Re: Economic reform policy: Some views and proposals

["Gary Santos" <evs@xxxxxxxxxxxx>]

John,

On the second issue first, I am one of those who believe that the stock
market is not for everyone. This view may sound strange coming from someone
involved in the stock brokerage industry. But, the view from the ground is
that any scheme such as the one visible in the US (social security via 401k
and IMRA's) is akin to a pyramid scheme bound for failure. Not only that,
the scheme diverted an inordinate amount of funds away from high grade bonds
where, given the fund's future use, rightfully belongs. The benefits of
compounding will work especially now with inflation appearing to have been
killed by globalization's increased competition.

To institute the taxing mechanism described, whether levied on the investor
or the publicly listed corporation, is an unfair and inefficient means to
stop excessive speculation. What if a single start up company, still in its
market development stage, becomes the market favorite? Should we stunt its
growth by taxing its market capitalization and, thereby, sapping internally
generated cashflow? Or, in the case of a property tax and the same start up
company, it becomes likely, as prices increase, that the shares are sold
given the increasing bite of the tax as time passes. One might actually
accentutate the bear market as the tax will certainly drive away some
liquidity from the market.

What drives prices upward is liquidity. To control upward momentum, decrease
the amount of liquidity available.


----- Original Message -----
From: "John O'Donnell" <jackodonnell@xxxxxxx>
To: "Gary Santos" <evs@xxxxxxxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Thursday, May 01, 2003 2:53 AM
Subject: Re: Economic reform policy: Some views and proposals


Gary Santos wrote:

>The problem with indirect approaches is that one usually gets something in
>addition to the effect desired. Both the property tax form or a tax on
>assets are necessarily significant carrying costs to be effective and will
>discourage long term investment in publicly listed corporations. It will
>prove unwise for an unsophisticated investor to buy and hold as he would
>probably have a difficult time doing the arithmetic alone.
>
I'm having difficulty following this argument. Yes, asset/property taxes
are a carrying cost but investments are made in anticipation of returns,
not with respect to production costs. As to individual investors "doing
the arithmetic" I have to ask -- what arithmetic? The taxes would be
paid by the corporation, not the individual stockholders.

>Why not deal with the problem directly?
>
>Simply *prevent* credit from entering the market by either raising margin
>requirements or banning all stock purchases by credit.
>
This would be a wise choice in the event of a bubble forming [such has
recently occurred] but would have little to do with preventing the
formation in the first place. To be effective in attenuating a bubble,
credit purchase would have to exist for an increase in margin
requirements to have meaning.

>And, *by education*.
>Notwithstanding what all textbooks say about the stock market and the
prices
>that they provide, the stock market is a speculative market in its roots
and
>the prices that it provides are speculative prices. That is the nature of
>the market. Will the capital raised bear fruit? Will there be such a
>technology boom that will revolutionize the way merchandize will be sold?
Do
>the PE ratios provide good enough returns given what future seems to be
>forming? The academic hype of "superior returns in the long term" never
>qualified whether "long term" was going to be within the lifetime of all
>individuals. In fact, since the long term chart of the market was certainly
>available to whoever said it in the first place, the thesis, I dare say,
>bordered on being fraudulent. It is, in fact, suspiciously coincidental
that
>the thesis came hand in hand with effort to privatize of social security.
>
Yes, markets are speculative. But they also have basis in reality.
Procedures/policies that counter or attenuate the tendency to excess
still have value, largely because of the tendency to speculate. Without
speculation, no excess would ever occur and such policies would be
irrelevant.

>
>
>----- Original Message -----
>From: "John O'Donnell" <jackodonnell@xxxxxxx>
>To: "Trond Andresen" <trond.andresen@xxxxxxxxxxx>
>Cc: "Gary Santos" <evs@xxxxxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
>Sent: Wednesday, April 30, 2003 10:36 PM
>Subject: Re: Economic reform policy: Some views and proposals
>
>
>Trond Andresen wrote:
><<SNIP>>
>
>
>
>>I made it explicitly clear that I did not suggest a transaction tax.
>>
>>
>Instead
>
>
>>I proposed a tax on stocks held, i.e. a "property tax", based on current
>>value. I have simulations of my long-wave stock model that shows that such
>>
>>
>a
>
>
>>tax very efficiently dampens the long cycle. Imagine a person holding a
>>
>>
>stock
>
>
>>portfolio in -- say -- 1996. It has finally sunk in for that (and many
>>other) person(s) that the market is really taking off -- that stock
>>appreciation is now in the double digit range and that this seems to be a
>>robust trend. But in my scenario the "stock market tax committee" meets --
>>assesses the situation analogously to the board of a CB when they meet to
>>adjust the overnight rate -- and increases the stock tax to -- say -- 10%.
>>This will take the momentum out of further increase. The balloon is given
a
>>small puncture before it has gotten very big.
>>
>>
>>
>You're getting close. A progressive tax on the total value of
>corporation assets [i.e. -- equity defined by market price of common
>stock plus mortgage/debt defined by preferred stock plus all outstanding
>debt] imposed on the privilege of limited liability granted to
>corporations and adjusted to cause the greatest rate of increase in the
>underlying tax base [i.e. --  corp. equity plus debt] will also impel
>stock prices to avoid irrational exuberance as well as encourage lower
>prices [i.e. -- to reduce the per unit tax burden of this fixed cost of
>production] particularly when the taxes thusly raised are used to reduce
>the transaction taxes that create a distortion by placing a wedge
>between the prices paid and the prices received for each transaction.
>
>Stick that in your model and see what happens.
>
>If your model can't handle it, see the model at
>http://www.geocities.com/CapitolHill/1067/widgets.html with description
>beginning at http://www.geocities.com/CapitolHill/1067/c04r4a.html
>
>--
>-- jbod
>
>Tax Privilege, Not People
>___________________________________________________
>Come visit and see a new economic perspective --
>       http://www.geocities.com/CapitolHill/1067
>           Comments/arguments welcome.
>.
>
>
>
>
>
>
>
>

--
-- jbod

Tax Privilege, Not People
___________________________________________________
Come visit and see a new economic perspective --
       http://www.geocities.com/CapitolHill/1067
           Comments/arguments welcome.
.