Monday, June 30, 2008

APPYING SOCIAL BENEFIT TO CAPITAL GAINS -

This is not what I wanted to talk about today, but it will do. Tomorrow I will be looking at DA Villalobos’ approach to the criminal investigation of Zavaleta and De Leon. I am becoming increasingly convinced he is setting up the investigation in a way so that he can blame the judges for ending the investigation. According to the Herald, which could be wrong, he has made a mistake that not even a first year law student would make. The last time I saw this was when Travis County DA Ronnie Earle empaneled the jury in the criminal trial of Kay Bailey Hutchinson and then informed Judge Onion he was not ready for trial, which forced Judge Onion to order the jury to find Hutchinson not guilty - more on that later the week.

Social benefit is a concept which is part and parcel intricate to socialism. The concept is simple - if there is a social benefit it is good, if there is not, then it is bad. I will concede that which has a social benefit can be debatable at times and may be subject to some type analysis related to the social norms of the time.

A big part of the economic debate currently ongoing between Democrats and Republicans is how to tax capital gains. Capital gains is basically the increase in value of an asset from the day of purchase to the day of sale - stocks are a good example. http://www.investorwords.com/706/capital_gain.html

In many cases I would tax capital gains at 30%, and the remainder at 0%. What is the difference? Not all capital gains create a social benefit. Americans make billions of dollars every year from capital gains on assets which contributed nothing to investment in real research and development (RD) and new products.
People who work the stock market know basically within a month or two when retail stocks will reach their low. It is actually quite predictable. They will buy low, and based on previous years performances will sell during the month retail stocks traditionally hit their high. The profits will be taxed at 15% in most cases. Exactly what benefit did society receive from this investment? Nothing.

Part of the problem with solving the oil and gas problem is we tax capital gains from investments in oil and gas the same as we do in retail stores. Investors, especially institutional investors will choose investments based on returns, and not based on social benefit. But if we were to remove capital gains on investments with social benefits, then investors might be more willing to invest large sums of money into the RD with knowledge that if it pays off, there is an automatic additional 15% tax savings on the original capital gains.

An example would be if I invest $100,000 into RD for a new car battery which would allow me to drive 500 miles without recharging it and which can be recharged in 15 minutes at a special recharging station, and the company in which I make the investment succeeds in marketing said battery, under my scheme I would not be taxed on the capital gains when I sell the stock for $500,000.00. For me that is an additional $60,000.00 in my pocket. A similar $400,000.00 capital gains for the sale of retail stock under my scheme would mean a tax of $120,000.00.

What this scheme does is reward investment in things which bring about new technology or new jobs. Retailers trying to raise capital to build new stores would be allowed to sell true capital stocks. Manufacturers trying to build a new factory would be allowed to sell true capital stocks. Meaning, stocks which are designed to raise capital for real capital development. As it is now, billions of dollars are invested everyday into speculation as to the artificial value of Target’s stock and that of other companies. No real capital improvement comes about as a result of said investment.

The social benefit scheme of taxation for capital gains, taxes capital gains from real capital investment at zero, and capital gains from non real capital investment at 30%. This scheme would promote real investment in our community because it rewards new jobs, and technology. Imagine you can invest $100,000.00 into building an new refinery and that in 5 years you can sell that stock for $250,000.00, tax free - would you? Yes you would. A cautionary note - I would make the capital gains on the second sale of the same stock at 15% with a progressive increase to 30% over time.

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