No, this is not how it works. When he gifts stock he does not have to pay capital gains tax on the stock gifted. That's it.
If he wanted to abuse the charitable system he could have gifted preferred shares. Dr. Bose of Bose speakers did that. He is not doing that.
If he wanted to avoid capital gains taxing he could start a plan of tax harvesting or completion funds. Transferring restricted shares to trusts and insurance plans. Special dividend payouts. Deferred compensation and pension plans. Which I am going to guess that is doing but that is another story.
I think the point is that there is a difference between feel good charity and effective charity.
As a example I would point to your desire to promote birth control? Why is the best way to reduce populaton growth?
Promoting birth control has a very low impact on the number of children born. The once exception is China when forced sterilization and other heavy handed techniques were used.
Education has a bigger impact. Economic growth has an even bigger impact. Employment outside of the home for women has an even bigger impact still.
And I made a mistake. The super voting right Ford Stock is owned by the Ford Family Trust, no the Ford Foundation. So that example is a bust. There are others out there.
Well, that is probably not the best way. Bond fraud is not the in thing these days but I hear that dot coms are making a comeback.
On to the technical issues. Most foundations, if we are weighing by size, are run legitimately. However, there are a lot of rinky family foundations that are not.
Sadly I have seen money transferred back to the owners. Spouses and children are given high paying low responsibility jobs in the foundation. Foundations buy overpriced services from the founder’s family; Investment advice, rent, consulting series, etc. Often the annual meeting is held in a tropical resort during winter. Etc. Lots of ways. It can be directly and the laws limit the strip-mining but I have seen some pretty sad cases.
You are technically right that you give up ownership but there are methods of abuse. One can used different share classes, preferred shares, partnerships, bearer stock, and pyramid structures to maximize the tax benefit while minimizing the loss of economic value and control. The Ford family has sold most of their Ford stock decades ago yet still controls Ford thanks to the super voting rights stock that the Ford Foundation holds. Let face the facts, Bill Ford Jr. did not become the CEO of Ford because he was the best candidate. Who knows what Ingvar Kamprad is doing with IKEA - his foundation is a black box.
It comes down to why the foundation was founded. If the person was black of heart there are methods of abuse open.
If MZ sold his stock he would keep 72%. Assuming his cost basis was $0 and a tax rate of 28%
By giving his stock away he keeps 0%. I mean, yes, you do stick it to the man by not paying taxes but you would have the same effect if you burned large piles of money.
MZ probably has other motives for giving his money away then avoiding paying taxes.
The first are a thin veil for a tax dodge. Set up a charity, pay yourself fat fees, transfer wealth capital gains free while retaining voting rights, give cash to the local opera and get sweet exclusive access, make sure the back 40 acres of your house remains undeveloped to protect your view and not pay property taxes. It can be useful for social climbing.
The second is that you have a concern and you want to remain hands on. I will point to Bill Gates and Carnegie. Both had very specific view on education and how the charities should be managed.
Both try to sneak in a little good PR. Carnegie has been dead for a long time yet his charities still spread good things about their name. Or Harvard who had one of the better deals in history – donating a few hundred dollars and we still remember his name.
What history are you pointing to? Economic history is a hobby of mine but I don't know what era you are talking about.
I can't recall off the top of my head any deflationary period prior to 200 years ago. Heck, most of the inflation issues that I can think of is from governments debasing their debts after times of war or local gold strikes which expanded the supply of money.
Of course, during the past 5,000 years growth, and thus increasing demand for money, was something like 1% a generation. And it was not until 1850 when the majority of the economy was monetized or local economies tightly integrated. If you are trading cows for ploughs a.025% deflation is not going to same affect on you as a 1% deflation rate is going to affect your salary and mortgage today.
By the way, can you explain to me why it matters that BitCoins can only be dived by 100,000,000? Why is this limitation important? If I have 1 BitCoin, and there is deflation, I can now convert my BitCoin to 1.0 coins. Or maybe 1.0000 coins? How does adding extra digits to the precision of the value affect the effects of deflation on value. Why does this matter? Governments can take their current currency at subdivide infinitely. Reintroduce the ½ penny. Mint the 1/100 cent – or cent cent. Redecriminalize the currency as many times as needed.
The problem with that approach is that there is no way to measure it, which takes to conversation away from facts and theory to dogma, which I don't find very useful in a economic context.
I will disagree with you a little. First, how do you figure that inflation transfers value to the government? By what mechanism? I am going to guess you mean that they can turn on the printing press and mint free money, but most OECD countries (rich countries like the US) systems are set up to prevent that.
You are correct that the poor have fewer options and thus inflation hits them more directly. But if that is so, then the sophisticated (who tend to be rich) can structure their investments to blunt their impact. Which is why most people say “unexpected increase in inflation”.
But you have to remember there is a difference between the poor (low income, few assets), the middle class (moderate income, relatively high debt), the rich (high income, but also relatively high debt) and the wealthy (less income then you think, but owns more debt then you might think). Where am I going with this? Take a look 100 years ago. Farmers were begging for higher inflation because deflation was transferring wealth from those with high debts to the wealthy. See William Jennings Bryan's Cross of Gold speech
No, the way governments transfer money from the rich and poor is though financial repression. i.e. when inflation is greater the nominal interest rates. Yes, this can happen when inflation increases, but most of the action by governments over the past 60 years have been to drop the nominal interest rates. That is what is happening in the US today (via the Fed's easy money policy) or China (where the government has placed caps on the interest rate). Or dozens of other cases.
Well, no. You are making the assumption that idea cash will cause the economy to grow. If you burry your cash or gold in your backyard it doesn’t grow the economy much.
Let’s go back to the math and see if it holds up to reality.
Nominal Interest Rates = Real Interest Rates + Inflation.
Does higher real interest rates lead to higher investments? Broadly yes. We have got 150 years of global data to back that up. Inflation only has a modest impact – mainly because high inflation (above 20%) is normally unpredictable inflation, which increases inflation risk.
So let’s say real interest rates are 3% and deflation is 1%, so nominal interest rates are 2%. So if you risk your money you get 2% - not 3% - risks stays the same but rewards go down. Theory implies that investment goes down.
And we have got 150 years’ worth of data showing that it does. It is not as robust as the real interest rate data – I will give you that. It tends to be from before the 60s because after that almost everybody dumped the gold standard and Bretton Woods, and the older data is not as good. But we do have the America (1870-1910), Great Briton (1920s), and Japan (1990-)
Not "unpredictable deflation", just significant decreases in the supply of money—planned or otherwise. Price deflation is not correlated with recessions in general, just in cases like the Great Depression where the supply of money underwent a significant contraction. You point out that a deliberate policy of destroying currency to manipulate its price relative to other currencies led to recessions. Well, naturally; that's what happens when you play with the currency supply, regardless of whether you're creating inflation or deflation: you send false signals, which leads to malinvestment, which destroys wealth, which leads to a recession.
mmmthat was not what Churchill was trying to do. And what false signal was he trying to send? To put this in context, England was on the gold standard prior to WWI, but had debased their currency to help fund the war. Churchill’s goal was to return the pound to its prewar value over 5 years. What type of malinvestment do you think occurred? I am not saying that malinvestment did not happen – it did. Investors overinvested in cash and loans and underinvested in real assets – which was my point.
And why do you say that deflation is not correlated to rescissions? I would be interested in where you are getting this data. I will point to 19th and the early 20th century where there was deflation due to a money supply growing slower than the real economy. Between 1870 and 1910 the US had a fairly constant and modest deflation of.3% and it was constantly being punctuated by recessions, financial bubbles, etc. There are plenty of other examples. I have a hard time pinpoint a example in the last 150 years where there was a prolonged period of deflation without a recessions.
If the value is only increasing at the rate of inflation then it's not an investment, it's just savings. So I buy a house, and in ten years (ignoring taxes and maintenance costs) I still have the same house, and it's worth about the same relative to other goods as it was when I bought it. Where's the expected return?
That one is easy – rent. Historically, property values and rent have a very high correlations with inflations – and there are good causal reasons. This is true even if you buy the house for your own personal use due to “opportunity costs”. That is, if you had not bought a house for yourself you would have had to rent a house and it’s rent would have gone up with inflation.
And this is true of most economic assets. If you build 1 factory that produces 1 widget a year, you’re your yield is 1 widget. Widgets, on average, increase in value at the same rate as inflation – by definition. Or a law degree where your yield is clients seen. Or stocks. Etc. Now if we are not talking about economic assets – such as cash, loans, or other fixed income investments – whole different story.
Fractional reserves are not the boogie man. There is a difference between currency and money. Currency is something hard and fixed. Money is a bit more nebulas. Do savings account? Money Market – maybe. Yes? Does your unused HELOC loan count? Pre housing crisis it was probably near money, today not so much. Money is something you think you can turn into currency. It is one of the reasons why the “real bill” theory of money died 100 years ago.
On to the point – inflation does not explicitly say any of this. Inflation is the change in the aggregate demand of money verse the aggregate supply of money.
You can have demand side shocks – this falls into the scarce human or investment capital.
You can have supply side shocks – think oil crisis and crop failures.
You can have changes in the supply of money. Government turning on the printing press or (in the gold standard days) a gold strike.
You can have a change in the demand for money. War – yep – that increases demand. Financial crisis? Banks needed 4% in cash before the crisis, now they need 8%.
Inflation tells you less than you think in these matters – you need to drill down another level. And realize that multiple pieces are moving and things work on a 6 month to 3 year lag.
o.k., I present a theory, you dislike the theory, and throw a non-argument in my way. Really? What do you want then?
I can pull data from the bond market for the past 50 years? To short? Try Milton Friedman ‘s A Monetary History of the United States, 1867-1960. Too narrow? Try Irving Fisher. His monetary theories have held up remarkable well for the past 50 years globally.
As you say, people can always factor in a consistent level of inflation or deflation in their planning. That's easy.
For deflation it is not as easy as you think. You point out unpredictable deflation leads to things like the Great Depression. The problem is that predictable deflation also leads to recessions as well. Inflation destroys wealth, which is the value of past investments. Deflation destroys the value of future investments, destroying the value of current investments.
Nominal Interest Rates = Real Interest Rates + Inflation/(Deflation). The higher the deflation the lower the real interest rates are. The value of investing in real asset fall so investments in future production fall. The value of investing in financial assets increase, shifting more money to those already wealth and less inclined to invest in tomorrow.
Take a look at what happened to Great Britton during the interwar years when Winston Churchill deflated the money supply to bring the pound back to the hard money standard – a 10 year deliberate, predictable, and well announced plan. Investment sank, productivity gains declined, and a general recessions was had. I would also point to America between 1870 to 1910 and Japan for the past 20 years. While less predictable, times of steady deflation, lower investment, and recsion.
BTW, in a relativity steady inflationary environment you don’t need to find investments that beat inflation. You need to do that for fixed financial assets, like cash or bonds. Real assets (factories, homes, college degrees, stocks, patents, etc.) value tends to increase at the same rate as inflation.
But it rarely is because it is difficult and expensive. Inflationary protection bonds have their principle tied to the inflation and these are the only loans that factor in deflation. And that assumes the bonds allow the principal to fall – many don’t. The only bonds of this type that I know of are issued by governments.
Here is a simple thought experiment. Assume you lend out $100, the real interest rate is 3%, and deflation is at 5%. At the end of the year, for the risk you have taken, you $98 ($100 + $3 -$5). Or you could have just buried the cash the back yard and have $100 with no risk at all so that loan will not happen.
The numbers are large to illustrate a point; borrowing money faces headwinds under deflation. If you don’t like theory I have historical and empirical examples that I could bring forward
Inflation (and increase of) reduce the value of money and thus reduces the value of those who hold (net) cash and financial assets – a.k.a. the wealthy. Inflation also reduces the value of money that need to repay loans and thus help those who owe (net) cash and financial assets.
Maybe one last point – I think we are getting to the end of the conversation here. I am a bit confused by your position on the flat tax and capital gains on BitCoins. I think a flat tax is a great idea. However, if you don’t tax cap gains on BitCoins that leaves a huge gap that you drive a semi-truck though.
I think you missed my point about transforming your salary – it’s not about including non-cash compensation. You can structure your pay in capital gains from BitCoins and excluded it from non-cash compensation. The Enron debacle offers lots of legitimate examples with the use of subsidiaries, partnerships, options, etc. to shift income. (Their issue was not that they used these forms but they cranked the volume up to 11.)
Here are 2 examples. Both are simple compared to what Enron did.
First, Steve Jobs He had a salary or $1, travel on the company jet, and other non-cash compensation (taxed at the higher income tax rate) plus a large slab of stock options (taxed at the lower long term capital gains). I personally consider this only semi-abusive. He got out of Social Security taxes, but he was exposed to risk and it aligned his interests with Apple’s. However, the reason why Jobs chose the $1 salary was to minimize taxes not out of altruism.
Second, I am going to make the assumption that you consider rent to be income and should not be – that is what I am getting from your posts. If not this still somewhat holds because rental income is taxed at a lower rate than other income. If you own a business you can split that business into 2 – one side is the operational side, the other owns the building. You can raise the rent to shift profits from the high tax corporate entity (double taxation on both the earnings and the dividends/cap gains) to the low tax building. That is a simple one.
Oh, and most biofules are not ready for prime time. Right now, only cheap sugarcane is the only viable option.Corn, et. al just does not cut it.
This is not to say that biofuels will always fail – just that the technology to this economically viable is here today. 10 years ago wind and solar were not economically viable and today they almost are (depending on how you measure externalities like CO2 and pollution).
Don’t massive push and subsidize a tech that is not ready.
You’re thinking of Brazil. It is easy to grow sugarcane in Brazil, it is easy to convert to ethanol, and they have decent policies. They are not self-sufficient – oil kicks off too many cool byproducts like plastic. However they have a viable industry.
Venezuela is in no ways self-sufficient. One would think a OPEC member would be but the government is just a plain basket case. They pump enough to meet their needs but their production has been falling because they have not been investing. Nobody is willing to invest in an oil refinery (including the goverment) so they ship the oil to the US to be processed into gasoline.
Yes, the higher the inflation rate the higher the effective tax for capital gains is. You can avoid this issue if capital gains are indexed to inflation. You can avoid this issue if capital gains are indexed to inflation.
To nit-pick a bit, I will repeat myself in saying that you want to look at inflation, no the relative value of the dollar to the EUR or whatever. The FX rate of the dollar could be off by +/- 20% from the “real” value. There is a relationship between currency strength and inflation, but it is lose and has a lag time of 10 to 20 years.
For example, during the Greek crisis when fear was at its highest, people dumped EUR for USD, so the dollar became stronger and the EUR collapsed. However, from a relative perspective not much happened – inflation rates remained mostly unchanged. Americans could buy about the same using USD before and after. Same for the Europeans using EURs. Or, to put it in your context, the USD/EUR could move 20% up or down and the cost of bread would still be $2.
I would argue that you would want to tax all income at the same rate unless you can justify the difference. If there is a difference between economic, accounting, cash, and tax recognition people can get up to mischief.
You argue that only payroll tax should be taxable. Want to convert you salary away from taxable payroll to tax free BitCoin capital gain? It can be done. There are schemes of transferring income of one type to another. If you think earnings should be taxed at a higher rate than capital gains I will structure the investment so it returns more capital gains and less earnings. You would be amazed – and maybe sadden – to know how much time goes into optimizing returns based on taxes rather than economic returns.
On to your specific points:
You can’t make dividends and capital gains exactly equal to each other – the math won’t let you. If you want to equalize them then you are going to need to index capital gains to inflation – which was my original point.
How are dividends at a tax disadvantage? If you live in the US they are not. See George Bush’s QDI tax reforms. BTW, I am not a fan of those.
And I would be careful in leaving a higher tax on earnings and a lower tax on dividends and capital gains. Taxing on earnings tend to have a higher tax drag then that on capital gains. Higher tax drag means lower returns. Lower returns implies lower investment for tomorrow’s production. Besides, corporations tend to do a better job at saving and investing then individuals.
Inflation is government meddling, most of the time
Less then you might think. Inflation only makes sense if you look at both the supply and demand for money. You have grown up in a era with fiat money and the government trying to regulate the monetary supply. Go back to the 19th and early 20th century when the world was on the gold standard. You still had inflation and deflation. The difference is that today we have a low and steady inflation rate. Back then you had much larger, unexpected spikes
The government, either today or yesterday, had little control over the demand on money. The Federal Reserve has control over some lending standards but that is a blunt tool. The problem of yesterday is that there was no control over the supply of money. This lack of control more often meant deflation rather than inflation but deflation is as invidious as high inflation.
I am a little confused on the situation – can you help me out? I feel like I am missing a step but I will take a stab at it. I think I am being thrown by the “global price of gold remains stable” - which is kind of a hoary concept.
You measure you gain based on your own local currency. You don't care about the change in the FX rates – it's got nothing to do with the problem.
Maybe this is a better example. You buy 1m USD of gold. Over 12 months there is 100% inflation. Now, a 100% inflation rate would imply a steep drop in the FX rate but that has nothing to do with this problem. You then sell the gold for 2m USD, so you would have 1m in capital gains that you would have to taxes on.
Since we are changing topics, I will bite. If taxing using money as the measure is silly, what measurement would you suggest?
I will point out that there is nothing has an absolute value. The value of labor, gold, land, computers, etc. on makes sense when it is measured relative to something else, but that these relative values are not fixed – they will float.
Slashdot Mirror
No, this is not how it works. When he gifts stock he does not have to pay capital gains tax on the stock gifted. That's it.
If he wanted to abuse the charitable system he could have gifted preferred shares. Dr. Bose of Bose speakers did that. He is not doing that.
If he wanted to avoid capital gains taxing he could start a plan of tax harvesting or completion funds. Transferring restricted shares to trusts and insurance plans. Special dividend payouts. Deferred compensation and pension plans. Which I am going to guess that is doing but that is another story.
I think the point is that there is a difference between feel good charity and effective charity.
As a example I would point to your desire to promote birth control? Why is the best way to reduce populaton growth?
Promoting birth control has a very low impact on the number of children born. The once exception is China when forced sterilization and other heavy handed techniques were used.
Education has a bigger impact. Economic growth has an even bigger impact. Employment outside of the home for women has an even bigger impact still.
And I made a mistake. The super voting right Ford Stock is owned by the Ford Family Trust, no the Ford Foundation. So that example is a bust. There are others out there.
Well, that is probably not the best way. Bond fraud is not the in thing these days but I hear that dot coms are making a comeback.
On to the technical issues. Most foundations, if we are weighing by size, are run legitimately. However, there are a lot of rinky family foundations that are not.
Sadly I have seen money transferred back to the owners. Spouses and children are given high paying low responsibility jobs in the foundation. Foundations buy overpriced services from the founder’s family; Investment advice, rent, consulting series, etc. Often the annual meeting is held in a tropical resort during winter. Etc. Lots of ways. It can be directly and the laws limit the strip-mining but I have seen some pretty sad cases.
You are technically right that you give up ownership but there are methods of abuse. One can used different share classes, preferred shares, partnerships, bearer stock, and pyramid structures to maximize the tax benefit while minimizing the loss of economic value and control. The Ford family has sold most of their Ford stock decades ago yet still controls Ford thanks to the super voting rights stock that the Ford Foundation holds. Let face the facts, Bill Ford Jr. did not become the CEO of Ford because he was the best candidate. Who knows what Ingvar Kamprad is doing with IKEA - his foundation is a black box.
It comes down to why the foundation was founded. If the person was black of heart there are methods of abuse open.
Horrible way to avoid paying taxes.
If MZ sold his stock he would keep 72%. Assuming his cost basis was $0 and a tax rate of 28%
By giving his stock away he keeps 0%. I mean, yes, you do stick it to the man by not paying taxes but you would have the same effect if you burned large piles of money.
MZ probably has other motives for giving his money away then avoiding paying taxes.
Private charities come in two variants.
The first are a thin veil for a tax dodge. Set up a charity, pay yourself fat fees, transfer wealth capital gains free while retaining voting rights, give cash to the local opera and get sweet exclusive access, make sure the back 40 acres of your house remains undeveloped to protect your view and not pay property taxes. It can be useful for social climbing.
The second is that you have a concern and you want to remain hands on. I will point to Bill Gates and Carnegie. Both had very specific view on education and how the charities should be managed.
Both try to sneak in a little good PR. Carnegie has been dead for a long time yet his charities still spread good things about their name. Or Harvard who had one of the better deals in history – donating a few hundred dollars and we still remember his name.
What history are you pointing to? Economic history is a hobby of mine but I don't know what era you are talking about.
I can't recall off the top of my head any deflationary period prior to 200 years ago. Heck, most of the inflation issues that I can think of is from governments debasing their debts after times of war or local gold strikes which expanded the supply of money.
Of course, during the past 5,000 years growth, and thus increasing demand for money, was something like 1% a generation. And it was not until 1850 when the majority of the economy was monetized or local economies tightly integrated. If you are trading cows for ploughs a .025% deflation is not going to same affect on you as a 1% deflation rate is going to affect your salary and mortgage today.
By the way, can you explain to me why it matters that BitCoins can only be dived by 100,000,000? Why is this limitation important? If I have 1 BitCoin, and there is deflation, I can now convert my BitCoin to 1.0 coins. Or maybe 1.0000 coins? How does adding extra digits to the precision of the value affect the effects of deflation on value. Why does this matter? Governments can take their current currency at subdivide infinitely. Reintroduce the ½ penny. Mint the 1/100 cent – or cent cent. Redecriminalize the currency as many times as needed.
The problem with that approach is that there is no way to measure it, which takes to conversation away from facts and theory to dogma, which I don't find very useful in a economic context.
I will disagree with you a little. First, how do you figure that inflation transfers value to the government? By what mechanism? I am going to guess you mean that they can turn on the printing press and mint free money, but most OECD countries (rich countries like the US) systems are set up to prevent that.
You are correct that the poor have fewer options and thus inflation hits them more directly. But if that is so, then the sophisticated (who tend to be rich) can structure their investments to blunt their impact. Which is why most people say “unexpected increase in inflation”.
But you have to remember there is a difference between the poor (low income, few assets), the middle class (moderate income, relatively high debt), the rich (high income, but also relatively high debt) and the wealthy (less income then you think, but owns more debt then you might think). Where am I going with this? Take a look 100 years ago. Farmers were begging for higher inflation because deflation was transferring wealth from those with high debts to the wealthy. See William Jennings Bryan's
Cross of Gold speech
No, the way governments transfer money from the rich and poor is though financial repression. i.e. when inflation is greater the nominal interest rates. Yes, this can happen when inflation increases, but most of the action by governments over the past 60 years have been to drop the nominal interest rates. That is what is happening in the US today (via the Fed's easy money policy) or China (where the government has placed caps on the interest rate). Or dozens of other cases.
Well, no. You are making the assumption that idea cash will cause the economy to grow. If you burry your cash or gold in your backyard it doesn’t grow the economy much.
Let’s go back to the math and see if it holds up to reality.
Nominal Interest Rates = Real Interest Rates + Inflation.
Does higher real interest rates lead to higher investments? Broadly yes. We have got 150 years of global data to back that up. Inflation only has a modest impact – mainly because high inflation (above 20%) is normally unpredictable inflation, which increases inflation risk.
So let’s say real interest rates are 3% and deflation is 1%, so nominal interest rates are 2%. So if you risk your money you get 2% - not 3% - risks stays the same but rewards go down. Theory implies that investment goes down.
And we have got 150 years’ worth of data showing that it does. It is not as robust as the real interest rate data – I will give you that. It tends to be from before the 60s because after that almost everybody dumped the gold standard and Bretton Woods, and the older data is not as good. But we do have the America (1870-1910), Great Briton (1920s), and Japan (1990-)
Not "unpredictable deflation", just significant decreases in the supply of money—planned or otherwise. Price deflation is not correlated with recessions in general, just in cases like the Great Depression where the supply of money underwent a significant contraction. You point out that a deliberate policy of destroying currency to manipulate its price relative to other currencies led to recessions. Well, naturally; that's what happens when you play with the currency supply, regardless of whether you're creating inflation or deflation: you send false signals, which leads to malinvestment, which destroys wealth, which leads to a recession.
mmmthat was not what Churchill was trying to do. And what false signal was he trying to send? To put this in context, England was on the gold standard prior to WWI, but had debased their currency to help fund the war. Churchill’s goal was to return the pound to its prewar value over 5 years. What type of malinvestment do you think occurred? I am not saying that malinvestment did not happen – it did. Investors overinvested in cash and loans and underinvested in real assets – which was my point.
And why do you say that deflation is not correlated to rescissions? I would be interested in where you are getting this data. I will point to 19th and the early 20th century where there was deflation due to a money supply growing slower than the real economy. Between 1870 and 1910 the US had a fairly constant and modest deflation of .3% and it was constantly being punctuated by recessions, financial bubbles, etc. There are plenty of other examples. I have a hard time pinpoint a example in the last 150 years where there was a prolonged period of deflation without a recessions.
If the value is only increasing at the rate of inflation then it's not an investment, it's just savings. So I buy a house, and in ten years (ignoring taxes and maintenance costs) I still have the same house, and it's worth about the same relative to other goods as it was when I bought it. Where's the expected return?
That one is easy – rent. Historically, property values and rent have a very high correlations with inflations – and there are good causal reasons. This is true even if you buy the house for your own personal use due to “opportunity costs”. That is, if you had not bought a house for yourself you would have had to rent a house and it’s rent would have gone up with inflation.
And this is true of most economic assets. If you build 1 factory that produces 1 widget a year, you’re your yield is 1 widget. Widgets, on average, increase in value at the same rate as inflation – by definition. Or a law degree where your yield is clients seen. Or stocks. Etc. Now if we are not talking about economic assets – such as cash, loans, or other fixed income investments – whole different story.
Fractional reserves are not the boogie man. There is a difference between currency and money. Currency is something hard and fixed. Money is a bit more nebulas. Do savings account? Money Market – maybe. Yes? Does your unused HELOC loan count? Pre housing crisis it was probably near money, today not so much. Money is something you think you can turn into currency. It is one of the reasons why the “real bill” theory of money died 100 years ago.
On to the point – inflation does not explicitly say any of this. Inflation is the change in the aggregate demand of money verse the aggregate supply of money.
You can have demand side shocks – this falls into the scarce human or investment capital.
You can have supply side shocks – think oil crisis and crop failures.
You can have changes in the supply of money. Government turning on the printing press or (in the gold standard days) a gold strike.
You can have a change in the demand for money. War – yep – that increases demand. Financial crisis? Banks needed 4% in cash before the crisis, now they need 8%.
Inflation tells you less than you think in these matters – you need to drill down another level. And realize that multiple pieces are moving and things work on a 6 month to 3 year lag.
o.k., I present a theory, you dislike the theory, and throw a non-argument in my way. Really? What do you want then?
I can pull data from the bond market for the past 50 years? To short? Try Milton Friedman ‘s A Monetary History of the United States, 1867-1960. Too narrow? Try Irving Fisher. His monetary theories have held up remarkable well for the past 50 years globally.
As you say, people can always factor in a consistent level of inflation or deflation in their planning. That's easy.
For deflation it is not as easy as you think. You point out unpredictable deflation leads to things like the Great Depression. The problem is that predictable deflation also leads to recessions as well. Inflation destroys wealth, which is the value of past investments. Deflation destroys the value of future investments, destroying the value of current investments.
Nominal Interest Rates = Real Interest Rates + Inflation/(Deflation). The higher the deflation the lower the real interest rates are. The value of investing in real asset fall so investments in future production fall. The value of investing in financial assets increase, shifting more money to those already wealth and less inclined to invest in tomorrow.
Take a look at what happened to Great Britton during the interwar years when Winston Churchill deflated the money supply to bring the pound back to the hard money standard – a 10 year deliberate, predictable, and well announced plan. Investment sank, productivity gains declined, and a general recessions was had. I would also point to America between 1870 to 1910 and Japan for the past 20 years. While less predictable, times of steady deflation, lower investment, and recsion.
BTW, in a relativity steady inflationary environment you don’t need to find investments that beat inflation. You need to do that for fixed financial assets, like cash or bonds. Real assets (factories, homes, college degrees, stocks, patents, etc.) value tends to increase at the same rate as inflation.
But it rarely is because it is difficult and expensive. Inflationary protection bonds have their principle tied to the inflation and these are the only loans that factor in deflation. And that assumes the bonds allow the principal to fall – many don’t. The only bonds of this type that I know of are issued by governments.
Here is a simple thought experiment. Assume you lend out $100, the real interest rate is 3%, and deflation is at 5%. At the end of the year, for the risk you have taken, you $98 ($100 + $3 -$5). Or you could have just buried the cash the back yard and have $100 with no risk at all so that loan will not happen.
The numbers are large to illustrate a point; borrowing money faces headwinds under deflation. If you don’t like theory I have historical and empirical examples that I could bring forward
You have that backwards.
Inflation (and increase of) reduce the value of money and thus reduces the value of those who hold (net) cash and financial assets – a.k.a. the wealthy. Inflation also reduces the value of money that need to repay loans and thus help those who owe (net) cash and financial assets.
Maybe one last point – I think we are getting to the end of the conversation here. I am a bit confused by your position on the flat tax and capital gains on BitCoins. I think a flat tax is a great idea. However, if you don’t tax cap gains on BitCoins that leaves a huge gap that you drive a semi-truck though.
I think you missed my point about transforming your salary – it’s not about including non-cash compensation. You can structure your pay in capital gains from BitCoins and excluded it from non-cash compensation. The Enron debacle offers lots of legitimate examples with the use of subsidiaries, partnerships, options, etc. to shift income. (Their issue was not that they used these forms but they cranked the volume up to 11.)
Here are 2 examples. Both are simple compared to what Enron did.
First, Steve Jobs He had a salary or $1, travel on the company jet, and other non-cash compensation (taxed at the higher income tax rate) plus a large slab of stock options (taxed at the lower long term capital gains). I personally consider this only semi-abusive. He got out of Social Security taxes, but he was exposed to risk and it aligned his interests with Apple’s. However, the reason why Jobs chose the $1 salary was to minimize taxes not out of altruism.
Second, I am going to make the assumption that you consider rent to be income and should not be – that is what I am getting from your posts. If not this still somewhat holds because rental income is taxed at a lower rate than other income. If you own a business you can split that business into 2 – one side is the operational side, the other owns the building. You can raise the rent to shift profits from the high tax corporate entity (double taxation on both the earnings and the dividends/cap gains) to the low tax building. That is a simple one.
Oh, and most biofules are not ready for prime time. Right now, only cheap sugarcane is the only viable option.Corn, et. al just does not cut it.
This is not to say that biofuels will always fail – just that the technology to this economically viable is here today. 10 years ago wind and solar were not economically viable and today they almost are (depending on how you measure externalities like CO2 and pollution).
Don’t massive push and subsidize a tech that is not ready.
You’re thinking of Brazil. It is easy to grow sugarcane in Brazil, it is easy to convert to ethanol, and they have decent policies. They are not self-sufficient – oil kicks off too many cool byproducts like plastic. However they have a viable industry.
Venezuela is in no ways self-sufficient. One would think a OPEC member would be but the government is just a plain basket case. They pump enough to meet their needs but their production has been falling because they have not been investing. Nobody is willing to invest in an oil refinery (including the goverment) so they ship the oil to the US to be processed into gasoline.
Yes, the higher the inflation rate the higher the effective tax for capital gains is. You can avoid this issue if capital gains are indexed to inflation. You can avoid this issue if capital gains are indexed to inflation.
Here is a link to another post in the same thread. It has formulas.
http://slashdot.org/comments.pl?sid=4561385&cid=45706561
To nit-pick a bit, I will repeat myself in saying that you want to look at inflation, no the relative value of the dollar to the EUR or whatever. The FX rate of the dollar could be off by +/- 20% from the “real” value. There is a relationship between currency strength and inflation, but it is lose and has a lag time of 10 to 20 years.
For example, during the Greek crisis when fear was at its highest, people dumped EUR for USD, so the dollar became stronger and the EUR collapsed. However, from a relative perspective not much happened – inflation rates remained mostly unchanged. Americans could buy about the same using USD before and after. Same for the Europeans using EURs. Or, to put it in your context, the USD/EUR could move 20% up or down and the cost of bread would still be $2.
I would argue that you would want to tax all income at the same rate unless you can justify the difference. If there is a difference between economic, accounting, cash, and tax recognition people can get up to mischief.
You argue that only payroll tax should be taxable. Want to convert you salary away from taxable payroll to tax free BitCoin capital gain? It can be done. There are schemes of transferring income of one type to another. If you think earnings should be taxed at a higher rate than capital gains I will structure the investment so it returns more capital gains and less earnings. You would be amazed – and maybe sadden – to know how much time goes into optimizing returns based on taxes rather than economic returns.
On to your specific points:
You can’t make dividends and capital gains exactly equal to each other – the math won’t let you. If you want to equalize them then you are going to need to index capital gains to inflation – which was my original point.
How are dividends at a tax disadvantage? If you live in the US they are not. See George Bush’s QDI tax reforms. BTW, I am not a fan of those.
And I would be careful in leaving a higher tax on earnings and a lower tax on dividends and capital gains. Taxing on earnings tend to have a higher tax drag then that on capital gains. Higher tax drag means lower returns. Lower returns implies lower investment for tomorrow’s production. Besides, corporations tend to do a better job at saving and investing then individuals.
Inflation is government meddling, most of the time
Less then you might think. Inflation only makes sense if you look at both the supply and demand for money. You have grown up in a era with fiat money and the government trying to regulate the monetary supply. Go back to the 19th and early 20th century when the world was on the gold standard. You still had inflation and deflation. The difference is that today we have a low and steady inflation rate. Back then you had much larger, unexpected spikes
The government, either today or yesterday, had little control over the demand on money. The Federal Reserve has control over some lending standards but that is a blunt tool. The problem of yesterday is that there was no control over the supply of money. This lack of control more often meant deflation rather than inflation but deflation is as invidious as high inflation.
I am a little confused on the situation – can you help me out? I feel like I am missing a step but I will take a stab at it. I think I am being thrown by the “global price of gold remains stable” - which is kind of a hoary concept.
You measure you gain based on your own local currency. You don't care about the change in the FX rates – it's got nothing to do with the problem.
Maybe this is a better example. You buy 1m USD of gold. Over 12 months there is 100% inflation. Now, a 100% inflation rate would imply a steep drop in the FX rate but that has nothing to do with this problem. You then sell the gold for 2m USD, so you would have 1m in capital gains that you would have to taxes on.
Our of curiosity, where's here?
Since we are changing topics, I will bite. If taxing using money as the measure is silly, what measurement would you suggest?
I will point out that there is nothing has an absolute value. The value of labor, gold, land, computers, etc. on makes sense when it is measured relative to something else, but that these relative values are not fixed – they will float.