From: demon@desire.wright.edu (Stupendous Man)
Newsgroups: sci.econ,misc.invest,misc.taxes,talk.politics.misc
Subject: Re: Taxes and stocks (mostly)
Date: 17 Nov 92 17:10:07 EST
Organization: Demonic Possesions, Inc.

In article <1992Nov16.202148.24943@midway.uchicago.edu>, thf2@quads.uchicago.edu (Ted Frank) writes:
> 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?

	Differences in price can be quite large.  You'd have to wait for
confirmation of the sell before you bought, at the least.  A smart trader would
wait to see what else the market was doing.  You don't want to buy at the top
end of a downslope.  You also don't want to buy if there is a local peak in the
price.  (A period when the price rises slightly before continuing down.
	And there's always the chance that after you sell the price simply goes
up, and up, and up...before you get back in.

>>	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.  

	Sorry, but there are no losses.  Someone does not knock on your door
and ask for money.  Paper "losses" are only real if you actually sell at that
point.  Most successful traders don't base their trades on paper.
	I held my Sears stock.  It's double since then (17-35), so where are my
"losses"?  (And I still haven't sold.)

> Remember, all you have to do is sell and buy within five minutes.  Then

	Do you buy stocks?  Have you ever gotten confirmation within five
minutes?  If you don't wait for confirmation you could be in for a rude
awakening the next day.

> 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.

	I don't agree (that is probably obvious by now :).  Anyone who held is
up by two commissions and the tax paid.  It's even better when you realize that
Clinton will either index capital gains for inflation or cut the rate.

>>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?

	Nope.  There's a difference between profit and loss.  I get the
impression that you don't trade stocks.

> My jaw is still on the floor after this sentence.

	As well it should be.  Best not to repeat it, eh?  If I'm paying 3%
more in taxes, but I sell at $10/share higher, it's more profit than selling at
the lower rate, but at $10/share less.
	You see, you can't guarantee that you'll get back in at the same price
you get out with.  You can't even guarantee that the stock won't simply
nosedive.  Selling and buying back immediately simply locks in whatever profit
you have at that time.  And if that were a successful investment strategy (ie,
repeatable) then everyone would be doing it as soon as their profits cleared
commission by X%.
	However, you can't know whether getting back in will be profitable. 
And if you are that sure the stock will go up, then hold it and save the taxes
and commissions.

>>> 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.

	Maybe.  If Clinton lowers the rate, I win BIG.

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

	Heh.  Good thing you're in law school.

> 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?

	Ahhh, the straw man.  Of course we can now argue about 100% income
taxes to prove Laffer, eh?

>>> 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.

	Year:	Revenue from cap gains (millions):

	1965	$4,100
	1966	$4,000
	1967	$5,500
	1968	$7,200
	1969	$5,900_________rate hike here
	1970    $3,600
        1971    $5,300
        1972    $6,900
        1973    $6,900
        1974    $5,600
        1975    $5,600
        1976    NA    
	1977	$8,104
	1978	$9,104________rate cut here
	1979	$11,669
	1980	$12,459
	1981	$12,684
	1982	$12,900
	1983	$18,500
	1984	$21,800
	1985	$26,500
	1986	$49,700_______rate increase here
	1987	$32,900_______crash here
	1988	$38,900
	1989	$36,020

	1990 should be out now, but I haven't been able to locate it.

        So, look at the periods after rate hikes, and the ones after rate cuts. 
Now you pick which trend you'd rather have.
        You can argue that $50k is a spike *caused* by the rate hike, but you
can't argue that the revenues have not declined since then.

>>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

        So we should leave you out? :)

> to an investment column that told people *not* to take advantage of the
> tax break.

        I can cite any number of investment columns that have been wrong. 
Getting it right means making a profit.  Which I have done.  Now, how much
money did you make?

> 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.

        Heh.  So your portfolio is up how much this year?  Mines up 40% so far. 
There's still time to get in on Value CIty and Federated.  Nike has passed you
by as have Liz Claiborne and Reader's Digest.  Allthough you did miss out on a
lackluster Spaghetti Warehouse. :)

>>> 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.

        Or simply looking at the larger picture.  The saying "pennywise and
pound foolish" comes from such situations.

>>> 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?

        What's your point here?

> 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?

        Heh, investment fund managers make money when they churn.  They make
even more money when they show gains.  And they make still more when the gains
last more than one year.

>>> 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.

        Not at all.  When Clinton lowers the rate, or indexes for capital
gains, I win big.

> 12% is a big number, Brett.  A lot bigger than commissions for more
> investors than you think.

        Sure it is, but 100% is even bigger.  (Sears doubled in that time
frame.  If I had sold, I would have paid more to get back in.)

        If you're so good that you can time the market, and can predict the
price of a stock 3 hours from now, I invite you to do some stock trading and
prove me wrong.
        But until you can show better results, I don't think any investors will
listen to you.

Brett
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80s: 18 million new jobs, deficits down (%GNP), tax rates down, tax revenues up
GNP up, inflation down, unemployment down, interest rates down, cold war won
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