Making the Occupy People Go Away

As I sat reading the latest Economist magazine and all of the injustices spouted off by the Occupy folks, I wondered if we all are as helpless as they portray us to be. In their worldview, we are all pawns of the “wealthiest 1 percent.”

Sorry, but I don’t believe that. We (the collective “we”) have more power than they imagine. Here is a simple plan that would a) sock it to the wealthy and b) improve the security of your balance sheet all at the same time.

Step 1: If you earn less than $200,000, sell 10 percent of all your stock-holdings (401k, IRA, day-trading, etc.) over the next year. This sell-off would put downward pressure on stock prices in the stock-market. Whooaa, won’t that be bad?

Well, if you’re concerned with socking it to the wealthy, the drop in the stock-market will primarily hit them. As shown in the chart below, for folks making more than $200,000 net capital gains (gains minus losses) account for 10  percent of their income. For those folks earning less than $200,000, capital gains rarely break 1 percent of income.

It gets even more skewed as you dissect the data even further. For folks with incomes over $10 million or more their reliance on net capitals gains is a whopping 34 percent!

Overall, 84 percent of all net capital gains income is accrued to those earning more than $200,000.

Chart Showing Net Capital Gains by Income Group as a Percent of Adjusted Gross Income for 2009

Step 2: Take the money from selling your stock and use it to either pay down debt (that includes your mortgage) or if you have no debt put it into a traditional savings account. This will increase your own personal financial security as well as buttress the overall economy from future debt-fueled financial shocks.

Step 3: Repeat steps 1 and 2 next year, and the year after, etc. until you have completely removed yourself from the stock-market. If you are trapped in a 401k, move your money into a bond fund (preferably Treasuries).

So to the Occupy folks . . . no, we don’t need higher taxes or more government spending to fix the economy. We just need to recognize that the stock-market was never designed as place to passively park your life-time savings. The stock-market is meant to manage the flow of capital to the most economically efficient companies.

And yet . . . the stock-market has been rigged against you, but not in the way touted by the Occupy folks. Inflating the stock-market with retirement funds has transformed the market into a casino and less of an exchange. Since the wealthy had/have more of their wealth invested in the stock-market, it’s no surprise that this inflation has benefited them the most. Of course, the opposite (deflation) is true as well.

As an added benefit, unlike capital gains, paying down debt is non-taxable. For instance, if you have a $200 credit card payment, you will need to earn $250 to $300 (depending on your federal tax bracket and the tax burden where you live) in order to pay that bill. Paying off your credit card means you no longer need to earn money to pay it . . . unearned money is untaxed money 🙂

And just maybe these actions will also help prevent the decapitalization of America.

Capital Gains Roller-Coaster and the Size of Government

New 2009 data from the IRS shows how foolish it is for government to tax capital gains income.  As shown in the chart below, capital gains income for 2009 is now back to 2002 levels ($224 billion).  Of course, thanks to the housing bubble, this is after a massive run-up in capital gains income to $819 billion in 2007.  This led to a whopping 73 percent drop in capital gains income from 2007 to 2009!

The capital gains roller-coaster also has a disproportionate effect on government budgets, especially Uncle Sam’s.  The IRS data shows that, in 2009, 87 percent of all capital gains income was claimed by those folks with income (as measured by Adjusted Gross Income) over $200,000.  That means these folks are paying at the highest marginal tax rates which can lead to rapid increases/decreases in government revenue.

This revenue volatility should also concern good/small government folks.  According to Dr. W. Mark Crain in his book Volatile States: Institutions, Policy, and the Performance of American State Economies:

 . . . uncertainty is the enemy of efficiency in public as well as private enterprise.  Budget volatility precludes efficient planning and adds significantly to the cost of government-provided services.  Put differently, a reduction in spending volatility would be equivalent to a funding increase.  The empirical evidence indicates that a 10 percent reduction in budget volatitlity generates efficiency gains comparable to a 3.5 percent increase in the level of funding . . .

The analsysis suggests that the reliability of tax revenues influences the size of government.  Greater instability in tax revenues contributes to spending instability that impedes the efficiency of long-run state government operations.  With less efficient planning, the level of government spending increases, which of course requires additional revenues. [emphasis added]

So in the long run, the volatility in the capital gains tax is helping to increase the size of government at all levels . . . with the exception of those states without an income/capital gains tax.  Um, like New Hampshire 🙂

There is, however, a silver lining in the capital gains volatility.  With capital gains income at such a low level, now is the time to ax the capital gains tax at the federal and state levels.  Not only is the cost of doing so minimized to government coffers, but it would also boost the incentive to invest in new capital which is exactly what the economy needs in this so-called “recovery.”

Chart Showing Capital Gains Income from 1997 to 2009

The Enterprise Value Tax

Last week I released a new study published by The Maine Heritage Policy Center examining a proposed federal tax dubbed the “Enterprise Value Tax.” (EVT)  The findings of the study (pdf) below:

In legislation backed by Congressional Democratic leadership this past spring, there was an attempt to more than double the taxation on the sale of many businesses. A provision in that legislation, known as the “Enterprise Value Tax,” would have changed the federal taxation on a sale of any business structured as a partnership from a capital gains rate of 15 percent to ordinary income rates. Under the proposed legislation, entrepreneurs, and family members owning small businesses, other than family farms, would no longer qualify for the 15 percent capital gains treatment upon the sale of their business if the entity held any form of partnership interest, interest income, investment real estate or securities.

The Enterprise Value Tax, or EVT, passed in the House of Representative as part of “H.R. 4213: American Jobs and Closing Tax Loopholes Act of 2010” and is still under consideration in the U.S. Senate. The adoption of an Enterprise Value Tax would be especially damaging to Maine’s businesses and economy for the following key reasons:

  • A large portion of Maine’s small businesses are structured as partnerships.
  • The imposition of an EVT will potentially extract around $55 million annually from Maine’s economy, working capital that would be better used by Maine’s current and future partnerships to expand an already anemic economy.
  • Maine is currently experiencing a “capital flight” with the ratio of interest, dividend and capital gains income per taxpayer dropping significantly against the national average.
  • Maine policymakers have been working on reducing state-level capital gains taxes through tax reform—an effort to reduce the volatility of the state’s revenue base that would be thwarted by an Enterprise Value Tax imposed at the federal level.

For these reasons, Maine’s state and local policymakers, as well as its Congressional delegation, should continue to oppose a federal EVT due to the economic damage it would inflict on Maine’s local businesses and residents.