How risk averse are you?

grey_gym_sock

bowlhead99 wrote: »

True. Investor one supports the company by literally providing equity finance to the company. When he sells out, investor two is not directly giving the company money, because he is giving investor one some money instead... but he is taking over the risk of providing the initial capital and retained earnings to the company, rather than have investor one wind up the company and close it down which would be his only other route to getting his money back. By having investor two step in a a substitute owner, the company can continue, which the company would generally consider to be a a good outcome.

Also, let's say a company originally raised money from offering shares at 40p. Today - because the company has grown to have net assets on its balance sheet of 80p per issued share, and it is making annual profits of 10p per share per year:

I am willing to take over ownership of those shares for 100p each because I don't mind paying 10x earnings or 1.25x assets as I am willing to take the risk of earning that much from it in real terms, over future years. But I am of course riskng my hard earned money to do it and it's not like i am just going to work to get a paycheque; i may earn nothing from my investment or i may lose money. I hope that if do earn money from this endeavour I won't be taxed as heavily as if I had gone for the guaranteed cheque.

When i pay my 100p, the company doesn't get another 60p on top of what it had already collected from the first round investors, but can continue running its business with 80p of assets as a going concern rather than be put into liquidation. A Good Thing for the business and its employees.

Also, as my activity on the stock market has set a market price for transactions in the company shares of about a pound each, when the company *does* want to raise more money it is quite likely to be able to do that at 99p now rather than 40p earlier, which is great for the company and its owners because they don't have to seek more expensive capital elsewhere to keep the company afloat or growing.

this is an argument for having a stock market. it's not a good argument for taxing people who only "invest" by secondary trading of shares as lightly as people who actually start businesses. if the merely secondary traders (such as me) paid a bit more tax, stock markets would continue to exist. we wouldn't stuff our money under the mattress instead. now, if we decided to start businesses, instead of buying second-hand shares, because of the lower tax rates on offer, then so much the better - but i wouldn't expect much of that. realistically, people who start businesses do so because that's what they're driven to do, not because of low tax rates. but i'd be happy to give them somewhat lower tax rates - partly because, if they keep more of the proceeds of selling a business, they might use it to start another. but there is no need to give secondary investors (such as me) lower tax rates, or more tax-free allowances, than people who are earning their money.

it's worth noting that retained earnings are the main source of money for businesses to invest - and this applies to both quoted and private companies. sometimes, cash from rights issues and IPOs are for investment. but often, the cash raised in IPOs is just used to buy out the existing shareholders, in which case it is just another form of secondary trading. and rights issues are sometimes used to take over other companies, which again is just a kind of secondary trading. the stock market has very little - but some - relevance to actual new investment.

and the way the stock market, and corporate governance, has developed over the last few decades - more emphasis on short-term performance - cost-cutting, rather than investment; more cash paid out to shareholders (i.e. the total of dividends + share buy-backs), hence less retained for investment - has reduced the level of investment by companies. if you want more actual investment, then you should be thinking about who own companies (are they short- or long-term owners?), how the owners do (or don't) influence the management, other influences on companies' strategies, etc. not at the tax rates paid by the shareholders and bondholders.

chucknorris

grey_gym_sock wrote: »

that was more logical. or at least less illogical. but you didn't get indexation allowance against interest on savings accounts. so you could get taxed on income which was merely keeping up with inflation, but not when it was in the form of a capital gain. to be more logical, all forms of investment return, whether income or capital gain, should be taxed similarly, which implies (as well as applying the same tax rates to all income and gains) either allowing indexation allowance to be set against either income or capital gains, or not having any indexation allowance at all.

in practice, some people are in a position to choose whether they get their return in the form of income or capital gain, so treating the 2 differently (in tax rates, or indexation allowance, or separate annual allowances) is an open invitation to invent tax avoidance schemes (e.g. to convert income into capital gains).

so long as inflation remains low, i think no indexation allowance is reasonable; but if inflation were higher, i would give some indexation allowance (which could be set against income for assets, such as savings accounts, which can't produce capital gains). no indexation allowance, with low inflation, would be intended as a deliberate small bias in favour of earned income (the opposite of what we have now). also worth noting that many people have non-tax-deductible job-related expenses - e.g. for commuting - so perhaps there would be no bias if you allow for that.

(i doubt the government realized inflation would be so low when they removed indexation allowance, BTW.)

well, did the asset pay any income while it was held? if it did, then the net total return - i.e. income plus capital gain minus tax on income and gain - may well be ahead of inflation.

also, a capital gains tax bill may look high because you it's all paid at the end - in a similar way that self-employed people sometimes resent paying tax more than people on PAYE, because they have to actually hand over the tax themselves. but, supposing the tax rates are the same, you get more benefit from compounding if you only pay at the end instead of every year. e.g. suppose your gross return is 5%, compounded over 30 years, and the tax rate is 20% ... if you pay the tax every year, you get 4% compounded, so you end up with 3.24 times your starting capital; but if you get 5% compounded, and pay 20% tax on the final gain, you end up with 3.66 times your starting capital. so even with the same tax rates, long-term capital gains have some advantage.

You are missing the point, with capital gains tax you can be paying tax on a real term loss, not just on a reduced profit, like in my example. It isn't a valid argument to say that an income return on the asset may have covered that loss, because then the overall tax which the individual is paying would be higher than that individual's normal marginal rate of income tax (which was one of your original points, i.e. to align other taxes to that marginal rate). You also said that the capital gains taxes are low in the UK, but they are not is you are paying that tax on an actual loss, the only fair way to apply capital gains tax, is to allow indexation, the current system is not an accurate way of assessing the actual gain. Paying the CGT at the end is irrelevant as to whether it is high or not, the unfairness lies in the fact that someone may have to pay 28% tax (on a nominal gain) when the real term gain can be much lower (even negative).

When the taper allowances were scrapped, that impacted on investments made many years prior, so it wasn't only applied to subsequent investments. Not like when taper relief was introduced, and indexation allowance was allowed up to that point. If they were going to change the system they could have at least allowed the previous allowances to be used up to that point in time (I know that goes against their 'simplification' argument).

EDIT: I'm not complaining, I'm merely pointing out the logic, at the end of the day, the tax is what the Gov says what it is.

jamesd

grey_gym_sock wrote: »

this is an argument for having a stock market. it's not a good argument for taxing people who only "invest" by secondary trading of shares as lightly as people who actually start businesses.

Those founders and backers usually want to sell at some point, since a share you can't ever sell is worth nothing. The secondary buyers are the ones who set the price and provide that ability to sell.

People who start a business in addition can often get very substantial additional tax benefits from relief specifically for them.

grey_gym_sock

chucknorris wrote: »

You are missing the point, with capital gains tax you can be paying tax on a real term loss, not just on a reduced profit, like in my example. It isn't a valid argument to say that an income return on the asset may have covered that loss, because then the overall tax which the individual is paying would be higher than that individual's normal marginal rate of income tax (which was one of your original points, i.e. to align other taxes to that marginal rate). You also said that the capital gains taxes are low in the UK, but they are not is you are paying that tax on an actual loss, the only fair way to apply capital gains tax, is to allow indexation, the current system is not an accurate way of assessing the actual gain.

ok, perhaps what i should have said is: taxing gains which are merely indexation is really a form of taxation of wealth. but what is wrong with a little taxation of wealth? we need more of that, to counteract increasing inequality of wealth. inheritance tax is also taxation of wealth, but a small annual tax is in many ways fairer than a very occasional (depending on when people die) 40% tax.

If someone opened a savings account that returned less than the rate of inflation, they would be aware of that (or should be).When the indexation/taper allowances were scrapped, the impact included investments made many years ago, not just subsequent investments.

i think there were few years after indexation was ended during which disposals could use indexation up to the end date, but not after. and a bit later, they removed indexation from all later disposals.

but even if the system is known in advance, why should some forms of investment return be taxed differently to other forms? it's both unfair, and encourages avoidance schemes.

EDIT: I'm not complaining, I'm merely pointing out the logic, at the end of the day, the tax is what the Gov says what it is.

understood.

chucknorris

grey_gym_sock wrote: »

ok, perhaps what i should have said is: taxing gains which are merely indexation is really a form of taxation of wealth. but what is wrong with a little taxation of wealth? we need more of that, to counteract increasing inequality of wealth. inheritance tax is also taxation of wealth, but a small annual tax is in many ways fairer than a very occasional (depending on when people die) 40% tax.

i think there were few years after indexation was ended during which disposals could use indexation up to the end date, but not after. and a bit later, they removed indexation from all later disposals.

but even if the system is known in advance, why should some forms of investment return be taxed differently to other forms? it's both unfair, and encourages avoidance schemes.

understood.

I mentioned that in my edit, when they introduced taper relief, you could still claim indexation up to that point in time.It would have been fairer to have taken a similar approach (but goes against the 'simplification' argument).

The problem with increasing taxes on the wealthy is that you might kill the golden goose, I am just arranging a holiday on the Isle of Man (IOM) in July. I want to see what it would be like to live there (that would take many more trips), so the Gov may lose our taxes, that is the other side of the coin to taxing wealthy people more. We wouldn't go just for tax reasons, but we are going to move when we retire, and if the IOM stacks up from a lifestyle perspective, then the tax advantages may be enough to swing it for the IOM being the place that we choose to retire to.

grey_gym_sock

jamesd wrote: »

Those founders and backers usually want to sell at some point, since a share you can't ever sell is worth nothing. The secondary buyers are the ones who set the price and provide that ability to sell.

actually, a share you can't sell is worth something, providing you expect it to pay some dividends in the future. businesses did exist, and have a value, before stock markets did.

but i wasn't arguing for abolishing stock markets anyway, so that is beside the point. if stock markets exist, the founders have a possible exit route.

People who start a business in addition can often get very substantial additional tax benefits from relief specifically for them.

yes. my argument (earlier in the thread) was for retaining some of those lower taxes for people who actually start businesses, but not having any lower rates (compared to the tax rates on earned income) for people who buy shares second-hand.

grey_gym_sock

chucknorris wrote: »

I mentioned that in my edit, when they introduced taper relief, you could still claim indexation up to that point in time.It would have been fairer to have taken a similar approach (but goes against the 'simplification' argument).

ah, i hadn't seen that bit.

The problem with increasing taxes on the wealthy is that you might kill the golden goose, I am just arranging a holiday on the Isle of Man (IOM) in July. I want to see what it would be like to live there (that would take many more trips), so the Gov may lose our taxes, that is the other side of the coin to taxing wealthy people more. We wouldn't go just for tax reasons, but we are going to move when we retire, and if the IOM stacks up from a lifestyle perspective, then the tax advantages may be enough to swing it for the IOM being the place that we choose to retire to.

realistically, very few people will leave for tax reasons.

however, there are a few things that could be done to the tax system to make that less of an issue. how could the UK charge more tax on philip green's monaco-resident wife (who owns "his" UK-based businesses)? higher corporation tax, and/or re-introduce withholding tax on dividends. the continual dropping of corporation tax rates means that people in her position are paying less and less tax. but when the economic activity is in the UK, it is possible to tax it if you try. very little actual economic activity takes place in tiny tax havens. when people have capital, and want to make some return on it, they need to deploy it where there is real economic activity.

i come to this from the perspective of noting that i've paid substantial amounts of tax when i've been earning a lot (which is fine), but much less when i have income from investments. which seems odd. (though i note that i have no BTL, unlike you - and BTL seems to be treated (increasingly) less favourably compared to investment in shares - at least, once you have more properties than can be covered by partial PPR exemptions, flipping PPRs, etc.)

and i think we have problems with growing inequality, and the tax system could be a way (though not the only way) to counter that. so i see unpleasant social consequences of failing to tax wealth more.

if i carry on not spending much, i'm also likely to inherit something (though of course i don't rely on this), and i may end up moderately wealthy myself. the last thing i would worry about is paying more tax in that scenario. that seems completely illogical to me: there are diminishing returns from having more money, so if i have more, why would i especially care about having yet more again (by paying little tax)? though of course, i'm always going to do the straight-forward things to reduce tax (ISAs, pensions).

Glen_Clark

chucknorris wrote: »

You are missing the point, with capital gains tax you can be paying tax on a real term loss

Something savers have been putting up with for years with interest rates below the real rate of inflation.
But when you tax capital gains less than earned income its another incentive to invest in existing assets (like BTL) instead of starting a business to create new assets (making things we can sell abroad to pay off Osborne's debts)
Hence the rocketing National Debt and my worries about Sterling cash as a store of wealth.

Glen_Clark

grey_gym_sock wrote: »

however, there are a few things that could be done to the tax system to make that less of an issue.

One of the things we could do is make tax havens like IOM and Gibraltar etc pay a realistic contribution towards their own defence. At least so the British taxpayer doesn't remain saddled with the highest military spending in Europe to defend tax havens. Without them Britain should be about the cheapest country to defend, being surrounded by water.

chucknorris

Glen_Clark wrote: »

Something savers have been putting up with for years with interest rates below the real rate of inflation.
But when you tax capital gains less than earned income its another incentive to invest in existing assets (like BTL) instead of starting a business to create new assets (making things we can sell abroad to pay off Osborne's debts)
Hence the rocketing National Debt and my worries about Sterling cash as a store of wealth.

But it isn't in many cases being taxed at less than earned income, that is the point that I was making. Because the taxable gain is not taking inflation into account. People don't have to put their money in savings accounts, currently only 0.8% of my wealth is in savings accounts. The CGT tax on a loss situation was retrospective, when the taper allowance was replaced, the least they could have done was freeze it (and retain the frozen indexation allowance), the same way that they did when they replaced the indexation allowance, so it goes retrospectively all the way back to 1982 (so there have been some years of double digit inflation in that period). It would be fair enough to say for subsequent investments, that the investors know the rules, so they have the option not to invest if they don't like the tax rules (just like savers).