From: thf2@quads.uchicago.edu (Ted Frank)
Subject: Re: Taxes and stocks (mostly)
Reply-To: thf2@midway.uchicago.edu
Organization: University of Chicago Computing Organizations
Date: Mon, 16 Nov 1992 20:21:48 GMT

In article <1992Nov16.125105.5632@desire.wright.edu> demon@desire.wright.edu (Stupendous Man) writes:
>In article <1992Nov16.041235.26993@midway.uchicago.edu>, thf2@ellis.uchicago.edu (Ted Frank) writes:
>> Because of people selling off their stocks in December 1985 (or whenever
>> the tax took effect) for the tax break.
>
>	Fence sitters and cyclicals due to peak in the first half of the year
>would probably sell in December, but there is not incentive for others to sell
>& buyback, incurring the commissions and possible adverse price change.

What kind of adverse price change is there going to be in a five-minute
stretch?

>	Holding costs you nothing.  

Brett, that's 100% false.  If you have $1000 in capital gains, and the
tax goes up from 23% to 35%, holding on to the stock costs you $120.  
Period.  

Remember, all you have to do is sell and buy within five minutes.  Then
you've "realized" the capital gains in the year with the lower tax rate.
Yes, you pay two extra commissions.  But for a large number of people,
especially long-term investors, who'd been holding onto stocks since
the days when the Dow was below 1000, that tax gain is going to outweigh
the cost of the exta commissions.

>When, and if, you sell, it's at the higher
>rate, but that's just another incentive to hold on for a little more gain to
>offset the taxes.

We lose money on every sale, but make it up in volume?

My jaw is still on the floor after this sentence.

>> And I refuted it.  I can re-explain that, if you'd like.
>
>	Go ahead.  I doubt whether you'll convince many people that incurring
>two commisssions is better than holding in the face of an *eventual* increased
>tax bite.  And then, only if gains are larger than losses for that year.

If you're investing for gains, eventually you pay a tax bite.

Unless you *plan* to lose money in the stock market.  In which case,
yeah, you should hold onto stocks.

Do a Laffer-like experiment on the capital gains tax, Brett.  Pretend
that instead of raising taxes from 23% to 35%, the government raised it
to 100%.  Do you doubt that people wouldn't sell off for the tax break?
No matter what the commission?

>> Someone holding onto stocks with significant capital gains on the eve of
>> the tax change takes a huge hit that they don't have to if they sell and
>> rebuy the stocks.  Yes, this transaction incurs two commissions.  And for
>> *some* people, it's more profitable to take the hit.  But are you really
>> arguing that there wasn't a single American out there whose tax advantages
>> didn't outweigh the sum total of the commissions?  There
>
>	No, just that their numbers are within the noise ratio.  

But, Brett there was a *spike*.  It's clear that the numbers aren't within
the noise ratio.

>They would not
>significantly increase the totals in the face of the usual year-end sell-offs. 
>We could always take an un-scientific poll in misc.invest and ask how many
>people sold off to avoid the higher taxes.

I'd prefer if you asked people who knew what they were doing.  Or cite
to an investment column that told people *not* to take advantage of the
tax break.

I'm sure there are a number of people in misc.invest who have the same
fallacious reasoning as you do.  That's how the rest of the world makes
its money in the market.

>> were billions of dollars of capital that were sold off and sometimes, but
>> not necessarily, rebought, for the sole purpose of avoiding the tax hit.
>> Which increases revenue dramatically in 1985 and drops it dramatically
>> in 1986.
>
>	If people were going to get out of the market in the near term, that
>would certainly push them off the fence.  But most investors don't play the
>market, they play the individual stocks.

That doesn't stop them from taking advantage of the tax code.

>> Ask any tax lawyer who was around in 1985, Brett.  
>
>	That's a bit like asking a broker whether I should trade now or wait. 
>When does he want to get paid?  Tax lawyers will always trumpet tax code
>changes to drum up business.

What business is a tax lawyer going to drum up in 1992 to take advantage
of something that can't be taken advantage of after 1/1/1986?

Sheesh, I'm not a tax lawyer, and *I* can figure this out.  You mean
to tell me that investment fund managers holding billions of dollars of
stocks couldn't figure this out?

>> Or draw up the scenarios
>> yourself.  For a certain capital gain greater than some N, it was more
>> profitable to sell off in 1985 and pay taxes that year.  And there's
>> lots of money in that when you consider the large number of long-term
>> investors out there.
>
>	I still have stock from that period.  Unsold.  No taxes paid.  No
>commissions paid.  How have I been hurt?

If the additional 12% tax on your capital gains in 1985 was larger
than the cost of commission, that's how much you've been hurt.

12% is a big number, Brett.  A lot bigger than commissions for more
investors than you think.
-- 
ted frank                     | thf2@ellis.uchicago.edu 
standard disclaimers          | void where prohibited
the university of chicago law school, chicago, illinois 60637
Newsgroups: sci.econ