Thread: Why should capital gains be taxed?

Originally Posted by Viktyr Korimir

Yeah. I know that long-term investing still exists. It just seems like it's fallen out of favor. People want to make the "fast buck"-- and keeping making the fast buck over and over again-- instead of trying to build real wealth, real value.

I can agree with that.
Partially why I'm very leery of tech stocks, like Apple and Google.
Love the Google product line (how can you not, it's largely free), but that's also the problem too.

How long can they go on giving services away, for ad revenue.
At least with dividends, I can get some of my initial investment back, but I drip soooo.

Originally Posted by Viktyr Korimir

Yeah. I know that long-term investing still exists. It just seems like it's fallen out of favor. People want to make the "fast buck"-- and keeping making the fast buck over and over again-- instead of trying to build real wealth, real value.

It most likely just our perceptions of what other people are doing, or maybe because those are the people we always hear about. I would wager to say that more people now a days have money in a tax deferred retirement acount such as a 401k, Roth/Simple IRA, etc. than most other times in our history, and those are not people trying to make a buck on day trading.

The problem is that an investment's price becomes disconnected from its value. It no longer has any basis in reality, and thus becomes susceptible to wild fluctuations in price based on nothing more than human instincts and emotions. It removes rational economic decision-making from the equation and turns the economy over to the same thrill-seeking and poor decision-making associated with gambling.

That would be a market inefficiency that becomes less and less likely the more people you have participating in the market. While I do think that the efficient market hypothesis is a useful and reasonably accurate model for the stock market, stocks sometimes do become disconnected from their value in the short term. However, for the long term investor this is not a concern as they these mis-evaluations will be ironed out eventually. So just don't go buying a stock trading at 30+ times its earnings or utilize one of the many index funds now available that will diversify away almost all of this risk.

Originally Posted by Viktyr Korimir

Yeah. I know that long-term investing still exists. It just seems like it's fallen out of favor. People want to make the "fast buck"-- and keeping making the fast buck over and over again-- instead of trying to build real wealth, real value.

Part of your perception is possibly the result of the media attention given to day traders. When technology and competitive pressures forced commissions down to pennies per share, transaction costs became much cheaper. (Google 'May Day 1975' for info how expensive it used to be to trade). When technology permitted those in far away places, any place, actually, to trade as if they were 'upstairs' traders on the street, many, many would-be Jesse Livermores were attracted to the market. The media caught on to this and publicized it. This group is now a part of the market, for better or worse.

Better in that their activity adds to the depth, breadth and liquidity of the market as a whole. Worse, in that a significant proportion lose money and drop out. Being a success at day trading is, over the long term, very difficult.

Question: How do you make a small fortune on Wall St?
Answer: Start with a large one.

The problem is that an investment's price becomes disconnected from its value. It no longer has any basis in reality, and thus becomes susceptible to wild fluctuations in price based on nothing more than human instincts and emotions. It removes rational economic decision-making from the equation and turns the economy over to the same thrill-seeking and poor decision-making associated with gambling.

Despite the publicity and attention given to short term market moves, the underlying bedrock of the capital markets still exists. That bedrock is the huge pool of savings committed by pension funds, mutual funds and other institutional investors. Just take a look at the amounts in the Fed's Flow of Funds report.

Consider also the primary function of the capital markets: facilitating the intersection of entrepreneurs and investors. The raising of capital to finance enterprise is an essential part of any robust economy. IPO's and secondary issuances of equity shares have been modest during and since the recession, which is typical of immediate post-recession periods, but think about how important this activity is over the longer term. Corporate bond issuance has been pretty robust, as is typical of periods of lower interest rates.

Longer-term investors don't get as much attention these days, with the lion's share of attention given to the 'sexier' hedge funds and almost rock-star status of the more successful of these managers. Don't be fooled by the CNBC-ish hype.

Originally Posted by drz-400

On the most basic level you are correct. Basically what you are saying would flow directly from the definition of a secondary market. But if I am going to go out and pick a single stock to put my money on, I will indeed be looking at its business model, long term viability, management, and expected earnings. So in one regard I am investing in the company, though if I am purchasing my stock on the secondary market I am not contributing any additional capital to the company. However, my activity (as well as the millions of others) provides liquidity from which many of the benefits of the stock market flow from. Finally, ask yourself a simple question, if a stock market provided no economic benefit to companies, why would any public corporation put forth the rather large time and expense to list themselves on a stock exchange and issue shares? Surely these large institutions with very experienced management would not do it if it was not worth the cost (and then some).

There is an economic incentive to list a company on the stock exchange. Only a company doing well can be listed and accepted as an IPO. Once listed, if some problem develops, the company can issue more stock to get money, so it can continue it's business and get it through a bad time, even when a bank won't lend it. It can even raise money on the stock market and pay off debt to put it's house in order.

The people investing in stock are just hoping the corporation will manage itself properly and grow as it should.

Originally Posted by CriticalThought

I'm just curious why should there even be a tax on capital gains? If people invest with money that they earned, then that income was already taxed, so why should they be taxed based on whatever that money earns? It isn't like the government pays people back if they lose money through investments so why should the government be free to tax money earned off of investments?

probably because of the same reason they can keep taxing me on the house iv'e already bought and paid taxes on year after year.

Originally Posted by Gary

There is an economic incentive to list a company on the stock exchange. Only a company doing well can be listed and accepted as an IPO. Once listed, if some problem develops, the company can issue more stock to get money, so it can continue it's business and get it through a bad time, even when a bank won't lend it. It can even raise money on the stock market and pay off debt to put it's house in order.

The people investing in stock are just hoping the corporation will manage itself properly and grow as it should.

That almost defeats the origional purpose behind the value of having the stock market. The theory is that companies that need very large amounts of capital, more than could be acquired from a limited number of investors, can be accumulated by publicly offering stock. Thus, even a poor or middle class person could potentially start a GM size company. If you already have to have a large profitable company to become publicly owned and traded, it essentially becomes impossible for someone who does not already have close relationships with lots of rich people to start a large company. It's an artificial barrior to success.

Originally Posted by majora$$hole

probably because of the same reason they can keep taxing me on the house iv'e already bought and paid taxes on year after year.

No. That tax is for things like police and fire protection and even to pay for schools. Those are all ongoing costs and last forever, thus the taxes have to last forever also.

You are welcome to un-American and resent paying taxes all you like, but what you pay in property tax is probably a bargain. How much would it cost you to have your own private police force? Or court system? things like police and courts and jails and laws help to protect your right to owning that property. Without that, someone with a big club could just come along and take your property by force.

Originally Posted by imagep

No. That tax is for things like police and fire protection and even to pay for schools. Those are all ongoing costs and last forever, thus the taxes have to last forever also.

You are welcome to un-American and resent paying taxes all you like, but what you pay in property tax is probably a bargain. How much would it cost you to have your own private police force? Or court system? things like police and courts and jails and laws help to protect your right to owning that property. Without that, someone with a big club could just come along and take your property by force.

fine but take it directly out of my check don't threaten me by saying you are going to take away my home if i don't pay.

Originally Posted by majora$$hole

fine but take it directly out of my check don't threaten me by saying you are going to take away my home if i don't pay.

so your issue with property tax is that they don't automatically take it out of your check?

Originally Posted by imagep

No. That tax is for things like police and fire protection and even to pay for schools. Those are all ongoing costs and last forever, thus the taxes have to last forever also.

You are welcome to un-American and resent paying taxes all you like, but what you pay in property tax is probably a bargain. How much would it cost you to have your own private police force? Or court system? things like police and courts and jails and laws help to protect your right to owning that property. Without that, someone with a big club could just come along and take your property by force.

the real bargain is what half of America gets in terms of federal government benefits -they get exactly the same thing as those who pay 400K or more in federal income taxes and they don't pay a penny