Investment versus speculation

by Doctor Science

William Holbrook Beard, The Bulls and Bears in the Market. I can't figure out if the bears in this close-up:

are looking for more money inside the bull they've eviscerated, or are angry because it turned out to be a hollow, bubble-y sort of bull.

In July Bill Domhoff, sociologist at UC Santa Cruz, posted An Investment Manager's View on the Top 1%, written by a long-time acquaintance who works in the business (and who wants to stay anonymous, not surprisingly). He emphasizes that there are two distinct sets in the "top 1%":

The Lower Half of the Top 1%

The 99th to 99.5th percentiles largely include physicians, attorneys, upper middle management, and small business people who have done well.

...Since the majority of those in this group actually earned their money from professions and smaller businesses, they generally don't participate in the benefits big money enjoys. ... Most of those in the bottom half of the top 1% lack power and global flexibility and are essentially well-compensated workhorses for the top 0.5%, just like the bottom 99%.

The top half of one percent, and especially the top tenth of one percent, are a different story:

The Upper Half of the Top 1%

Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting. Some hard working and clever physicians and attorneys can acquire as much as $15M-$20M before retirement but they are rare. Those in the top 0.5% have incomes over $500k if working and a net worth over $1.8M if retired. The higher we go up into the top 0.5% the more likely it is that their wealth is in some way tied to the investment industry and borrowed money than from personally selling goods or services or labor as do most in the bottom 99.5%. They are much more likely to have built their net worth from stock options and capital gains in stocks and real estate and private business sales, not from income which is taxed at a much higher rate. These opportunities are largely unavailable to the bottom 99.5%.

... Folks in the top 0.1% come from many backgrounds but it's infrequent to meet one whose wealth wasn't acquired through direct or indirect participation in the financial and banking industries. One of our clients, net worth in the $60M range, built a small company and was acquired with stock from a multi-national. Stock is often called a "paper" asset. Another client, CEO of a medium-cap tech company, retired with a net worth in the $70M range. ... One client runs a division of a major international investment bank, net worth in the $30M range and most of the profits from his division flow directly or indirectly from the public sector, the taxpayer. Another client with a net worth in the $10M range is the ex-wife of a managing director of a major investment bank, while another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company.

The important point here is that even the people who look like they've made their money from a business outside the financial industry -- the Bill Gates or Steve Jobs types -- really haven't. They've made their money from *stocks*, not from selling things or services.

It's not just the wealth from the stocks of their companies, either. This chart of income sources for the top hundredth of a percent

shows that dividends -- direct shares in profits -- have become much less important since the 1970s, while "wages" have become much more important. It looks as though these extremely wealthy people are working for their money, doesn't it?

Except that "wages" includes stock options and bonuses, which are often based on stock price performance. So wealthy people who aren't getting money from S-corporations, sole proprietorships, and partnerships are getting almost all their income from capital stock/ real estate gains, and from stock-indexed wages.

And the stock market isn't really for investment, it's for *speculation*. "Give them money and get a percent of the profits" is be investment, because you (the wealthy person) are tying your income to how much money the company actually takes in for doing things. "Buy low, sell high" is speculation, because how much money you get doesn't have to depend on anything the company actually sells or does -- all that matters is what potential buyers think, and their confidence that the stock will continue to be worth more in a market of people who think like them.

No wonder so many of our Very Serious Leaders keep saying "confidence" is of overwhelming importance, more important to businesspeople than things like "are there enough customers?" -- even though actual businesspeople are most concerned about lack of demand.

Speculation is driven by confidence, and the more large corporations are run by and for the interests of speculators, the more confidence -- instead of customers -- will seem to be truly necessary for business success. For gamblers, the Confidence Fairy seems real:

Fortune and her Wheel, from an illuminated manuscript of Boccaccio.

and marketing -- in the form of "if you believe in fairies, clap your hands" -- is the most crucial element for success.

In any case, it looks as though the wealthiest and most powerful people in our society, regardless of what line of work they claim to be in, are all really in finance and Wall Street. The rest of us are the 99.9%.

Comments

[bobbyp]

Or they are in http://www.nytimes.com/2011/11/27/business/estee-lauder-heirs-tax-strategies-typify-advantages-for-wealthy.html?pagewanted=all> the wealth coddling business.

[bobbyp]

http://www.nytimes.com/2011/11/27/business/estee-lauder-heirs-tax-strategies-typify-advantages-for-wealthy.html?pagewanted=all > oops

[Platypus]

I think your analysis is mostly correct, but your claim that the Bill Gates or Steve Jobs have made their money mostly from stocks is misleading. Most of that stock is in the companies they founded and helped build, so it is at least somewhat grounded in provision of real goods and services. One could argue endlessly about the disproportional reward for them vs. others who helped build those same companies, but they're still a different breed than speculators who had *nothing whatsoever* to do with the success of the companies in which they bought stock.

[liberal japonicus]

interesting stuff. I wonder if what you say applies to all developed countries or if this is a US phenomenon. Unfortunately, the visualizingeconomics.com website that you got that compelling graphic from seems to only do the US economy.

[Doctor Science]

Platypus:

Actually, that's one of my big points. We automatically think of Gates, Jobs, etc., as having made money from their firms' goods and services, but what the investment manager points out is that the *great wealth* part comes from the stocks, which are speculative financial tools.

[russell]

I think my point of view on this is closer to platypus'.

To me, the line between 'investment' and 'speculation' is more a function of (a) does your investment actually create new capital for an enterprise, and/or (b) do you have any meaningful, hands-on involvement in the enterprise?

Or, a shorter form: do you actually contribute to the value that is represented by the stock price, or are you just laying bets (however well informed) on where it is headed?

There are lots of problematic aspects to compensation in the form of equity, but IMO they are a different set of issues than investment vs speculation.

[Ugh]

bobbyp's link at 8:56am is to this NYtimes article, which is interesting in that the article doesn't show Mr. Lauder participating in any of the more egregious tax shelters of the late 1990s/early 2000s (though it would likely be hard for the NYtimes to find that out without the cooperation of Mr. Lauder or some disgruntled Big 4 employee or some sort of lawsuit between Mr. Lauder and his tax advisor).

The tax planning techniques he personally engaged in (as opposed to his parents via estate planning/trusts) are said to be the following (in general order of the article):

1. Deductions for charitable donations of his art.
2. A variable pre-paid forward contract.
3. A short against the box transaction.
4. Pledging appreciated assets (stock) to secure loans.
5. Deducting property taxes (and perhaps mortgage interest, though the NYtimes doesn't say), though sometimes limited by the AMT (the latter according to his spokesman).
6. Charitable deductions for fractional donations of artwork.
7. Some type of strategy to avoid unspecified foreign - but not U.S. - taxes on the sale of stock in his broadcast network CME.

Other than perhaps #2, these don't seem particularly controversial or some sort of "loophole" exploitation. 1 & 5 are run-of-the mill itemized deductions. 6 was perhaps less-run of the mill in terms of itemization but was specifically blessed until Congress changed the law. 3 was a longstanding strategy until, again, Congress changed the law in 1997 or so (the "box" refers to a time when people held actual physical shares of securities and kept them in a lockbox). I find it hard to call 4 any type of tax strategy at all. 7 doesn't concern U.S. taxes and so I'm not sure where to go with that.

That leaves the variable pre-paid forward contract in #2. The IRS specifically blessed a certain form of these contracts in revenue ruling 2003-7, and Lauder's spokesman said his transaction complied with this ruling (though that's what they always say).

If the point of the NYTimes article is to point out the tax planning techniques available to the extremely wealthy, then it seems they've succeeded on #2 and perhaps to a lesser extent on #7. If there was some other point, I'm not sure what it is.

[bobbyp]

Ugh,

My statement was a follow along from that of the good Doc that great wealth is from finance or "coddling" (maintenance of usually inherited swag). There was no implication that what Lauder has done is in any way illegal. Socially useless perhaps (my opinion, not that of the august NYT), but not illegal.

As to #4, it's pretty straightforward. A tax deferred is a tax saved. You get to realize the use of the financial power of the appreciated asset (or even spend it down) without selling it and paying the tax. The tax liabilit is deferred into the future. This is elementary bird in the hand stuff.....ask any accountant.

The point of the article was to explain the methods employed by the uber wealthy to minimize their taxes. It should be smack-you-in-the-middle-of-your-eyes-obvious that these strategems are not available to the ordinary taxpayer. Insofar as that was the theme of the piece, it was very informative.

Thanks.

[bobbyp]

Russell,

Let us look at the case of Mr. Gates in greater detail. The initial IPO in 1986 allocated to the public some 3 million shares raising 70-80 million dollars. This represents the initial 'investment' in the company. The buyers were essentially speculators. The IPO gave insiders, such as Gates, a way to make their portion of the business liquid (all those shares kept in house).

Leaving aside charges that Gates basically swindled the author of MS-DOS to begin with, and the fact that the vast wealth of Microsoft derives essentially from a patent (thank you, government), it does not strike me that Mr. Gates invested all that much in the startup, though he was the prime founder and ran the company for many years thereafter. Point taken on that one.

I should think the Doctor's take has a great deal of validity. Gates' great wealth derives from pieces of paper called stock certificates, the value of which is determined by the markets guess as to the company's future outlook....not its past.

Stocks are essentially speculative financial tools and provide their owners with liquidity....a valuable thing in a risky world.

Regards.

[Ugh]

bobbyp: The point of the article was to explain the methods employed by the uber wealthy to minimize their taxes. It should be smack-you-in-the-middle-of-your-eyes-obvious that these strategems are not available to the ordinary taxpayer.

Well, I guess it really depends on what level one looks at the article. Can ordinary taxpayers take charitable deductions? Absolutely, unless you think anyone that itemizes deductions is not ordinary. Does an ordinary taxpayer own a piece of art worth 9 figures? Obviously not.

You are correct of course that #4 can be a tax planning technique in that if I want to obtain cash now I can either (a) sell an appreciated assets pay the tax and get the cash, or (b) borrow the cash and pledge the assets as security without incurring the tax, and choosing the latter (and presumably leaving the loan outstanding until death or repaying the loan with other income, paying interest along the way, of course). But people enter into secured loans all the time with little consideration of the tax consequences.

In any event, as to what tax stratagems are available to the ordinary taxpayer among the seven I list, I would say only #2 (and #7 depending on how one defines ordinary taxpayer). No one is going to enter into a variable prepaid forward in exchange for your 100 shares of publicly traded X Corp stock worth $1,000 (though in theory it could be done). But if you want to donate them to charity or engage in a short-against the box transaction, it wouldn't be much of a problem (borrowing specifically against those share might be more difficult, but they would certainly would be included in your assets for consideration of granting the loan, and I doubt Mr. Lauder got a $ for $ loan against his Estee-Lauder shares).

In any event, I guess my points are that there's nothing in the Times article to suggest Mr. Lauder engaged in any of the more egregious (legality aside) tax shelters of late (e.g., FLIP, BLIPS, OPIS, BOSS, Son of BOSS, COBRA, etc.), and that to the extent that the Times article implies that the strategies it discusses are only available to the uber-wealthy, it really only hits the mark on #2.

More broadly, I'm not sure what's to be done about this. To the extent that certain transactions only make sense on a large scale due to transaction costs, those will always favor the rich. One potential partial solution would be to adopt a mark-to-market system of taxation, where everyone's assets are treated as sold for their FMV at the end of the year and folks are taxed on their gains (or are allowed to deduct their losses) based on such a hypothetical sale. That would eliminate 2,3, and 4 above as a tax planning technique, but such a system has its own issues.

[russell]

Gates' great wealth derives from pieces of paper called stock certificates

I'd say the liquidity of Gates' wealth derives from the fact that he holds some portion of it -- maybe most of it -- in the form of stock certificates.

The wealth itself derives to some significant degree from his management of Microsoft. Regardless of how you view the quality of his leadership.

To put it another way - I probably own MS stock. I frankly have no idea if I do or not, if I do it is via some fund or other. But it's highly likely that I do.

My contribution to the value of MS as an ongoing concern is significantly less than Bill Gates'.

That's pretty much all I'm saying.

I understand that the value of stocks, specifically, fluctuate based on investors' estimate of what their future worth will be, but their value also reflects the real value of the underlying enterprise. Especially over the long term.

It's not a totally made-up number.

[bobbyp]

More broadly, I'm not sure what's to be done about this.

Thanks for the reply. Yes. Several of those items can be employed by those of the hoi polloi who manage to rise to the level of qualified itemizing deductors (many don't make this level). However, donating your grandmother's paint by numbers work to charity and claiming a deduction has nowhere near the chachet or throw weight of donating priceless pieces of art to a world famous museum that obligingly puts you on the board and pays for your fancy meals at swanky meetings where you can meet and exchange insider information with other members of your class and write it off as a business expense. Apples vs applets? At some point it strikes me there is indeed a phase change.

What to do about it? Many ideas try to deal with the results (huge wealth disparity? Then tax it!) instead of the causes (how about a financial transaction tax? lower caps on mortgage interest deductions? Treating all income as, well, income? patent reform? Corporate structural reforms).

That's where I would like to start. I see the difficulty in trying to "take" from those that have. It's a tough sell. But if we as a society adopt rules to insure that very few ever acquire that much to begin with? Then the shoe is on the other foot. Those that want the advantage need to justify it, and the Mores will have to convince us they indeed deserve More.

[McKinneyTexas]

(b) borrow the cash and pledge the assets as security without incurring the tax, and choosing the latter (and presumably leaving the loan outstanding until death or repaying the loan with other income, paying interest along the way, of course).

This is available to anyone with an asset, but how this is a tax avoidance measure is beyond me. The loan has to be paid back, with dollars on which the tax has already been paid. At best, you are encumbering an asset, and incurring an obligation. Plus, there's the interest, as was noted, but unless the loan was for a business or the purchase of real estate, the interest isn't deductible. The obligation never goes away unless it is paid in full. If the borrower dies, it is passed along to the estate. The borrower can't default, because then the lender levies on the collateral. This doesn't look clever to me at all. It looks like what put so many people underwater before the bubble burst.

[McKinneyTexas]

But if we as a society adopt rules to insure that very few ever acquire that much to begin with?

BP, I'd like to know three things:

1. What rules should society adopt to achieve this end?

2. Why?

3. How do we know such rules would make others' lives materially better and how, more importantly, can we be sure these rules won't make things worse?

[bobbyp]

McTx,

You can sell the asset today and pay the tax today (let's say it's 15%). Or you can defer the tax for a very very very long time. What is the present value of that tax obligation in today's dollars? Depending on the discount rate, and the length of time of the deferral, that obligation can be made to be very small on a discounted basis. The interest on the loan may or may not be deductible. That one I don't know. But if the loan is rolled over into another asset that earns income or has appreciation, this offsets the loan cost. Plus the orginial asset continues to grow at whatever rate, and you get the advantage of interest on interest, tax deferred.

I'd suggest you talk with your accountant. If you defer a tax long enough, you effectively do not pay it. If this did not make sense, why would a centimillionaire do it?

Cordially,

[bobbyp]

1. What rules should society adopt to achieve this end?

I listed several above.

2. Why?

Because I believe these policies will help us to acheive a saner, more just, more responsible, and healthier society, with a stronger social contract while still promoting individual freedom.

3. How do we know such rules would make others' lives materially better and how, more importantly, can we be sure these rules won't make things worse?

The conscious adoption of destructive social policies since J. Carter in the late 70's, accelerating with the Reagan presidency, and up until now have directly led to lower rates of economic growth, growing income and wealth inequality, increased social alienation, and the rendering of the social fabric. If the policies I advocate contribute to turning that trend around, what's not to like? I can say this: Major policies adopted since the 70's have been a disaster. How can you possibly defend them?

This has been another general answer to a general question.

[bobbyp]

but their value also reflects the real value of the underlying enterprise.

If I buy a share of MS today, I contribute absolutely nothing to its value as an on-going enterprise. My funds go to somebody else who sold for any number of reasons, and not toward buying more programmers and office space in Redmond, WA.

The real value of a stock is the stream of future earnings, not the amount of "shareholder equity" on the latest balance statement.

[russell]

If I buy a share of MS today, I contribute absolutely nothing to its value as an on-going enterprise.

This is, *precisely*, my point.

Bill Gates contributed quite a bit to the value of MS as an on-going enterprise. I have no problem with him being wealthy.

IMVHO, if we want to incentivize productive entrepreneurial activity, I can see the sense of giving Bill Gates, frex, some kind of favorable tax treatment on the income he derives from the stock he holds in MS.

Me, personally, not so much.

I don't think our current public policy makes those kinds of distinctions.

That's my point.

If we don't want to incentivize entrepreneurial activity via the tax code, then our problem is much, much, much simpler.

If you make income, it gets taxed, as income, at whatever the appropriate rate is for your income bracket.

I would also basically not lose a lot of sleep over that plan, either.

But if we are in fact going to give people tax incentives to *invest*, then the incentives for a guy like, frex, Bill Gates should really be different than they are for a guy like, frex, me. At least as regards our respective "investment" in MS, specifically.

IMVHO.

[russell]

But if we as a society adopt rules to insure that very few ever acquire that much to begin with?

I guess I consider myself reasonably far to the left, as Americans go. At least, Americans who aren't graduate students.*

That said, I find the idea of adopting rules specifically aimed at limiting what any given individual can acquire to be very problematic.

How much is "too much money"?
Who gets to decide?
What if somebody is just freaking lucky?
What if somebody is just really smart, hard-working, and freaking lucky?

As far as I'm concerned, I'm looking for three things, and pretty much only three things:

1. structure our social and economic public life such that more of the wealth that gets created goes to folks who do the stuff that folks actually pay money for
2. strictly limit the influence of private wealth on the political process
3. if we're going to raise revenue via an income tax, it should be realistically progressive

Beyond that, if money's what you're after and you happen to grab the brass ring, mazel tov.

Some people are really good at what they do. Some people do stuff that commands a high rate of compensation. Some people are very driven and competitive and are highly motivated by the idea of getting dirty stinking rich.

Whatever floats your boat. I don't see a need to try to limit how wealthy somebody can be, I just don't want them getting special favors.

* that was a joke.

[DBN]

Major policies adopted since the 70's have been a disaster. How can you possibly defend them?

The 1970's were an economic disaster for the United States with multiple oil shocks, a sharp decline in American manufacturing, double-digit inflation and high unemployment. How can you defend the policies that led to that?

[bobbyp]

I have no problem with Bill Gates being wealthy. I have a problem with a set of policies that promote, protect, and coddle that extreme amount of wealth...in his particular case patent law, and effectively shift income upward. So of your items 1-3, I come down more heavily in favor of policies that can be identified with your item 1, because if you are relying more heavily on items 2 and 3, well, the horse is already out of the barn, the omelet broken, and etc.

[bobbyp]

Whatever floats your boat. I don't see a need to try to limit how wealthy somebody can be, I just don't want them getting special favors.

Rising tides aside, I feel we are on the same tack, but looking through different ends of the viewing glass. I would argue that special favors (i.e., consciously adopted social policies beginning in the 1970's-often termed "neoliberal" in some quarters)have worked to promote and/or create the vast disparities in wealth and income we now observe, and concomitant social ills that follow: The destruction of the commons, anti-democratic concentrations of economic and political power, and the rending of the social fabric.

[Sebastian]

I'm in agreement with the first half of this post, and very much in disagreement with the second half.

There are people making a huge amount of 'financial' money. I strongly suspect something shady or bad for the overall economy in it.

But it is totally wrong to tie this quote to that concept:

"The important point here is that even the people who look like they've made their money from a business outside the financial industry -- the Bill Gates or Steve Jobs types -- really haven't. They've made their money from *stocks*, not from selling things or services. "

No. They built up strong businesses creating and selling very important things and services. They sold off SHARES of those businesses, and that came in the form of stocks. Their stock options were indeed speculation, but it was a bet that they could make the companies even more valuable than the strike price of the stocks. For the most part they did so.

Interestingly, I would say that a lot of the big bank/finance money involves taking money from people like Jobs and Gates. The finance sector is supposed to facilitate profits, but I think it has been taking a larger and larger percentage of the facilitated profits. When you see people like Jobs and Gates making lots of money off the stocks from their own companies, the economy is probably functioning well. When you see big bankers making just as much and more, then I suspect the economy is not functioning well.

[bobbyp]

DBN,

I don't know what policies you are referring to. Perhaps you could state them. As for the 70's:

1. We went off the gold standard. This was a good thing. Our balance of payments made it untenable to continue supporting.
2. The oil shocks experienced by the world economy were not driven by US domestic economic policy.
3. Unemployment decreased steadily in the 2nd half of that decade only to spike upward again during the early 80's recession.
4. Despite all the oft cited problems, economic growth was slightly more robust in the 70's than it was in the 80's.
5. We have continued to lose manufacturing jobs to overseas competitors throughout the 80's, 90's, and the oughts.
6. We have a 9% unemployment rate right now. Perhaps you are not paying attention?

I lived through the 70's. The world didn't end. People still had good incomes. A typical single wage earner could still support a middle class life style--the house, the car, sending the kids to college. Today, these things seem like a dream to many, if not most American.

So I ask again: How can you support the policies, beginning with the Carter de-regulations and reaching their apogee under George W. Bush, that have brought us to this woeful state?

We have adopted some very bad social policies. It's time to change them.

[bobbyp]

Sebastian,

Did Bill Gates acquire more of his wealth from (a.)The income stream derived from the business known as Microsoft; or (b.) The fact that as founder, he held a gigantic portion of the original stock allotment?

Agree in part re your rant about bankers, but historically, most of American business growth has been financed by retained earnings not funds raised from "investors".

[cheap UGG boots]

I could not agree more. Last week I wrote a similar post on why corporate IT is oblivious to their new role. But, I do think the renaissance of IT is coming. Either that or the same time next week we will be using EC2 dashboard to provision new server ;)

[Julian]

My objection to discussion of the ultrawealthy focused on Bill Gates and Steve Jobs types is that we all understand that they at some point made a widget that had some value and so there is some proportion of the money they definitely earned. What about the ultrawealthy's kids? How many of the top .01% are wealthy because of an inheritance? Do we feel as passionately about letting them squat on their parent's billions? If I had 3 billion dollars, I'd evade taxes just as brilliant as Mr. Lauder. "Here," I'd tell the lawyers. "Hide it."

Also, I can never quite square the fact (is it a fact? I will proceed as though it is) that there is diminishing marginal utility to a dollar with the fact that we are so keen on concentrating dollars in one place. Isn't almost statistically certain that we have enough smart and hardworking poor people who would, proportionally, benefit far more and arguably benefit our economy far more if they had a larger share of wealth, even if doing so took money away from the Mr. Lauders?

I think the bedrock belief of people who oppose higher marginal tax rates is that the money is already in the right places. Everyone who is rich now (or at least sufficient proportion such that we should only meddle, if at all, in the other direction) deserves it. The worthy people are already rich, and taking money from them and giving it to the poor is throwing money away.

[McKinneyTexas]

Bill Gates contributed quite a bit to the value of MS as an on-going enterprise. I have no problem with him being wealthy.

The motivation and reward for doing what Gates--and many other much smaller players--did is that there is a market for the stock, i.e. ownership, of the company Gates or whoever puts together. No market, no incentive.

We are mixing a lot of different concepts here. I am in general philosophical agreement that deferring taxes in most contexts makes for bad policy. Tax gains net of losses/expenses in the year of the gain? Fine. For companies that have a loss, should they be allowed to carry that forward? I think "yes" is the right answer. It's better to allow a company to stay in business and use next year's profit to cover last year's loss. The rub comes in how you define "loss".

That's probably a discussion for another day, assuming anyone here has the expertise to address it substantively.

What I can't fathom is how GE can pay a dividend but no taxes. Something smells there. Immelt's proximity to this administration doesn't make that smell go away.

[sapient]

I don't see that the distinction between investors and speculators is necessarily important. The problem is that with publicly traded companies, there are people who are rewarded for reasons that don't necessarily have anything to do with the quality of the product or business management. This goes not just for bankers and financiers, but top level corporate management. I don't know how to fix it, but it's not my inclination to demonize people who know how to get rich off of the system. Somebody needs to change the system.

In the meantime, I agree with those who want to 1) increase income tax rates on the very wealthy and eliminate some deductions, 2) tax financial transactions (see Krugman yesterday), 3) tax inherited fortunes, 4) eliminate wealth as a factor in the political system.

[McKinneyTexas]

One thing that occurs to me that could stand some hard review is this business of buying up a ton of high priced art and then donating to a self-created foundation, where the donor retains functional control, and getting a tax write off for doing something that is pretty much self-aggrandizing fun.

If I could figure out a way to depreciate/deduct golf clubs and green fees, my views on this would probably change. Maybe I could donate my game to a foundation on theory that the good I do is making all other golfers feel better about their game.

The problem is that with publicly traded companies, there are people who are rewarded for reasons that don't necessarily have anything to do with the quality of the product or business management.

This is true in every aspect of life. There is no solution. Certainly not one that wouldn't have its own set of bad problems.

[hairshirthedonist]

So, given that buying and selling shares on the market, subsequent to the initial stock issue, doesn't really fund capital investment by the company the shares are for, what's the justification for treating dividends the capital gains from sales of stock *purchased from a previous shareholder* differently from wage income?

Is it just that it will entice more initial investors, knowing that there will be a greater demand for the shares they purchased, because of preferential tax treatment for all *subsequent sales* of those same shares? It wouldn't be enough to give special treatment only to the initial investor? Would that many people thereafter choose not to make money simply by buying and selling something because the taxes would be marginally greater?

Does this special treatment really have a major effect on the level of actual capital investment?

[CaseyL]

I don't have a problem with people becoming wealthy through their own work - whether that means creating a company that does very well, or having a skill people will pay through the nose to watch performed, or otherwise putting some effort into the achievement.

What I do object to is letting that vast wealth be passed on to successive generations in its entirety. I don't see how anyone can argue the descendants "earned" that money, nor how taxing it can be considered "penalizing them for their success" (their success at what, precisely? Picking the right parents?). What unlimited inheritance is good for is building an oligarchy, and oligarchies aren't good for anything except perpetuating their own privilege.

As Americans once upon a time knew monopolies were bad for society, we also once knew no-limit wealth accumulation was bad for society. We had things like estate taxes to limit the size of financial legacies, as we used to have anti-trust laws to limit the consolidation of business. It's kind of a shame we no longer believe those things or have those things.

[Laura Koerbeer]

I do not know how it can be argued that relatively high taxes on the rich penalizes them for earning the money. it would be a penalty if the taxes actually affected quality of life, I suppose, if the taxes were so huge that the rich person was not able to live as a rich person. That's not even close to being the case in the US. If the tax cuts for the rich were not extended weatlhy people would not have to pull their kids out of private schools, forgo the purchase of that fourth car, or sell their seventh house because they couldn't keep up the mortgage. The poor old rich people are not going to suffer!

On the other hand those Repulican politicans who refuse to reinstate the taxes on the rich are the very ones who oppose funding unemployment, Medicaid, Pell grants, want to turn Medicare into a voucher system...changes that would very dramatically and horribly impact millions of people.

Claiming that taxing the rich is a penalty is an attempt to make it look that there is a moral issue involved, a moral wrong done to the poor deserving rich people. But without the higer tax rate for the wealthiest us middle class people or working poor people who have to make up the lost revenues out of our much smaller incomes or try to live without the services that our society can't afford without the taxes from the weathiest.

There's a moral issue involved alright, but its not the so-called penalty of taxing weatlh.

[sapient]

This is true in every aspect of life. There is no solution. Certainly not one that wouldn't have its own set of bad problems.

Actually, McKinney, although I agree that life is unfair, I don't agree that there is no solution to the problem of corporate executives basically plundering employee pensions to pay themselves more money, and collecting giant bonuses when they've laid off workers and run a company into the ground:

"CEO salaries are still running at double the 1990s CEO pay average after inflation adjustment according to the 17th annual executive compensation survey, CEO Pay and the Great Recession by the Institute for Policy Studies. At a time when many laid off Americans are hurting financially, CEOs are reaping the rewards of handing out mass pink slips. Layoffs pay off for CEOs, with the money in saved wages further padding their plump paychecks. CEOs at 50 companies -- "layoff leaders" in the study -- that laid off the most employees took home an average pay of almost $12 million in 2009, 42 percent more than the average CEO pay.

Most firms -- 72 percent -- announced mass layoffs during periods of profit, reflecting a growing trend in corporate America: tightening the workforce to increase profit and maintain high CEO salaries.

Even CEOs who lost their jobs, like Fred Hassan of Schering-Plough, the highest paid layoff leader, received a $33 million golden parachute when his company merged with Merck, while 16,000 employees lost their jobs. Hassan's total 2009 compensation -- $49.6 million -- is enough to provide all 16,000 who were pink slipped average unemployment benefits for more than 10 weeks.

These are the job creators we keep hearing about? Right.

[Ugh]

On CEO pay, what's most interesting to me is a comparison of U.S. based MNC CEO's compensation to non-U.S. based MNC CEO's. The former outstrip the latter by a large margin, controlling for obvious variables. Why?

[McKinneyTexas]

Sapient writes: Actually, McKinney, although I agree that life is unfair, I don't agree that there is no solution to the problem of corporate executives basically plundering employee pensions to pay themselves more money, and collecting giant bonuses when they've laid off workers and run a company into the ground:

Several points: (1) we weren't talking about CEO pay, (2) your link on CEO's plundering pensions for all sorts of evil purposes is likely grossly in error, since not a single example is provided by the law firm who is posting this startling information, (3) your examples of overpaid CEO's doing bad things-laying people off-is a classic example of using anecdotal evidence to prove a general trend (GF, where are you?) and (4) what is your plan: put together a federal agency on Equity in Executive Compensation? Using what criteria and metrics, that will apply to every publicly traded company in the country?

I ask again, rhetorically, is there anything the progressive left doesn't want to regulate?

And, finally, no, these are not the job-creators that Palin et al like to tout. That group is small business owners and entrepreneurs starting new businesses.

And a final "finally"--if you want to see executive compensation go up, just raise taxes. The large corps will simply increase compensation to produce the same after tax gain.

[envy]

(3) your examples of overpaid CEO's doing bad things-laying people off-is a classic example of using anecdotal evidence to prove a general trend (GF, where are you?)

[...]

I ask again, rhetorically, is there anything the progressive left doesn't want to regulate?

...

[russell]

I ask again, rhetorically, is there anything the progressive left doesn't want to regulate?

Marijuana.

[Doctor Science]

I ask again, rhetorically, is there anything the progressive left doesn't want to regulate?

Sex, duh.

[bobbyp]

Tex,

There are a variety of corporate structural reform proposals out there that would presumably act to align shareholder and management incentives (for example, barring the management from voting shares held by the corporation) that could also bring management pay down (also decreases costs & raises profits!).

You should be familiar with them, so I assume you are just having another bout of ideological dyspepsia. And if you have not heard of managements of some companies looting the company pension system, then you really do live on another planet.

So I'll ask you, just rhetorically:

IS THERE NOTHING CONSERVATIVES DO NOT WANT TO STEAL AND CALL THEIR OWN?

[sapient]

I've tried to post a comment several times, so this is a test in case I've discovered what's wrong....

[russell]

The motivation and reward for doing what Gates--and many other much smaller players--did is that there is a market for the stock

A brief aside on this point:

First, I think you are confusing ends and means here.

Second, I also participate in a market. It's the market in consumer goods, which constitutes 70% of the GDP of the US.

Not an inconsequential thing.

By your logic, perhaps I should get a tax break for buying stuff.

this is a test in case I've discovered what's wrong....

The test is coming through loud and clear.

[sapient]

'm unable to post a lengthier comment for some reason. I'll try once more, but I'll be horrified if it turns up later as many times (and slightly different versions) as I've thought I put it up. I'm not sure quite what's going on.

[sapient]

Well, failed again to post my full comment. I guess I'll just have to briefly state my agreement with bobbyp's response to McKinney. The American Airlines bankruptcy (to reduce "labor costs") is today's "anecdote," with the deposed CEO walking away with millions (an 11% raise he received over the previous year, when there was a 471 million loss; a $982 million loss through the first nine months of this year). I wonder how many of the employees got an 11% raise. Can't wait to read about tomorrow's anecdote.

[hairshirthedonist]

The motivation and reward for doing what Gates--and many other much smaller players--did is that there is a market for the stock

Another brief aside on this point:

Has someone suggested abolishing the market? Or was it something else far short of that?

[McKinneyTexas]

I am having the same posting problem as others. What follows, hopefully, is a series of responses in separate comments.

There are a variety of corporate structural reform proposals out there that would presumably act to align shareholder and management incentives (for example, barring the management from voting shares held by the corporation) that could also bring management pay down (also decreases costs & raises profits!).
Taking this one example: what evidence is there that the cure isn't worse than the ill? Is every publicly traded corporation a bad actor? What happens if the non-management voters start making really stupid decisions? Further, it seems to me that when we impose new rules on everyone because of the conduct of some, it's group punishment.
just having another bout of ideological dyspepsia
Good one. You know I'll be playing this one back, again and again.
IS THERE NOTHING CONSERVATIVES DO NOT WANT TO STEAL AND CALL THEIR OWN?
So, the conservative analogue to the progressive yearning for more and more regulation is theft. Speaking only for myself, I don't like telling other people what to do absent compelling reasons. The fact that some companies do things I don't like isn't a good enough reason to interfere in the operations of every company. Further, the kind of regulatory scheme necessary to prevent the kinds of wrongs the left desires to fix would be incredibly oppressive. Regulations are like rain--everyone gets wet. Compliance is costly, far more so for smaller outfits than the really large companies.

[McKinneyTexas]

Comment No. 2:

Has someone suggested abolishing the market? Or was it something else far short of that?

I am not clear what the suggestions are--maybe it's just ideological dyspepsia. But, reading between the lines, I think what we're hearing is two things: stock market investment is speculation and non-productive and generally not socially responsible and, therefore, we should tax the carp out of it--transaction taxes, no more capital gains, no more deferred taxes of any kind (so, tough luck IRA and 401K participants).

[McKinneyTexas]

Comment No. 3:

Second, I also participate in a market. It's the market in consumer goods, which constitutes 70% of the GDP of the US.
Not an inconsequential thing.

All brought to your courtesy of corporate America. Out of curiosity, for those who put something back for the future, do you invest in the stock market? Bonds?

By your logic, perhaps I should get a tax break for buying stuff.

In fact, depending on congress' mood swing, this could be the case. Example: in 2004, it was deemed in the public interest to sell more vehicles over a certain weight. So, a business purchaser could buy, say a large SUV, and expense the entire thing in the year of purchase. Back in the day, I hunted and fished a lot, pulled boats, trailers, and hauled a lot of stuff around, so my law firm bought a big SUV and paid, effectively, 60 cents on the dollar for it. Stupid, but there you go.

[McKinneyTexas]

The American Airlines bankruptcy (to reduce "labor costs") is today's "anecdote," with the deposed CEO walking away with millions (an 11% raise he received over the previous year, when there was a 471 million loss; a $982 million loss through the first nine months of this year).

It may be that the AA management was and is inherently corrupt and incompetent. Or, it could be that, but for their efforts, the company's losses would have been larger, the bankruptcy would have been filed sooner and would have been much more severe.

I put a client into bankruptcy over an FLSA matter. It's kind of an interesting counterpoint to the labor angle cited by Sapient. Under the FLSA, you pay overtime in the week it was worked. My client did things a little differently. It was an ambulance service in which employees worked six 48 hour shifts and three 72 hour shifts every nine weeks. However, so that employees had level paychecks, they got paid 56 hours every week, with time and half for the time over forty. It averaged out with every overtime hour being paid at time and a half, although not every OT hour was paid in the week it was worked. My client even had a letter from the US Labor Dept expressly approving this process.

It turns out that you can't do this even if the Labor Department says you can. It turns out that we were underpaying our employees in the three 72 hour weeks by 16 hours of overtime. The overpayments in the six other weeks were viewed, by the law, as a gift. When my research revealed we were in technical violation of the law, I told the client and it immediately agreed to pay (again) for the "underpayment". However, the lawyer for the class wanted double damages. I put my client into bankruptcy and he didn't get double damages.

The sword cuts both ways and I'd bet that there are two sides to the labor dispute at AA. I will also point out that my client provided, and continues to provide emergency services to over a half a million Harris County citizens at a level of care well above state standards. Every ambulance is a Mobile Intensive Care Unit, our paramedics are trained way above state requirements and it is a completely private, non-profit endeavor. No good was served by squeezing more than a half a million bucks out of this small, vital operation, but that was the effect of laws, regulations and judicial interpretations that are the unintended consequences of the regulatory state.
Or, maybe this is just more ideological dyspepsia. Smiley face goes here

[McKinneyTexas]

Ok, for those having problems posting larger comments, first, save your entire comment in Word or some other cut and past format. You will be told your long comment is posted, but it isn't and you don't want to lose it.

Then, cut your comment up into bite sized pieces and post serially. Back to work.

[Phil]

All brought to your courtesy of corporate America.

Really? I don't think that's the case. At all.

[Ugh]

McTx: Back in the day, I hunted and fished a lot, pulled boats, trailers, and hauled a lot of stuff around, so my law firm bought a big SUV and paid, effectively, 60 cents on the dollar for it.

All of that was related to your law practice?

[Phil]

The sword cuts both ways and I'd bet that there are two sides to the labor dispute at AA.

Perhaps, but only one side gets to walk away with millions of dollars of money that rightly belongs to AA's shareholders (the majority of whom have no say whatsoever in executive compensation); while the other side gets to be unemployed, then called lazy for not taking part time work at a fraction of their previous wages.

Taking this one example: what evidence is there that the cure isn't worse than the ill? Is every publicly traded corporation a bad actor? What happens if the non-management voters start making really stupid decisions?

Well, golly, since we can't all foretell the future with 100% certainty, I guess we'd better not ever change anything. Or only change them to benefit already-rich people, since you seem to have no problem with any of THOSE proposed changes, like extending the Bush tax cuts, lowering the capital gains rate or eliminating regulations that exist to protect workers.

[Phil]

Is every publicly traded corporation a bad actor?

*Every* company? Probably not. But how are we defining "bad actor" here? I'd bet solid money that every company in the DJIA is, right now, doing *something* shady, unethical or outright illegal. I'd bet less solid money that the same is true of every company on the S&P 500. In fact, let's just say that everything from mid-cap up is probably kinda suspect.

[russell]

I am not clear what the suggestions are

I think the overall gist of the original post, and most of the thread, is that not all forms of capital 'investment' really deserve either that name, or the preferential treatment that investments received under US public policy, tax-wise and otherwise.

Some people put lots of their own money and time into a business that they themselves own and run.

Some people direct their own or other folks' money into businesses that use that money to improve or expand the business.

Some people buy and sell fractional ownerships in businesses from people who bought them from people who bought them from people etc etc etc... who fall into one of the other two categories enumerated just above.

These last folks contribute zero dollars to the actual business, have zero involvement in the productive effort of the business, have zero involvement in its governance or management, and may not even know what they own.

It seems, to me, that it's fairly easy to distinguish between the value created by the three.

It's lovely that folks who *speculate* in securities create a market that provides liquidity to *investors*. I'm sure they would do so even if their returns were not taxed at the highly preferential rate of 15%, because they would still make more money than burying their cash in the back yard.

In most years, anyway.

Almost certainly, the number of folks speculating in securities would be sufficient to provide liquidity to the original investors.

And if not, we would all find another way for investors to cash out. People are resourceful like that.

Hey, they could sell the business to the workers!

tough luck IRA and 401K participants

If I'm not mistaken, distributions from tax deferred savings plans like IRAs and 401K are taxed as earned income. The assumption is that your overall income level is probably lower at retirement, so you just pay at a lower rate.

[Nigel]

Dr. S., 'real world' investment decisions (such as: do I upgrade my manufacturing plant ?) are driven by 'confidence', in a quite similar manner to those decisions that you label speculative.

McKinney T., you seem to be setting up on or two straw men to defend the status quo.

"...I don't like telling other people what to do absent compelling reasons. The fact that some companies do things I don't like isn't a good enough reason to interfere in the operations of every company..."

This sort of thing looks pretty compelling to me:
http://www.nytimes.com/2011/03/25/business/economy/25tax.html?pagewanted=all
http://www.nytimes.com/2011/11/26/business/for-companies-the-good-old-days-are-now.html

"...the kind of regulatory scheme necessary to prevent the kinds of wrongs the left desires to fix would be incredibly oppressive..."

Why ?
For example, many liberals believe in a simpler tax code, with lower rates and fewer exemptions. Simpler means less expensive to administer, and also less easy to avoid. Lower rates benefit everyone but those who don't pay the current rates anyway.

Unless you imagine that current regulation is as efficient and well directed as is possible to imagine, then your statement above is born of dogma, not analysis.

[sapient]

What bothers me about McKinney's reflexive anti-regulation bias is that corporations are creatures of statute. They exist as a product of made-up rules; they operate under made-up rules; securities are made-up things, with their own legal framework that is all made up. In other words, these aren't natural beings that should be allowed to let evolve all by their own competitive stronger, more fit, selves. They are basically sets of regulations, some of which may be inadequate or wrongheaded. It doesn't seem to me that tweaking this set of regulations to produce an outcome that's a bit more beneficial and just to our society as a whole, rather than to a relatively few annointed players, is such a threatening concept.

Perhaps we should go back to common law partnerships which were based on people's individual agreements, involving mutual consent, meeting of the minds, etc. Then, maybe there would be an argument for saying "just let the talented businessman do his thing."

Just kidding, of course - I'm a believer in our system, basically. But when the system is consistently producing inequitable results, I don't really understand why the masses of regulations that corporations are shouldn't be tweaked.

[envy]

Further, it seems to me that when we impose new rules on everyone because of the conduct of some, it's group punishment.

This is rather telling. Rules are, by their mere existence and content immaterial, punishment? Um...

Also, punishing who, exactly?

sapient's prior comment dovetails quite nicely with this as well. Corporations aren't natural entities which we are burdening down with unnatural rules. They're unnatural sets of rules that we are adding to, subtracting from, or modifying. And that's it.

[Hartmut]

We also have inconvenient controls at the airport because some guys have used their lack and/or inefficiency in the past to commit acts detrimental to a lot of people. Few will object to those regulations per se but it is reasonable to discuss the value and efficiency of these in detail. Some may be simply intrusive whithout real added security while others are simple, cost-effective and non-intrusive and nonetheless work well. Or it can be the other way around (full NMR bodyscan lasting about 6 hours before you may use the bus to work).
There is lots of corporate malfeasance and the damage is considerable on an international scale. Personally I am willing to have some pretty intrusive regulations, if this can reduce that significantly, although I know that there will be negative side effects. It's a matter of balance.
As for shareholders making stupid decisions if allowed, it's their own money. If they overrule the CEO and it turns out bad, bad for them. If the CEO runs the company into the ground and is even rewarded for it, that looks worse to me, even if it was not done on purpose.

[Ugh]

McTx: No good was served by squeezing more than a half a million bucks out of this small, vital operation, but that was the effect of laws, regulations and judicial interpretations that are the unintended consequences of the regulatory state.

It's all so...human.

[Sebastian]

My point is that the investment/speculation question should be a live one, but if we're talking about Gates or Jobs as examples of being on the wrong side of it, we aren't talking about the same thing at all.

[hairshirthedonist]

I'm with Sebastian on his last comment. Gates and Jobs may have made most of their money from stocks, but the companies they started wouldn't have existed without their efforts, and they created lots and lots of value for the rest of the world (with lots and lots of help from other people, though many of those people also benefited nicely).

There's a big difference between what people like Gates and Jobs did to make lots and lots of money and what some hedge fund manager who utilized complex derivatives and/or high-speed computerized trading did to make lots and lots of money.

[bobbyp]

Sebastian,

I don't believe anybody is talking about "wrong sides". You and Russell seem to be hewing to a similar line....you don't like the term "speculator" beging applied to Jobs and Gates. Please address how venture capitalist fit into this scheme. Are they of the same heroic cut as Gates and Jobs? Mere speculators? Tweeners?

(A.) Assume a world without stocks. Somebody builds a business. It grows big. Really big. the owner's wealth derives from the income from the business. How wealthy is this person?

What's missing? (B.) The ability to split the firm easily into little pieces of paper that speculators can buy...AND SELL, and the ability to multiply shares held X share price and call that "wealth".

Under which scenario is the founder wealthier? (A.) or (B.)?

[Sebastian]

B) because he can't grow the business big enough unless he either has the corporate form or can become a monopolist.

The fact that you seem to think the answer is A) is indeed an enormous problem with our having this discussion.

Frankly, I strongly suspect that the problems we are talking about go well beyond simple investment in stock. Partially divided direct interest in an ongoing business isn't really the issue so far as I can tell. Things like betting that they fail, and then hedging that bet at 100x leverage becomes the problem.

[russell]

Please address how venture capitalist fit into this scheme.

That's a hard question to answer because "venture capitalist" covers a wide range of individual.

Some VCs are basically looking for the next hot thing to pump and flip.

Some VCs make serious, long-term investments of both capital (their own and other folks') and their personal managerial expertise to grow a good idea into a solid business.

So, IMVHO, it depends.

One thing you don't mention in your question is the role that going public plays in raising capital. Issuing and selling shares in a company isn't done solely to make the founders' stake liquid, it's also done to bring working capital in the door.

Gates and Jobs are probably not good examples of people who acquired 'excessive' wealth, because as rich as they are (or, were), their personal wealth is actually dwarfed by the value their businesses created.

I mean, their wealth is certainly excessive in the sense of being far, far, far more than they could ever have made sensible use of in 10 lifetimes. Gates, for example, appears to have recognized that, and has given quite a lot of it away.

But I'm not sure it's excessive relative to the value that his work created.

I agree that there is a problem here, but I'm not sure Gates and folks like him are where it's located.

[sapient]

I'm not sure why the terms "speculator" and "investor" are helpful. Everyone is trying to make money. The term "speculator" implies that a person is betting on the success of an enterprise in order to make money. But isn't an investor betting on the success too (with money, or labor, or intellectual effort)? Even if the "investor" is an employee and lends labor to the enterprise, satisfaction is measured in money. Obviously "shorting" is different than "investing" in a company, but as long as there isn't any self-dealing, I'm not sure how destructive to society "shorting" is.

Still, it's true that when a company "goes public," priorities change. (This is anecdotal, McKinney, just so you know - I speak not only from personal experience, but from the accounts of many friends and acquaintances.) Suddenly, unlike a closely held or employee owned business, management is looking at one thing, and one thing only: profit. When, say, an employee owned business is facing hard times, lay-offs aren't the first way people think of to cut costs. In a closely held business, where the owners are part of the same community where the employees live, it's less likely that they're going to incur the wrath of the community by laying off people.

I've seen this happen over and over with small corporations, privately held (by owners who were either Democrats, Republicans, liberals and conservatives - didn't matter). In bad economic times, every effort was made to keep employees on board. One company I know of took pride in keeping every single employee employed throughout the Great Depression. Companies made reasonable profits; some years were better than others but, all in all, these were successful enterprises, where people were paid a living wage, and owners were quite wealthy. As soon as they went public, boom - layoffs, mergers, acquisitions, more layoffs, dissatisfied employees, no loyalty between employees and management (in either direction) - in other words, a much worse place to work, and a much more questionable product, and no connection between employees and management.

Is anyone to blame? The private owners who "went public" got filthy rich, but who can blame them for doing that? Other than that, it's just the way the system works. The system rewards short term profits, the largest profit margin possible. Be damned the quality of the product. Be damned the quality of the workplace. Be damned the longterm health of the corporation. That's what public stock trading does to business. I don't blame anyone who knows how to get rich off of that system - I'd love to know how. But is it really a good system? I don't think so.

And I'm not demonizing corporate management either. I don't think they lack empathy. They're just part of a system in which they play their part - if they didn't do it, somebody else would take their place. They might as well be the ones who get rich - why not them? It's a system problem, not a human problem.

[bobbyp]

One thing you don't mention in your question is the role that going public plays in raising capital.

For the most part, disagree. Generally, the firm is already capitalized prior to the IPO. The founders have shares. The VC boys have shares. The underwriters have shares. Absent those times when we have goofy stock manias, the firm is already a going concern or has some other valuable revenue stream (for example, Gate's monopoly deal with IBM).

MS did not really need the cash from the IPO. It was already a stone winner.

The IPO enables the insiders to cash out or "realize" the extent of their new found wealth as dictated by the now public stock price.

[bobbyp]

B) because he can't grow the business big enough unless he either has the corporate form or can become a monopolist.

Tell that to Cornelius Vanderbilt.

The fact that you seem to think the answer is A) is indeed an enormous problem with our having this discussion.

You are deliberately being obtuse. Economically, they are the same. The output of goods and services is the same in either case. I said nothing to indicate otherwise.

So yes, mission control, we have a problem.

[bobbyp]

It's a system problem, not a human problem.

Agree. And that leads directly to the answer. We need to do something about the system.

[russell]

I've seen this happen over and over with small corporations, privately held (by owners who were either Democrats, Republicans, liberals and conservatives - didn't matter).

As an aside, I *very specifically avoid* working for publicly traded companies. For exactly the reason sapient cites here.

A bad week on the market, for whatever reason, and people get canned 'to send a message' that management 'is serious about cutting costs'.

Which is to say, they are 'sending a message' that they can make the numbers look better this quarter.

It's boneheaded.

In 25 years, I've worked for precisely one publicly traded company, and that was for precisely one year. And that was plenty.

I like small shops, operated by their owners. I know them, and they know me.

But I digress, as usual.

One thing you don't mention in your question is the role that going public plays in raising capital.

For the most part, disagree.

As with so many things, the reality here is that 'it depends'.

[russell]

I'm not sure why the terms "speculator" and "investor" are helpful.

Also for the record, IMVHO there is a useful distinction to be made between speculating and investment.

Investors actually create value in the enterprise itself. They bring their money, their time, their expertise, their whatever, to the enterprise.

Speculators do not.

Whatever policy flows from that is sort of another question, but the fundamental distinction exists.

[sapient]

Also for the record, IMVHO there is a useful distinction to be made between speculating and investment.

russell, the distinction you make is an interesting one, but I think it's based on your own personal definition. The technical distinction is that investors are concerned about preservation of principal (safety of the money they put in), and speculators are primarily concerned with maximizing return. It has nothing to do with time, expertise or whatever.

In many cases, it's a distinction without a difference: I might buy a painting that I personally enjoy having in my living room, whether or not its worth anything. I invest in it if I think it might hold its value and appreciate. I speculate if I think the artist is on a track to become the next Picasso and I'm going to make huge bucks when I sell it. All three scenarios would assume that I would take care of the painting while I owned it. The latter two would imply some knowledge and expertise. The investor bought it for its value. The speculator would sell it in a heartbeat for the right price. I'm not sure why they would be treated differently, or could be, since it's really a matter of attitude.

[sapient]

Just to follow from my previous comment (and as Doctor Science mentioned), technically an "investor" in stock would be in it more for dividends (a share of the profits), while a "speculator" mainly hopes to make money on the sale of the stock. But an investor wouldn't turn into a speculator merely because he expected the stock to appreciate, and would sell it if so. In a sense, the short term capital gain tax penalty is meant to punish speculators. Anyone willing to hold stock for over a year is deemed an investor.

[bobbyp]

As with so many things, the reality here is that 'it depends'.

Mostly true.

[russell]

The technical distinction is that investors are concerned about preservation of principal (safety of the money they put in), and speculators are primarily concerned with maximizing return.

Aha, in my ignorance it appears I have run afoul of terms of art.

And, given the technical definition, I agree. For purposes of this discussion, there isn't much difference between the two, so defined.

Here is the thing.

Income derived from capital investment is treated very favorably, tax-wise, as compared to earned income.

The rationale for this is that we, as a society, want to encourage capital investment. Working for a living, apparently, needs no such reward, the threat of starvation is a sufficient inducement.

In fact, however, not all kinds of capital investment are the same. Some kinds result in the creation of real value in the thing invested in, and some do not.

There's a purpose and a place for both (or all) kinds of investment, obviously. But for purposes of deciding *what kinds of behaviors we are going to encourage through favorable treatment under law*, I'd say the kind of investment that creates tangible value is more deserving than other kinds.

Assuming, again, that we want to be in the business of using tax law to incentivize one kind of behavior rather than another.

You could also argue that simply making more money might in and of itself be a sufficient spur to invest, and that from a tax point of view income should just be considered income.

That argument doesn't seem to be on the table, however.

[McKinneyTexas]

All of that was related to your law practice?

Yes, client entertainment. But still, I agree it's stupid to use the tax code to promote car sales even if that means, theoretically, keeping car companies in business.

I'm sure they would do so even if their returns were not taxed at the highly preferential rate of 15%, because they would still make more money than burying their cash in the back yard.

I am sure they would too, but not so sure if the tax rate is 35-38%. Risk/reward kicks in and, on balance, we are better off with a liquid, publicly traded economy.

If I'm not mistaken, distributions from tax deferred savings plans like IRAs and 401K are taxed as earned income. The assumption is that your overall income level is probably lower at retirement, so you just pay at a lower rate.

You are correct, but this is true for all tax deferred income. Someday the gain is realized and a tax is paid.

[McKinneyTexas]

(I am commenting serially so that it all gets posted)

Nigel writes Unless you imagine that current regulation is as efficient and well directed as is possible to imagine, then your statement above is born of dogma, not analysis.

I believe, upthread, you will see me specifically call out GE and the uber weathy's penchant for donating their art (or what-have-you) to their foundation, getting a big PR boost, a big tax write off and retaining functional ownership of the donated goodies.

Also, nothing in my comments even remotely suggests that I am opposed to leaner, simpler tax codes or any other kind of reduced, less complex scheme. Just the opposite, reading between the lines fairly.

My comment, that you call dogma, was focused on compelling companies to "do something" to make them more fair, socially responsible, whatever. That is part of the progressive bent: make corporations, rich people, employers, etc "do something" to make life better for others. Tax rates and the tax code—yes, people are made to pay taxes—are not class/behavior specific, i.e. certain people aren't told what they must do other than pay taxes, and that rule applies to everyone based on income level.

[McKinneyTexas]

What bothers me about McKinney's reflexive anti-regulation bias is that corporations are creatures of statute.

Corporations aren't people so why should we treat them like people? This is, I suppose, one of the true disconnects between the progressive left and whoever. There isn't a single corporation anywhere that actually does something that isn't also made up of people who are either employees, owners or both. So, when you tell a corporation it has to do X, you are telling people they have to do X. If you think it is fine to tell a person doing business as a corporation to do X, but not fine to tell that person in his/her individual capacity to do the same thing, for my money, you exalt form over substance, labels over actuality.

First and foremost, this is a free country. Telling other people, regardless of how they do business, what they can and cannot do is a last resort, compelling need situation.

Also, everytime you impose a new expense on a business, you deprive that business of expansion money, money for raises and bonuses, etc. You can't worry about lay offs on the one hand, and burden a business excessively with regulatory obligations on the other. If you think compliance isn't a cost factor, then you simply haven't had first hand experience running a business.

Also, punishing who, exactly?

Any and everyone who owns their own business in one of several corporate forms.

[McKinneyTexas]

Personally I am willing to have some pretty intrusive regulations, if this can reduce that significantly, although I know that there will be negative side effects. It's a matter of balance.

Of course you are, because you will never have to personally deal with the impact of compliance and penalties for noncompliance. It's the easiest thing in the world to lay requirements on others, particularly when those "others" aren't on your list of favorites.

It's all so...human.

No, it's all so oppressive and stupid. I am guessing you've never enjoyed the experience of being in litigation, with literally everything on the line, substantial legal bills coming due every month, AFTER having received approval by your gov't for doing what you do.

To me, this comment is derivative of the eggs/omlette cliché: "As long as someone else's eggs are getting broken to make an omlette pleasing to me, I am fine with that."

There's a big difference between what people like Gates and Jobs did to make lots and lots of money and what some hedge fund manager who utilized complex derivatives and/or high-speed computerized trading did to make lots and lots of money.

Yes, there is, functionally. And that matters why? The logical endgame of this kind of thinking is that we have a regulatory scheme that endorses some kinds of business endeavor, but not others. Then, we can all apply to our gov't for permission to do this or that kind of business, fill out the many forms to show that we are on the 'good' side of enterprise and not the 'bad.'

[McKinneyTexas]

The ability to split the firm easily into little pieces of paper that speculators can buy...AND SELL, and the ability to multiply shares held X share price and call that "wealth".

And, again, why the hell should anyone care whether Gates wants to own or sell his business to someone else, or many others, who want to buy it? You spend your money your way, they spend their's their way.

The system rewards short term profits, the largest profit margin possible. Be damned the quality of the product. Be damned the quality of the workplace. Be damned the longterm health of the corporation.

It's all so . . . human. Smiley face.

Sure, in a country this size, not everyone is going to work and play in the manner decent people expect. I agree completely that the quest for the next quarter's profits and meeting or exceeding analysts' predictions is one stupid way to run a business.

That said, small operations lay people off, as do large ones. Publicly held vs privately owned, I can find examples that cover the range of benevolent to cruel. The problem is, there is no good way to legislate kindness. Even very well meaning companies find themselves in difficult straits and have to make hard, unpleasant decisions.

I've never, so far, had to lay anyone off for economic reasons, but I've had to terminate several people—a fair number over the years—for performance issues. I find it very, very unpleasant, even when dropping the ax is clearly and obviously warranted. What would be a real problem for, however, is having to get a legal opinion from an employment specialist on those occasions where someone doesn't measure up and needs to find work elsewhere. The undercurrent here is that business decisions of this type should be subject to some kind of third party review and criteria.

[McKinneyTexas]

The IPO enables the insiders to cash out or "realize" the extent of their new found wealth as dictated by the now public stock price.

Economically, they are the same. The output of goods and services is the same in either case.

Yes to the first and no to the second. You won't get the second, i.e. a company producing goods/services, if the owners can't sell that company and make money doing so. People start a business because (1) they like being the boss, (2) they think they can make a go of it and (3) they plan to sell it someday and retire. Stock is how ownership of a business is evidenced and traded, like title to a car.

Investors actually create value in the enterprise itself. They bring their money, their time, their expertise, their whatever, to the enterprise.
Speculators do not.

"Speculators" is used pejoratively by most here for a reason. The idea that people and institutions buy and sell securities hoping to realize a gain offends some people. They won't just say that. Everyone says they are fine with letting people 'speculate', they just want speculators treated differently, particularly those that are very good at it. If I buy a stock that pays a 5% dividend and has a decent chance of appreciating, I am putting my money in an investment that pays a return and could well appreciate. I would like to be left alone by those who, whether they will come out and say so, would prefer that I make money in a different way.
But more to the point, speculators are the market, the only market, that gives many people a reason to build a big business: so they can sell it.

[hairshirthedonist]

So, when you tell a corporation it has to do X, you are telling people they have to do X.

I think the distinction here is that people have no choice but to be people. They do have a choice about whether to be part of a given corporation, or any corporation at all.

That and, except for one-person corporations, when you tell a corporation to do X, each person who is part of the corporation does not personally and individually have to do X. Some subset of the people composing that corporation will have to contribute in some way to the corporation's doing X.

Corporations can do things as organizations that individual people cannot. That's why their different from plain old "people."

[hairshirthedonist]

The logical endgame of this kind of thinking is that we have a regulatory scheme that endorses some kinds of business endeavor, but not others.

That sounds crazy. What sort of society in history has ever conceived such a thing?

[hairshirthedonist]

I would like to be left alone by those who, whether they will come out and say so, would prefer that I make money in a different way.

I don't think anyone here is suggesting that you or anyone else shouldn't be able to speculate. Just that it's not something that should be encouraged with special tax treatment, whereas investment that results directly in value creation might be worthy of such special tax treatment.

[liberal japonicus]

"Speculators" is used pejoratively by most here for a reason. The idea that people and institutions buy and sell securities hoping to realize a gain offends some people.

I haven't been on this thread, but yeah, I have a notion that a speculator is someone trying to get something for nothing.

I don't know if you or anyone here plays a lot of craps, but if you do, you know that you bet the pass line, which means that you are betting on the person throwing the dice to win, rather than bet against him. (I'm pretty sure that a lot of the folks I've played craps with are more conservative than liberal). At least the way I see it, the speculator is akin to the guy betting on the no pass line. I realize that one could define a speculator as some just betting pass OR no pass, but there seems to be a quality when I think of speculator as the guy betting on the no pass line, which is a bet that the shooter is going to lose. So I'd suggest you hone your arguments at your local casino, telling your fellow crap shooters that betting the Don't Pass is simply logical and come back and tell us how you do ;^)

To me, speculators bring to mind vulture funds, which have recently been in the news a bit. If you want to define terms so that we can exclude 'good' speculators and put a clear dividing line around bad speculators, I'm all ears, but I don't see how you can do that.

[bobbyp]

Yes to the first and no to the second.

I am reminded of the bitter zoning struggles in my county upon the adoption of the Growth Management Act which essentially mandates higher densities within a certain prescribed geographical area by limiting what is commonly called suburban "sprawl".

This resulted in bitter recrimination from those just beyond the line who had nice 5 acre plots enabling them to live a bucolic country/urban lifestyle free from the crime and "others" associated with crowded urban areas, but who also wanted to be able to subdivide their property and cash out big time when they retired. Why, it was asserted, the GMA was taking away their "wealth" and "limiting their freedom".

Wealth and freedom created in the first place by the rules known as zoning laws.

[bobbyp]

"the speculator is akin to the guy betting on the no pass line..."

Nick the Greek always bet the no pass line and laid odds.

[McKinneyTexas]

If you want to define terms so that we can exclude 'good' speculators and put a clear dividing line around bad speculators, I'm all ears, but I don't see how you can do that.

Well, if, to use your example, someone acts in an overtly predatory and exploitative manner, that is more than mere speculation, it is precisely as I described: predatory and exploitative. Not that I have a lot of sympathy for stupid lenders who lend to poor risks or for countries who borrow and do not expect to have to pay according to the terms of the loan. The rule of law and all of that.

Wealth and freedom created in the first place by the rules known as zoning laws.

That's one way of looking at it. I don't agree with it, but it's one point of view. If I buy something predicated on an existing system of rules and laws and without notice of imminent and material change in those existing rules and laws, and then, at a later date, existing rules and laws change in such a way that materially affects my investment, I see that portion of my wealth being taken away and the freedom which I once had being denied. Your comment treats freedom as a privilege, not a right.

Moreover, if I follow your point, what you are talking about isn't zoning--it's re-zoning, i.e. changing the rules in the middle of the game. In extreme or significantly changed circumstances, with just compensation for those injured, this can be necessary. I don't know enough about your situation to have an opinion.

[Ugh]

McTx: No, it's all so oppressive and stupid. I am guessing you've never enjoyed the experience of being in litigation, with literally everything on the line, substantial legal bills coming due every month, AFTER having received approval by your gov't for doing what you do.

Me and, what, 99.99999% of everyone else in the country? I mean, is the idea that we can't have a regulatory state unless it's perfect and/or has no unintended consequences? Yes I know you're not saying that, but you sound like you're saying that because someone somewhere might unjustly be screwed by this rule we can't have the rule, even though it works just fine in the vast majority of cases.

To me, this comment is derivative of the eggs/omlette cliché: "As long as someone else's eggs are getting broken to make an omlette pleasing to me, I am fine with that."

Yes, yes, I'm not allowed to think regulations barring dumping toxic waste into drinking water are a good thing because I will never be in a position to have to comply with such regulations. Just like I'm not allowed to have an opinion about the Iraq War because I've never served in the military.

[envy]

If you think it is fine to tell a person doing business as a corporation to do X, but not fine to tell that person in his/her individual capacity to do the same thing, for my money, you exalt form over substance, labels over actuality.

Then you are fine with people working to further corporate interests being held accountable for their actions in their individual capacity? Or do you actually feel that form reflects substance, that labels do correspond with an underlying reality? You can't have it both ways. Either individuals working on behalf of a corporation are treated exactly as individuals, or they are not. You can argue about where we draw the lines, but you cannot, as above, dogmatically assert that we daren't lay corporate-only regulations upon corporations simply because they are made up of individuals. That dog don't hunt.

[McKinneyTexas]

Yes, yes, I'm not allowed to think regulations barring dumping toxic waste into drinking water are a good thing because I will never be in a position to have to comply with such regulations. Just like I'm not allowed to have an opinion about the Iraq War because I've never served in the military.

I am pretty sure this is a pair of straw men.

Then you are fine with people working to further corporate interests being held accountable for their actions in their individual capacity?

You are confusing two separate issues. My view is that, in economic activity, individuals and corporations have the same freedom of action. People choosing to do business with a corporation know that they must look to the corporate entity, not the individuals behind the company, for commercial obligations and some torts.

That said, individuals doing business in the corporate form remain individually liable for their criminal acts, for torts in which they owe a duty independent of their employment, in FLSA cases and in any number of other contexts.

If I understand the majority view here, you included, it is fine to require a heavier regulatory load on a corporation than on an individual simply because of the corporate form. I am simply telling you that I don't buy into that. In this regard, the distinction is superficial.

[Slartibartfast]

Which is to say, they are 'sending a message' that they can make the numbers look better this quarter.

That, coupled with middle management (e.g. division VP and higher-level directors) electing to do things that are downright illegal but difficult to discover, such as taking revenue on current inventory, and then taking a return in the next quarter, in an attempt to boost this quarter's numbers at the expense of next quarter's.

This is just an example of something I know has happened; not at my current employer but at a previous employer.

But there are probably endless stupid things of this nature that are done simply to make numbers look better. It's likely that such incentives are also in effect at privately-owned corporations, but are less subject to market scrutiny so the incentive from above is less. Probably. Depends on the owner(s), and how inclined they are to micromanage.

[russell]

The logical endgame of this kind of thinking is that we have a regulatory scheme that endorses some kinds of business endeavor, but not others.

We have that now.

If your business endeavor results in earned income -- i.e., somebody pays you, personally, for rendering some good or service -- you will be taxed at a rate between 10% and 35%, plus 4.2% on the first $106,800.

If your business endeavor results in a capital gain, you will be taxed at a rate between 0% and 15%.

In this regard, the distinction is superficial.

If McK, personally, screws up and is sued, they can take your house, your personal savings, whatever they can find in your name.

If McK, Inc. screws up, they cannot.

Not a superficial distinction, at all.

Also: as far as "undertones", or "what some here might think", IMO you're engaging some serious mind-reading.

I would personally appreciate having the discussion confined to what people actually say, or don't say.

[Sebastian]

I'm much more with McKinney on the litigation question. It is borderline crazy that you can have something signed off by the relevant government agency and then get your ass sued off for the same agency later deciding that it was wrong. And it is more than crazy that it can send you into bankruptcy. And it happens really quite often. Much more than should be dismissed with arguments along the lines of "regulation isn't perfect".

[russell]

I'm much more with McKinney on the litigation question.

I understand the problem here, but I'm curious to know what the solution is.

In an extraordinary number of cases, regulation exists as a response to somebody behaving very, very badly.

As far as I can tell, the options are (a) regulation, and (b) vigilante justice.

As in, your carelessness results in e. coli in my food, I'm coming after you with a gun.

Is there a third option? I'm all ears.

[Ugh]

McTx: I am pretty sure this is a pair of straw men.

Well then what were you saying when you referenced that particular litigation and the whole eggs/omelet thing?

And even in your particular case, from your own comment (emphasis added), Under the FLSA, you pay overtime in the week it was worked. My client did things a little differently.....The overpayments in the six other weeks were viewed, by the law, as a gift. When my research revealed we were in technical violation of the law, I told the client and it immediately agreed to pay (again) for the "underpayment".

So, the law says you must do X, your client did not-X, when called on doing not-X the defense is "DOL said it was okay," but apparently this isn't a defense to a legal action brought under the FLSA by someone other than the DOL, as provided by the FLSA (if I'm reading your comment correctly).

I agree that this seems to be a particularly sympathetic case for your client, especially after they agreed to pay twice for the same work and the DOL ruling. Nevertheless, there are good reasons not to let administrative rulings overturn/contradict what the law as passed by Congress and implemented in formal regulations provides.

[bobbyp]

That's one way of looking at it.

You miss the point. The point is, we as a society make the rules. They are not handed down from on high. People's oxen get gored when they change. Ask the Native Americans. They were subjected to some pretty brutal zoning regulations.

You seem to think the rules are just fine as they are. I disagree. They are biased toward certain behaviors that, in aggregate, have resulted in negative outcomes.

[bobbyp]

"And it happens really quite often."

I'll tax 'cite please' for $500, Alex.

[bobbyp]

Correction above: "tax" should have been "take". My subconscious sociopathic 'consficate all wealth and give it to the parasites' bias got the better of me....although I might add "some here" seem to believe the two words are exactly identical.

[Ugh]

Sebastian: It is borderline crazy that you can have something signed off by the relevant government agency and then get your ass sued off for the same agency later deciding that it was wrong.

Why is this borderline crazy? If you get a ruling from an agency that blatantly contradicts the law, why shouldn't you be on notice that you're not entitled to rely on the ruling? Wouldn't the "law" be meaningless then, so long as you can get someone at an agency to go along? And aren't there generally rules for when you may and may not rely upon such a ruling?

Look at McKinney's case, based his comment and my recollection, it seems that the FLSA says you have to pay overtime in the week it's worked. His client didn't. It's not like we're dealing with vague and/or particularly nuanced/complicated rules here, AFAICT.