options were forced to sell their stock to avoid being stuck with an impossible tax burden. I imagine that this is one big reason why the market crashed.
How do I know this? Because I'm one of the idiots who did NOT sell his stock by the end of the tax year (I didn't understand the AMT as well as I do now, and didn't believe that the tax law could be so broken). As a result, I now owe over $140000 in tax for stock that is worth about $2000. As a result, I will be in debt and paying every penny I earn to the IRS for the next 10 years. And when I sell the stock, I'll get taxed on it again. Sad but true.
So, I like the idea of the BFT (Big Fat Tax) on people who dump their shares early; but you'd have to repeal/fix the Alternative Minimum Tax as well so that people are not forced to dump their shares, and people like me are not sent to the poorhouse.
-- D
Re:Much of this is because of the Stock Market (Score:3, Informative)
I was smart, and sold all my stock options as same day sales - thus avoiding AMT - but getting bent over by having been taxed as income.
I agree 100% that AMT is the most boneheaded idea, and actually discouraged people from buying and holding, and was largely responsible for the dotcom crash. Absolutely every person I know at my former place of employment had to do the same thing.
Fortunately, I had a few extra thou laying around, and when I left, I cashed in and bought a buttload of my options when the price had hit rock bottom, very near my option price. In a few years, these may be a nice addition to my retirement. Unless some other diabolical tax law is devised to fuck us all up the ass.
Already done in Europe (Score:1)
Germany for example, if you sell within a year you pay capital gains tax, after a year its free.
Re:Great idea BUT... (Score:2, Insightful)
I agree that the current system is flawed, as stock ownership is no longer regarded as giving a small loan to a company. Yet, we still need a way for small company's with an uncertain future to tap capital when necessary. I fear that if short term gains are not allowed, many of those with money will have little incentive to invest.
Personally, I am not too worried about any of that stuff. I believe the rule of business should be caveat emptor. There will be abuses, but I don't think the cost of those abuses is greater than the cost to society in lost capital...
Its a sad fact, but going all the way back to the jews forced to live on the island Ghetto in Venice till now, society has always had a tense relationship with those who have money and are willing to lend it. We can rant and rave, but we need their money.
Re:Much of this is because of the Stock Market (Score:2)
Unfortunately, your proposal takes much of the liquidity out of the real estate, stock, options, and commodities markets. Much like Ralph Nader's proposal to tax every share purchase a small fraction of a penny (i.e if there are 6 billion shares traded a day, and we tax each share 0.1 cent, we can make 6 million bucks a day for the gov't).
The US relies on "short-term market manipulation" to set a fair price for equities in the market.
As it is, you pay less capital gains on stocks you hold for a year and sell to the feds. If you lose money, you can take a deduction of your ordinary income - but only if you didn't repurchase the stock in the next thirty days.
There are some economists and market watchers who feel that capital gains shouldn't be taxed at all, which is an entirely different argument. As a general rule of thumb, the less taxes on capital gains, the better the market performs - one of the legacies of Reaganomics.
Re:Much of this is because of the Stock Market (Score:2)
As for removing the liquidity of real estate, stock, options, and commodities - is that such a bad thing? If you want liquid, invest in liquid items like certificates of deposit. Besides, a stock would only be not liquid for five years (assuming you refuse to take the 50% hit) - if you are planning for your retirement, you would just start liquidating your older stocks first.