High Cgt Rates Seperate Investors From Speculators

[LuckyOne]

There are two types of buyers of assets in the world.

Investors tend to buy assets that will generate appropriate ongoing returns from the time of purchase without regard of possible asset price inflation and have no intention of selling their assets.

Speculators tend to buy assets that generate minimal ongoing returns at the time of purchase in the hope that they can sell their assets to a greater fool at a higher price.

In my view, high CGT rates will help reduce asset price bubbles caused by speculation. For the life of me, I cannot understand why anyone would object to asset pricing being determined by ongoing returns rather than by a speculative anticipation of future capital gains.

High CGT rates will reduce the probability of speculative asset price bubbles which are worsened by lax credit standards which are the root cause of all of our current financial problems.

[IBlewItLastTime]

There are two types of buyers of assets in the world.

Investors tend to buy assets that will generate appropriate ongoing returns from the time of purchase without regard of possible asset price inflation and have no intention of selling their assets.

Speculators tend to buy assets that generate minimal ongoing returns at the time of purchase in the hope that they can sell their assets to a greater fool at a higher price.

In my view, high CGT rates will help reduce asset price bubbles caused by speculation. For the life of me, I cannot understand why anyone would object to asset pricing being determined by ongoing returns rather than by a speculative anticipation of future capital gains.

High CGT rates will reduce the probability of speculative asset price bubbles which are worsened by lax credit standards which are the root cause of all of our current financial problems.

Well its a reasoned argument. There might be two types of buyers, but there is one market and at any one time one market price.

The market price is the value of future returns - it can't be anything else. Whenever it is in excess of this , well that is the definition of a bubble and eventually they burst.

You are probably right, it will kill off asset bubbles - well, all of them except the worst one which caused all the trouble, domestic housing which for most people is CGT free. In fact high CGT will reveal your own home as the last place on earth you can make a capital gain.

So what will high CGT do? Any investors that can relocate will, ruthlessly and quickly. That will affect jobs, admittedly mostly confined to London. If property prices were to react to the high CGT rate, they may fall suddenly, probably too suddenly to avoid a crisis in the banks which we will have to bail out again.

It makes you wonder why, if we are keen to avoid another housing bubble, we massively increase a tax which will mainly hit pension portfolios and only clobbers the BTL part of the domestic housing market. A better targeted measure would be perhaps interest rates or, rather ironically since it is an odious tax, Stamp Duty.

Edited May 29, 2010 by IBlewItLastTime

[LuckyOne]

Well its a reasoned argument. There might be two types of buyers, but there is one market and at any one time one market price.

The market price is the value of future returns - it can't be anything else. Whenever it is in excess of this , well that is the definition of a bubble and eventually they burst.

You are probably right, it will kill off asset bubbles - well, all of them except the worst one which caused all the trouble, domestic housing which for most people is CGT free. In fact high CGT will reveal your own home as the last place on earth you can make a capital gain.

So what will high CGT do? Any investors that can relocate will, ruthlessly and quickly. That will affect jobs, admittedly mostly confined to London. If property prices were to react to the high CGT rate, they may fall suddenly, probably too suddenly to avoid a crisis in the banks which we will have to bail out again.

It makes you wonder why, if we are keen to avoid another housing bubble, we massively increase a tax which will mainly hit pension portfolios and only clobbers the BTL part of the domestic housing market. A better targeted measure would be perhaps interest rates or, rather ironically since it is an odious tax, Stamp Duty.

You are quite right. I did overlook the OO part of the equation.

Perhaps we should consider the US approach to capital gains on a primary residence. It is zero for as long as you upgrade to a more expensive home. It is treated as a normal capital gain on any portion applied to downsizing (with death being the ultimate in downsizing).

Announcing this type of change now to take effect in the 2011-2012 tax year would probably stop a lot of the hoarding of expensive properties by older people who are sitting on massive capital gains.

[Stars]

You are probably right, it will kill off asset bubbles - well, all of them except the worst one which caused all the trouble, domestic housing which for most people is CGT free. In fact high CGT will reveal your own home as the last place on earth you can make a capital gain.

This is what bothers me about it - it does get the problem area, real estate - but only incidentily and with so many loopholeable exclusions and at the same clobbering other areas even more.

What we need is a change targetted only at the real problem; real estate price speculation.

I would sugest a real estate tax that made price speculation in real estate near profitless

Edited May 29, 2010 by Stars

[IBlewItLastTime]

If you had CGT on OO houses it would act a bit like Stamp Duty only better targeted. It could be a lower rate, just enough to dampen things down. It would make moving house potentially expensive, but thats the only way to cool off the market.

Profitless Real Estate taxes is just a bit to Marxist for me.

[Stars]

Profitless Real Estate taxes is just a bit to Marxist for me.

It would take a bit to explain why it really isn't marxist - in fact Marx called this idea, the last dying gasp of the capitalist. Importantly, letting people pocket these kind of profits on land property isn't really free market. In reality we are leting them collect a kind of welfare from others, using their property as the coercive vector.

Edited May 29, 2010 by Stars

[Toilet-Currency]

Investors tend to buy assets that will generate appropriate ongoing returns from the time of purchase without regard of possible asset price inflation and have no intention of selling their assets.

Really?

Do you not think that even long-term investors invest in the expectation that they can exit at a better price than they paid? What about a pension fund - a long term investment, but the asset allocation is into assets that will appreciate over the longer term. It isn't for income alone.

Almost all investment of capital is speculative (unless it's benificent/charitable, but that's not really what we're talking about).

[euroconv]

There are two types of buyers of assets in the world.

Investors tend to buy assets that will generate appropriate ongoing returns from the time of purchase without regard of possible asset price inflation and have no intention of selling their assets.

Speculators tend to buy assets that generate minimal ongoing returns at the time of purchase in the hope that they can sell their assets to a greater fool at a higher price.

A little bit simplistic. Remember your basic supply and demand laws.

You are saying that the government can water down the value of my savings (by printing more cash), yet I can't hedge against that theft?

I agree that net profit taking from social necessities such as housing is wrong, but why stop me from looking after the value of my hard work when I invest it (sorry speculate) in hard assets?

[LuckyOne]

Really?

Do you not think that even long-term investors invest in the expectation that they can exit at a better price than they paid? What about a pension fund - a long term investment, but the asset allocation is into assets that will appreciate over the longer term. It isn't for income alone.

Almost all investment of capital is speculative (unless it's benificent/charitable, but that's not really what we're talking about).

My point is that long term investors do not have a pre-determined exit strategy.

They will buy and sell assets when relative price changes corrupt their asset allocation models but they do not buy with an explicit selling price target.

[LuckyOne]

A little bit simplistic. Remember your basic supply and demand laws.

You are saying that the government can water down the value of my savings (by printing more cash), yet I can't hedge against that theft?

I agree that net profit taking from social necessities such as housing is wrong, but why stop me from looking after the value of my hard work when I invest it (sorry speculate) in hard assets?

I have no objection to anyone looking after the value of their hard work by investing in hard assets.

The only time that CGT is due is upon the sale of assets. Investments in hard assets for the income that they can generate will not attract CGT. Investments in hard assets for the capital gains that they generate will attract CGT.

Raising CGT rates to a level that drives out buyers who seek capital gains and forces prices low enough that income buyers are interested in hard assets will reduce the likelihood of bubbles.

I would prefer to see markets where 100% of the total return on hard assets comes from income and 0% from capital gains rather than the current environment where a high proportion of expected returns comes from capital gains. The German property market is more like the former while the UK market is more like the latter.

[Guest The Relaxation Suite]

There are two types of buyers of assets in the world.

Investors tend to buy assets that will generate appropriate ongoing returns from the time of purchase without regard of possible asset price inflation and have no intention of selling their assets.

Speculators tend to buy assets that generate minimal ongoing returns at the time of purchase in the hope that they can sell their assets to a greater fool at a higher price.

In my view, high CGT rates will help reduce asset price bubbles caused by speculation. For the life of me, I cannot understand why anyone would object to asset pricing being determined by ongoing returns rather than by a speculative anticipation of future capital gains.

High CGT rates will reduce the probability of speculative asset price bubbles which are worsened by lax credit standards which are the root cause of all of our current financial problems.

Exactement. What this proposed increase is doing is flushing out the greedy speculators who are trying to mask their greed by waffling about free market principles. It's that simple.

[Toilet-Currency]

My point is that long term investors do not have a pre-determined exit strategy.

They will buy and sell assets when relative price changes corrupt their asset allocation models but they do not buy with an explicit selling price target.

I cannot think of any examples of investors, entrepreneurs, asset managers, banks, private equity barons, companies, etc that would invest without an exit strategy and without at least some expecatation of a total return. And since yields are so low, that means capital growth.

Asset allocation is used to provide a framework for matching expected return vs risk. Again, the objective is total return (including capital growth).

I would prefer to see markets where 100% of the total return on hard assets comes from income and 0% from capital gains rather than the current environment where a high proportion of expected returns comes from capital gains.

If you're talking specifically property, fair enough. For shares - no, since that would mean companies paying out every penny of profit as a dividend rather than growing the business or investing in R&D or tangible fixed assets.

[LuckyOne]

I cannot think of any examples of investors, entrepreneurs, asset managers, banks, private equity barons, companies, etc that would invest without an exit strategy and without at least some expecatation of a total return. And since yields are so low, that means capital growth.

Asset allocation is used to provide a framework for matching expected return vs risk. Again, the objective is total return (including capital growth).

If you're talking specifically property, fair enough. For shares - no, since that would mean companies paying out every penny of profit as a dividend rather than growing the business or investing in R&D or tangible fixed assets.

I think that you are making my point for me.

The reason that yields are so low is that the expectation of speculative capital gains which will be taxed at low rates has driven up asset prices to such a high level (which has in turn depressed yields) that the only way to generate a total return is for prices to rise further. This is the classic definition of a bubble.

I would not class "entrepreneurs, asset managers, banks, private equity barons, companies etc" as investors. I would put them firmly in the category of speculators.

As far as shares go, my definition of yield is broader than just the dividend yield. I look at it as dividends plus retained earnings. If the company can generate higher returns on retained earnings than I can on other investments, I prefer a very low dividend payout ratio. If I can generate higher returns on dividends received than the comapny can generate on retained earnings, I would prefer to see a high dividend payout ratio.

Potential corporate growth rates should drive dividend policy. At present it is driven by the relation between dividend tax rates and capital gains tax rates which makes no sense to me at all.

Further to this point, the relationship between tax rates on dividends and capital gains has caused companies to choose share buybacks over dividends. Low CGT rates have caused companies to increase leverage to buy back shares which has increased systemic risk.

[euroconv]

Investments in hard assets for the capital gains that they generate will attract CGT.

But you miss my point that the capital gain needs to outpace inflation of the money supply and my spending power before it is morally acceptable for the Goverment to take the 'surplus' as tax.

[Stars]

But you miss my point that the capital gain needs to outpace inflation of the money supply and my spending power before it is morally acceptable for the Goverment to take the 'surplus' as tax.

Not really

For instance, taxes on wages take a great big section of something you have (your labour) and then if you have any more, the tax man takes some more of it and so on. It doesn't have to inflate / deflate or come to the worker as a windfall to qualify, the taxman just takes it. The concept of only being taxed on a net windfall or gain for a worker is equivalent to not being taxed at all.

Edited May 30, 2010 by Stars

[Peter Hun]

You are quite right. I did overlook the OO part of the equation.

Perhaps we should consider the US approach to capital gains on a primary residence. It is zero for as long as you upgrade to a more expensive home. It is treated as a normal capital gain on any portion applied to downsizing (with death being the ultimate in downsizing).

In the US you would therefore expect a loss being used to write off against tax, This is significant as many US home owners are looking at a Capital Loss. Businesses can carry forward losses from previous years so why not home owners?

I would not class "entrepreneurs, asset managers, banks, private equity barons, companies etc" as investors. I would put them firmly in the category of speculators.

Ok, you are completely alone with that viewpoint. Can you explain why an entrepreneur who spends years building a business and gambles his home, personal life and future on setting up a business is a speculator? How are companies the same as banks? how is a asset manager a speculator? Or are you simply an idiotic a communist who disagree's with capitalism?

Edited May 30, 2010 by Peter Hun

[LuckyOne]

In the US you would therefore expect a loss being used to write off against tax, This is significant as many US home owners are looking at a Capital Loss. Businesses can carry forward losses from previous years so why not home owners?

Ok, you are completely alone with that viewpoint. Can you explain why an entrepreneur who spends years building a business and gambles his home, personal life and future on setting up a business is a speculator? How are companies the same as banks? how is a asset manager a speculator? Or are you simply an idiotic a communist who disagree's with capitalism?

I wouldn't describe myself as a communist. If I were to force a label onto myself it would probably be something like an anarcho-capitalist but even that isn't quite right as my ideals are not pure enough.

To your points about the roles of "businesses" :

1. Entrepreneurs are the most difficult to deal with. I admit to some bias from the self labelling. Most people who call themselves entrepreneurs do not think like long term business owners. They tend to think in terms of an exit strategy from the outset. Legitimate business owners couldn't really care less about CGT as they want to own the business that they have built.

2. Asset managers are fee gathering machines that exist for the benefit of the asset managers rather than the asset owners. The so call performance fees are where they make the bulk of their money through speculation. The way that high water marks tend to be reset means that the risk of good then poor then good performance is skewed in favour of the asset manager at the expense of the asset owner. As asset managers are professional speculators, I see no reason why their gains and losses should be treated any differently to ordinary income.

3. Banks are not investors. They should be middlemen earning a small margin on everything that they do. Some of them are also speculators. This didn't work out too well. If the tax regime discourages speculation, I am not bothered.

4. Private equity barons spend their time buying companies, asset stripping them, re-leveraging them and then selling them on. I fail to see how the world would lose anything if they disappeared. The true investors in start-ups are the so called angel investors who aid start-ups with equity well before the venture capital / private equity money enters the fray with their fees, complex structures and desire to sell as quickly as possible.

5. Companies exist primarily for the benefit of their management and bankers. The way that executive compensation is designed, management are generally rewarded for executing capital market transactions which have a short term impact on share prices rather than rewarding long term, organic growth. Changing the tax structure to favour organic growth over capital market transactions would be a positive development as far as I am concerned.

In general, I believe that there is too much leverage in the system. Changing the tax structure to equalise the after tax income from long term organic growth and short term capital growth which is clearly magnified by leverage can only be positive for the economy in the long run.

Permanent wealth is generated slowly. Transitory wealth is generated and lost quickly. Designing the tax system to discourage short term behaviour is a good thing.

As far as I am concerned, tax rates are too high and the state is too large. That does not mean that I am satisfied that a lower CGT and higher income taxes on ordinary income is my desired solution. I would prefer to see taxes from all sources taxed at an internally consistent rate that does not distort economic decisions.

As far as capital losses are concerned, I am in favour of them being carried back or forward. I think that 10 years is about right for the carry back / carry forward rules.