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Old 09-15-2012, 04:45 PM   #41
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I agree with everything Khufu says.

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Originally Posted by Khufu View Post
If I may say so, you, like most people, probably think of the national economy as like a household, which is something we all understand at least to some degree. For a household to borrow money, to spend more when its income is reduced is a reckless policy that will eventually lead to financial ruin. However, the national economy, even though it comprises, among other things, all the households in the country, is itself nothing like a household. A better analogy would be to a human body for which demand, i.e. borrowing and spending, is like flowing blood. If the blood doesn't flow the body will die. Unlike a human body though, the economy can die in pieces and to a degree, but as far as the essential life-giving aspect of maintaining demand the analogy has value.

So, the Fed's policy of lowering interest rates to the point of the zero rate lower bound and then buying up bonds to provide liquidity, is an attempt to stimulate demand by lowering the cost of money. You are right that "things" are worse than you realize because those "things" are jobs that people need and don't have. In huge numbers. You probably don't realize the extent to which the US is in a jobs depression, either because you still have one yourself or you don't need one. In addition to the lives that are being ruined, the output of those workers who are not engaged during this period is forever lost, which constitutes the "output gap" in GDP.

But the effect of monetary policy, which is the best the Fed can do, is limited and insufficient. Despite the complaints of the Hooverites, gold bugs and inflationistas, the Fed is not the cause of the jobs depression. The $8 trillion losses in the housing bubble plus the related losses in the financial markets are the cause. As in all other cases of recessions caused by the bursting of debt and speculation bubbles, the recovery is very slow. It would be much better if the govt pursued a fiscal policy of borrowing and increasing spending, such as investment in education, infrastructure and research in a wide range of areas from medical to energy. But the shocking polarization of wealth in America during the last few decades has also polarized politics to the point that investments in the future of this kind are no longer acceptable to the 1% because their interests have diverged from those of the middle class.
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Old 09-15-2012, 05:01 PM   #42
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Originally Posted by Khufu View Post
If I may say so, you, like most people, probably think of the national economy as like a household, which is something we all understand at least to some degree. For a household to borrow money, to spend more when its income is reduced is a reckless policy that will eventually lead to financial ruin. However, the national economy, even though it comprises, among other things, all the households in the country, is itself nothing like a household. A better analogy would be to a human body for which demand, i.e. borrowing and spending, is like flowing blood. If the blood doesn't flow the body will die. Unlike a human body though, the economy can die in pieces and to a degree, but as far as the essential life-giving aspect of maintaining demand the analogy has value.

So, the Fed's policy of lowering interest rates to the point of the zero rate lower bound and then buying up bonds to provide liquidity, is an attempt to stimulate demand by lowering the cost of money. You are right that "things" are worse than you realize because those "things" are jobs that people need and don't have. In huge numbers. You probably don't realize the extent to which the US is in a jobs depression, either because you still have one yourself or you don't need one. In addition to the lives that are being ruined, the output of those workers who are not engaged during this period is forever lost, which constitutes the "output gap" in GDP.

But the effect of monetary policy, which is the best the Fed can do, is limited and insufficient. Despite the complaints of the Hooverites, gold bugs and inflationistas, the Fed is not the cause of the jobs depression. The $8 trillion losses in the housing bubble plus the related losses in the financial markets are the cause. As in all other cases of recessions caused by the bursting of debt and speculation bubbles, the recovery is very slow. It would be much better if the govt pursued a fiscal policy of borrowing and increasing spending, such as investment in education, infrastructure and research in a wide range of areas from medical to energy. But the shocking polarization of wealth in America during the last few decades has also polarized politics to the point that investments in the future of this kind are no longer acceptable to the 1% because their interests have diverged from those of the middle class.
While I agree with first several paragraphs, don't know that I agree with the last 2 or 3 sentences. We have sent tons of money towards education, infrastructure and research of all kinds to include medical and energy. Can't say that it was managed well...but it was most certainly doled out. We all know of the government backed contracts whose costs sky rocketed out of control. The other thing I somewhat disagree with are the "causes" for the polarization of wealth. I dare say, the losses of our manufacturing sector and "blue collar" type positions have been as responsible for hurting our middle class and polarizing wealth as say perhaps the factors that led to the housing crisis. The housing and bank crisis (greed) nailed it shut...for a while. While it has become almost politically correct to blame the 1% I think the truth lies in the deeper reasons. Loss of industry sectors that once supported the middle class. We can thank years of Congressional decisions for that.
I have a view that the 1% have become the scapegoats. It wasn't a problem as long as everyone was doing moderately well. So the question is what happened to the middle class such they aren't doing well and such that the so called 1% have become the scapegoats? My answer is loss of industries that supported the middle class.
Just my opinion.
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Old 09-15-2012, 07:55 PM   #43
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I also believe that the average Japanese person does not invest in the stock and bond market so a flat market means nothing to them directly.
Exactly my opinion too that It is not affecting the Japanese as much as it would here.

Can you imagine the same thing happening here (dji acting like nikkei index) where almost every retiree is counting on 4% returns on their investment?

I would like to think we are too greedy to let that happen in this country...to let the stock prices stay low, you know. I hope there is a bunch of speculators who would buy tons when the prices are low and perpetuate the market game...
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Old 09-16-2012, 12:36 AM   #44
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While I agree with first several paragraphs, don't know that I agree with the last 2 or 3 sentences. We have sent tons of money towards education, infrastructure and research of all kinds to include medical and energy. Can't say that it was managed well...but it was most certainly doled out. We all know of the government backed contracts whose costs sky rocketed out of control. The other thing I somewhat disagree with are the "causes" for the polarization of wealth. I dare say, the losses of our manufacturing sector and "blue collar" type positions have been as responsible for hurting our middle class and polarizing wealth as say perhaps the factors that led to the housing crisis. The housing and bank crisis (greed) nailed it shut...for a while. While it has become almost politically correct to blame the 1% I think the truth lies in the deeper reasons. Loss of industry sectors that once supported the middle class. We can thank years of Congressional decisions for that.
I have a view that the 1% have become the scapegoats. It wasn't a problem as long as everyone was doing moderately well. So the question is what happened to the middle class such they aren't doing well and such that the so called 1% have become the scapegoats? My answer is loss of industries that supported the middle class.
Just my opinion.
Globalization is certainly one of the causes of the income losses for workers in manufacturing, but this was not the inevitable outcome of a natural process that was beyond the influence of policy. Indeed, Rubin's strong dollar policy of the 90's directly helped bring about this result. At the same time that blue-collar workers were ruthlessly exposed to competition from cheap labor countries by Walmart for instance, other sectors of the economy have retained effective protection against foreign competition such as doctors. At no point in the discussion of the many possible reforms to US medicine, for instance, did we ever hear a discussion about the pros and cons of a wholesale offering of green cards to any foreign doctors who can pass a US medical competency test as a method of relieving the doctor shortage in such areas as general practice. Free trade in medical skills would allow the US to benefit from the comparative advantages of countries with lower cost and more efficient medical training programs. The fact that this possible solution never emerged for discussion is evidence that the doctors have much more political influence than the blue collar workers.

And there are many other examples of policy choices that were made to benefit the upper classes at the expense of the general citizenry, such as:

Bush cuts in income tax rates for the rich
preferential tax rates on investment income over labor income
income ceiling on the payroll tax
Medicare Part D that provides for Medicare to buy drugs from the pharmaceutical companies, but prevents Medicare from negotiating on price
state govts reducing support for state universities resulting in tuition increases that affect lower income students disproportionately
the Citizen's United decision of SCOTUS extending more political influence to corporations, the ownership of which is largely in the hands of the rich
refusal of Greenspan's Fed to regulate the mortgage industry
extension of monopoly protections for copyright and patents benefiting corporations
failure of the FBI to institute massive investigations/prosecutions of fraud in the mortgage industry in 2004 when it reported the large increase in fraudulent activity

The list could go on to book length. Far from being scapegoats the 1% have successfully waged class war against the middle and working classes. Far from being the "job creators" of myth, the top percentiles have engaged increasingly in rent-seeking behavior, i.e. extracting money from economic activity while adding little or no economic benefit.

Those were just a few of the policy decisions that benefitted the rich. And what about the results for the rest of us? Median US household income in real terms is back to 1989 levels, but not for the upper percentiles. The US taxation system is less progressive than Europe's while social mobility in the US is less than in Europe. American medicine produces poorer outcomes at vastly higher expense than those of other highly developed countries. In the 2000's up until the crash 40% of profits of the S&P 500 went to financial companies, whose last beneficial innovation, as Volcker points out, was the ATM machine. And so on.
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Old 09-16-2012, 03:48 AM   #45
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Globalization is certainly one of the causes of the income losses for workers in manufacturing, but this was not the inevitable outcome of a natural process that was beyond the influence of policy. Indeed, Rubin's strong dollar policy of the 90's directly helped bring about this result. At the same time that blue-collar workers were ruthlessly exposed to competition from cheap labor countries by Walmart for instance, other sectors of the economy have retained effective protection against foreign competition such as doctors. At no point in the discussion of the many possible reforms to US medicine, for instance, did we ever hear a discussion about the pros and cons of a wholesale offering of green cards to any foreign doctors who can pass a US medical competency test as a method of relieving the doctor shortage in such areas as general practice. Free trade in medical skills would allow the US to benefit from the comparative advantages of countries with lower cost and more efficient medical training programs. The fact that this possible solution never emerged for discussion is evidence that the doctors have much more political influence than the blue collar workers.
Since the rest of your point are close to a political discussion I'll steer clear of them. But I don't find the Dr. argument at all compelling.

I don't think there has been high tech CEO (i.e. rich guy) for the last 25 years that hasn't advocated that a green card gets attached to the diploma of any foreign student who gets a Masters or Doctorate in a STEM field, including an MD. There is not a lot of opposition to the idea, some from professional engineering organization, and some from unions. But I don't look at the failure of this idea which draws wide bipartisan support as the power of labor unions lobbies, or the brilliant lobbying of the IEEE (Electrical Engineer organization) but rather I see this as the basic dysfunctional nature of our government. Even things that 75% of Congress agree on get held hostage to political games.
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Old 09-16-2012, 05:46 AM   #46
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If I may say so, you, like most people, probably think of the national economy as like a household, which is something we all understand at least to some degree. For a household to borrow money, to spend more when its income is reduced is a reckless policy that will eventually lead to financial ruin. However, the national economy, even though it comprises, among other things, all the households in the country, is itself nothing like a household. A better analogy would be to a human body for which demand, i.e. borrowing and spending, is like flowing blood. If the blood doesn't flow the body will die. Unlike a human body though, the economy can die in pieces and to a degree, but as far as the essential life-giving aspect of maintaining demand the analogy has value.
I agree that are profound difference household economy and national economy. But I think it is important to understand that there is also profound differences between the national economy of 2012 and the world of John Maynard Keynes in 1933 when The Means to Prosperity was written. A lot has changed in the last 75+ years and some of the Keynes ideas which made sense during the Great Depression may no longer make sense as cure for the Great Recession.

One main differences is the size of government, back in the 30s total government (Fed+local) spending was in the teens for most developed countries. Now days it is 35% to almost 50% in Northern European countries. What this means is that if we increase the deficit spending by 5% of GDP (say from 3% to 8%), if government was 15% back in the 30s and goes to 20% that much larger increase than 30-35% today. This decreases the multiplier effect.

Second capital is vastly more liquid than it was back in the last century,much less in the 1930s. It isn't just the obvious things; how I can shift 200K from the US equity markets to the international equity markets with a few mouse clicks. How computerized trading program can shift billions in milliseconds. In search of higher returns I have been flying into Vegas and buying rentals properties. I can do a lot of looking at these properties, get assessment of the fair market price from my house in Hawaii something not possible a decade ago. But what is truly remarkable is my Realtor in Vegas has investors not only from the out of town, but from foreign countries like Canada and the Philippines and she's never even met some of them.

I am not a big fan of analogies but to me a much better one is the national economy is network on the internet. We have watched for 20 years as government have tried and fail to keep information from their citizens. As one of the internet pioneers said "the internet treats censorship as damage and routes around it." I think the same thing is true of capital markets , when central banks try to manipulate the currency and government try and play games with fiscal policy. The markets (eventually) see through the game and gets around it searching for the highest risk adjusted return. The result is these policies are far less effective than predicted and there are unintended consequences.

So for instance in QE3 Bernanke acknowledges that this will be painful for retirees and savers. Lower interest rates means lower spending for retirees like myself with no pension or social security, counteracting some of the stimulus. One of the best explanation I've seen what is really behind QE3 is attempt to trigger the wealth effect, if our 401Ks go up and houses price raise because of even lower mortgage rates maybe we will spend more. However, what isn't talked about is that some of the money Bernake creates will flow into other asset class like commodities; precious metals, oil, gas, agricultural products. The higher prices of these will increase cost to both business and consumers further counter acting the stimulus effect.

The one thing that has not changed since Keynes times is the mobility of labor. In part because of the housing crisis, it is not much easier for unemployed mortgage loan broker to travel to the Dakotas to work in the oil fields than it was for the Okie farmer to go to California and get job in the aviation business in the 1930s.

But what has changed is in last decade or so is we have seen a billion new worker in the BRIC countries move from subsistence agriculture to become part of the global economy. A billion new workers means lower wages and the developed world has been very slow to accept this. Despite all the prattle about American workers are the most productive in the world, I am skeptical. But I am especially skeptical than a factory with 100 American workers and 10 million in capital is much more productive than 100 Chinese workers and 10 million in capital. Since it is easy for capital to move, I think the productivity gap between developed country workers and Asian workers will continue to narrow and so will wages.

For much of the last decade we have been in denial about these lower wages. Individuals have maintained their standard of living by borrowing heavily. Countries have attempted to cushion the blow, by borrowing heavily from the Chinese and other, in order to provide their citizens with better health care, pensions, earlier retirement ages, and shorter work weeks. I'm afraid the game ended back in 2008 and people simply need to accept that we are going have to live with the hangover of our excesses from earlier in the decade.

Sure in the short term a few stiff drinks sound very appealing but in the long run, heavy drinking will kill us to use your body analogy.
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Old 09-16-2012, 06:49 AM   #47
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preferential tax rates on investment income over labor income
You want to eliminate the risk premium? Why would those who start up/invest in businesses wherein there's a possibility of losing some/most/all of their money choose to take this route if they're going to be taxed at the same rate as someone who, say, puts their money in fixed income CDs?

I can envision at least two outcomes:

- Investors will demand higher returns to offset the increased taxation rates, which will impact the cost of doing business, and result in a price upswing that will disproportionately affect lower wage earners.

and/or

- There will be fewer people starting/investing in companies, which will result in lower employment opportunities......or increased offshoring to areas with better tax rates.
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Old 09-16-2012, 06:59 AM   #48
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On the doctor thing - we DO have a huge influx of foreign doctors from foreign medical schools due to the AMA restricting the number of doctors graduating form US medical schools. These doctors fill open residency positions and go on to become board certified in their specialty in the US. Where I live only a tiny percentage of doctors went to US medical schools.
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Old 09-16-2012, 07:52 AM   #49
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preferential tax rates on investment income over labor income
As has been discussed here before, there are many cases where the tax rates on investment not only exceed those on labor, but losses (due to inflation) are taxed as gains, when they rightly ought to be allowed to offset gains.

At any rate, if you want more investment in capital here to stimulate jobs, it's tough to see how increasing taxes on investment rewards will help.

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Old 09-16-2012, 07:55 AM   #50
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We could sure use a Solomon like figure to lead us out of these trying times.

I understand the theory about the government spending more money to stimulate the economy. What I do not understand is how we get out of the spending spree if things turn around. Will that not in turn effect the economy if the money stops flowing. It is a similar argument as the Bush tax cuts. Though the Bush tax cuts are unpopular with some, at the time they were instituted they did what the intent was and that was to stimulate the economy. Remember at the time the country was in a recession and then 9-11 came and there was legitemate fear for the economy. Both Democrats and Republicans voted for it with the stipulation that they expire in ten years.

Our representatives feared the impact on the economy if they let them expire and so they keep extending them. Is this not what we will face with the increased spending? When does it end?

To blame successful people for the problems with the economy is going a bit far. I would think that most if not all members of this forum have stock or mutual funds, or pensions that invest in them. Do you wish that these companies do poorly? That people only work for companies that are financially struggling?

You can point to companies that have strectched the limits ethically but at the same time you should not overlook the people who are dependent on the government by choice and not need.
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Old 09-16-2012, 08:03 AM   #51
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It has never been clear to me how borrowing money will improve the economy. The borrowed (or created) money must produce a return that is greater than the cost of borrowing it for this to work.

The Government is not a business and does not operate on a profit motive. Not the best entity to get a return from investments.

Borrow and spend plans can only stimulate the economy for a short time. Then the bills come due. Eventually the cost of servicing the debt will exceed the economies ability to support it.
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Old 09-16-2012, 08:12 AM   #52
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On the doctor thing - we DO have a huge influx of foreign doctors from foreign medical schools due to the AMA restricting the number of doctors graduating form US medical schools. These doctors fill open residency positions and go on to become board certified in their specialty in the US. Where I live only a tiny percentage of doctors went to US medical schools.
At the risk of straying off topic, I'm curious how exactly the AMA restricts the number of doctors graduating from US medical schools, and where they got that ability from?
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Old 09-16-2012, 10:54 AM   #53
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It's been going on at least since the 80's. Basically convinced congress there was an over supply of physicians, who then cut back funding for residencies.

article from '86

CURBING THE SUPPLY OF PHYSICIANS - WHO SAID WE HAVE TOO MANY DOCTORS? - NYTimes.com

article from '05

USATODAY.com - Medical miscalculation creates doctor shortage
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Old 09-16-2012, 11:02 AM   #54
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Rates are so low right now that the real cost of capital for the government is currently negative, if you assume an inflation rate of 2%. If you assume that we'll eventually see an uptick in inflation, it looks even better.

There really has never been a better time for the government to borrow money for long-term infrastructure projects.

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It has never been clear to me how borrowing money will improve the economy. The borrowed (or created) money must produce a return that is greater than the cost of borrowing it for this to work.

The Government is not a business and does not operate on a profit motive. Not the best entity to get a return from investments.

Borrow and spend plans can only stimulate the economy for a short time. Then the bills come due. Eventually the cost of servicing the debt will exceed the economies ability to support it.
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Old 09-16-2012, 11:17 AM   #55
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We could sure use a Solomon like figure to lead us out of these trying times...........
Sounds appealing, but can go badly wrong. Think Stalin, Mao, Jim Jones....
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Old 09-16-2012, 11:18 AM   #56
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Generally, I think government "borrowing" should be limited to "investments", such as highways, airports, schools, etc.

These could provide an immediate stimulus while having something to show for it down the road.

For the most part, I find the whole "tax the rich" thing distasteful and misguided. I am "okay" with progressive rates, I suppose. And one has to wonder just how many mansions, jets, and yachts one person needs. On the other hand, someone has to build and maintain the aforementioned amenities. But, perhaps, if someone has multiple mansions, jets, and yachts, a bit higher tax rate would not necessarily reduce their willingness to invest.

I am willing, as if I have a choice, to accept either version of government, as long as it's paid for, which includes pretty much everyone, rich and poor. To paraphrase, the best way to get rid of government excess is to have to pay for it...
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Old 09-16-2012, 11:26 AM   #57
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Rates are so low right now that the real cost of capital for the government is currently negative, if you assume an inflation rate of 2%. If you assume that we'll eventually see an uptick in inflation, it looks even better.

There really has never been a better time for the government to borrow money for long-term infrastructure projects.
That is quite true but at the rate the Fed is buying U.S. treasuries and now mortgages, Bernanke will be the true ruler of the country before long.
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Old 09-16-2012, 12:43 PM   #58
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A massive energy policy maybe would get us out of the jobs slump? We are now producing so much natural gas that it is getting hard to even store it. If we built a vast amount of infrastructure to utilize this, and also started building some coal gasification plants (would probably take a decade but would make jobs now), we could put an insane amount of people to work and become net exporters of oil to places like Asia and Europe.

The USA has a lot of resources
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Old 09-16-2012, 07:13 PM   #59
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It has never been clear to me how borrowing money will improve the economy. The borrowed (or created) money must produce a return that is greater than the cost of borrowing it for this to work.

The Government is not a business and does not operate on a profit motive. Not the best entity to get a return from investments.

Borrow and spend plans can only stimulate the economy for a short time. Then the bills come due. Eventually the cost of servicing the debt will exceed the economies ability to support it.
At the end of WWII the US national debt was about 120% of GDP. Twenty years later it had dropped to 40%. How did the US manage to pay off so much of the cost of the war in twenty years? It never did. The economy grew. The stimulus from the war spending lasted a very long time.

When the govt borrows money and spends it, the effect on the economy is the same as when a company does. The "profit" to the govt comes from higher tax collections on an economy that grows.

Japan's spending during their two lost decades has produced a national debt greater than their GDP, either 120% or 200% depending on how you count. The interest rate on 10 year Japanese Treasury bonds is currently less than 1%. If their is a level of debt that the Japanese economy cannot support, they haven't found it yet.
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Old 09-16-2012, 07:21 PM   #60
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You want to eliminate the risk premium? Why would those who start up/invest in businesses wherein there's a possibility of losing some/most/all of their money choose to take this route if they're going to be taxed at the same rate as someone who, say, puts their money in fixed income CDs?

I can envision at least two outcomes:

- Investors will demand higher returns to offset the increased taxation rates, which will impact the cost of doing business, and result in a price upswing that will disproportionately affect lower wage earners.

and/or

- There will be fewer people starting/investing in companies, which will result in lower employment opportunities......or increased offshoring to areas with better tax rates.
Historically capital gains tax rates have varied significantly without a noticeable effect on the willingness of entrepeneurs to start businesses.

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