Category: Political Science & Economics

Investment vs. Speculation: Capital Gains Tax Rates

Category : Political Science & Economics
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The US has a spending problem.  The US also has a revenue problem.  Anyone who believes it’s one or the other and not both is not being intellectually honest.  Our government spends too much on many of the wrong things and has unfunded liabilities in the trillions of dollars for health care and social security.  At the same time, the wealthiest people in the country enjoy the lowest tax rates in decades and over 50% of the population pays no income tax at all.

On the tax side, I see four main problems.  First, the wealthiest are not paying enough.  Second, too few people are paying income taxes and the taxes they do pay, like payroll and sales tax are regressive.  Third, the tax code is far too complex and doles out favors to political contributors.  Fourth, the tax code does not distinguish between investment and speculation.

I’ve blogged about all four problems before, but I want to focus on the fourth problem: capital gains taxes are completely out of whack.  The left focuses on raising income taxes and letting the Bush tax cuts expire so that “the wealthy pays their fair share.”  But they are ignoring that the majority of wealthy people earn their income from capital gains: investing in companies, stocks, property, fine art or anything else they can buy and later resell at a higher price.

Capital gains are broken into two levels, short term capital gains and long term capital gains.  Short term capital gains are things that you buy and hold for less than a year before reselling them.  Short term gains are taxed as normal income, 35% for top earners.  Long term capital gains are things that you buy and then sell after more than a year and are taxed at a 15% rate, a 43% reduction from the normal income rate.

This discrepency is why people like Warren Buffett pay a lower overall rate than his secertary.  I believe that investment is the engine that drives growth and ultimately creates jobs and innovation in our economy, but I believe that one year is way too short of a window.  I would change the capital gains system so that it encourages real, long term investment, not speculation.  Here’s what I would change:

Years                    Rate

0-1                   Normal Income (35%)
1-2                       30%
2-3                       20%
3-4                       15%
4-5                       10%
5-6                       5%
7+                        0%

I want to incentivize people to invest for the long term, not speculate in the short term.  I want to make it more risky to play in the casino that has become our economy and make it more attractive to look for real value, for real innovation and for real job creation.  This system would raise revenue by raising rates on the highest earners, those who are speculating right now.  It will impact the real rich and will actually change the system instead of just raising income taxes, which won’t affect the truly rich.  For example, 1400 millionaires didn’t pay a penny of income tax in 2009 because they didn’t take a salary.  It was all capital gains.

Congress should differentiate between speculation and real investment and push people to invest long term, not short term.  It’s a fix that I believe makes sense and could gain bipartisan support in Congress, but so far, both parties are looking at the red herring that is the income tax rates.  True long term investments are in startup companies, publicly traded companies you truly believe in, alternative energy that pays off in 5-6 years, new buildings, etc. Fix capital gains, then move onto the other three problems.

PS – An added loophole that defies logic?  Hedge fund managers have been allowed to take billions in profits and income as capital gains instead of normal income, saving them billions in taxes.

A Few Thoughts on the #Occupy Movement

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I’ve been watching the #occupy movement pretty much since it started about a month ago, first from retweets from some of my friends, next on facebook and now finally in the mainstream media.  Some of my more liberal friends and liberal bloggers that I read are getting incredibly excited, saying that they believe that the #occupy movement “has staying power” or “is the start of a sea change.”  Many conservatives are dismissing #occupy as nothing more than “a bunch of lazy, dirty hippies with no jobs looking to party.”  Some are calling it “a very privileged protest.”

I think conservatives are wrong to simply dismiss the protesters as lazy and looking for handouts. Our economy has become incredibly unbalanced over the past few decades.  Wall Street, large corporations and the already rich are able to take advantage of advances in technology, government policy and changes in how the economy works to make huge sums of money, while firing US based employees or moving production offshore.  Those without skills or cash have not been able to.  The vast majority of people are struggling.

When recession hit, the government bailed out Wall Street at the expense of Main Street, stimulated “preferred” industries and passed bills approved (maybe even written) by  lobbyists.  We have a dysfunctional government led by a President who is unwilling or unable to lead, a Republican obstructionist Congress with no clear message and ineffective Democratic opposition.  We now have close to 25% un/underemployment.  People are angry and scared.

I see huge parallels between the #occupy protests and The Tea Party.  When the Tea Party First started, it was a movement against huge government debt, government spending, higher taxes and the new health care law.  Within a month or two, it was co-opted by the religious conservatives in the republican party like Michelle Bachman.  What started as a movement from outside the system with narrow objectives with real grievances became just another far right republican movement.

The same thing is happening with #occupy, but much more quickly.  It started as a grassroots movement, led by people who believed that the bailouts to wall street were unfair, that there is too much money in politics and that our economy needs to be reset in order for us to grow again.  Within two weeks, its been co-opted by far left activists, labor unions and now many Democratic elected officials with a broad range of issues.

Just like the Tea Party, elected officials and those with power saw that they could benefit from latching onto the cause.  They see another way to gain popularity and potentially stay elected.  Both movements started with reasonable grievances, but are now being co-opted by the extremists in their parties.  I believe #occupy has the chance to be as big and as influential as the Tea Party has been, but both movements have lost chances to be as important as they could have been because they have allowed themselves to be taken over by people on the extremes.

I believe that we need to incorporate grievances from both the tea party and the #occupy movement:  Our government is too big, is fairly dysfunctional and costs way too much.  We never should have fully bailed out Wall Street and done nothing to help main street.  There is far too much money in politics, on both sides of the aisle.  Pretty much all of congress is bought and paid for.

We also should be realistic:  We are in the biggest period of change since the industrial revolution.  We now have to compete with people around the world.  The internet is replacing jobs with computers.  Every industry is experiencing productivity increases at the expense of people.  Recovery is not right around the corner.  It will be hard and will require sacrifices and big changes (including lower standards of living) by pretty much everyone, the rich, the middle class, the poor.

I believe #occupy and the tea party have a ton in common.  We need a 3rd centrist movement that incorporates the good from both #occupy and the tea party, without the extremists.  What do you think?

Mixed Messages from Libya

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I’ve been watching US/NATO involvement in Libya for the few months and have a few thoughts.  Just like Saddam Hussein, Mummar Gaddafi was a dictator who abused his own people to varying degrees.  There are horror stories coming out about some of the things his regime did to citizens and its clear that we’ve lost another brutal dictator.

I’ve been interested in the message that foreign involvement sends to dictators around the world.  In 1979, the US placed Libya on the new “state sponsors of terrorism” list as the State Department believed that Libya and Gaddafi were actively supporting terrorist networks around the world.  Over the next 24 years, US/Libya relations worsened, reaching a nadir in the aftermath of the Lockerbie Bombings and subsequent retaliation in the form of increased sanctions.  Full chronology here.

In the mid 90s, Libya restarted its nuclear, chemical and biological weapons programs and further moved into isolation.  Things started to thaw in the 2000s, and by 2003, the US, Britian and Libya reached an agreement where Gaddafi would give up his weapons of mass destruction, let foreign inspectors come in and dismantle the plants and stop any further development.  Libya also exposed AQ Khan’s nuclear secrets bazaar, making the world a much safer place.  In exchange, the sanctions against Libya were annulled and Libya was removed from the State Sponsors of Terrorism list.

Fast forward eight years later.  Libyans rise up against the Gaddafi regime, demanding freedom and self rule.  Gaddafi’s troops respond and start to put the uprising down, but the US and NATO intervene and begin to bomb the Libyan army and later “command and control” infrastructure all over the country.  They demand that Gaddafi step down and attempt to kill him and his family with bombs.

What lesson does NATO’s intervention teach rouge regimes, dictators and others with aspirations counter to western interests?  First, NATO and the US negotiate to get what they want: Libya gave up their WMD asiprations, let foreigners in to actually do the disarmament and later renounced terrorism.

Then a few years later, NATO tries to kill you and your family when there is an internal armed uprising.  This is not to say Quadaffi is a good guy, but after seeing what happened to Hussein and now Gaddafi, Bashar Al Assad, Kim Jong Il, Mahmood Ahamdinejad, Pakistan’s rulers and others must think that the only thing protecting them from foreign bombing or invasion is weapons of mass destruction or a huge military with the ability to strike back at western targets.  It seems like a really bad lesson to teach these foreign dictators who have interests counter to the US and NATO’s.

President Obama said the US got involved in Libya to prevent a massive slaughter of civilians, but in reality, our governemnt really supported an armed rebellion to overthrow a dictator.  Its clear that this dictator did some horrible things, but he did sit down to the negotiating table and give up his WMDs and do exactly what we wanted.  On the other end of the spectrum, we invaded Iraq after Hussein refused to allow inspectors.

If this is how we are repaying those who actually sit down and negotiate and give us exactly what we want, how can we really get mad at dictators and foreign heads of state who refuse to negotiate?  In their eyes, the only way to avoid being attacked is to either have no significant natural resources (Darfur), build up significant armed forces (Iran and Syria) or build weapons of mass destruction (Iran, North Korea, Pakistan).  If you are weak like Hussein or give up your weapons like Gaddafi, you’ll be attacked at the first sign of weakness.

The US/NATO has two conflicting objectives.  Our government wants to stop the spread of weapons of mass destruction and also support uprisings against dictators (Egypt, Libya etc).  I think that we need to look very carefully at the message we are sending to the dictators of the world with our Libya intervention.  In the short term, we’ve helped remove a brutal dictator, but in the long term, have we lost even more of our credibility?  If I’m a dictator, I’m going to build up my army and my WMD program so that the US cannot bomb me without fear of retaliation.  I’m not going to risk being weak like Hussein or make a deal like Gaddafi.  Not a good message to be sending.

Wow! Food is Expensive!

Category : Political Science & Economics
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I just made my first trip to the supermarket after coming back to the states today.  It was amazing to see how much more expensive food is than when I left.  I had read that food prices had gone up, but I hadn’t realized how bad it was.  I bought three bags of groceries and it cost $68.  The same three bags would have cost about $55 when I left.  The most jarring examples were meat, boxed cereal and dairy products.

Chicken breasts are now up to $7 per pound, up from $4.50.  Beef stew meat is $3.99, up from $2.50.  A box of frosted mini wheats $4.75, up from $4.  Premium deli roast beef $10.50, on sale, up from $8.50 when I left.  It’s crazy.  My favorite sandwich shop raised prices from $5 to $5.50 and my favorite bagel store raised prices by $1.

So why are prices so much higher?  It’s a confluence of government policy, a falling dollar, rising commodity prices, mandates for corn based ethanol and crop failures around the world.  In the last six months, corn has nearly tripled in price.  Farmers feed corn to chickens, pigs and sometimes cows.  Add in higher fuel prices for transportation and you get much higher prices.  Pork has gone up 33%. Beef at least 12%. Chicken at least 10%. Wheat 25%.

The government claims that inflation is 1.8%, but since it does not include food and fuel, it’s a completely meaningless number.  When I left in November, the average price of a gallon of gas was $2.85.  Now it’s $3.96, a 39% increase.

Rising food and fuel prices disproportionately hurt the middle class, the poor and seniors on fixed income.  Food and fuel make up a larger portion of the monthly budget for those who are not wealthy.  Government policy is to blame.  Instead of letting banks and bondholders take losses, the Federal Reserve cut interest rates in an attempt to let the banks earn their way back to solvency.  Low rates hurt savers and retirees who put their money into CDs, money markets and savings accounts.

On the other hand, banks can borrow from the Fed for virtually nothing and led it back to the government at 3%, generating 100% risk free profits.  With “quantitative easing,” which is just another name for printing money, the value of the dollar is falling quickly.  Since commodities are priced in dollars, it takes more dollars to buy goods.

Government policy is to bail out the banks at the expense of the poor, those on a fixed income and the middle class.  It started under Bush and has accelerated under Obama.  I don’t understand why more people aren’t outraged.