Hudson: Coming to Terms with FIRE

[flintlock]

Re: Hudson: Coming to Terms with FIRE

This whole issue is not the real problem. Hudson wants to re-invent the wheel when all that is needed is a tune up. Fix loopholes in the tax system, punish fraud, break up monopolies and you will see an improvement. The strong value the US puts on RE ownership rights has been a huge draw for it's economy for decades. Tax property enough and you can end up with what basically amounts to public ownership with the "owner" in effect renting his own property from the govt. Raise too much and watch the money flood out of the country. And people wonder why people have been leaving the NE for greener pastures. Just look at the taxes.

[c1ue]

Re: Hudson: Coming to Terms with FIRE

However, land does not produce wealth if it is not "worked" in some fashion -- buildings built and maintained, crops planted, wood harvested -- so there is always an "earning" aspect to it. Even renting farmland out to others still requires paying taxes and some management (something that is readily obvious to anyone who becomes a landlord).

As I alluded to in the previous post - Hudson has no issue whatsoever with charging for services rendered. Maintenance, cost of sales/servicing, etc etc all are perfectly legitimate ways to be paid - and are thus not free rent.

Of the categories noted above, all except perhaps renting out farmland fall into this category.

The problem with Proposition 13 isn't its original premise per se: that outrageous increases in property taxes should be ameliorated. The problem is both with its premise and implementation. The problematic premise is that limiting property tax increases in any way reduces the overall tax load; as history now shows, the only real effect was to shift state tax revenues away from property taxes and onto sales and income taxes (and other stuff like vehicle license fees). The problem with this being that these other taxes are all much more regressive - effectively shunting more and more of the tax burden onto the poorer people. Some parts of the population consider this a benefit.

The problem with Proposition 13 on the implementation side is that it naively (or deliberately) made the assumption that any changes in property valuation over or under 2% was 'unnatural'. History has in this case also shown this to be a fantasy - although to be fair - 2% was probably fairly descriptive of annual property valuation changes prior to the abrogation of Bretton Woods.

If owning land was such a free lunch, why are so many on iTulip buying gold, and those suggesting real estate are in the minority. With the property "free lunch" you would think that EJ's investment focus would be on real estate rather than gold, but I moved to the cheaper seats a few years ago, so I have no idea what he's recommending now.

Because the 'economic free rent' aspect of property accelerates compounds over time even if the short term costs and risks are quite high, whereas gold is insurance precisely against a major US balance of trade crisis and also has the benefit of being much more liquid. Gold also doesn't compound over long periods of time.

If you think owning land is "unfair" because income is earned forever, what is your solution?
Should we restrict land ownership to 50 years, after which it must be sold?
Should we raise income taxes on rent collection?
Should we prevent homeowners from turning over their property to their children after death?

None of the above.

If property tax rates are set to an agreed upon level - say at the point needed for funding of public education, which is where many of the property taxes were originally set for - that's one way.

Another way is via supply and demand - but that of property. An overly low property tax rate means huge amounts of property can bought and held for costs far below future gains by speculators or wealthy people. Hudson has noted many times that increasing the property tax rate - even a small amount - makes it uneconomic to just hold property which is doing nothing. Put it this way: if you're renting out property - why would a 5% property tax matter? The 5% property tax would be passed on directly to the renter as a cost of business - and every landlord would face the same cost. Obviously 5% is probably too high - 3% plus a homestead exemption seems to work quite well in Texas.

This brings up another interesting question: Should anyone derive benefit forever for an asset?

If I bought a share of Coca Cola in 1919, should I turn in my stock now, rather than continue to earn income from it . . . .

It all depends on the asset. Hudson doesn't have any issue with the stock market or shares in companies; after all, Coca Cola may have done well but 95% of its peers in 1919 no longer exist. Clearly not much free rent there unless you have a time machine.

Do I need to point out that the dynamic for land is completely different?

So I'm a poor person renting a crappy apartment or house. Now my landlords property taxes double. How does this help me? Sounds like a good chance I'll be paying higher rent or the landlord will have even less money for maintenance.

If property taxes double, then the price of property falls. Falling property valuation decreases the capital cost basis of rent even if it increases the ongoing cost of goods basis.

Put another way: is rent higher or lower in California - a low property tax state - vs. Texas - a high property tax state?

Examining the 50 state property tax vs. valuation situation shows a general trend where higher property taxes = lower property values. There are apparently exceptions like New Jersey, but the problem is that New Jersey can easily be said to have property valuations skewed by the very close proximity of New York. Within New Jersey, for example, there is a very clear trend where proximity to New York (and highways leading to same) = high median property value, with the exception of the peninsula south of Atlantic City.

Hudson also notes that increased property taxes will force more property to 'working' status - thus leading to increased supply/competition. This isn't so hard to imagine either: if you're a property owner with a high property tax, the need to receive revenue to offset property taxes would make you a lot less picky about short term failure to make a profit or even repay cost of capital. Certainly the cost to have the property empty is much higher than in a low property tax regime, while the cost of capital is identical.

This whole issue is not the real problem.

I disagree.

The entire point Hudson is making is that economic thought and action in the past 5 decades has been diverted into a stream completely different than the century plus before it. The shift in state revenue from property to 'other' is also well documented, thus it is far from clear that 'nothing is broken', as clearly some things have changed (and aren't working).

[thriftyandboringinohio]

Re: Hudson: Coming to Terms with FIRE

...Imagine that you buy a plot of land ....

... imagine that the local government builds out its subway to where your building is and puts a subway stop within easy walking distance and does this before you sell the property...the selling pric...would more than...you would have gotten without the subway services. ...It is that unearned...(gain).. that Hudson wants taxed away as he believes that it should not go to the owner...since that additional value was created by public infrastructure....

Your example actually happened here in central Ohio some years ago. The rich landowner was Mr. Leslie Wexner, founder of the Limited Brands which includes Victoria's Secret.

Wexner and his associates had already become fabulously wealthy with their clothing store empire. They quietly pulled off a spectacular two-pronged real estate plan that made them even wealthier by applying huge tax dollars to their benefit.

In part one, they built a huge high-end shopping mall complex called Easton Town Center. It was located just inside the Columbus outer-belt in the northeast part of that circular freeway. Part one was very visible publicly.

Part two was not so visible. Wexner and friends quietly bought up vast amounts of real estate northeast of Columbus. That real estate was rural and remote, mostly undeveloped because it did not have good road access in to Columbus. The main road through that area was state route 161, a little two-lane black asphalt country road. That road, just by coincidence, passed under the Columbus outerbelt and ran right in to the Easton shopping complex, but it had no freeway interchange.

Wexner made quite a big public show of writing a seven million dollar check to assist with building a freeway interchange to connect state route 161 to the outer belt freeway so there would be better access to the new shopping complex. The interchange cost the taxpayers about 175 million, so he paid about 4%. Upon completion, that interchange also tied his real estate holdings to the city, and little old state route 161 was upgraded at huge taxpayer expense into a 4-lane limited access highway running right through the heart of his new land holdings. Wexner and his friends rapidly built them out into the the most expensive homes in the Columbus area, now known as the New Albany area (named after the former sleepy little rural village at the center of it all). Wexner and friends started the project as very rich men, and now have a few additional zeros on the end of their personal wealth.

The better part of a billion dollars in taxpayer money was spent visibly to enhance the earnings of his shopping complex, and invisibly to enable huge profits on the farmland-to-mcmansion land project. Taxpayers around here retain the burden of paying off the billion dollars of road improvements. Wexner and friends keep the billions in profits on their miraculously more valuable real estate.


http://www.newalbanybusiness.org/sit...munity-profile
http://www.eastontowncenter.com/tour...eogallery.aspx

[ProdigyofZen]

Re: Hudson: Coming to Terms with FIRE

As I alluded to in the previous post - Hudson has no issue whatsoever with charging for services rendered. Maintenance, cost of sales/servicing, etc etc all are perfectly legitimate ways to be paid - and are thus not free rent.

Of the categories noted above, all except perhaps renting out farmland fall into this category.

The problem with Proposition 13 isn't its original premise per se: that outrageous increases in property taxes should be ameliorated. The problem is both with its premise and implementation. The problematic premise is that limiting property tax increases in any way reduces the overall tax load; as history now shows, the only real effect was to shift state tax revenues away from property taxes and onto sales and income taxes (and other stuff like vehicle license fees). The problem with this being that these other taxes are all much more regressive - effectively shunting more and more of the tax burden onto the poorer people. Some parts of the population consider this a benefit.

The problem with Proposition 13 on the implementation side is that it naively (or deliberately) made the assumption that any changes in property valuation over or under 2% was 'unnatural'. History has in this case also shown this to be a fantasy - although to be fair - 2% was probably fairly descriptive of annual property valuation changes prior to the abrogation of Bretton Woods.



Because the 'economic free rent' aspect of property accelerates compounds over time even if the short term costs and risks are quite high, whereas gold is insurance precisely against a major US balance of trade crisis and also has the benefit of being much more liquid. Gold also doesn't compound over long periods of time.



None of the above.

If property tax rates are set to an agreed upon level - say at the point needed for funding of public education, which is where many of the property taxes were originally set for - that's one way.

Another way is via supply and demand - but that of property. An overly low property tax rate means huge amounts of property can bought and held for costs far below future gains by speculators or wealthy people. Hudson has noted many times that increasing the property tax rate - even a small amount - makes it uneconomic to just hold property which is doing nothing. Put it this way: if you're renting out property - why would a 5% property tax matter? The 5% property tax would be passed on directly to the renter as a cost of business - and every landlord would face the same cost. Obviously 5% is probably too high - 3% plus a homestead exemption seems to work quite well in Texas.



It all depends on the asset. Hudson doesn't have any issue with the stock market or shares in companies; after all, Coca Cola may have done well but 95% of its peers in 1919 no longer exist. Clearly not much free rent there unless you have a time machine.

Do I need to point out that the dynamic for land is completely different?



If property taxes double, then the price of property falls. Falling property valuation decreases the capital cost basis of rent even if it increases the ongoing cost of goods basis.

Put another way: is rent higher or lower in California - a low property tax state - vs. Texas - a high property tax state?

Examining the 50 state property tax vs. valuation situation shows a general trend where higher property taxes = lower property values. There are apparently exceptions like New Jersey, but the problem is that New Jersey can easily be said to have property valuations skewed by the very close proximity of New York. Within New Jersey, for example, there is a very clear trend where proximity to New York (and highways leading to same) = high median property value, with the exception of the peninsula south of Atlantic City.

Hudson also notes that increased property taxes will force more property to 'working' status - thus leading to increased supply/competition. This isn't so hard to imagine either: if you're a property owner with a high property tax, the need to receive revenue to offset property taxes would make you a lot less picky about short term failure to make a profit or even repay cost of capital. Certainly the cost to have the property empty is much higher than in a low property tax regime, while the cost of capital is identical.



I disagree.

The entire point Hudson is making is that economic thought and action in the past 5 decades has been diverted into a stream completely different than the century plus before it. The shift in state revenue from property to 'other' is also well documented, thus it is far from clear that 'nothing is broken', as clearly some things have changed (and aren't working).

Clue I agree with just about everything you say here except on stock.

Why should someone who has inherited 10 million be able to park that capital in high dividend paying stocks or (even a state muni tax free) and only pay the 15% cap gains rate?

That unearned income to me is even more egregious than buying raw land and waiting for the government to develop roads/bridges/infrastructure near by although not as dentrimental to the economy as a whole.

I know you probably agree that labor should be taxed lower at least up to a certain income level and capital gains taxed higher?

[littleshark]

Re: Hudson: Coming to Terms with FIRE

Your example actually happened here in central Ohio some years ago. The rich landowner was Mr. Leslie Wexner, founder of the Limited Brands which includes Victoria's Secret.

Wexner and his associates had already become fabulously wealthy with their clothing store empire. They quietly pulled off a spectacular two-pronged real estate plan that made them even wealthier by applying huge tax dollars to their benefit.

In part one, they built a huge high-end shopping mall complex called Easton Town Center. It was located just inside the Columbus outer-belt in the northeast part of that circlular freeway. Part one was very visible publicly.

Part two was not so visible. Wexner and friends quietly bought up vast amounts of real estate northeast of Columbus. That real estate was rural and remote, mostly undeveloped because it did not have good road access in to Columbus. The main road through that area was state route 161, a little two-lane black asphalt country road. That road, just by coincidence, passed under the Columbus outerbelt and ran right in to the Easton shopping complex, but it had no freeway interchange.

Wexner made quite a big public show of writing a seven million dollar check to assist with building a freeway interchange to connect state route 161 to the outer belt freeway so there would be better access to the new shopping complex. The interchange cost the taxpayers about 175 million, so he paid about 4%. Upon completion, that interchange also tied his real estate holdings to the city, and little old state route 161 was upgraded at huge taxpayer expense into a 4-lane limited access highway running right through the heart of his new land holdings. Wexner and his friends rapidly built them out into the the most expensive homes in the Columbus area, now known as the New Albany area (named after the former sleepy little rural village at the center of it all). Wexner and friends started the project as very rich men, and now have a few additional zeros on the end of their personal wealth.

The better part of a billion dollars in taxpayer money was spent visibly to enhance the earnings of his shopping complex, and invisibly to enable huge profits on the farmland-to-mcmansion land project. Taxpayers around here retain the burden of paying off the billion dollars of road improvements. Wexner and friends keep the billions in profits on their miraculously more valuable real estate.


http://www.newalbanybusiness.org/sit...munity-profile
http://www.eastontowncenter.com/tour...eogallery.aspx

Actually, if what you said is correct, this seems like a not so bad public/private partnership. You have to admit he did take some risk building out a large shopping mall complex first, no? Unless the govt owned the land they bought to develop and they fleeced the govt, private risk capital seemed to go into this before public capital was committed. Now I'm sure there was some cronyism and some handshakes here given the connections, but that's par for the course in the world we live in. I would surmise that the development plan for part 2 was probably better handled in Wexners hands than the govt assuming something was going to be done at all. I would also think it's a bit simplistic to assume that the public has just taken all the burden of paying off the debt when there are new businesses, new homes, new jobs that were created and the revenue that the city will collect over time from this developement relative to the debt burden is hard to quantify on such a long timeline. I just think there seem to be much worse examples of what is wrong than this, no?

[c1ue]

Re: Hudson: Coming to Terms with FIRE

Clue I agree with just about everything you say here except on stock.

Why should someone who has inherited 10 million be able to park that capital in high dividend paying stocks or (even a state muni tax free) and only pay the 15% cap gains rate?

That unearned income to me is even more egregious than buying raw land and waiting for the government to develop roads/bridges/infrastructure near by although not as dentrimental to the economy as a whole.

I know you probably agree that labor should be taxed lower at least up to a certain income level and capital gains taxed higher?

In my view, the problem with dividends isn't that they are unearned income. After all, corporations can and have failed as my comment on the Coca Cola fellow stocks of 1919 illustrate. Dividends furthermore aren't unchanging - they go up and down over time.

The primary unfairness of the capital gains tax is that its rate is so much lower than taxes on income (except for those who don't have much income), and furthermore is excluded from the so called entitlement taxes: Social Security, Medicare, and unemployment insurance. Thus the effective tax rate for those who have enough money to live off dividends is literally a small fraction of what most people have to pay.

As for the estate tax - while I am very sympathetic to the idea that your descendants should benefit from your accumulated assets, unfortunately there is a line where 'head start' becomes 'menace to society'.

To morph one of EJ's comments on government: if we are suffering because there are so few people in government who have had operational responsibility for a business, how much danger is imposed on society for wielders of gigantic masses of money who equally have no operational experience in creating wealth?

I talked many times before on how the wealth of the Bushes, the Rockefellers, the Morgans, and what not have influenced the course of American society.

Where the above line is, I do not know, but I do know it absolutely exists.

Actually, if what you said is correct, this seems like a not so bad public/private partnership. You have to admit he did take some risk building out a large shopping mall complex first, no? Unless the govt owned the land they bought to develop and they fleeced the govt, private risk capital seemed to go into this before public capital was committed. Now I'm sure there was some cronyism and some handshakes here given the connections, but that's par for the course in the world we live in. I would surmise that the development plan for part 2 was probably better handled in Wexners hands than the govt assuming something was going to be done at all. I would also think it's a bit simplistic to assume that the public has just taken all the burden of paying off the debt when there are new businesses, new homes, new jobs that were created and the revenue that the city will collect over time from this developement relative to the debt burden is hard to quantify on such a long timeline. I just think there seem to be much worse examples of what is wrong than this, no?

Actually, IMO this is a perfect example of unearned economic rent.

Putting up 4% of a project's billion dollars of investment, but getting many many times the 'at risk' investment back isn't itself a crime.

However, if the project was never necessary, then what was done was essentially to use other people's money to remove almost all risk. The point of Hudson's commentary about property taxation is that should the increase in property values in this case have been taxed away in whole or part, then the motivation for shenanigans is greatly reduced. If, on the other hand, the work was necessary anyway, then the cost of such improvements can and should be recovered at least in part from the capitals gains such a project creates.

Why should Wexner be the primary one to profit, as opposed to the taxpayers who paid in the billion dollars?

[thriftyandboringinohio]

Re: Hudson: Coming to Terms with FIRE

Actually, if what you said is correct, this seems like a not so bad public/private partnership. You have to admit he did take some risk building out a large shopping mall complex first, no? Unless the govt owned the land they bought to develop and they fleeced the govt, private risk capital seemed to go into this before public capital was committed. Now I'm sure there was some cronyism and some handshakes here given the connections, but that's par for the course in the world we live in. I would surmise that the development plan for part 2 was probably better handled in Wexners hands than the govt assuming something was going to be done at all. I would also think it's a bit simplistic to assume that the public has just taken all the burden of paying off the debt when there are new businesses, new homes, new jobs that were created and the revenue that the city will collect over time from this developement relative to the debt burden is hard to quantify on such a long timeline. I just think there seem to be much worse examples of what is wrong than this, no?

You make good points, littleshark. And allow me to now defend Mr. Wexner a bit -he is excellent at being a tycoon around here, very generous as a philanthropist, and personally consumed by principles of good community planning. We would have done much worse with most anyone else in charge of developing the northeast part of the county. The project as a whole is far from a boondoggle.

Still, all business activity brings some product or service to market and provides jobs in that enterprise. We can't go around paying the big expenses for businesses with tax dollars on that justification alone. This project may be a great candidate for the type of partnership you describe, where taxpayers build the roads and interchange first, and the developers make some contribution from their profits later. Sadly, that conversation never occurred, and the developers paid just 4% of the interchange and none of the highway, and even that small contribution was entirely voluntary. On the spectrum between robberies on the one hand and partnerships on the other, this one is intermediate.

I think it supports Hudson's point that fairness demands better. It also argues against Hudson's harsh take-all-the-additional-profit position. The developers would surely have done nothing at all under that scenario.

[littleshark]

Re: Hudson: Coming to Terms with FIRE

You make good points, littleshark. And allow me to now defend Mr. Wexner a bit -he is excellent at being a tycoon around here, very generous as a philanthropist, and personally consumed by principles of good community planning. We would have done much worse with most anyone else in charge of developing the northeast part of the county. The project as a whole is far from a boondoggle.

Still, all business activity brings some product or service to market and provides jobs in that enterprise. We can't go around paying the big expenses for businesses with tax dollars on that justification alone. This project may be a great candidate for the type of partnership you describe, where taxpayers build the roads and interchange first, and the developers make some contribution from their profits later. Sadly, that conversation never occurred, and the developers paid just 4% of the interchange and none of the highway, and even that small contribution was entirely voluntary. On the spectrum between robberies on the one hand and partnerships on the other, this one is intermediate.

I think it supports Hudson's point that fairness demands better. It also argues against Hudson's harsh take-all-the-additional-profit position. The developers would surely have done nothing at all under that scenario.

I think we agree there is a middle ground for all this stuff. Wexners immediate monetary windfall relative to how the state may benefit over time is hard to quantify.. Nobody should put up a diminimus amt of capital and reap all the gain, but I don't think that's the case here..I do think that focusing on the 4% number unto itself makes it look worse than it really is. Wexner did risk his capital with the shopping center first, no? He also took risk developing the land as well, right? I would add his capital committed to those projects to the total and its much more reasonable than the 4% number. No municipality would get private investment for roads unless that private money is getting some type of cashflow off the deal (tolls). Wexner obvoulsly knew that the 7 million was ceremonious and very little relative to what he committed to the overall project and how he stood to benefit...Wexners immediate monetary windfall relative to how the state may benefit over time is hard to quantify.
I do think it would be better to see the govt work with industries other than FIRE in partnership where the public may lose relative to the private capital if things go wrong, or make less if they go right...I still think that investment over time works better in our political framework because either the govt doing everything or the public sector doing everything is not an option, there has to be a middle ground and our country would be better than just funneling cash to markets via QE.

[thriftyandboringinohio]

Re: Hudson: Coming to Terms with FIRE

...I do think that focusing on the 4% number unto itself makes it look worse than it really is. Wexner did risk his capital with the shopping center first, no? He also took risk developing the land as well, right?....

My brief sketch left out important details here, perhaps misleading you. Wexner's shopping complex was a big hit making good money before the new SR161 interchange.
The complex is big enough that it reaches up and over to arterial roads that provided good access. Had the SR161 interchange not been built, the investors were just fine.
They did even better afterwards, they really had no downside risk on that bet as regards the new interchange.

..I would add his capital committed to those projects to the total and its much more reasonable than the 4% number...

That is a good point, but the reality seems different when you consider the timing. Although the investors had purchased most of the unimproved land before the highway was built, they had not developed it at all before the big road was in. I'm sure the land alone was a huge sum of money, but their worst case scenario was agricultural rents forever until they could sell it off. I'm not sure it's accurate to count their after-the highway improvements (side streets; parking lots; residential water and sewer lines) the way you suggest. Once the highway was installed, their holdings became a much less risky investment for those improvements. They bought land at the low price of a remote dirt-road cornfield, and it shortly became highway-frontage prime building sites 20 minutes from a state capital at no cost to them.

That dramatic difference in value is, to me, the profit amount subject to Hudson's ideas here.

[c1ue]

Re: Hudson: Coming to Terms with FIRE

I think it supports Hudson's point that fairness demands better. It also argues against Hudson's harsh take-all-the-additional-profit position. The developers would surely have done nothing at all under that scenario.

I do agree that taxing all of the value add assumes that there cannot be any other sources of it - which is false.

The reality is that today - there is not even a tiny bit of taxing of value add, unless you count the eventual miniscule capital gains taxes on the windfall profits made.

Wexners immediate monetary windfall relative to how the state may benefit over time is hard to quantify.

I think the fact that Wexner went out and bought up land to be developed into fancy housing projects - in addition to his core retail commercial area - bespeaks considerably more planning and effort than some purely speculative action.

I do think it would be better to see the govt work with industries other than FIRE in partnership where the public may lose relative to the private capital if things go wrong, or make less if they go right.

If you'll read some of what Dr. Hudson says elsewhere, he notes that the vast majority of the infrastructure in the US was originally built under government charter, but by private companies. The same can be said for any number of industries ranging from water/sewer/electricity utilities to the early Silicon Valley.

Thus to say that there hasn't been significant government interaction with industry in the past - outside of FIRE - is incorrect.

For that matter, the effects of government subsidies to the railroads - as can be seen by such institutions as Stanford University today - are still reverberating.

The reason for such activities in the past was that it was termed in the public and/or national interest.

The sad state we are in today is that the same rationale is being used to support the TBTF banks and the 'heads I win, tails you lose' behavior of the speculators - which is what Dr. Hudson has also pointed out.

[ProdigyofZen]

Re: Hudson: Coming to Terms with FIRE

The primary unfairness of the capital gains tax is that its rate is so much lower than taxes on income (except for those who don't have much income), and furthermore is excluded from the so called entitlement taxes: Social Security, Medicare, and unemployment insurance. Thus the effective tax rate for those who have enough money to live off dividends is literally a small fraction of what most people have to pay.

Precisely my point. Recently there was concern over Linn Energy. My firm has a large investment in this "stock" that pays abnormal compared to the industry "distributions." Notice I stated distributions and not capital gains.

Since LINE (Linn Energy) is an MLP this particular fund structure allows it to pay out distributions quarterly like any other stock paying capital gains but that goes toward your cost basis and is never taxed as long as you do not sell the stock. So if the stock pays out a .75 dividend in a quarter and you bought it for 20 dollars then your cost basis is 19.25.

That .75 is never taxed. If you did this within an IRA well you can see where this is going when you start gifting it to children etc (that is if the company doesnt go under before hand).

Well it was reported that the SEC was investigating LINE for their use of derivatives for hedging etc. The stock collapsed to just under 20 on fear of the potential future SEC ruling.

Our firm debated selling but didn't because of the "large tax" that our clients would get from the sale. This completely obviates the fact that for 2+ years they got distributions tax free each quarter from LINE. So say you bought at 20 and got 10 dollars over a few years then your cost basis would be 10 not 20 and if the stock went from 20 to 25 then your cost basis would be 15 and you would only have to pay "capital gains" rate taxes.

They were crying foul over paying 15% capital gains tax. It was ludicrous IMO.

[littleshark]

Re: Hudson: Coming to Terms with FIRE

If you'll read some of what Dr. Hudson says elsewhere, he notes that the vast majority of the infrastructure in the US was originally built under government charter, but by private companies. The same can be said for any number of industries ranging from water/sewer/electricity utilities to the early Silicon Valley.

Thus to say that there hasn't been significant government interaction with industry in the past - outside of FIRE - is incorrect.

For that matter, the effects of government subsidies to the railroads - as can be seen by such institutions as Stanford University today - are still reverberating.

The reason for such activities in the past was that it was termed in the public and/or national interest.

The sad state we are in today is that the same rationale is being used to support the TBTF banks and the 'heads I win, tails you lose' behavior of the speculators - which is what Dr. Hudson has also pointed out.

Of course there has been govt interaction other than FIRE..I'm just saying that there should be investment outside of FIRE today through some type of fiscal stimulus not just printing money via QE. Public/Private partnerships have worked in the past as you say, I think there needs to be more of it but it's gotten so polarized to where it's all govt on one side vs. all private on the other. In the end totally unproductive. Continual govt subsidies that have been abused aren't an excuse to think that govt and private money can't work going forward if there was any decent leadership. You just hear about Solyndra on one side and the evil speculators on the other. There has to be a middle ground. I haven't read a ton of Hudson, but I like a lot of what he says, but I think he's been a little hard on people who have accumulated capital/savings over their lifetime and are looking to make an investment in something that will make them a return/cashflow/rent. If I'm misreading him let me know.

[ProdigyofZen]

Re: Hudson: Coming to Terms with FIRE

For that matter, the effects of government subsidies to the railroads - as can be seen by such institutions as Stanford University today - are still reverberating..

Clue, I am interested in a further explanation of this statement, please?

[seobook]

Re: Hudson: Coming to Terms with FIRE

Clue, I am interested in a further explanation of this statement, please?

The railroads were the "too big to fail" scam of their day.

They were often heavily subsidized & unprofitable. A big reason they were unprofitable was that rather than operating efficiently, they would have parallel companies (sharing common robber baron owners) that provided them services at inflated prices
http://baselinescenario.com/2011/12/27/state-of-nature/

So how did unnecessary, inefficient railroads get built? Because of government subsidies. In short, the federal government paid to build the railroads through massive financing subsidies and also gave them ample land grants. The trick to building a railroad was not knowing anything about railroads or even about business; it was having friends in Washington who could give you the right financing and land subsidies.

Even then, the railroads lost money. Not only was there insufficient demand for their services, but they were run by people who were generally incompetent. (For one thing, they didn’t even know their own costs of doing business.) Yet the people who owned the railroads made fabulous amounts of money (of which Stanford University is one symbol). The main way to do this was simple. The people who controlled a railroad (generally by putting up very little of their own money, thanks to the government subsidies) would also wholly own a construction company. They would cause the railroad to overpay the construction company to build the railroad—in effect transferring wealth from railroad stockholders and creditors into their own pockets

I haven't read it, but here's a book on it
http://www.amazon.com/Railroaded-Tra...dp/0393061264/
and here's an hour-long audio interview of that book author
http://thedianerehmshow.org/shows/20...ite-railroaded
and a shorter interview
http://www.npr.org/2011/07/11/137497...erican-economy

[c1ue]

Re: Hudson: Coming to Terms with FIRE

Continual govt subsidies that have been abused aren't an excuse to think that govt and private money can't work going forward if there was any decent leadership. You just hear about Solyndra on one side and the evil speculators on the other. There has to be a middle ground. I haven't read a ton of Hudson, but I like a lot of what he says, but I think he's been a little hard on people who have accumulated capital/savings over their lifetime and are looking to make an investment in something that will make them a return/cashflow/rent. If I'm misreading him let me know.

I completely agree that government subsidies are not inherently evil. As I noted previously, subsidizing development which benefits the public - both immediately via jobs and for the future via infrastructure development - is one of the primary charters of government (think irrigation in the Babylonian era onwards).

The problem is when said subsidies are abused - either via operational incompetence and/or targeting. Solyndra is a failure not because it failed; it is a failure because investing hundreds of millions of dollars to build out a solar panel factory that churns out product that was uncompetitive in the existing overall energy marketplace, was equally uncompetitive in the solar only marketplace, and which did little to improve state of the art technology - was stupid.

As for cash flow/rent: it all depends on what you define as reasonable. The US population grows at slightly more than a 2% rate, and the US economy grows at a similar pace. Why should anyone expect a 'safe' return significantly over these levels? Sure, there is inflation, but inflation is a function of growth as a whole albeit it can (and is) easily distorted by monetary maneuvers.

So while I perfectly understand that many people want to make money on what they've saved over time, the problem is that the more income these people might get for their passive investments, the less income is available for anyone else.

A 'safe' 10% return on investments pretty much guarantees either inflation or economic disenfranchisement of a lot of other people. Inflation robs savers immediately, for example, but it robs young people cumulatively because most of the assets which have pricing power grow ever more out of reach of ownership for young people. Thus the 20 year old who is living poor might not be robbed of interest income by ZIRP, but he/she's robbed just as effectively because they will not be able to buy into anything that has pricing power due to the same ZIRP - via credit - increasing asset prices.

To put a more specific example: the 'free lunch' enjoyed by real estate owners since 1970 or by consumers of higher education prior to the '90s is actually paid for by the next generation who have so much higher an economic rent to enjoy the same privileges.

Note that this dynamic is very different than PCO.

I have my views, but ultimately the dynamic I describe above isn't a question of good or evil, but should be a question of whether it makes society better or worse to live in, more or less stable economically/politically/socially, etc etc.

Of course in real life, everything is not zero sum. Technological advancement does accelerate growth in quality of living without necessarily having physical growth. But this is captured in economic growth, so those trying to claim technology will magically fix this are at least somewhat deluded.

I'll lastly note that in our unequal American society - where ownership of the pricing power assets is very disproportionate and growing more so every day - I personally believe a big part of why this is occurring is exactly because of the search for 'safe' investments. Safety of high return investments (or at least the illusion of it) is what led to the abuses of the S & L era. The same safety is what led to the bailout of LTCM. We see this safety again in the TBTF bailouts in 2008/2009.

A low or zero property tax for existing holders of property is a similar form of 'safety of high return'.