Tag Archives: capitalism

The People’s Capitalism

President Obama’s proposal to raise the capital gains tax is a good one, and overdue. No, you have not been redirected to Bloomberg – where the president never has a bad idea. This is about restoring the balance to corporate balance sheets. In fact, the tax disparity may already have damaged American capitalism beyond repair.

Stock buybacks boosted earnings per share by 4% or more on 99 companies in the S&P 500, simply by lowering the number of shares outstanding.

Absent tax policy, companies and shareholders should be indifferent to capital gains. If the company has one dollar per share to spend on dividends, and keeps it instead, then the value of the company will increase. Each shareholder can then take his dollar as a capital gain, at such time as it suits him to cash out.

The argument for a lower tax on capital gains is that, with a six or twelve month holding period, it encourages long term investment. Unfortunately, share prices are a lot easier to manipulate than dividends. Companies can borrow, for example, and use tax deductible debt to buy back shares.

Buybacks only make sense if the company has no prospects that will return more than its cost of capital – which, with Fed funds at zero, is not good news. When we look back on this one, it will be called the “buyback bubble.” Along with the capital gains preference, the buyback bubble is abetted by a high corporate tax rate, the tax deduction for interest, and stock based compensation for executives.

Apple is one of the many corporations that, rather than dip into its cash and take a tax hit, took out debt instead to fund a big stock buyback and dividend program.

President Obama should follow up with a proposal to end the tax preference for debt. Ironically, he has proposed a tax on bank assets – which the banks would not be holding if tax and monetary policy had not overstimulated corporate borrowing in the first place.

One good way to end the tax preference for debt would be to dramatically reduce the corporate tax rate. Everyone knows that corporate earnings are taxed twice – once, as income to the company, and again as income to the investor. Less well known is that this tax is regressive.

Let’s say Alice and Bob both own shares in the company and the company pays dividends. Alice, a wealthy investor, will pay tax on her dividends at a marginal rate of 39%. Bob, a working man, will pay 15%, but only after the company has paid its 39% – money that would have gone into his dividend. On the underlying corporate earnings, Alice and Bob are taxed at the same rate.

Corp Tax

So, raising the cap gains tax is a good first step. Additional steps are:

  • End the cap gains preference entirely, taxing all market returns as income.
  • End deductibility of interest – all interest, starting with corporate debt.
  • Reduce the corporate tax rate, so more income flows to personal returns.
  • Raise interest rates.
  • Crack down on HFT and other market manipulators.

These are not anti-capitalist reforms at all. On the contrary, they remove artificial preferences that have distorted our stock market. For example, we have the world’s highest corporate tax rate. Slashing it would repatriate $1.5 trillion, and make America more attractive for jobs and investment. We could make up the lost revenue through progressive taxes on the shareholders, not the companies.

In the old days, ordinary people could invest their savings and earn a good return. Stocks paid dividends, and bonds paid a decent yield. Marx said that “the people should own the means of production,” but capitalism actually made it possible. Americans would cherish their little slice of IBM or General Motors – and they could retire on it.

Broad based participation in the markets would be the best, or at least a partial, remedy for inequality. With an emphasis on unfakeable cash dividends, it would also restore the market’s proper job of allocating capital. The president’s policy objective should be to remove all the distortions – arising from tax policy, monetary policy, and failed regulation – which make the markets unsafe for ordinary people.

See also: Blame Canada


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Bogus Capitalism

HappyBankerThe expression “crony capitalism” is misleading. Capitalism is all about competition, which drives innovation and keeps prices low. Cronyism means using government connections to stifle competition. This leads to confusion on both sides of the aisle.

Republicans believe uncritically in helping business, which often means protecting entrenched companies from the rigors of competition. Democrats generally want more power to regulate companies, which only produces more opportunities for rent seeking.

The result is a vicious cycle, in which big government abets monopolistic companies. Here are a few of the cases we’ve looked at recently:

Here is how the cycle works. Someone says capitalism isn’t working – we need to step in and regulate, bail them out, form a new agency, or whatever. Connected companies then soak up the bailout money and capture the regulator – at the expense of taxpayers, consumers, et al.

This drives our economy farther down its thirty year death spiral, and soon someone observes that capitalism isn’t working, again. Wash, rinse, repeat.

Jeremiah’s reaction to “capitalism isn’t working,” is incredulity. Capitalism? Where?

See also: You Say You Want a Revolution

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Message from Keynes

Jeremiah complains that there is little difference between the red and blue parties, but this year we have a real choice.  President Obama has spent the last few years setting up a social welfare state on the European model.  He has nationalized health care, mortgage lending, and General Motors.  He has increased social assistance of all kinds, from unemployment to food stamps.

When the facts change, I change my mind.

It is hard to write about this objectively, given what has happened in Europe.  When the President took office, in February 2009, he could look across the ocean to a place where the rich took care of the poor, the government provided everything, and people didn’t worry too much about money.

Employment was propped up by short hours and long vacations, and people retired early.   In those days, Obama often spoke of emulating the European model – France, in particular.  His policies and his public remarks bear this out.

Now, unfortunately, that model is gone.  It was crushed by the weight of promises it couldn’t keep – as, too, were many American cities.  We invite the President to consider the words of his favorite economist, John Maynard Keynes – when the facts change, I change my mind.  Maybe capitalism wasn’t so bad after all.

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Wall Street is a Casino

It’s true.  The stock market is mayhem.  This is a serious problem, and both sides are to blame.  The stock market serves a vital function in our economy, allowing ordinary people to share the profits of successful American companies.

These are not just wealthy investors.  They are your pension funds.  California’s pension fund, CALPERS, is one of the world’s biggest investors.  If they can’t make a decent return in the stock market , then there are going to be a lot of old people living on beans and cat food.

Every day, we learn of new abusesMF Global loses billions, and nobody knows where the money went.  The boss of PFG Best frankly admits he stole client money and spent it.  Today’s regulators are just as blind as they were in 2008.  Sarbanes, Oxley, Dodd, and Frank have made life hard for honest business, but the crooks are unfazed.  The PFG guy was printing phony bank statements on his laser printer!  His NFA auditors never thought to verify them.

We even have crooks using computers to manipulate the market.  If Jeremiah tries to stuff bids, mark the close, or paint the tape, he will go to jail.  But if Jeremiah’s computer does it – at a thousand trades per second – that’s just fine!  This “high frequency trading” is what caused the Flash Crash of 2010, when the Dow fell 600 points in about one minute.

Crop Circles are now found in daily charts of large-cap US companies..what the hell algo is that?!?! $MCD $IBM – Mike Bergen

Finally, we have central banks around the world – not just Chairman Bernanke – competing to devalue their currencies.  So, the market swings wildly on any bureaucrat’s remark.  No wonder ordinary decent investors prefer to keep their money under the mattress.  Investment by mutual funds, pension funds, and regular folk are at an all-time low.  Prominent firms are closing their doors.

Markets are increasingly distorted by central banks’ attempts to squeeze drops of growth from an over-indebted private sector across much of the developed world – Louis Bacon

Both sides are to blame.  The left thinks this is just rich-on-rich violence, and they laugh it off.  The right dislikes any kind of regulation, and they especially dislike paying for it.

Congress keeps passing new regulations and creating new agencies, but none of them is getting the job done.  It’s like trying to fight crime with sentencing laws.  No amount of law will prevent crime if the police aren’t up to the job.

Specifically, here is what Congress must do to clean up the stock market:

  • More effective (quality, not quantity) regulation
  • Tax breaks for buy-and-hold investors
  • Scrutinize program trading for manipulative practices
  • Ban high-frequency trading entirely
  • Discourage central-bank manipulation

If we don’t clean it up soon, there will be vast social problems.

Disclosure: Jeremiah is long Purina Cat Chow.

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Shorting the Dollar

Here is another example of capitalism going underground.  Soros Fund Management is going private.  The fund is estimated to manage around $25 billion – and that’s the last figure we’ll ever hear, because henceforth this money is Soros family private property.  Fund manager George Soros will return roughly $1 billion to outside investors.

This is a familiar story, hedge funds going private to escape Dodd-Frank and SEC scrutiny.  The Reuters article lists several others.  Here’s the disturbing part:

The trades that people will have to conduct in the future in order to make money may not be very politically correct – you may have to short the dollar and do other things that are considered unpatriotic.

Would George Soros, a Democrat and a philanthropist, really short the dollar?  The man who broke the Bank of England?  Never mind the debt ceiling.  Here’s a thought to keep Tim Geithner awake at night.

See also: Capitalism Goes Underground

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Capitalism Goes Underground

This month’s CFO magazine reports that the number of companies traded in America is on the decline, from 9,000 in 1997 to 5,000 today.  The article stops short of citing regulatory compliance as the culprit.

Goldman Sachs, however, spoke volumes when they decided to take the Facebook IPO offshore.  Regulators have been harassing Goldman ever since they avoided the mortgage lending debacle of 2008.  So, who needs the headache?  There are plenty of investors in China.

Goldman Sachs now says it will only offer Facebook equity to investors outside the US as the firm is apparently worried about scrutiny from regulators.

Politicians like to blame Wall Street for their problems, but stock ownership is the most egalitarian thing going.  As companies go private, or leave America entirely, it is the common man who will suffer.

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