Rossputin.com

re: Hold the quiche: Manly men are back (Washington Times article, 4/7/05)
http://www.washingtontimes.com/national/20050407-121528-6317r.htm

Did you ever run across a fad, especially in fashion, which made you wonder whether you were an idiot or whether everyone else was?

Some examples from the past couple decades which occur to me are: hawaiian flower shirts (men), white sports shoes with business skirts (women), neckties flung over the shoulder (yuppies), the "mullet" haircut (rednecks), "Baby on Board" signs in car windows (mostly women, I hope), and I'm sure you can think of many others.

Few things, however, (other than the mullet) have been harder for me to understand than the rise of the "metrosexual".

At www.wordspy.com, metrosexual is defined as "An urban male with a strong aesthetic sense who spends a great deal of time and money on his appearance and lifestyle". Also, "A metrosexual is a clotheshorse wrapped around a dandy fused with a narcissist....The metro- (city) prefix indicates this man's purely urban lifestyle, while the -sexual suffix comes from "homosexual," meaning that this man, although he is usually straight, embodies the heightened aesthetic sense often associated with certain types of gay men."

Metrosexuals, to me, are men without masculinity, and it was amazing to me that any real percentage of the female population would have any interest in such a thing.

Now we learn maybe they didn't...and at least they don't now.

I suppose the self-centeredness of such men was actually enough to keep the fad going. Anyone willing to spend $30 on salon hair gel is probably willing to spend $6 repeatedly on glossy magazines with pictures of their type, reinforcing their idea that they must be interesting and glamorous.

It looks like those magazine covers are a-changin'. The new Harris Interactive poll shows that women like guys rough rather than smooth, strong rather than fashionable, and buying electronic toys rather than expensive clothes.

Maybe as we say in the trading world "it's my position talking" since I'm genetically incapable of glamour or of spending a lot of money on hair products, and I love electronic toys, but I must say I would be surprised if the reality of "what women want" was ever different, at least outside of Miami Beach and major urban centers in California.

I guess this was a short and pathetic parallel to the worst days of feminism when Gloria Steinem and her followers acted as if gender equality meant gender interchangeability.

It wasn't true then, it isn't true now, and although I'm sure we'll see similar fads in the future it will never be true. Men are men (except for Michael Jackson), women are women (except for Rene Richards), and we should all be thankful (except for Larry Summers.)

Now pass me a piece of quiche lorraine.

A friend sent this to me. I don't know who wrote it but if the author contacts me I'll be happy to give you credit. You might want to bring this to your attorney to use instead of his boilerplate.

---------------

LIVING WILL

I, _________________________ (fill in the blank), being of sound mind and body, do not wish to be kept alive indefinitely by artificial means. Under no circumstances should my fate be put in the hands of peckerwood, ethically challenged politicians who couldn't pass ninth-grade biology if their lives depended on it.

If a reasonable amount of time passes and I fail to sit up and ask for a cold beer, it should be presumed that I won't ever get better. When such a determination is reached, I hereby instruct my spouse, children and attending physicians to pull the plug, reel in the tubes and call it a day.

Under no circumstances shall the hypocritical members of the Legislature (State or Federal) enact a special law to keep me on life-support machinery. It is my wish that these boneheads mind their own damn business, and pay attention instead to the health, education and future of the millions of Americans who aren't in a permanent coma.

Under no circumstances shall any politicians butt into this case. I don't care how many fundamentalist votes they're trying to scrounge for their run for the presidency, it is my wish that they play politics with someone else's life and leave me alone to die in peace. I couldn't care less if a hundred religious zealots send e-mails to legislators in which they
pretend to care about me. I don't know these people, and I certainly haven't authorized them to preach and crusade on my behalf. They should mind their own business, too.

If any of my family goes against my wishes and turns my case into a political cause, I hereby promise to come back from the grave and make his or her existence a living hell.

_____________________ ___________
Signature Date

_____________________ ___________
Witness Date

PUBLISHED in the Rocky Mountain News 4/13/05
http://www.rockymountainnews.com/drmn/opinion/article/0,1299,DRMN_38_3694823,00.html

re: Why is Social Security rate of return so poor? (Rocky Mountain News, Letter to the Editor, 4/6/05)
http://www.rockymountainnews.com/drmn/opinion/article/0,1299,DRMN_38_3677438,00.html

To the Editors:

Ann Harroun’s letter is a perfect example of how poorly the public understands the Social Security System.

By discussing Social Security’s “returns”, she implies it is an investment. It isn’t. It is nothing more than an transfer scheme. Any apparent return is simply due to government indexing of benefits. Furthermore, because of the way indexing is done, “returns” have substantially exceeded inflation....a major source of our current problem.

Other errors Ms. Harroun makes include claiming that she can’t buy the same bonds as “wealthy” investors and asserting that buying bonds is an “inflation-proof” investment.

The only thing Ms. Harroun got right is that the current Social Security surplus allows Congress to mask the true extent of their wasteful spending habits.

For Social Security to be made viable, pro-reform organizations will have to do a much better job educating the public out of huge misconceptions such as Ms. Harroun harbors.

re: Wal-Mart Officials Defend Company at Media Conference
http://story.news.yahoo.com/news?tmpl=story&cid=564&ncid=564&e=4&u=/nm/20050405/ts_nm/retail_walmart_dc
or (subscription only)
http://online.wsj.com/article/0,,SB111273592776998730,00.html?mod=home_whats_news_us

To the Editors:

What is surprising is not that Wal-Mart claims to be "good for America" but that it's not already apparent to more people. Wal-Mart employs over a million Americans, sells one quarter of all the toothpaste sold in the USA, spends half a billion dollars on advertising annually, and averages over 15 million customers every day. Wal-Mart is the greatest single anti-inflationary force of my generation.

The real motivation behind most criticism of Wal-Mart is caused by unions which are frustrated at their inability to penetrate such an important company. Since, today's unions function more than anything else like a tax increase on customers and union members alike, Wal-Mart's position is consistent with their mission to provide the lowest possible prices to consumers.

Wal-Mart is good for America and it's a shame that they have to spend advertising dollars making sure Americans know it. I'd rather see Wal-Mart do what they're good at: using that money to keep prices down. Wal-Mart deserves thanks from all of us, even those of us who don't shop there, for making life more affordable.

I'm really enjoying this conversation with WCV. This is exactly the person the Republicans should be convincing of the benefits of reform, yet they're not getting it done effectively. WCV is asking fundamental questions, questions which any pro-reform person should understand and be able to answer if you happen to get into this sort of conversation.

Comment from: WCV [Visitor]

Okay, fair enough, I think your points are valid (I support the concept of privatization but am undecided on the current proposals) and there's room for reasonable people to disagree on the extent to which workers will see the "employer's" share of SS taxes.

As for the hamburger flippers, my readings over many years has led me to conclude that about 10-15 percent of Americans earn low wages throughout their working years. They never advance, never buy homes, never build a retirement nest egg. The current SS system treats these people badly, will reform make them better off?

Reply from Rossputin:

In theory, I accept your point about the employer's share of SS taxes not necessarily getting to employees at the lowest skill and wage levels. But keep in mind that there is not a proposal out there to eliminate the employer's share. I made that point to show how big the Social Security tax really is and that most workers are paying twice as much as they think they're paying in payroll tax.

You are not at risk of losing that part of the payroll tax contribution. What is being discussed is for some of either the employer's part or the employee's part or both to go into a personal account. Selecting the personal account would be voluntary -- up to you, not the employer. If you choose it, a part of your payroll taxes would go into it. If you don't you simply stay in the current system. In no case does your total payroll tax amount (i.e. contribution towards Social Security) decline. But with personal accounts, that part of the money is truly yours whereas under the current system it's absolutely not yours according to the Supreme Court.

Before I get to your second point, I want you to understand that I am not spending so many hours writing about this because I am a partisan Republican trying to score political points. To be clear, I am a registered Libertarian and frequently disagree with Republican politics (although I agree with them far more often than I do with the Democrats.) I write what I believe to be true...period.

Now: Your second question is the most important question in this entire discussion.

The answer is undoubtedly YES, reform will make low-income workers better off...with even more relative financial improvement than for upper-income workers.

I submit to you that there are a couple of issues including Social Security reform and Education reform (i.e. school choice and vouchers) where the relationship between the Democratic Party and unions causes them both to work against the interests of low-income workers who think both groups are looking out for them.

[The AARP has also taken a stand against Social Security reform. I still don't fully understand their motivation simply because there is no logical reason I can find for their position.]

The Republican party is perceived as the party of the Rich White Male, so low income workers and minorities (especially African-American) often are skeptical to say the least of their motivation. "Why would the Republicans do something good for me? I must be missing something."

No, there's nothing missing in these two issues. The Republican position is hugely beneficial to low-income workers and minorities, much more so than it is to the upper-middle and upper classes. Republicans are acting primarily out of the principle that government involvement should be limited to Constitutionally-approved action. This is both because that is how our system is supposed to work and because government typically is one of the least efficient providers of services. Government is the least accountable, most bureaucratic, and often most corrupt organization around, especially below the Federal level. What company could run like most school boards and not have all the management thrown out to prevent bankruptcy or massive litigation?

As a Libertarian, I go further than most Republicans in this thinking and would get government out of more than the Republicans would, but the reasoning is the same. They often get caught up in the lure of their own power and are unwilling to give it up. For example an Senator on the Energy Committee would be slow to vote to eliminate the Energy Department because it's one less thing he has control over. I'd get rid of it anyway.

My points in my article of March 19th are all valid and important reasons why you and other low-income workers will benefit from Social Security reform. If you're part of an organization like a union which is fighting the reform, you should challenge them on the economics of their position.

If you really analyze any union position against Social Security reform (or Education reform) you will find 100% of the time that their position is based solely on maintaining as much political influence with the Democratic party as possible and maximizing union dues. They do nothing for your benefit in these areas, and rarely in any other area.

Doesn't it strike you as odd that big unions fight against personal accounts while they put almost all their own pension money into financial market investments? Here's a quote from a Tax Foundation report I urge you to read: "The largest pension fund in the nation (private or public) is the California Public Employees Retirement System (CALPERS), which has 61 percent of its assets in stocks, including 21 percent in foreign stocks."

Here's a story about Calpers opposing reform. In it, a Calpers spokesman makes arguments which are so economically ridiculous that anyone invested with them should wonder who's watching the money. In particular he argues that massive investments in the bond market would drive interest rates up when just the opposite is true. And he argues that the plan is bad because it would increase the deficit with borrowing to fund upcoming benefits to retirees. While it's true that the deficit would go up, the point is that we can borrow some money now or MUCH more later.

What if you needed to buy something and the terms were either you can buy it with $1000 of debt today or $5000 of debt in 10 years? Sure, nobody wants the debt but that doesn't mean that debt sooner is worse than debt later, particularly when you know that taking debt now accrues some of history's lowest-ever interest rates.

No, Calpers and other unions are arguing out of politics rather than economics, to the detriment of their membership.

More on Calpers: http://www.sacbee.com/content/business/v-print/story/11782336p-12667043c.html

Here's another interesting article on the subject: "Unions Mislead With Scorn For Stocks", by Thomas McClannahan

Democrats and unions have something important in common: They want you DEPENDENT on them. The idea of low-income workers becoming more self-sufficient scares the hell out of them. The politicians want nothing more than to win the next election and the unions want nothing more than to grab as much dues money as they can. They work together to strengthen each other and their combined grip on union workers but not because they care at all about those workers.

A worker who can say "I can handle my finances better than the government can" and "I don't want my union dues going to support someone who thinks otherwise" is a very scary person to the Democrats and the unions.

I hope you become one of those people. Social Security reform can help you and many other low-income workers gain a better retirement and get out of the grip of politicians and union bosses who treat you like a beast of burden. Social Security reform is better for you than for me and if there's anyone who should be clamoring for it, you should.

A thoughtful blog reader posted a comment with two concerns in response to my last piece about bankruptcy protection for Social Security and other retirement accounts. I think the concerns (and my response) are interesting enough to post as a separate article. I hope you agree.

If anybody knows that I am wrong on facts about indexing, please let me know.

Here are the comments:

Comment from: WCV [Visitor]
This brings to mind a couple concerns of mine:

(1) I have read a claim (in a newspaper article) that one complaint regarding SS reform is that workers in specific age cohorts (those close to but not yet 55) are likely to lose ground under reform. This group also won't receive much protection from creditors because they won't have time to build up any substantial balance in their personal accounts.

(2) I have also read that workers will see lower benefits under the president's plan than under the current system, because benefits will become indexed to inflation rather than to a worker's past wages. This appears hopeful to me, since my wages have acttually lagged behind inflation. Can I therefore expect that under reform, my scheduled retirement benefit will be greater than my currently scheduled benefit?

And my response:

WCV,

These are both interesting questions. I think the first is a political question and the second an economic one.

As for number 1, there is no way that a proposal will be put forward which economically damages those near or at retirement age. Keep in mind the common political wisdom which says that a person's likelihood of voting is proportional to his/her age. There's simply no way something will even be discussed which hurts 50-year old people.

As to protection from creditors, it's clearly true that the point I made about this is important proportionately to how many years someone would have contributed to a personal account. So it helps younger workers more than older. But this does not mean it hurts older workers. It simply won't effect them in an important way.

I have not seen or heard any credible argument (or maybe not even an incredible one) saying that people near 55 will lose ground under reform. If you heard that, I'd say it's a scare tactic being used by unions and the AARP without any factual basis. If you can send me a reference I'd love to see it and refute it with the facts.

On point #2, it's probably right that a "final" proposal will include lower benefits, but not because of personal accounts. Lower benefits are simply a necessary change to avoid absolute collapse of the system in less than 20 years.

I believe you are interpreting the current reform discussion incorrectly. My understanding is that benefits will become indexed to inflation rather than to an economy-wide index of wages. They were never indexed to an individual worker's past wages. Keep in mind that indexing represents how benefits increase beyond the worker's actual contributions and has nothing to do directly with the changes in those contributions.

For example, imagine you had a bank account into which you deposited $10 in the first month and $1 more each month for the rest of a year, ending by depositing $21 in month 12. Also imagine that the bank account paid interest at the "Fed Funds" rate, i.e. a rate which changes occasionally when the Federal Reserve Bank changes rates. Your total contributions have been $186, but your benefit growth is essentially "indexed" to that interest rate. The $1 increase per month in your deposits does contribute to your final benefits but is not part of indexing. In the simplest terms, indexing is what makes your benefits change when you're not contributing just as interest makes your bank account go up when you're not depositing.

We have had a system which was unjustifiably generous to retirees in that it based COLAs (Cost of Living Adjustments) on a wage index rather than a price index. The wage index almost always increases faster than prices, so benefits increased faster than inflation which is financially unsustainable in a pay-as-you-go system where revenues are not actually invested in anything.

Therefore, to answer your concern #2 directly, even though your wage growth has lagged inflation, the change in indexing will be a negative to your benefit payments in the same proportion as it would be for someone whose wages grew faster.

I'd like to make a point that should be especially important to you:

If your wages have lagged behind inflation, the current system is killing you even with today's wage-based indexing. Sure, the indexing is generous but it is indexing you up on amounts which are increasing by less than inflation meaning you are likely falling ever further behind.

I belive that a personal account should be even more compelling to you than to most people. This is because financial markets almost always demand and provide returns in excess of inflation (at least over a medium or long time frame) whereas contributions to Social Security don't. (They did a long time ago, but no longer.)

For a worker whose wages lag inflation, the current system is devastating to retirement security while personal accounts offer greater relative improvement to long-term financial health than they do for higher-income workers. Simply put, a personal account can help you recover from slow wage growth.

Re: Supreme Court: Creditors Can't Seize IRAs
http://news.yahoo.com/news?tmpl=story&u=/ap/20050405/ap_on_go_su_co/scotus_bankruptcy
or
http://ap.washingtontimes.com/dynamic/stories/S/SCOTUS_BANKRUPTCY?SITE=DCTMS&SECTION=HOME
or
http://www.washingtonpost.com/wp-dyn/articles/A24753-2005Apr4.html

The Supreme Court ruled today that bankruptcy protection extends to Individual Retirement Accounts, giving IRAs the same protection already afforded to Social Security Benefits and 401(k) accounts.

The issue was that since it is possible to withdraw from IRAs before retirement age some creditors argued that IRAs should not receive the same type of protection as other retirement accounts. The Court noted that the penalty for early withdrawal was large and that few people under the age of 60 took early withdrawals, demonstrating that in theory and practice IRAs do work as benefits based on age.

My first thoughts upon hearing the ruling were not about IRAs though, since I don't have one. (I'm self-employed so I have a different retirement account structure.)

Here was my train of thought:

• Social Security benefits and "accounts" (that don't really exist now) are protected in bankruptcy.
• Low-income workers are more likely to file for bankruptcy than higher-income workers.
• Low-income workers generally can not save enough to have IRAs or 401(k) accounts.
• Therefore, personal Social Security accounts give low-income workers a new ability to invest in stocks or bonds AND to have those investments protected during bankruptcy, a protection many market investors today do not have (or at least have only with the portion of their investments that is in retirement accounts.)

So, which would you rather have: A) The current system where returns are tiny and your benefits are at risk due to the bankruptcy of Social Security itself, or B) Personal accounts where you can get higher returns (with potentially less economic risk and much less political risk) with protection if you must file for bankruptcy yourself?

Today's ruling, although not about Social Security, highlights yet another excellent reason for low-income workers to support voluntary personal retirement accounts being funded with a part of their payroll taxes.

The more I think about it, the less excuse there is for any objective analysis to come down against personal accounts. And the more certain I am that the major forces against Social Security reform are all about power politics (i.e. government's addiction to spending and the incestuous relationship between unions and the Democrats) and nothing about benefitting citizens of any economic class.

re: DeLay spokesman rebuffs critical poll (Houston Chronicle, 4/4/05)
Nearly 40% of likely voters in sample have a less favorable view of him, survey says.
http://www.chron.com/cs/CDA/ssistory.mpl/politics/3116290

I read and took seriously analysis showing that poll questions regarding Congressional involvement in the Schiavo case were biased. In fact I agree with the premise that the questions were leading in a way which would bias results against such involvement.

But I can't get away from believing that the poll results were nevertheless a generally accurate reflection of popular opinion on the issue.

A new poll by the Houston Chronicle (see link above) shows that of Tom DeLay's constituents whose opinion changed through the Schiavo case, over 80% of them moved to a less favorable opinion. (About half the 501 likely voters surveyed said that their opinion changed.)

While a majority of those surveyed opposed government intervention as well as DeLay's participation, fewer than half said they would vote for someone else if there were an election today.

Given that voters are usually hesitant to toss out politicians who have great power and seniority, I'm not too surprised. But there might be less "important" representatives, especially in not-too-religious districts, who could be hurt just enough to lose if they can be tied to the attempted Republican intervention in Schiavo's sad death.

In a great example of people putting party before reason, "poll respondents split along party lines on the issue of DeLay's ethics, with about one in 10 Republicans and nearly seven in 10 Democrats considering him unethical."

I hate to admit that this, to some degree, contradicts my assertion that Americans care about principle as much as politics. Maybe I'm an incurable optimist, but I don't think so....

As I mentioned in my prior 2 postings, I’m on a short vacation, taking my wife and two nephews snowboarding at beautiful Steamboat Springs, Colorado.

I had an interesting conversation while going up a very long lift today and it opened my eyes to something I think I’ve misunderstood about the dynamics of towns and issues of growth.

I actually didn’t get the guy’s name but he has been in Steamboat for about 6 years and actively involved in local politics for most of that time. We started talking about how property prices have risen so much that local people can’t afford to move into bigger houses and workers at the ski resort can’t afford to live anywhere near work.

He said that he had introduced a resolution in the city council to double property taxes on houses worth more than $500,000, and double them on any house if the house occupied for fewer than 4 weeks a year by the owners. So, an expensive house which is rarely owner-occupied would have its property taxes quadrupled.

The money would go to help people who work in town and at the resort afford to live in or near Steamboat with housing or business subsidies based on how long they have lived in the area and how many people live in the household or work at the business.

At first I thought it was a bad idea, but he explained how it would improve property values in the long run because so much of the value of being around here was the authentic character of the area, which is being ruined by the influx of part-time residents, especially higher-income people who can’t help but detract from the “old coal mining town” atmosphere.

Now this guy was a professor of economics at an excellent university in the northeast, and if we can’t trust Ivy League professors, who can we trust to have done the proper research on such issues?

It’s really true…when you walk through town and see spoiled rich kids (or adults) you can’t help but wonder “Wow, wouldn’t this town be great without all these yuppies? They ruin the place.” Taxing their second houses is probably a great way to help keep the old-time feel and to support the people who have been here a long time and work to keep the place as a place I like to vacation.

For the same reasons I support his idea to base traffic violation fine amounts on a person’s net income, like they do in Finland. If we can’t keep our beautiful mountain towns beautiful, what’s the point of living in Colorado?

I’ll be e-mailing a petition to help in this fight. I hope you’ll sign it and send it to friends. We can help Steamboat Springs regain its historic character and we can all feel good about ourselves which is something we capitalists don’t do often enough.

Oh, I forgot the most important part of this discussion:

APRIL FOOLS!!!

(I would no sooner consider a tax system like any Scandinavian country than Hillary Clinton would consider eliminating the IRS or the teachers’ unions would actually care about students more than union dues.)

Have a great weekend, everyone!
Rossputin

In the continuing effort to enjoy my brief vacation, I'd like to offer another "guest writer". My friend David Storobin runs the excellent web site GlobalPolitician.com.

While most of his and his contributors' writing is about international issues, they also have some good writing about US issues and economics.

This one was written by David himself. The article is excellently titled "Eliminate Capital Gains Taxes Now … for the starving children" and you can link to it directly at: http://www.globalpolitician.com/articles.asp?ID=514

Enjoy!

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Eliminate Capital Gains Taxes Now … for the starving children

3/31/2005

By David Storobin, Esq.
One of the founders of left-liberal economic thought, John Keynes wrote, "taxation may be so high as to defeat its object, and ... a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more--and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss."

Earlier this year, the British Conservative Party announced a plan to reduce or even eliminate the capital gains tax to improve the nation's economy by eliminating punishment of investors who create jobs and develop new products.

The Labour Party, BBC and others in the U.K. quickly attacked Michael Howard's Conservatives, "threatening" voters with possible spending cuts that Conservatives may also implement. While Michael Howard would be wise to reduce government spending if he is elected Prime Minister, tax cuts may not necessary lower tax revenue.

The Laffer Curve says that there are times when lowering tax rates will actually increase tax revenue, while increasing tax rates will decrease tax revenue. Neither Laffer nor anyone else who supports this theory ever claimed that tax cuts will always produce higher revenue for the government. Rather, the claim is that there is a point when taxes are so high, it makes no sense for many to work and invest, so economic activity is killed and the government is unable to tax income if there is no income.

That the Laffer Curve is sometimes true cannot be denied. We know that there are two tax rates at which the government would collect no tax revenue - 0% and 100%. It would collect nothing if there was a 0% tax because there would be no tax. And it would collect nothing if there was a 100% tax because nobody would work or invest. We know if that if the government were to raise taxes from 25% to 100%, its tax revenue would not increase by 4 times and would, in fact, disappear. Likewise, it is almost definite that a 95% tax on investments would bring less to the government than a 25% rate because very few people would decide to plunge their money into an economy where they will only be able to bring home 5% of their profits.

On the other hand, it would be probably untrue to say that lowering income tax on the poor or the middle class from 15% to 10% will bring more revenue. The reason is simple: poor and middle class people need to work anyway. It is true that they would prefer to keep 90% rather than 85% of their salary. But someone making $30,000 a year will be unlikely to quit working because his after-tax income decreased from $27,000 to $25,500 simply because he must go on working and $25,500 is still a reasonable amount for the person of his salary.

We, therefore, see that the Laffer Curve does not apply in all situations and will produce higher revenue only under certain circumstances (but cuts are always preferable to eliminate government bureacracy, while increasing the spending power of hardworking people).

The one tax that is especially detrimental is a Capital Gains Tax, which is imposed on investments. This is nothing short of a tax on economic growth because it provides a disincentive to invest. Those who have the money to be invested do not necessarily need to invest. The money may be placed in a bank account or even kept at home. The only reason people may decide to invest is if they have an incentive to do so. The higher the capital gains tax, the lower the rate of return and, therefore, the lower the incentive.

The above is especially true when it comes to investing in high-risk projects, such as production of new drugs. Since most high-risk projects lose money in the end and usually take a very long time to start producing profits (this is particularly true in the pharmaceutical industry and new sectors, such as hi-tech), the investor will need to make a very significant return on the profitable ventures in order to cover his losses on failed experiments, as well as the losses he suffered as a result of inflation while his money were used to build a new project. If the investor is then heavily taxed, he will likely not be able to make up the losses he suffered in past years on previous projects and, therefore, will lose money.

For ex., Mr. Venture Capitalist invested $1 million in abc.com in 1999 and doubled his money. Next year, he invested $1 million in xyz.com, but this time the risky hi-tech industry fell and he lost the $1 million. It would look like Mr. Capitalist should be even, having gained $1 million in 1999 and lost $1 million in 2000. However, if the government imposes a tax, he is not. Let's say the government charged him 25% capital gains tax in 1999, which would equal $250,000. But the tax authorities do not return money to investors who lost their "gambles". As a result, Mr. Capitalist lost $250,000.

In most casinos, the "house" has about a 15% edge on the most unfair, anti-gambler game. Some games have an edge no more than 1%. And yet, the overwhelming majority of people lose money, and some are bankrupted. However, gambling presents better odds than investing in most countries since almost all of them create an anti-investor "edge" of more than 15%.

So why aren't more people losing money while investing? Because they do not invest in projects where their odds are 50-50 or 55-45. Instead, the capital gains tax forces them to invest in high probability investments or those that may have huge profits. As a result, many projects that could potentially be helpful or even save lives do not get funding because taxation makes them money-losers.

In an environment without capital gains taxes, any project that stands a 51% chance of succeeding should get funding (assuming one can lose and win the same amount). Similarly, any project where one can make $1.01 for every possible $1.00 lost (assuming same odds of winning and losing) should be worth-while for an investor.

That is not true when taxes are introduced. Say you have a 50-50 chance of success and you can make $1.00, but lose only 0.90 cents. Seems like a good investment - until you realize that if you "win", the government will take away 25% and you'll be left with 0.75 cents, while if you lose, you'll be out of 0.90 cents. No smart investor would decide to through his money at such a money-losing proposition.

Because the capital gains tax is a block to economic development, its increase usually leads to decrease in revenue - not just revenue from capital gains, but also other taxes from personal income, corporations, etc.

In 1986, Ronald Reagan was convinced to raise the capital gains tax because of the ever-growing deficit (looking at government tax revenue and spending, we see that the earlier Reagan tax cuts on personal income actually produced higher tax revenue, and deficits were caused by out-of-control spending). A previous capita gains tax cut in 1978 led to a 4-fold increase in revenue between 1978 and 1986 from about $21 billion to about $84 billion.

As a result of the tax hike on investments, capital gains tax revenue immediately decreased from about $84 billion to about $54 billion. In fact, revenue did not go back to the pre-86 levels until 1997, following a cut on the capital gains tax.

We, thus, see that capital gains taxes should be severely cut or, preferably, eliminated completely. A country without taxation on investments will allow its businesses and venture capital to invest, to create jobs and to create more goods. Higher profits and more jobs will mean more taxes collected from the income tax. It will also mean fewer people will require social services, such as food stamps and Medicaid (and even public schooling since more people will be able to afford to send their children to a private school). It will also mean lower prices since the cost of production will be lowered and, even more importantly, greater after-tax profits will mean greater incentive to start a businesses causing more competition, which inevitably results in lower prices and/or better products. Greater sales, too, will result in higher revenue not only from sales taxes (which exist only at state and local level in the US, but not necessarily so in other countries), but also from personal income taxes of the additional salespeople, delivery-people, goods-producers, etc.

As an American, I hope that George W. Bush will do what Michael Howard promises: cuts or eliminated the capital gains tax.
David Storobin is a New York lawyer who received Juris Doctor (J.D.) degree from Rutgers University School of Law. His Master's Thesis (M.A. - Comparative Politics) deals with Extremist Movements in the Middle East and the historical causes for the rise of fundamentalism. Mr. Storobin's book "The Root Cause: The Rise of Fundamentalist Islam and its Threat to the World" will be published in 2005.