Reflections on a windfall
The windfall
About a year ago, my wife and I received a windfall inheritance. To us, and to almost anyone else, it’s a huge amount of money. It’s not Bill Gates huge or Warren Buffet huge, but it’s close to the amount that a couple can hope to have by their 60s if they don’t have kids, are fortunate enough to be employed full-time in well-paying jobs for their productive years, have no major illnesses or suffer any other costly calamities, and save a lot and invest wisely and luckily. We are in our 40s now, so we got this money 20 years sooner. It’s windfall by that measure alone.
It’s also a windfall because we weren’t expecting it and did nothing to earn it. I won’t go into details, but a strange and unlikely sequence of events, of the sort that you might read about in a poorly written nineteenth-century novel, led to us getting this money.
And thanks to the laws on financial trusts and to politicians’ reluctance to enact “death taxes,” we haven’t had to pay a dime to the government for receiving the money. The money came from a trust, and one of the “structural” reasons that that trust existed for us is that so many people who would otherwise support taxing large inheritances would raise bloody hell to taxing the financial tools that protect the legacy wealthy and trust-fund babies among whom, it now appears, I am now numbered. But my glass house is looking mighty fine at the moment, and I better put my stone down.
Still, in one way it’s not a windfall. It’s more like an addition to a good thing we already had going. We already had resources before the inheritance. And while those resources were only a fraction of what the inheritance amounts to, they were a sizeable fraction. If we’re very comfortable now, we were still comfortable enough before.
Reflections
I originally called the following reflections “lessons,” but I realized that with a couple of exceptions, these weren’t things I learned, but thoughts I already had about money and worldly wealth. I have chosen to let this windfall buttress my priors and not challenge my worldview.
Reflection #1: Worldly wealth is tied to the economy and the political order
About 90% of the inheritance is in stocks. While I’m not particularly astute about investments (my spouse handles that), the portfolio seems to me “diverse” and well-balanced among the economic sectors. (We realize, of course, that it’s not “diverse” in the sense that very few of our holdings are in non-stock items.) This diversity offers a seeming paradox. On the one hand, it seems at least somewhat protected from swings in the economy. On the other hand, it’s sensitive to to the rules the United States and non-US states use to enforce the rights of property holders.
I already knew all this. But seeing it on paper just drives it home. I remember reading the trust document that transferred the money to us. It had all the legalese you might expect, and I couldn’t help thinking that that legalese, and the rules and laws it represented, were part of a vast legal and political infrastructure designed to protect those who already have resources to begin with. Of course, I can’t deny this infrastructure also supposedly protects those who work hard to earn their own living. But the deck seems to be stacked, and in this case it’s stacked in our favor, and seeing that in the trust document’s legal language is sobering.
The recent tax law, to the extent I understand it, stacks the deck even more. My spouse and I benefit in at least three ways. The first is that we’ll simply pay less in federal taxes. The second is that the decrease in the corporate tax will probably lead to a short term gain among many of the companies in which our portfolio is invested. The third, less obvious, benefit is that with the resources we have, we’re more likely to weather the longer term results from the tax bill, such as any increase in local taxes, a decrease in government-provided services, or inflation.
Reflection #2: It could all end tomorrow, or sooner
I could get sick, or my wife could get sick, and the resulting expenditures, after insurance, etc., could take it all away. Or I could die unexpectedly. I can’t take it with me, at any rate. The economy could collapse. Maybe all the specific stocks the portfolio is invested in will tank and we’ll lose it all.
Of course, we now have a lot further to fall than most people. We have choices. Someone with much less, or with almost nothing, would suffer much worse and more quickly if they get sick or the economy tanked. And while I don’t have the stats in front of me, it’s probably the case that people in poverty tend to die unexpectedly more often and in greater numbers than richer people.
Even knowing that, there’s a weird sense of insecurity and vulnerability. Even though we are much better placed than most people and even though if we lost 99% of what we received, we’d still have that 1% more than we had before, there’s a sense, for me (I don’t necessarily speak for my spouse), that we could lose it all, and quickly.
I suppose that’s the essence of greed, seeing only the scarcity from what you have instead of the abundance.
Reflection #3: There is no such thing as moral investing
With the help of a financial planner, we’re still trying to figure out what exactly we’re invested in (and how to diversify so we don’t hold so much in stocks). We’ve uncovered some distressing things.
One investment is in that Big Tobacco Company you have all heard of. Another is in a company that provides a lot of things you and I probably enjoy and depend on everyday, but one of its divisions sells materials used by the US military (not weapons exactly, but engines that go on the machines that deliver the weapons). A couple companies extract fossil fuels and while I don’t know a lot about these companies and I’m no tree-hugger, I assume they’re pretty bad for the environment. One company is in cosmetics, and I strongly suspect it conducts research on animals. Those are all things I feel very uneasy getting rich off of.
Some of the companies, it’s hard to know what exactly they do, and others seem innocuous or even positive. But they all, the good, the bad, and the opaque, mask certain relations. Any for-profit company has an interest in getting more out of their workers for the same or less money, and a goodly number of those workers are much less well off than I am, now or before the windfall. Even if the company produces things people need and want, that relation is still there.
Or take the stock we have in Big Soda Beverage Company. Its product is sugary and caffeinated and therefore bad for people’s health and in some measure addictive. How exactly is it better than Big Tobacco Company? (Actually, I can’t blame this one on the inheritance. I believe we were invested in Big Soda Beverage Company beforehand.)
Even if the portfolio were more heavily invested in mutual funds or index funds or exchange traded funds, we wouldn’t be out of the mix. I understand such things poorly, but those types of funds to my knowledge support a mix of companies at least some of which do some very bad or questionable things.
My freer market proclivities tell me that in the long run, such investment, conducted by thousands of people, is part of how the economy serves (almost) everybody and creates wealth that gets spread around. The cost of necessaries of life over the last 200 years or so have declined in the developed world and I believe we owe that decline to the market-friendly liberalization the developed world has, with interruptions (some good, some harmful), pursued during that time. But if others benefit, people like me benefit disproportionately more.
Reflection #4: Divestment is hard (but not really that hard) (but I probably won’t do it as much as I could)
I have long believed that if we look closely enough at what we do, even when we’re doing good, we’ll find ourselves doing a little bit of bad. But some things are less bad than others, and maybe I should, like Dr. Rieux, focus on doing the least amount of evil possible.
So maybe treasury bonds and CD’s would be a way, if a less profitable one, to go. Even in that case, we’d still be enmeshed with banks that profit from a system that supports businesses that do questionable things, and we’d have a stake in a government the interests of whose leaders don’t necessarily match the interests of the rest of the people. (That’s obvious now, but it’s always been thus.) The taint applies to anyone who has a bank account or a US savings bond. But it scales the more one has, if only because one benefits more.
When it comes to redirecting our resources to that elusive goal called “socially responsible investing,” one thing to keep in mind is that selling off stocks is a “taxable event.” And selling everything off in one swoop–be it fell or unfell–can be costly. We are taxed on the gains from the original purchase.
But maybe not that costly. We should remember that gains are taxed at a lower rate than regular income, and we can offset gains by selling other things that had losses. These are examples of what I noted above about how the political system stacks the deck in our favor. Even if we focus only on losses, the cost by itself need not be an insurmountable concern. If I receive a $100 from a tainted source and can disband myself from (some of) the taint by paying, say, $30 in extra taxes, I’d still have $70 that I didn’t before. Increase the $100 by some amount, however, and the decision seems much more difficult because the loss is greater in nominal terms.
Difficult, but not impossible, though. One of the first things we did after receiving the inheritance was sell off the Big Tobacco Company stock, tax consequences be damned. And yet we didn’t do an obvious move. We could have donated the money from the sale of Big Tobacco Company stock to, say, an organization that fights lung cancer or to smoking-prevention programs. Or if not all the money from the sale, we could have donated the gain. We have not done that.
Reflection #5: I’m more dishonest than I used to be
It’s not surprising that person A will treat person B differently after finding out that person B has more money. What is mildly surprising, is how much I treat people differently.
What I mean is, it’s not so much how people treat me, but how I expect them to treat me. I am reluctant about telling people of my windfall. In part, that’s just me keeping my business to myself and nothing to apologize for. But in part, that reflects my own apprehension about how I will be seen.
The rich are derided as part of the problem in our society. And I do believe we are indeed part of the problem, know on some level we are part of the problem, and yet even if we support reforms of the system, most of us (me included) still hold tight to what we got. A healthy way to look at this is, the price one pays for having more than others is that others will resent you for it and that you’ll never win a pissing contest about how bad off you are.
I’m cagey in a way I wasn’t before. When coworkers talk about certain financial troubles, or what they’d do if they had X amount of dollars, I lie by omission about my windfall. Or in casual conversation, I talk about how I save money on mass transit by walking to work,or how I buy olive oil and coffee from cheap discount grocery store. Those are true statements, and I am truly price conscious about many everyday purchases, though not about as many I used to be. But they’re also lies because I know that I’m giving false impressions through humble bragging.
Reflection #6: I’m no longer working class (if I ever was)
And yet, despite my reluctance to disclose the windfall, I’m writing a blog post about it. I do so for two reasons. The first is that I’m protected by my relative pseudonymity. I’m not under many illusions about how secure my identity is, but I’m under enough illusions to make me comfortable blogging about all this.
The second reason is that on this site, and elsewhere, I have often identified myself as working class, and now I feel the need to be upfront about my resources so that if I dare again make the claim to being working class, others will have more information to evaluate and engage that claim.
To be sure, I have always, or almost always, been clear that while I was working class, my family was relatively affluent. My parents had steady enough employment and my father was unionized so that at least when I was growing up, I never had to worry about whether we’d be evicted from our home or whether my parents could afford to feed me. I always had new clothes when I needed them and each school year I had fresh school supplies. When I lettered in cross-country, my parents bought me a letter jacket. At close to $100 (in 1989), most of my friends’ parents couldn’t afford that kind of purchase. I didn’t qualify for the reduced-price or free lunches like many (most?) of my classmates, and unlike one of my friends, I didn’t live in public housing. When I got my first job, at 16, I found that many of my coworkers who were the same age or just a little bit older had to contribute a portion of their paychecks to their parents for rent while I got to keep everything. During my early to mid to (ahem) late twenties, I knew I could always go home if I lost my job or couldn’t afford to live on my own.
Being working class is not just about having money. And I still have, and probably will always have, a “working class attitude” about some things. For example, I’ll probably always be temperamentally opposed to mixing my leisure and work time in that exhausting practice known as “networking,” even though I have benefited from networking and even though working-class people also do networking in a way. I’ll also always be proud that I’ve worked a lot of service jobs and that I worked my way through college and grad school, even though that process was in many ways demoralizing, even though I wouldn’t want to (and probably wouldn’t be able to) do it again, and even though I got a lot of assistance along the way.
But money and what money confers is a big factor in class identity and class belonging. And having a lot of money, especially money that I or my immediate family members did not earn from our own labor, probably takes me out of the working class.
Reflection #7: I have no right to judge others
I have for a long time held a chip on my shoulder against trust fund babies, especially those who complain about how hard life is for them or who rail against corporate greed, and yet don’t recognize or don’t acknowledge how much they benefit from the way things are.
I’ve held that chip with an awareness that it was wrong to do so. I’m also aware that if I look at my own attitudes and at some of the things I’ve complained about, I’d find many, many instances where I don’t recognize or acknowledge the many advantages I’ve enjoyed, even before the windfall. I have the usual reservations about “show your privilege” retorts, but I’ve always had almost the full suite of unearned advantages someone in the United States could hope for.
While I probably have the right and duty to judge actions and to discern motivations, I take it as a imperative that I mustn’t judge another person’s moral worth. Maybe the wealthy person has had a very difficult life in ways I don’t know about. Or if I do know, I don’t understand the depths of that person’s challenges. Any person can suffer and while I don’t really believe all suffering is equal, I am acquainted with and partially agree with the argument that suffering is not quantifiable and not comparable.
Not that I have actually followed, or followed consistently, the imperative not to judge. Some of what I’ve written in this blog post strays into judgment territory. But I believe the imperative ought to bind me. That was true before the windfall. It is true now. I stated above that I worry how people see me. Even if others impose on me the sorts of judgment of which I have been guilty, that would not give me the authority to reciprocate.
The rich person’s conceit
One conceit among rich people is that their riches create problems that poorer people don’t have and can’t understand. As EcclesBC Tweeted a while ago,
The sleep of a labouring man is sweet, whether he eat little or much: but the abundance of the rich will not suffer him to sleep.
It’s not that the conceit is wholly wrong. Most of my “reflections” above are about the challenges of having money. And not having something means not having to worry about losing it. Some things in my life which I have lost have in retrospect turned out not to be worth the worry, or not worth as much worry as I had assigned to them.
In a larger sense, though, the sleep of the laborer is probably often “sweet” only because his or her waking life is so exhausting. I strongly suspect that it’s often not “sweet” at all, but filled with worry. And frankly, it probably does matter whether that laborer “eat little or much.”
I don’t wish to sentimentalize suffering or the goodness and simplicity of the poor. If you’re doing or saying something in the name of “THE POOR,” that’s a sign you’re probably doing something self-serving. But the fact that it’s so hard not to sentimentalize or to lapse into the rich person’s conceit is a warning signal that something is amiss. If I fear losing everything I have, why wouldn’t a poorer person have similar fears, only magnified? Maybe a person can come to a point where they no longer let insecurity rule them. That’s a good point to come to, and maybe in an abstract sense enduring real poverty hastens one to that enlightenment. But that’s no argument for poverty.
At any rate, I am spared, if briefly, certain insecurities others must endure, and I have choices others do not. Much of what I’ve written above is about the challenges of wealth. I have not stressed the very good things about it. Everyday purchases are no longer the concerns they once were. My spouse and I now have the resources to indulge in luxuries we could not, or not as much, before the windfall. We’re able to give more to charity (my spouse always gave, I’ve just started) and while I have mixed feelings about “the relations of charitable giving,” it feels good to give. We’ve paid off our student loans. While we still need and are grateful for our jobs, we’re less dependent on them than we were before. It’s easy to exaggerate the independence we now have, but it’s a real independence. It behooves me to remember my good fortune and to try to do less evil with it than I already do.
Photo Credit: Money Shirt, by Rob Lee, April 23, 2006. Creative Commons Attribution 2.0 Generic License.
Hello everyone:
I may not be able to respond to any comments until later tonight, or sometime tomorrow. But thanks for reading.Report
You are hiding your wealth for a very good reason: Wealth is isolating.
For instance, this.
I agree with #3. The best I can do is to cross off one or two companies to not invest in. Which ones they are changes over time. It kind of makes me realize that, well, everyone’s a problem. We all live in Omelas, only it’s not that nice.
Re #6: I think class is more complex than simply being your income. It’s who you hang out with, how you engage with people, who you are comfortable with. I find I’m comfortable with a lot of things that reflect my upbringing around working class people, even though I could not describe myself, or my father for that matter, as “working class”.
I quite like #1. A lot of time and energy have been spent on legal and structural matters that really only matter to someone who’s rich. And yet, at least some of those structures make things that benefit everyone possible.Report
I think you are right on number 6. A few years ago there was a lot of research that showed people had a really hard time adjusting up or down if they married someone from a different socio-economic background. IIRC adjusting down was much harder.Report
Genteel poverty exists as a phrase for a reason. The Cratchits in A Christmas Carol are typically seen by moderns as a poor or working class family because of their financial troubles but everybody in the 19th century would recognize them as a proper middle class family despite their financial troubles. This is because Bob Cratchit worked as a clerk, a white collar worker, rather than as a manual laborer or artisan. Your class was based more on what you did than how much wealth you had.Report
That’s a good point. Of course (or maybe not “of course”), there are competing definitions of class, as you know. I tend to agree with the one you’re referring to, with “manual” vs. “non-manual” being one of the main distinguishers. Have you read Stuart Blumin’s The Emergence of the Middle Class? It’s not a groundbreaking work, but he does a lot with that definition of class to map class in early 19th century NYC.Report
Speaking for myself, I can’t say which is harder. I do know my in-laws in some ways are much more middle class, and it’s a bit of a culture shock, especially when it comes to education. With my in-laws, college and even an MA ares considered something like a default, whereas on my side of the family they’re nice to have, but not an expectation.
Of course, you know from our other conversations on this site that that’s not an easy move from me 🙂Report
Thanks for the comment. I haven’t read the link yet, but I’ll bookmark it.Report
Well good for you. It sounds like a nice cushion. As I’ve said to some folks, never PLAN on receiving an inheritance, just thank your good fortune and do something worthwhile with it should you get one. Hopefully, you’re got yourself a good financial adviser who can manage your new found money with the objectives you determine going forward. In a lot of ways, I agree with the points you make–
“Reflection #3: There is no such thing as moral investing” No, it never has been, nor, from a “returns perspective”, has it seems to have been very successful, so I’ve heard. I have no problem buying stocks in stuff that’s destructive to people. It’s their choice, not mine to consume said products.
“Reflection #5: I’m more dishonest than I used to be” I don’t consider it dishonesty. My money and business are just that. You don’t need to know I’m sitting on 500K in the bank. Hell, it opens you up to solicitations and possible robbery.
“Reflection #7: I have no right to judge others” You write this as if you are suggesting that people, or some people, actually DO have a right to judge others. They don’t.
Don’t spend the money all in one place. 🙂Report
All good points, especially no. 7. I don’t believe anyone has the right to judge others. But then if I go about judging others for judging me,…..then I’m in a bit of a bind.
Maybe dishonesty is the wrong word. On the other hand, it *feels* dishonest. Maybe it’s safer/better to say “less open”?Report
Gabriel,
“Right” is carrying a lot here. I’m not saying that judging others doesn’t happen. I do it. I’m sure everyone does, but I don’t volunteer my conclusions to people. What I think of others has no impact (or very little) on my everyday dealings with them, especially in a work environment.
“Less open”. That seems better. I’ve always been less open for the most part. I keep my mouth shut. People don’t need to know everything about you, and if you talk too much, you can come off poorer than if you keep your mouth shut. 🙂Report
You’re right that “right” is probably not the right word. Maybe “prerogative” is better? I think you and I are (mostly?) in agreement about the ought’s of the matter.Report
On your point about no. 3, it’s strange how I agree on some things and not on others. I tend to think tobacco is different and have a really hard time investing in it. I feel less bad about sugary stuff or alcohol. Even so, I still feel a little self-conscious (though apparently not enough to do anything about it), if only because I’m making money off of other people’s poor choices.Report
For the record, I hate HATE tobacco smoke–and pot smoke. I’m allergic and it gives me headaches. BUT I will not advocate the use of gov’t to force others to conform to my view of how others should live their life. I do, however, see no reason not to profit from their choices. The liquor industry profits from my choices. As long as it’s voluntary, I’m good. Of course, you have the freedom to make the choices you believe are in your best interest-and how you see that best interest. 🙂Report
#5 is absolutely a thing and I’ve noticed it in myself and others. I was lucky to graduate from undergrad, grad school, and law school without any student loans. I was certainly not alone in this set at any educational institution I intended but many people did have student loans (not including loans from the bank of mom and dad). So there was lots of lying by omission when people complained about their student loans.
The problem in general is being trying to be honest about money causes no end of grief especially when you are young. I know people from undergrad who come from wealthy enough families where they can be “independently employed in the arts*”. Meaning, even my very fortunate status was nothing compared to theirs. One of the things I remember from the privilege checklist is “Did you grow up with original art in your house?” The interesting things is that this can mean so many things. The answer for my family was yes and the pieces were relatively expensive but then you think and you know your classmate’s parents and grandparents had art that is museum-grade and often lent out to museums. One of these friends tried being honest about his fortunate status/privilege in a production and nothing good came of it.
*I’ve mentioned before that this is a big issue in the arts world and it is something that often goes unsaid. Theatre never really pays except in a few situations. Even earning 30K a year from acting or other theatre work is often very lucky. So on any professional production, you might have people living a hand to mouth existence or people who come from money and don’t need to worry about the rent and bills. A few years ago, the NY Times did a fluff piece on the NOHO loft of a theatre director named Trip Cullman. What the article sometimes eluded to but did not mention is that Trip Cullman was the heir to a major tobacco fortune. He is a good director and I enjoy his work but his income from theatre directing doesn’t even cover a fraction of the cost of his loft.Report
I wonder if the finger-painted hand “Turkey” on the fridge counts as original art?
Of course, I get what you’re saying. While I’m not prepared to see it as a marker of “privilege” per se, it probably is an indication of class if the art one has at home is mass produced. At the same time, it’s not unheard of for working-class people to buy original art from non-studio places, or to know how to paint or draw. Maybe the issue is more where the art comes from or how close the person who owns the art is to the artist?Report
Congrats on the windfall and thanks for the very insightful meditations.Report
Congratulations seems an odd phrasing here, given the circumstances?Report
I dunno, “I’ve come into a big bunch of dough but it makes me feel inheritors guilt that spur me into insightful musings” feels like congratulations are best in order to me. Certainly if his article was “an unexpected calamity has brought me to the brink of penury and here are my insightful musings on the experience” would spur me to offer condolences.Report
“I’ve been rich and I’ve been poor and rich is better.”
–Beatrice Kaufman
Of all of the problems I’ve had, the ones that attended having more than I needed were infinitely preferable to the ones that attended having less than I (thought I) needed.
But it is nice, from time to time, to lie in bed with Maribou and talk about stuff like that time that our credit limit was $300 and we still managed to find the time to drive to the Grand Canyon for a four-day weekend.Report
I have never personally been that poor, thank goodness, though poor Shawn has been soul crushingly/mind destroyingly poor.Report
Even at our worst (I was making $12 an hour (IN CLINTON DOLLARS!) and she was not employed), we both had cultural capital out the yin-yang.
And we quickly invested our cultural capital and quickly moved from thither to hither and look forward to yon, someday.
It’s the cultural capital that is actually worth something. The “Privilege”, I guess it might be called.Report
Yup, Shawn had none. I had/have bucket loads. Probably why he’s burning the candle at both ends with his coding boot camp thing- he’s crazy motivated even though he has me to back him up because he’s used to having nothing under him for safety nets but what the state provides.Report
@jaybird @north
Note that 1) “Our” worst is a lot better than my personal worst, which was much poorer – so I didn’t feel poor when our net income was $12 / hr because hey, we owed almost nothing; 2) Cultural capital and safety nets aren’t really the same thing. My mom worked her butt off to get me cultural capital just like she worked to build it herself; my dad was born into cultural capital that he regularly squandered starting with not going to college (and then had to start over which funny how you can do that over and over…. I mean, not funny…) – and then I worked even harder in college to grow my cultural capital so I could get better and better paying jobs with more and more cultured people – but there was not much of a non-governmental safety net for me at all until I got married. I could go home to my perpetually impoverished family to be abused by my dad some more, I suppose. But that was about it. Nobody was going to lend me money or give me a leg up because they didn’t have it. Nobody was going to take me in because they’d want to know why I wouldn’t just stay with my family and my dad’s abuse was mostly a secret / if not they were in denial about it.
Getting married and acquiring a mother-in-law who would help out with the rent (not that we would let her) or pitch in on house downpayments (not that we would let her) or even buy us dinner without asking for a bigger amount of money herself later in the week (this I did manage to let her, and gratefully, and it’s part of our family ritual these days) was…. a revelation for me.
And probably why I was perfectly happy to work 10 hour days at 6-7 bucks an hour for years, building up my cultural capital and my resume, but not much else, while Jay clambered his way up the IT ladder, always making more at each non-permanent contract, because damn, I wanted us to be able to look out for my baby sister the way Jay’s mom looks out for her younguns someday. (And when the time came, although it wiped out our savings, we were able to do that. And that money helped her get out from under my dad’s clutches, at long last. Woo.)
Uh, sorry for the biographical tangent. Just, people do often equate “safety net” and “cultural capital” – but cultural capital is only one kind of safety net, and when mixed with mental health issues, trauma, or abuse, it’s got some pretty darn big holes in it.Report
Oh yes indeed, I was using the term in its’ literal form, not as it’s commonly used in political chatter as a family term for all state operated aid programs.Report
@north *head tilt* I’m not sure what the “literal” form is. I mean, I know what it is, we’re talking the net they spread under a trapeze artist, etc., when talking literally – but I’m not sure which of the metaphorical forms you were designating as the literal.Report
(Shawn is the hubby?)Report
Shawn is the Hubby.Report
The Rabbis in the Talmud thought that poverty was the worst thing you could wish on purpose. One of the disputes between the Pharisees and the Nazarenes was that the Pharisees didn’t really go for the entire “its easier for a camel to go through the eye of a needle than for a rich man to get into heaven thing.” They believed that material poverty lead to spiritual poverty because the focus becomes on mere survival for good reason.
There is a Jewish story about a wealthy merchant who visits a prominent Rabbi. The Rabbi asks the merchant what he wants and the merchant says he gets on with corse bread, salt, and a few vegetables. The Rabbi asks about where the merchant sleeps and the merchant talks about his spartan bed. The Rabbi admonishes the merchant that this will not do. A man of his station needs to eat finer foods like meat, white bread, spices, and wine. He needs to sleep on a well made bed with fine linens. When the merchant leaves, the Rabbi’s students asks him why did he advice the merchant to eat finer food and sleep in a more comfortable bed. The Rabbi responds “yech, if a wealthy man thought that he could get along fine on that diet and with that bed than imagine what he things a poor person could get by on.”Report
@north Somebody died though. That’s what I’m referencing.Report
You’re right that that fact got lost in the OP I wrote, but the blame goes to me and not to North. From what I know, that person’s life, for all of the money that was held in trust to take care of him, was in many ways very tragic and sad. It’s possible I don’t know the whole story and maybe it’s not as sad as I think it is. But all the details fall into the realm of what I won’t disclose for the sake of maintaining others’ privacy.
But you’re definitely right that this windfall was brought about by someone else’s misfortune. That might not necessarily be the case with all inheritances. But it’s a somber circumstance nonetheless.Report
I thought it was odd that no one mentioned that, either. Although the way he said it, it sounds like maybe it was one of those distant relatives one barely remembers having.
@gabriel-conroy Sorry for your loss, if there was one of any significance.Report
Strangely, I’m not even sure it was a relative. If so, it was a very distant relative (on the in-law side). Some things I do know about this person, however, do tell me that the person’s life was very hard and probably not fulfilling.
It is something I should have thought about in my OP, though.Report
I remember rounds and rounds of congratulations offered both times we got pregnant. It always felt a bit odd. We were trying, so both pregnancies were welcomed. We got pregnant very easily (on the 2nd or 3rd go around with Mayo and the 1st or 2nd go around with LMA), though that wasn’t really because of anything we did particularly right.
On the one hand, we were getting congratulations for doing something teenagers manage to do by accident. On the other, it can be hella hard to get pregnant and, hey, we were getting a(nother) baby we wanted.
Maybe we just need some new words to celebrate positive events that may or may not be “deserved”. At the risk of appropriating a culture the boys share but I do not, Mazel Tov feels like it engenders the appropriate attitude.Report
@kazzy The dictionary definition for congratulations includes both the achievement sense and the good wishes on a felicitous occasion sense.
I think it’s fine to use it either way and I’m not sure where the “it’s only appropriate for achievements” thing crept into the language…. sometimes I wonder if it’s a regionalism.
I have a sense that in my own home culture, even achievements were acknowledged as having, in some sense, an aspect of Lady Luck smiling on one, so the line wasn’t as stark as all that in the first place…Report
(Also etymologically, while I am no scholar of Latin, it means something like “I share your joy at this!” which… seems rather flexible.)Report
Congratulations. I understand the trepidation and the concern that, after coming into money, you’ll become one of those people for whom you’ve always had a little bit of… trepidation about. Or maybe that’s not how you feel at all. I’ve never had a big windfall and I’m not incredibly wealthy or anything, but I’ve slowly worked my way from a lower middle class upbringing into a comfortable upper middle class life with solid prospects of going higher into the SES distribution and I think about similar issues every day.
A couple of random thoughts:
I’m not sure about this idea that lowering taxes stacks the deck. I don’t like the tax bill, because it completely ignored our long-term fiscal sustainability issues. But I’m happy for anyone to get a tax cut, whether it’s me or everyone but me. To say it in the vernacular, what you eat don’t make me sh*t. I understand that it’s very common right now to mostly talk about individual welfare in the context of relative wealth and position, but that’s a dead end. We’re never going to reliably and efficiently make one group of people better off by making another group worse off. Some things are zero-sum; most things are not.
More specifically, changing the tax laws to make wealth accumulation harder isn’t going to help the working or middle classes. Quite the opposite, we ought to be doing everything we can to incentive and advantage savings and investment. Taxing investment income at a lower rate means that a family that works to save for a house and lives in that house and raises a family in that house can, at retirement, sell the house without handing over more than a third to the government. And it means that someone who foregoes consumption to put money away for retirement or for their children’s education, can access that money without losing a significant portion of the gains. If someone wants to explain to me how taxing capital gains as regular income would benefit the middle class, I’m all ears. But it just wouldn’t.
Also, there is another issue that runs through the piece, a bit of a false dichotomy of the private sector and profit as being morally questionable and the public sector and taxing more wealth as being obviously good. I don’t think that holds up to closer inspection. Is there a company listed on the NYSE or the NASDAQ or whose stocks you can buy over the counter that has done more immoral action than the U.S. government? You’d be hard pressed to find one. And yet, several times in the piece you are lamenting the fact that the government hasn’t demanded more of this money from you. It doesn’t quite make sense to lament that a company that you own stock in makes a motor for a weapons system, while wishing more money for government that owns, operates and deploys that weapons system.Report
I think on a policy level, I agree with you more than one would gather from the OP. And your point about the US government doing really horrible things, more horrible than things done by most corporations, is well-taken. In other words, you’re right to detect that dichotomy and I agree that that dichotomy has the problems you cite.
At the same time, while I don’t believe in redistribution for the sake of redistribution (where the problem is A has more money than B, and the solution of the problem is to give some of A’s money to B), I do think the wealthier should pay more for the upkeep of society. I believe that for two reasons. 1)The more wealthy can afford it better. (Of course, there’s the conceit that just because I can afford to pay x amount of taxes doesn’t necessarily mean that someone whom the tax code says is in the same situation can similarly afford to pay that amount). 2) I do believe that most of us who are fortunate to have wealth, have it by circumstances we don’t wholly control. Some, of course, do work harder for it than others, but there’s usually/always a little/a lot of help along the way.
The first reason is moralistic, and based on premises that others don’t share. The second reason bills itself as pragmatic, although perhaps it’s reducible to the zero-sum thinking you criticize (mostly rightly, in my opinion) in your comment.Report
So do I. And more than that, I believe that a social safety net fits the textbook definition of a public good and is something that ought to be funded out of general government revenues. The thing is, we already have a progressive income tax, which is exactly why tax cuts benefit the wealthy more than the less wealthy. Because the wealthy are the ones paying the majority of the income tax in the first place. The only way to make a tax cuts benefit the less wealthy more than the wealthy is to make the tax code less progressive. Alternately, you can just never significantly cut taxes, but I don’t know how that gets you where you want to be.
If you find something lacking in what we are doing on the spending side, colleting more tax revenue isn’t going to fix that. For every extra dollar that the federal government collects from the wealthy in taxes, about 60 cents is going automatically into poorly conceived, poorly managed entitlement programs that end up benefitting the wealthy more than the poor (Social Security and Medicare are very regressive programs). Of the rest, what’s called the discretionary budget, because the first 60% is mandatory, about half of that goes to defense spending. These numbers have been pretty steady over the nation’s history. Again, raising more tax revenue isn’t going to do much to change it. The only way to change these things is to muster the political will to change the expenditure side.
There are two types of countries that have well-functioning cradle-to-grave welfare states and neither of them accomplish that by soaking the rich. There are countries that tax everyone at relatively high rates and don’t do much actual redistribution (the Nordics may be the best examples). And there are countries that have generally low tax burdens and fund the welfare state from some natural resource endowment or by running tight fiscal stances; Saudi Arabia and Singapore respectively are examples.Report
I think we’re mostly in agreement, and you know the facts better than I do. Your rendering of the facts hews pretty closely to how I understand them.
I still feel weird that I benefit more from the system than others do, even if most/all benefit.Report
If someone wants to explain to me how taxing capital gains as regular income would benefit the middle class, I’m all ears. But it just wouldn’t.
?
Not to turn this into a political discussion, but I’m pretty certain the premise is: The government needs a certain amount of money to operate, and when there’s money it _doesn’t_ get from taxing investment income less, it usually ends up getting by taxing non-investment income more.
Taxing non-investment income more hurts people who do not have enough to invest (Or at least not invest much.), but do have enough income to tax. Aka, the lower-middle class.Report
That story doesn’t match up to the numbers. About 44% of Americans pay no federal income tax, which is fine by me, by the way. I’m all for a progressive tax system. For households making less than $30K/yr, their effective tax rate is about 5% and they pay about 1.5% of all federal income tax. For households making between $30K and $50K/yr, they have an effective tax rate of about 7% and pay 4% of total federal income tax.
Obviously, these people pay payroll taxes and state and other taxes, but we are talking about this in the context of the federal capital gains tax rate. The story of the federal government taxing lower-middle class people more to make up for tax breaks to the wealthy doesn’t really hold up to serious scrutiny. I get that it makes for great political talking points, though.Report
“Federal income tax” is doing a lot of heavy lifting there.
A great deal of the federal government is…SS and Medicare, and I can promise you that those 44% are paying their FICA taxes.Report
FICA taxes
FICA *CONTRIBUTIONS*.Report
….Mmmmokay sure.Report
Penalty? Fine? Individual FICA Mandate?Report
In fairness to JR, he did acknowledge payroll taxes as an exception to what he was talking about.Report
I want to unpack this a little bit because the claim I usually hear (not necessarily from DavidTC’s comment, but in general) isn’t so much that the feds start taxing the less affluent to make up for shortfalls created by tax breaks. Rather, the argument I’m familiar with is that states have to enact more taxes to compensate for lack of federal funds or to shore up services that are now challenged by less federal money. (Or the states have to borrow more or raid pension funds, or whatever.)
Now, I realize you’re talking about capital gains and not other taxes. I also realize your main point isn’t to defend the new tax law (in fact, you said you disagree with it). You’re point, at least originally, was to suggest that the tax system and the new law don’t stack things in my favor the way I suggested in the OP.
Even with that said, it’s possible I’m misrepresenting what you’re saying, and if so, I apologize.Report
That story doesn’t match up to the numbers.
What ‘numbers’?
You seem to think that the fact that middle class people are taxed less than upper class people would disprove my point.
But I wasn’t saying ‘Reduced capital gains taxes are making the middle class get taxed more than the upper class.’.
I was saying ‘Reduced capital gains taxes are making the middle class get taxed more _than they otherwise would be_ if capital gains was taxed at normal income rates.’
Governments have a set amount of revenue they need to take in. Any reduction is going to matched somewhere else by an increase.
Any reduction of a tax is mostly paid by a specific group will generally be countered by the general population paying more than they otherwise would pay. (Which, as gabriel conroy point out, might even be at an entirely different level of government.)Report
This is how you do social science. You posit a theory about why something is the way it is or how it would change if you enacted some specific policy change and then you see if the relevant numbers match that theory. So, here we have a theory:
Sounds compelling on its face, but that’s not really the way that public finance works. The best example that I can think of is that there is the Schoolhouse Rock version of how laws get made, based on a literal reading of the Constitution, and then there is the actual way that laws get made, which fully incorporates the political economy of the moment and the layers of legislative procedure that have built up over the years.
Generally, governments decide what they’re going to spend; they raise as much revenue as they can; and they make up the difference either by not executing on the spending side or running deficits that they finance with debt. The revenue side of the budget almost never drives changes on the expenditure side. So, I get that a lot of people think that the U.S. government isn’t doing enough in certain areas, but there is no evidence that changing tax rates or taxing the rich more is going to get the government to do the things that people want them to do.
Back to the numbers. If changing the tax rates on the wealthy had a significant effect on everyone else’s tax burden or on what the government was able to pay for, then you would expect to see that effect in the numbers. But you don’t. Going back to the end of WW2 you sae dramatic changes in the highest marginal tax rates and yet, (a) the effective tax rate of the median household has stayed about the same; (b) the level of revenue raised as a percentage of GDP has stayed about the same; and (c) the composition of federal expenditure has stayed about the same.
This is a separate issue, which is, I admit an issue. The federal government has created all sorts of new categories of social spending, but has had no appetite for raising federal income taxes to fund that spending and has largely dealt with it by passing it on to the states in the form of unfunded mandates. That is far from ideal, but that doesn’t get fixed by taxing the rich more. That gets fixed by either taxing everyone more or by adjusting the level of social spending to be appropriate for the level of taxes being collected.Report
Thanks for your comments (and sorry you had to do it twice!). What you say seems to make sense to me.Report
I’ll add that while I’m still absorbing/thinking about your argument, I can certainly agree with what you say below, that “[i]f we want to fully fund more social spending, then everyone is going to have to pay more taxes.”
Few things bothered me more from Obama’s 2008 campaign than his claim that so many of our spending woes could be solved by raising taxes only on those who make more than $250,000. It bothered me for a lot of reasons, but one of them was that I thought it simply wouldn’t be sufficient.Report
So, I get that a lot of people think that the U.S. government isn’t doing enough in certain areas, but there is no evidence that changing tax rates or taxing the rich more is going to get the government to do the things that people want them to do.
I…didn’t say that.
In fact, my point was literally the opposite: The government is trying to take in a specific amount of money (And in fact most tax changes are ‘paid for’ in other tax changes.), and thus taking in less from a specific group is going to result in them taking more across the board.
You are correct in that they might just borrow it, but that just changes it from ‘taking more across the board in the present’ to ‘taking more across the board in the future’. If anything, that is _more_ likely to allow shortfalls to occur, which then ‘everyone has to chip in’ to make up.
changing the tax rates on the wealthy had a significant effect on everyone else’s tax burden or on what the government was able to pay for, then you would expect to see that effect in the numbers. But you don’t. Going back to the end of WW2 you sae dramatic changes in the highest marginal tax rates and yet, (a) the effective tax rate of the median household has stayed about the same; (b) the level of revenue raised as a percentage of GDP has stayed about the same; and (c) the composition of federal expenditure has stayed about the same.
I would like to see some documentation of (a) because that seems wildly implausible even without _any_ changes in the tax code. For one, it should shift around due to unemployment.
Moreover, I would like for you to explain the basic underpinnings of your idea, because it seems almost tautological that if money is being taken from a group of people, and less money is taken in from a certain subset of that group, either less money will be taken in from the entire group, _or_ the rest of the group will have more money taken from them to counter. One of those has to be true.
I can’t think of any logical scenario where, if I pay a dollar less in income tax, the outcome isn’t either a) the government ends up with a dollar less in tax revenue, or b) other people pay slightly more tax to cover the missing dollar.
Well, unless you’re making some sort of ‘perfect Laffer curve’ argument, but even the Laffer curve supposes that when the wealthy pay less in taxes, the less wealthy will pay more in taxes…it just assumed the less wealthy will be paying more in taxes because they _now make more_.
Although, technically, under our existing system, this would result in the people trickled down upon paying a slightly higher tax rate, in theory countering the wealthy paying a lower rate…but it would be an absurd hell of a coincidence if not only did total revenue stay the same, but somehow everyone’s tax rates movements all canceled each other out and the effective tax rate of the median household stayed the same.Report
This strongly implies there was a ton of tax-avoiding activity and the rich managed to not be harvested like carrots. “Tax-avoiding activity” is going to be something like taking advantage of loopholes and “investing” in politically favored items. Presumably we’re diverting useful resources into less than optimal expenditures.Report
Either I just had a comment eaten or it is stuck in moderation.Report
@gabriel-conroy and @davidtc
I write a longer comment that looks like it’s been eaten. I’ll try to recreate a Cliffs Notes version.
On the face of it, the claim that more or less taxes collected from one segment of the tax base means that some other segment of the tax base has to make up the difference seems obvious, but that’s generally not how public finances work.
For one thing, there really isn’t a particularly strong relationship between revenues raised and expenditures, at least not one where the former drives the latter. Generally, governments decide what they’re going to spend, raise as much tax revenue as they can, and finance the resulting deficits either by borrowing or just under-executing the budget. The United States has pretty much unlimited borrowing power, so we just issue lots of debt.
The other thing is that the components of the federal budget are pretty stable over time. This is where the numbers come in. If the tax rates imposed on the wealthy had an impact on government spending or on the amount of taxes that everyone else pays, then you would expect the numbers to reflect that. They don’t. In the post-WW2 era, top marginal tax rates fell precipitously and over the same period the effective tax rate of the median household stayed about the same. And over the same period the level of total tax revenue and the components of the federal budget don’t show a whole lot of sensitivity to the top tax rates either.
There is something to be said about the shifting tax burden to the states, but that’s not really about how much the wealthy are taxed. Rather, the federal government created a whole lot of social spending commitments that it didn’t have the ability to pay for, so it dealt with it by creating a bunch of unfunded/underfunded mandates for the states. If you want to argue that could have been funded by taxing the wealthy more, then you’re going to have to show your work. The political economy of that doesn’t work. As I wrote earlier, there is no country that I know of that provides a robust welfare state by soaking the rich. If we want to fully fund more social spending, then everyone is going to have to pay more taxes.Report
(((I think I just rescued your original comment, but I’ll read both before responding.)))Report
@davidtc
@j-r
In terms of the damage to the economy, not all taxes are equal.
For example the “inventory tax” is (insanely!) destructive because very large inventories can have very low profits, but the tax is unrelated to profit and ability to pay. The “Wall Street transaction” tax is a good example, an activity that has a penny of profit is eliminated if we put 30 cents of tax on it. The math is less stark with things like clothing stores but can still be grim.
Similarly, all activities are not equally good for the economy.
Investment is a good thing, it creates jobs and so forth, we want to encourage it, it’s how small companies become big companies. Thus presumably we want to tax capital gains less.
This lacks “certainty” which we’d like to micromanage into the tax code, but that’s a trap. It will also “mostly benefit the rich”, because it’s the rich who create jobs and own companies and such. However big picture the middle class benefits from economic growth, activity, job creation and so forth.Report
The “Wall Street transaction” tax is a good example, an activity that has a penny of profit is eliminated if we put 30 cents of tax on it.
Erm, a good example in what sense?
You are correct in what the tax does, but the tax is intended to do that. We do not need companies front-loading stock transactions at the speed of light to somehow gain fractions of a cent from someone else’s stock purchase…we don’t even actually need day traders at all.
Investment is a good thing, it creates jobs and so forth, we want to encourage it, it’s how small companies become big companies. Thus presumably we want to tax capital gains less.
So here’s a question that usually isn’t asked: Why, exactly, do people think people trading stock is encouraging ‘investing in companies’? Stock is almost always purchased from other people, and the capital gains is from making a profit when it’s resold to others.
I understand that _issuing_ stock is getting people to invest, but after that, it’s just trading around already-existing investments and the company doesn’t get any of the money. People know this, right?
It’s like trying to boost house manufacturing by reducing the taxes on all house purchases. That will result in more houses exchanging hands, yes, but most of those houses will be houses that already exist. In theory, that does create slightly more demand for houses, so slightly more might be built…but seriously, this is a stupid plan and drunk people could think of better ones.
And that imbalance of ‘new sold’ vs ‘existing sold’ is nowhere near as inbalanced in housing as in the stock market, where probably 99.9999% trades don’t create any additional investment at all.
Why is this even a thing? If we want to encourage ‘investment’, perhaps we should figure out a way to reward people for ‘putting money into a company where the money wasn’t in that company before’ (Or rewarding companies that manage to make that happen.) instead of rewarding people for ‘purchasing ownership of an investment made by someone else 10 years ago and then having its value slightly rise while they owned it, and then they sold it’.
—
Meanwhile, in actual fact, a lot of the ‘capital gains’ that happens as soon as we lower capital gains taxes is companies buying their own stock back to bump up the price, which is literally _reducing_ total investment in the company by basically cashing investors out. (Granted, it’s investment the company doesn’t want anymore, but still.)
Somehow no one seems to notice this.Report
Multiple consequences.
1) Day traders supply liquidity to the market. They’re the key force which reduced spread (and yes, because of that they’re despised by market makers who used to be able to pocket that spread). “Spread” is the difference between what a trader is willing to buy a stock and what he’s willing to sell it for.
No DT means the spread between Bid and Ask will increase, a LOT. It won’t be a handful of pennies, it will be perhaps dollars. With vastly less liquidity I’d also expect transaction costs to rise a lot (overhead will need to be absorbed by fewer trades). This money will be taken out of the pockets of normal investors.
2) Well over 99% of all trades will no longer happen. This would do a staggering amount of economic damage.
You’re getting rid of hundreds of billions of dollars of economic activity. That’s not even money being taxed away, it’s being destroyed.
3) I suspect this results in Wall Street being forced to relocate to another country. Saying that an activity shouldn’t happen is just saying it shouldn’t happen here.
First, capital gains is hardly limited to stock trading. Second, purchasing a stock is purchasing a piece of that company. You, the owner of the company, hopefully want the company to do good things and increase in value.
Companies in turn can use their stock’s value for various activities. Yes, issuing new stock is rare, but giving out stock bonuses isn’t, and they can also exchange shares with other companies in the context of a merger or buyout.Report
No DT means the spread between Bid and Ask will increase, a LOT. It won’t be a handful of pennies, it will be perhaps dollars.
…and?
I find it funny how people keep describing how things would change under a stock trade tax, but not able to articulate why these changes would be bad.
With vastly less liquidity I’d also expect transaction costs to rise a lot (overhead will need to be absorbed by fewer trades). This money will be taken out of the pockets of normal investors.
Ah, yes, the famed overhead of computer transactions.
Let’s see if I follow this argument: For decades, the stock market has been extremely overbuild to handle millisecond timing and an absurd amount of transaction volume because of people front-running trades by millionths of a second, and if we stop allowing this, or rather if we start taxing it, the amount of transactions will drop massively.
Which will cost much more money. Because we would, for some reason, keep all the same infrastructure to handle that load, while not having the load.
But, hey, I’ll go with that. Let’s pose a hypothetical, where taxing stock transactions results in ten, no, wait, one hundred times less volume to spread the cost across, while all costs remain the same! So NASDAQ, for example, starts charging a hundred times as much as they currently charge to trade a share on the exchange.
That would raise the cost to…five whole cents!
Holy crap, that would render the entire system…wait, that really doesn’t do anything at all, considering we just put a 0.5% tax on the entire transaction as the _premise_ of this thing, (Assuming we’re talking about Sander’s plan), which works out to twenty five cents if the stock is at $50.
You’re getting rid of hundreds of billions of dollars of economic activity. That’s not even money being taxed away, it’s being destroyed.
People repeatedly buying and selling stuff that already exist does not create any sort of wealth.
First, capital gains is hardly limited to stock trading.
…I didn’t say it was?
Capital gains, however, is limited to purchasing something, owning it until it increases in value through nothing you did, and selling it. (Because if you did so something to make it increase in value, that increase is usually ‘income’, not ‘capital gains’.)
No one has ever come up with any real reason for the government to incentivize that happening that beside ‘Look, those people have all the money and they pay Congress very well’.
Well, I guess a fairness argument can be made about inflation, that an investment that was made for $100 in 1980 but sold now for $400 is should really only count as $85 of income. But would be trivial to allow people to discount for just that while still taxing as normal income rates. Before anyone goes ‘that sounds really complicated’, please note that pretty much investment company is required by law to send various forms out, form 1099 or something if I recall correctly, to investors, and thus their computers would presumably just be told ‘inflation this year was X’ and have that all calculated automatically and sent to taxpayers.
And, no, ‘double taxation’ is gibberish. All taxation is double, triple, quadruple taxation. The economy can be considered a circular process by which all money is traded around until it is eventually is taxed to nothingness. Except, obviously, the government spends it back out.
Even if I believe that it was unfair to box tax corporate profits and the people given those corporate profits, it makes a much stronger argument to remove all corporate taxes instead. (Which I would be unopposed to if we made it revenue neutral by raising taxes on income from corporate dividends and stock sales. I.e, we basically move all the taxes from the corporations to the owners of the corporations.)
Second, purchasing a stock is purchasing a piece of that company. You, the owner of the company, hopefully want the company to do good things and increase in value.
Explaining why someone wants to purchase stock is not actually a justification for why the government should incentivizing said behavior. If anything, it’s a justification as to why it shouldn’t. We don’t need to subsidize people doing things they have every reason to already do.
Companies in turn can use their stock’s value for various activities. Yes, issuing new stock is rare, but giving out stock bonuses isn’t,
Do you mean dividends?
Interesting fact: Dividends were actually not included in the capital gains exception originally, and only got added about _90 years_ after we started carving out exceptions for capital gains, so trying to use them to justify why that exists seems dubious.
Also, technically and legally speaking, they still aren’t capital gains. They’re just (if they qualify) _taxed_ at the capital gains rate.
I am unsure as to why we want to tax dividends lower, either. Although that offends me less because a rational reason can be invented for that. (Specifically, we’d rather have corporations consistently giving out dividends vs. having them manipulate their own stock prices to please current stockholders who can then sell when it’s high, leaving the new stockholding suckers with a hollowed out company. Not because I care about suckers, but because that process usually is done by randomly firing people and crippling the company so badly it has to fire other people later.)
and they can also exchange shares with other companies in the context of a merger or buyout.
Erm….yes?
What does that have to do with anything?
I suspect this results in Wall Street being forced to relocate to another country. Saying that an activity shouldn’t happen is just saying it shouldn’t happen here.
The tax would be on investors. It doesn’t matter where the market is.Report
@davidtc
Let’s walk through this at a transaction level. In theory, a thirty dollar stock could be purchased for $30.01 (the Ask) and sold for $29.99 (the Bid). Obviously I’m ignoring overhead and fees and assuming highly liquid stocks (Google, Apple, or the Spiders).
Although theoretical, it’s reasonably close to reality. $29.99/$30.01 is 0.999334, so getting in and out of the stock would cost you 0.067%. As of this minute GOOG’s current spread ratio is 0.087%
Increasing the spread means that same $30 stock can only be purchased for $31 and sold for $29. That’s money coming out of the consumers pocket just because of a lack of competition. Even if you only do this twice (buy a stock and sell it), that’s a 6.452% percent loss.
The way DTs narrow the spread is if a trader offers $29.00/$31.00, then the DT could make money by offering the same trade for $29.01/$30.99, so he’d be pocketting $1.98. Then a different DT realizes there’s $1.98 on the table so he offers same trade for $29.02/$30.98.
And so forth and so on. The price war is brutal and directly benefits the consumer.
As awful as this tax is for a buy/sell once consumer, it’s going to be worse for various institutions. If your business used to buy/sell stocks several times a year, you probably just went out of business. A lot of fiscal instruments disappear. A lack of demand in buying stocks implies prices fall.
If you think “ten” is anywhere close to a reasonable number then you’re not dealing with reality. I expect a minimum 100 fold loss in volume and wouldn’t be surprised at 1000 or 10,000.
A 1000 decrease implies your five cent increase in overhead is actually fifty cents, while a 10,000 decrease implies five dollars. Obviously this is absurd, the actual result is volume drops to zero as the entire industry relocates.
And even with a 100 fold decrease this probably still happens. You’re imposing breathtakingly awful competitive disadvantages on the American markets. There are other countries and other markets.
Apply that logic to the real world and you’re claiming gas stations shouldn’t exist because consumers could purchase directly from the refinery. Similarly WalMart shouldn’t exist because it only buys and sells things. Adding liquidity to a market is adding access, efficiency, and is hugely beneficial.
So in addition to Wall Street fleeing the country, so does any rich people who are seriously involved in the stock market, which might be everyone over a certain level of wealth.
What problem are we trying to solve here? The only thing you’ve put on the table is “front running”, which isn’t a Consumer level issue.Report
Let me pause for a second, because I just read this before posting, and I have a feeling there is something you are going to argue with, but you need to grasp it, so here it is upfront:
The stock market, as in the market itself, is a zero sum game. (Or, technically, a negative sum game if transaction fees and hypothetical taxes are counted, but let’s ignore those.)
Now, yes, the market grows, but it grows via _outside_ money, aka, by companies selling new stock (Or shrinks via the inverse.)
There is absolutely nothing anyone with a brokerage account do to put money into, or take money out of, the market in total. When you buy stock, someone else sold exactly that amount of stock…to you, in fact.
Another clarification: You seem to think that increased competition brings the prices down.
Not only is that not really how it works in a closed-market like that (Increased competition generally brings prices down because the supply increases, but the supply of stock cannot increase due to market trading.), but ‘keeping the prices down’ does nothing for investors anyway.
Everyone in the market equally buys _and_ sells. It is exactly symmetrical. This is not the bread market, where one group of people make and sell bread, and another group purchases and consumes it. But in the stock market, everyone purchased stock, and everyone sells the exact same stock.
Retail establishments provide _one thing_ (Goods and services) in exchange for _a different thing_ (Money). The stock market has money go in, and later the same amount of money goes out.
It’s much like a bank…and, much like a bank, people use them because there is some _other_ goal they want. I mean, if their goal was just ‘my own money, but later’, that happens automatically if they own money and time passed! With a bank, the goal is security while having easy of access, and some other stuff, I don’t think I need to explain banks.
With a stock market the goal is either ‘I can, via partial ownership, participate in the gains of a specific company, either via dividends or the stock increasing in value as it grows with the company’, which is an entirely reasonable goal that I am trying to save, or ‘I can, via buying low and selling high, take out money that _other people_ put in.’, which is…sorta stupid and pointless, and also consists of like half the stock market right now. And I would urge them to take up poker instead.
The way DTs narrow the spread is if a trader offers $29.00/$31.00, then the DT could make money by offering the same trade for $29.01/$30.99, so he’d be pocketting $1.98.
Day traders cannot offer both sides of the same trade. I don’t know what you think is going on there. Those would be two different entities. (And, moreover, it would require one of those entities to already own some of that stock…or they just purchased stock at $31 to sell at $29.01, which seems like a poor business model to me.)
It’s the market maker that sets the spread.
The market spread is based off the risk that the market might drop between the market maker buying stock and selling it to someone else. Or vis versa. (Which is even riskier, because the market maker just sold some stock that technically doesn’t exist. Which means if they can’t find it to buy, they literally have to fake it by buying something else close to it and paying earnings out of their own pocket to the ‘stockholder’ until they can buy the damn thing.)
So you’re basically claiming that reducing the total number of stock transactions will increase risk. Which it would, to some level.(1) But it wouldn’t as much as you think, because, again, the risk is that the cost will move under the market maker, which means that ‘asset is not traded as much’ is not a particular risky thing. If market maker know the next sell order from someone (As in, something they can buy) isn’t coming for another three minutes vs. the three seconds it used to come, that hardly matters. What matters if they can be sure that is coming at a known price.
Also, increased volume, or rather increase volatility, can also increase the spread…because the marker makers do not actually know what is going on or what will happen in the future.
I argue that our stock market are right now functioning as a casino with day traders who have no care as to the actual underlying value of anything, whereas in a rational world stock prices would barely move (Or, rather, slowly follow corporate profits) outside of weird disasters and earning report released.
And in such a world, there would be almost no spread because stocks would generally would be entirely predictable. (Some larger spread might show up right in advance of an earnings report or a new product launch or CES or whatever. And during volatility like some PR disaster.)
1) Although I note complaining about this and reduced liquidity is nonsense. In auction markets, less transactions means less liquidity as no one would be matching offers. In dealer markets, it means a higher spread as dealers are basically paid the spread to provide liquidity. It can’t mean both.
—-
That said…you did notice where I wanted to increase transaction costs for stocks, right, where it became much harder to day trade them and people only used them for long term investments? So, again, to hypothetical increased spread (Which probably would not be ‘several dollars’, but could possibly quadruple or whatever.), I say: And?
That is literally in the direction of what I wanted to happen. You asserted that my attempt to make stock trading more expensive will make stock trading more expensive. Yes…yes it might. That was why I was doing it.
You can perhaps argue that the transaction tax should be _lower_ than it is currently proposed, because there are going to be some knock-on effects that will additional raise the cost of transactions more than the tax does, and that is an interesting calibration argument…that I completely disagree with will happen that much.
But hey, I will entirely fold to that argument, and agree. It would be entirely reasonable to add such a tax _very slowly_, increased slightly every month or so, and phased in over years, and see if there are any multipliers. I have no problem at all with that idea.
The price war is brutal and directly benefits the consumer.
That’s not how it works at all. It is not _traders_ who do that.
Again, stock trading is a zero sum game, made up of repeated transactions between two people. (Or one person and a market maker, I guess, but they’re only a stand-in for a future hypothetical person found as soon as possible.) No wealth is created from it.
Thus it is not possible for any stock transaction to benefit or hurt people on average. If it moves the stock price up, that helps people who have the stock and want to sell by the exact same amount as it hurts people who want to buy it. If it moves the price down, reverse that. The average amount made _trading_ in the stock market is always zero…
Except wealth does get extracted from the market, via negligible transaction fees and hypothetical taxes and the spread of market makers. (And gets added in via stock sales and corporate valuation.) But here’s the thing: The premise of market makers is basically the premise of life insurance. It’s a set of calculations about risk made so that slightly above zero profit is made.
If the calculations result in more profit than that, someone else will soon step in with _less_ profits, and in fact market makers are removing all human interaction from them.
That’s where the ‘bidding war’ is, and it will continue to exist.
—
That said, just because money is not made on average via trading, trading can still can move money from one group of people to another on average.
I.e., if we divide the people playing the market into two categories, and assign everyone either a ‘investor’ (Which you called consumers for some reason.) behavior or a ‘day trader’ behavior based on how long they plan to hold onto stock, we can argue that one makes money on average at the expense of the other. I.e., one type of behavior is more profitable within the stock market than the other. And this…is true, in exactly the way we don’t want.
We can deduce which is making money by simple logic: If the business model of day trading didn’t work at all, if it didn’t make money from trading, it seems unlikely that such businesses would continue to exist.
(How do they do this? Day traders, because they tend to have access to more information and faster connections, tend to win slightly more. And sometimes because they, in something that should be illegal but isn’t, often front-run transactions so that they can do a transactions milliseconds before some other, known transaction is about to happen.)
Which means investors must logically be losing money (They’re the only people that day-trading money can be coming from!) Investors are presumably willing to lose a slight amount of money on the trading game because they are attempting to make money on long-term ownership, aka, money from outside the market when the underlying value of the stock goes up, or just money from dividends.
This means that if day traders didn’t exist, if the market no longer instantly responded to everything (Which actually means ‘the day traders respond instantly, and then investors change positions later, and the day traders take their cut for being first’), the investors would stop averaging slightly negative in the trading part.
This is, of course, not to suggest a transaction tax would eliminate day trading, and in reality this is a gradient anyway…the actual best investors respond pretty quickly to change _while also_ otherwise holding long-term investments. A transaction tax would just require a recalculation of things, where people stop making trades they expect to make pennies on.
If you think “ten” is anywhere close to a reasonable number then you’re not dealing with reality. I expect a minimum 100 fold loss in volume and wouldn’t be surprised at 1000 or 10,000.
You have basically just argued that any online store smaller than Amazon cannot exist, because if Amazon had their volume decreased by a large amount, their overhead would kill them.
Yes, that would indeed happen, because Amazon is operating like half the damn computer servers that exist, in a operation that probably rivals in logistics every war the US has even fought added together.
The key point you are missing is that none of which is _needed_ if the volume drops like that.
As evidenced by all the other online stores that exist that do a millionth the volume of Amazon, but somehow managed to have only two or three times the overhead of Amazon!
And that’s including storing and shipping a physical product. A stock market, being almost purely computer based, would presumably ‘unscale’ even better.
There are other countries and other markets.
And weirdly a lot of those other markets have _much less volume_ than the American stock market, but, even weirder, do not have overhead at anywhere near the level you suggest.
So in addition to Wall Street fleeing the country, so does any rich people who are seriously involved in the stock market, which might be everyone over a certain level of wealth.
Erm, no.
First of all, most wealthy people are invested in things with a _lot_ more overhead and fees than the stock market, and a lot less liquidity.
Second, most people who assert they are ‘invested’ in the stock market exhibit ‘investor’ behavior (Hence the reason we’re calling it that.), which means they purchase stocks with the intent of holding on to them for at least a year, which means that the fees are negligible. If a 0.5% tax meaningfully cuts into the profit made from holding on to the stock for a year….they probably should have invested in something else.Report
“whereas in a rational world stock prices would barely move”
Have we ever lived in that world though?
https://en.wikipedia.org/wiki/Kipper_und_Wipper
Money-related manias *predate* stocks and have been baked in since the beginning of the stock market itself (and sure, I’m fine with treating day-trading as a form of mania).
Are you suggesting we should… evolve out of them?
Somehow?
I’m out of my depth, but I’m having trouble parsing this as something other than a beautiful wish…Report
@davidtc
I think I have a reasonable understanding on how DT and the market work. I did it, professionally, for years.
You’re ignoring stocks are assets, and assets can increase or decrease in value by external events as well as via supply/demand (and with stocks, dividends).
So if a company announces good things after the market closes, when the market opens it’s stock will have increased even external to any trades that have been made. In effect this is “creating” money. Similarly if it announces bad things (or at the most extreme, it’s delisted), then some of its value is destroyed.
Calling the stock market a zero sum game is like calling real estate (or any other asset purchased for investment) a zero sum game.
Transactional prices, yes.
Please review what I said about lowering spread in my last post. Lowering a 6.7% trading loss because of transactional friction to close to zero isn’t nothing.
A pointless quibble. In practice is this isn’t “the same trade”, we’d make two different trades to two different people. One of whom wants to buy the stock and the other whom wants to sell it. Sometimes these trades are separated in time (if only microseconds), sometimes they’re on different markets.
:Amusement: Oh they wish. Spread is set by the market. The market maker can certainly offer larger spreads, but if he does so he’ll make few trades because he’ll be undercut by DTs.
There are certainly DT trading strategies which don’t depend on “the underlying value” and just take advantage of various imbalances, you seem to be under the impression this is a bad thing.
:Blink: You’re getting rid of the DTs, who are the ones who undercut market makers and their efforts to increase spread, and you expect spread to decrease? Seriously? And that’s after I’ve pointed out current spread ratios have been driven close to zero because of DTs?
If you talk to market makers who have been on the market for decades, they’ll talk about the happy days when spreads were large and market makers could print money just by existing, before the damn DTs forced them to narrow.
No, you should expect the spread to increase, a lot, exactly like I suggested. You’re making it impossible for anyone to chase small imbalances in the market. You’re also greatly reducing competition. This implies large imbalances in the market will be very common, spread will be one of them.
Increasing the time you’re holding a stock by a factor of 60 most certainly matters, a lot. There are strats which involve close to instant trading (milliseconds), there are also strats which involve longer time horizons. I’ve done both, they’re totally different animals.
Trying to claim you’re not increasing the risk of the stock changing price is nonsensical.
I’ve participated in that price war. I assure you it is indeed traders who do this.
This isn’t the overhead issue. I’m saying the typical profit is a penny or two, and you’re effectively destroying the vast bulk of trading strategies that I’ve seen. There will be no more short term trading, and short term trading is something like 99% of the market.
You’re also kneecapping all trades in general. Every trade STARTS as a brutal loss, just because of spread and taxes.
You’re missing the point. The American market is so big mostly because it’s so big. We attract stocks because we’re big and they make us bigger. Sort of like why Ebay or Amazon are so big. It would take a lot to make Wall Street relocate to other countries, but this would be “a lot”.
I think this destroys the industry for America.Report
So if a company announces good things after the market closes, when the market opens it’s stock will have increased even external to any trades that have been made. In effect this is “creating” money. Similarly if it announces bad things (or at the most extreme, it’s delisted), then some of its value is destroyed.
It is pretty easy to notice that, in your hypothetical, the company increased in value when the market was not open, and hence market trading cannot be creating the wealth.
It’s also obvious that not every company is public, and yet they appear to function perfectly normally. If anything, they avoid the idiotic failure mode of ‘Stockholders demand a CEO that pumps up the stock price by making dumb decisions and ruins the company later’.
Calling the stock market a zero sum game is like calling real estate (or any other asset purchased for investment) a zero sum game.
No, it’s like calling the trading of investments a zero sum game. The money from investments come from what is invest in rising in value. No one expects to make money from timing their purchases and sales in most investments, besides generally buying low and selling high. They purchase an asset, and expect it to generally rise, period….or not rise, if it’s a flop.
I don’t have a problem with the stock market. A market to make it easy to purchase stock is a fine idea.
However, and maybe I haven’t explicitly made this clear: I think it makes trading _way_ too easy. Way way way way too easy.
So easy it is possible to make money in ways besides ‘own an investment and have it increase in value’. (Which, again, because the entire market is a closed system with the exact same amount of money entering it as leaving it, means they take money from actual investors.)
It is perfectly reasonable to have a market where people can purchase and sell investments. It’s not reasonable have the casino that is the stock market operating like it is.
Lowering a 6.7% trading loss because of transactional friction to close to zero isn’t nothing.
I know. It’s been a complete disaster.
It’s resulted in the stock market having even more absurd panic attacks and bubbles, moving it in exactly the wrong direction.
I want a stock market operating based on any sort of underlying market cap of the companies plus a logical estimation of future earnings, where earnings reports come out and people go ‘Hrm, this company made slightly less than it estimated last quarter, perhaps they’re inflating their estimates this quarter’.
Not ‘OMG the news mentioned something about this company let’s all buy them or sell them or something!’
There are certainly DT trading strategies which don’t depend on “the underlying value” and just take advantage of various imbalances, you seem to be under the impression this is a bad thing.
I’m under the impression that _any_ form of making money from the stock market that is not ‘purchase the stock because you think it is going to rise in value over the next few months, and hold it’ or ‘purchase the stock for the dividends’ is a bad thing _unless demonstrated otherwise_.
Note that I am serious about ‘unless demonstrated otherwise’, and I’m perfectly willing to say ‘That seems useful’. There are other things that seems to be useful. Long-term shorts, for example, to bet against the market when they seem overly optimistic about earnings, or as hedges.
However, as I am trying to seriously reduce the volume of trades, things that exist solely to make trades easier or cheaper…are not useful.
:Blink: You’re getting rid of the DTs, who are the ones who undercut market makers and their efforts to increase spread, and you expect spread to decrease? Seriously? And that’s after I’ve pointed out current spread ratios have been driven close to zero because of DTs?
Yes, congratulations, the market has turned so purely into a casino that it is a now a _perfectly functioning_ one. Good job.
Again, I point out that under what I am saying, stock prices would barely move (Except in certain circumstances), which rather obviously reduces the spread, which is the risk of movement ‘during’ trades.
You’re making it impossible for anyone to chase small imbalances in the market.
Yup.
This isn’t the overhead issue. I’m saying the typical profit is a penny or two, and you’re effectively destroying the vast bulk of trading strategies that I’ve seen. There will be no more short term trading, and short term trading is something like 99% of the market.
I _am_ destroying the bulk of trading strategies (Which is really just another way to say ‘Make money from the market in ways other than investment in a company, thus reducing the gains for people who do invest in a company’.), and I _am_ reducing stock trading volume by 99%.
*plays Super Mario level success music*
You’re also kneecapping all trades in general. Every trade STARTS as a brutal loss, just because of spread and taxes.
Yes, so maybe, people will start saying ‘Hey, purchasing this stock starts me $5 in the hole, which at its current rate of climb it will recover in six months. Seems good.’ and not ‘Hey, I learned some good news about this company twenty seconds before everyone else, let me buy now and sell three minutes from now.’Report
The trading of investments is not a zero sum game anymore than any economic transaction is a zero sum game. And if most economic transactions were zero sum games, then most of those transactions would never happen. But they do happen, because most of those transactions are welfare-enhancing.
Trading securities only appears to be a zero sum game when you use a very crude model of trading that leaves out risk and investor preference. In the real world, different investors have different strategies and different risk profiles and different investment horizons and different tax liabilities and… you get the picture. They are doing much more than trying to buy low and sell high.Report
I am not calling the stock market zero sum to mean we should not have it, or that it does not serve any useful purpose.
I am merely calling it zero sum to point out that day traders _are removing profits from long-term investors_, by definition. There is a finite amount of money put into the stock market, and that is all the money that can ever be extracted from it.
Dark Matter seems intent on claiming what day traders do somehow makes them and everyone else money, that they are a net positive to the market. Which is, of course, literally impossible, at least in the money aspect.
Now, day traders and the absurd level of stock volume do make a lot of things ‘easier’ in the stock market, but almost all that ‘easier’ is for slightly-less-short-term investors!
In fact, there’s a notable progression of the stock market constantly inventing slightly-shorter-term ‘investing’ and other ways to make money off slightly-longer-term investors. The entire stock market exists for that, the concept of a dealer market is for that, day trades, HFT, etc, etc. Although at this point it’s literally impossible to keep going in that direction unless the speed of light is repealed.
None of this really benefit long-term investors in any manner past the original stock market, which, I mean, that frankly makes things much easier, so, yeah, they can get a cut. But everything past there is dubious to me. Even the idea of a dealer market. If someone is expecting to hold stock for months, it hardly matters if their buy and sell orders take minutes to fulfill and they sometimes have to make them a few times.
Meanwhile every dime they make is a dime not going into the pockets of long-term investors.
I don’t like this. Any of this. It all exists to remove money from long-term investors, hopefully in ways they don’t really notice.
The main focus of the stock market should be long term investors. It would be better for the vast number of Americans with portfolios that have stock, and it also might help stop companies stop chasing short term stock bumps, although I might be wildly optimistic there.Report
Hardly. No, Day Traders remove profits from Market Makers, i.e. the guys who benefit from very large spreads. More competition and liquidity means there are fewer (not more) opportunities to take advantage of people.
Where you get serious abuses is with monopolies and serious market imbalances which should be expected to serve the interests of the people running the show at the expense of normal investors.Report
Hardly. No, Day Traders remove profits from Market Makers, i.e. the guys who benefit from very large spreads. More competition and liquidity means there are fewer (not more) opportunities to take advantage of people.
Again, you keep skimming right past the entire zero-sum thing. A set amount of money goes into the market every day, the exact same amount of money exits every day.
Actually, let me make that a bit clearer: A set amount of money goes into every _stock_ every day, and the exact same amount of money exits that stock every day.
Wait, even clearer: A set amount of money goes into every _stock_ every _trade_, and the exact same amount of money exits that stock every trade.
If I purchase a single stock for $50, that $50 went somewhere. There was microscopic per-stock transaction fee that went to the market itself but the rest of the money entered the market and then left in someone else’s pocket. (And, overhead-wise, my stockbroker is paying money to rent a seat on the market, but that was paid out of him charging me a trading fee on that $50 or a yearly fee or however he structures it and isn’t part of the $50.)
So we have $50 (Or $49.9995, after the transaction fee, but let’s just round it back to $50) that is going to players _in_ the market.
Now, what _you_ are asserting is that day traders can step in and undercut large profits of market makers. I.e., instead of them ending up with $5 of that $50, the day traders with end up with (Or, by bidding down, force the market maker to end up with) $2.
This is true.
What you have failed to notice is that the day traders have _still_ exited the market with $2. Long-term investors put up with this because hopefully the stock prices will rise, or it will return more dividends, to make up for this lost $2, but it’s _still lost_.
Whereas if I had instead purchased stock from a long-term trader who was selling that stock (The guy that the market maker or day traders would be buying from), that $2 would not be lost. He would have still gotten $48, but I would have only paid $48 to start with. (Both ends are $50, or $49, it’s not important _who_ specifically ended up with that $2, because it will average out.)
Now, it is possible to argue that $2 is worth it because the All Important Liquidity. Except this is, basically, complete bullshit. The market demands liquidity because it has been taken over by the people who provide liquidity and otherwise serve no purpose at all, and thus liquidity is the Most Important Thing Ever.(1)
In actual reality, (instead of the ‘We must trade as fast possible’ nonsense world that day traders have convinced everyone off), most actual _investors_, as in, most people who hold stock any real amount of time, hell, most people who hold stock for a fricking week, would be better off if the market was an auction market where bids were directly matched with each other. No spread at all.
Trades might take minutes, or even hours, to complete, rarely traded stock could take days, but _no one would be walking off with that $2_.
1) How did this happen, you ask? Well, because back in Ye Olden Days, actually matching buyers and sellers was a nightmare, and basically the people hired to do figured it they could sorta fake it and it would mostly all work out if they left themselves a buffer, and that was then formalized, and it made perfect sense back then.
And if ever find ourselves in a world without computers where we have to hand-match buyers yelling prices on the market floor with sellers yelling prices on the market floor, by all means, bring back market makers to buy and sell at set prices to fudge the edges of what is going on and make it a billion times easier.Report
@davidtc
You have not explained why this situation isn’t a horrible thing for, say, real estate, or any other asset.
Worse, even if we assume you’re right, your suggestions would make the situation much worse, not better. We can measure the real-world losses created by transactions, they’re a lot less than your proposed solution.
Source? That seems low. If you’re just going to make up unrealistic numbers you can justify anything you want.
48/50 is 0.96, for a loss of 4%. With Day Trading, real-world losses are currently 0.087%, not 4%. It’s a strawman to argue against a $2 loss on a $50 stock, that’s exaggerating the losses by 46x.
If memory serves, it’s also what the world used to look like with computers but before day trading. Much worse, it’s the low end expected result for your solution (ignoring all the other economic damage you’d inflict).
You’re trying to inflict 4% losses (or likely a lot more) in order to prevent a 0.087% loss. That’s not good math.Report
Source? That seems low. If you’re just going to make up unrealistic numbers you can justify anything you want.
The transaction fee is the amount per-trade that NASDAQ charges, and is indeed that low on common forms of trading.
You’re trying to inflict 4% losses (or likely a lot more) in order to prevent a 0.087% loss. That’s not good math.
I’m not trying to prevent _any_ loss.
I am literally trying to _impose_ loss on trading stocks! Literally, that is the entire point of an added transaction tax.
This will make them more costly to trade, thus they will be traded less often and positions will be entered into and held based on actual real-world information instead of leaping around randomly.
Seriously, I cannot comprehend how you keep missing this point. It is reasonable to complain that my idea will do something bad, but it’s pretty unreasonable at this point to not actually grasp what I am trying to do, and to keep complaining ‘This plan of reduce trading volume by making trades more expensive will result in reduced trading volume and make trades more expensive!’ No duh.
And as I pointed out, if we actually cared about ‘losses’, once the tax is in place and transaction volume decreased by what you yourself claims will be thousands of times, no one actually needs to be a market maker and we can go back to an auction market, where buyers make bids and sellers match those bids, and there is literally no spread at all…since you’re apparently so worried about the spread increasing and all.
In a different, much much slower stock market, we literally don’t need spread and market makers at all. That system only needs to exist in markets where people a) need to buy and sell incredibly quickly, so quickly they cannot be matched with each other fast enough, and b) don’t want to take tiny losses by mistakenly over- or under-bidding vs. what everyone else is doing.
—
But whatever. I think it’s becoming pretty clear you think the stock market is an end unto itself, and you have focused on how these is massive economic activity in the stock market and how it goes away if the trading volume is reduced.
The fact this is _imaginary_ economic activity appears to have totally passed you by. Trading stocks generates no wealth at all. There is a reason that stock trading is not including in the GDP. Corporations do need original investors/owners, and the stock market was invented to easily allow new investors/owners to purchase those investment from them when they want out, which is good, because if the original investors cannot sell moderately easily, they are less likely to invest in the first place. The stock market serves that purpose, the ability to sell and purchase stock, and only that purpose.
So as long as the stock market operates well enough that people who purchase stock can sell it with a reasonable tax (And we’re really talking about a microscopic tax here, not a ‘reasonable’ one. Compared to actual capital gains tax, it’s nothing.), the _actual wealth-generating economy_ will be just fine, regardless if the stock market is operating a million times slower or a million times faster.
But whatever. I’m done here.Report
What are you counting under the category of day trading? The guy trading OTC stocks at home on eTrade? A few guys with some capital and a algorithm? Traders on big institutional desks? Are you only talking about people who unwind all their positions at the end of the day or are you counting anyone with short-term positions?
This is all a gross oversimplification of the way that capital markets work. There is no clear delineation between short-term investing and long-term investing. For one thing, in order for there to be a market for long-term retail investors, there needs to be market makers who maintain liquidity in any particular security and market makers take a whole bunch of short-term positions.
If you look hard enough, I’m sure you can find some examples of short-term trading activity that fits neatly into the category of speculation and doesn’t do much to add liquidity to markets or help price discovery. You could also find some examples of activities that are firmly in the realm of long-term financing. But those are the very edges of the spectrum. Most market activity falls somewhere in between.Report
This is all a gross oversimplification of the way that capital markets work. There is no clear delineation between short-term investing and long-term investing.
Yes, jr, if you pretend I said there is a clear line between the two, and I want to ban one and not the other, it is very easy to asserting I am oversimplified things.
Of course, what I am actually saying is ‘we should make the act of trading more expensive, which means for trades to be profitable, people are going to have to hold them longer, and, just as importantly, plan to hold them longer’.
For one thing, in order for there to be a market for long-term retail investors, there needs to be market makers who maintain liquidity in any particular security and market makers take a whole bunch of short-term positions.
Oh, good, now someone else wants to step in and say ‘The market works the way it works because it works the way it works, and thus changing the way it works is Bad.’
I’m getting pretty tired of arguing this over and over, where people somehow have confused the status quo for ‘good’ (You would think the current wild drop for no obvious reason would cause some people to reconsider, but nope.) so why don’t you instead _explain why you think the stock market has to be anywhere near as liquid_ as it is?
Other ‘owing a unique thing’ investments aren’t anywhere near that liquid. Real estate is illiquid. (1) Art is illiquid. Baseball cards are illiquid.
Why should _partial ownership of companies_ be so liquid?
Or, rather, why should we demand that the market prop up the liquidity of the entire thing? Both you and Dark Matter keep pretending that the liquidity of the market is a thing that exists as a whole, whereas in reality each individual stock would have different amounts of liquidity in an auction market.
In a stock market where we just let liquidity fall where it may, most commonly traded individual stocks would be liquid, because, duh, they’d be traded all the time. It is insane to talk about illiquidity as in pretending that most people will run into it, when in real life if a lot of people are trading a particular stock, it’s going to be liquid.
Stocks that were rarely traded would be much less liquid. It make take a day to unload or buy some of that obscure company. It might also be hard to put a value on it. Oh…noes?
And, of course, the difference is that currently, while I can quickly sell uncommonly-traded stocks now, I will probably end up paying a large spread. I.e., in the current market, I _pay money_ to turn illiquidity into liquidity, and it’s hard to exactly figure out why this is, in any manner at all, a good thing.
This isn’t the currency market, where we actually need up-to-the-second price comparisons for reasons external to the market, so need market makers to tell us what they are.
And, of course, there’s nothing from stopping day traders from showing up and essentially posting bid/ask prices for some of the obscure stuff, if they wanted. Presumably, the tax would be included in the spread.
1) Yes, I know about REITs, and I think that’s a bit silly also, but it’s not doing any damage to anything, unlike a universe where the apparent value of almost every economically significant company swings wildly around on random whim totally unconnected from the actual value of the company. Get back to me when the people running REITs start trying to manipulate their share price by firing all their maintenance people and claiming increased projected profits so they can sell off their REIT shares to dumber people.Report
I haven’t said anything about good or bad. And that’s on purpose. Making good policy starts with understanding the system that you’re trying to reform. And even then, there’s no guarantee that making the changes that you want will have the desired result or that the desired result will have the impact that you thought it would.
You want to know a surefire way to make bad policy? Spend minimal time trying to understand the way things are and instead mostly focus on the way that you want things to be. And that is exactly what you’ve been doing in this thread. You’ve got two people trying to explain to you that you’re model of how capital markets work is overly simplistic and woefully inadequate. Instead of letting that give you pause, you’re doubling down. Good luck with that.Report
You’ve got two people trying to explain to you that you’re model of how capital markets work is overly simplistic and woefully inadequate.
No, I’ve got two people who keep trying to explain to me how what I would do would harm the stock market, by which they mean ‘result in less trading volume’
Despite the fact I keep explaining I do not give a single f*ck if I ‘harm’ the stock market in that way, as I think the massive trading volume on the stock market a good fraction of the problem with it in the first place, and exactly what I am trying to solve, and exactly what various taxes of this sort are trying to solve!
At which point you two explain, again, how this would reduce volume.
You know, if you actually understood this stuff and I didn’t, and I was wrong, you presumably would be able to actually _list_ some actual negative side effects of making higher transaction costs, resulting in reduced trading volume, besides ‘That will result in higher transaction costs resulting in reduced trading volume’, to which my response will continue to be ‘No shit’.
But, hey, this is always how you talk about financial things. You just respond: “Oh, you don’t understand it.” and that’s it, apparently.
So how about you put your money where your mouth is and _list_ some actual harm a stock ‘transaction tax’ would do, and, no, you do not get to just list the intended goals of said tax as the harm itself. (For example, you could list how the cost of capital will increase a bit, but…that’s not actually a problem with the economy right now.)
Now, Dark Market has claimed this would result in companies moving to stock markets in other countries, which at least is a reasonable objection…but that seems to assume that companies _want_ their stock traded like it currently is, which seems dubious. I am sure some some stock _traders_ will move to other markets, but who cares. And ‘rich people will move to another country if required to pay more taxes’ is always a threat, and it never seems to actually happen, anyway.Report
In what universe is arguing on the internet with someone who has, at most, a surface level of understanding of the topic and maybe not even that akin to putting “your money where your mouth is?”
To be honest, I don’t know what harm a stock transaction tax would do. And that’s the whole point of my comments. Not knowing, not understanding the thing that you want to reform is a recipe for making bad policy. You’re perfectly entitled not to care how capital markets work. You’re perfectly entitled not to think too deeply about unintended consequences. And you’re perfectly entitled to your opinion. But I’m going to deeply discount your opinion based on the fact that you don’t demonstrate a particularly high level of knowledge about the subject.Report
I would like everyone to notice that the second I ask j-r to actually prove he has some of this knowledge he claims he has, he instantly changes his claim to ‘Well, I don’t know anything about this topic, but you don’t either.’
And there’s the actual trick people: Whenever anyone suggested regulation or slowing down the massive idiotically pointless capital markets nonsensically fictional money juggling in the country, there are always people who leap in and claim ‘You don’t understand the capital markets’.
No. Of course I don’t. No one does. It is literally impossible, and designed that way.
So instead I ask everyone else: Why should ownership of a company be part of these incomprehensible gibberish markets?
Why can we not, instead, have an auction system where people can say ‘I am willing to sell a piece of stock at this price?’ and others response ‘Okay, I will buy that’, or the other way around? Yes, it might take a few minutes to match someone, but for people who want to actually buy and actually sell stocks, who the hell cares?
There are probably a few other things that can be put in it, maybe let people short stocks, but at some point we have to ask ourselves a question about every market: Does this market exist to buy and sell _external things_ (Even if those ‘things’ are partial ownership of virtual people.) or does the ‘market’ exist solely to screw around in the market?
Because, and we really need to notice when that happens, that second thing is not a market, it is a casino. A market has people show up with money and try to buy goods, or show up with goods and try to sell them for money. A casino has people show up with money and risk it to try to leave with more money. And, yes, corporate ownership is a risk…but there’s a different between a casino vs a market you can buy lottery tickets at. You are buying an external risk at the market, but it is still some external thing instead of trying to juggle money around and walk out with more.
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Basically right now most ‘capital markets’, the giant virtual economy perched over our tiny actual one, exists basically to screw around in themselves, with all sorts of little money-sucks and created risk and whatnot that let’s people invent money out of thin air and reasons that they should get paid. (And, weirdly, they often seem to get paid in real money.)
And people have been trained very hard to think like this is some normal required thing hovering overhead, supported by nothing…and a few of them have stood up and said that maybe we should think about trying to regulate more of it in case it blows up the economy again.
And, of course, the reply is always ‘This is way too complicated for humans to understand’
Screw that. Yes, the people saying that are correct, but the secret to all this, the thing everyone skims right past, is: There is no good reason for any of them to exist. Oh, defenders will make handwaves about how investors will stop investing and…do what with their money, exactly? No one ever seems to know. Presumably still investing, but in, you know, actual things, instead of securities of securities of gold futures or whatever gibberish the ‘capital market’ has invented.
And don’t get me wrong, I’m not even suggesting we do anything about these pretend markets of nonsense, except figure out the things in them that _actually impact Americans_, like, oh, corporate ownership and their home mortgages and stuff like that, and keep it the hell away from these nonsense markets. (And also keep any institution that is too big to fail away from them.) The superrich can have lots and lots of fun trading gold futures and lunar real estate, I don’t care.
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Note, that capital markets are pretty good at inventing things to trade around out of thin air, but sometimes invents useful things. (Like stock.) So sometimes it’s hard to tell if the trading is really about those things, or those things just exist so they have something to trade.
For an example, take CDOs. The concept of a CDO seems reasonable in very rare circumstances. But banks started issuing them because people wanted to essentially short mortgages, which was…an odd request, to say the least.
But banks not only ignored the fact that other people were trying to bet against their mortages, and they then also willingly overinvested in them, in both directions…but on top of that, a lot of CDOs were just plain _invalid_ as securities. Created incorrectly, and literally worth nothing. But it didn’t matter, because no one looked in them because the entire point was ‘trade them around as much as possible and sell them high and buy them low’, with no one giving a damn as to what they _actually were_.
An entire market which actually existed so the superrich and their banks would have a lot of pieces of paper they could use as poker chips. And it blew up our economy. (Well, the fact that banks had been issuing crap mortgages for years didn’t help, but without CDOs, we wouldn’t have had anywhere near the problem we had, and also banks would have been more willing to admit something was wrong sooner.)
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Hey, I wonder if anyone ever claimed the CDO market is too complicated to understand, so it shouldn’t be regulated. Because it sorta was too complicated to understand! In fact, it is pretty clear that banks didn’t understand it!
Because it seems to _me_ that the correct banking response to ‘A large amount of people are betting that significantly more of our mortgages will default than we are? No, wait, they’re betting that significantly more of _everyone’s_ mortgages will default than all banks are?’ would logically be ‘Uh, we better look at this math again. Call the actuaries.’ and not ‘Whee, we’ll take some of that action!!’
It seems just awesome to have things that dwarf the actual economy that no one really seems to understand, not even the people participating in them and literally creating them out of thin air.Report
“I would like everyone to notice that the second I ask j-r to actually prove he has some of this knowledge he claims he has, he instantly changes his claim to ‘Well, I don’t know anything about this topic, but you don’t either.’”
That’s not quite what happened, and if you think it is, I suggest you take a deep breath and maybe step away from the topic for a bit. It’s fairly obvious to me that you’re on tilt.Report
That’s not quite what happened, and if you think it is, I suggest you take a deep breath and maybe step away from the topic for a bit.
In what manner is it not what happened?
I would like everyone to notice that the second – Okay, this is a lie, he didn’t post the exact second, but it’s a figure of speech.
I ask j-r to actually prove – What I did.
he has some of this knowledge he claims he has – He has claimed this knowledge implicitly by repeatedly asserting my understanding is ‘simplistic’ and and I don’t have a ‘high level of understanding’.
he instantly changes his claim to ‘Well, I don’t know anything about this topic, but you don’t either.’ – And, well, you might have a point.
He never _explicitly_ claimed to know anything about the topic, so it’s possible he has not changed his position, and everyone (Including me) made a mistake by inferring that repeated comments about my lack of knowledge meant that he had more knowledge.
Now, I would apologize for making that assumption, but obviously I don’t want to accidentally misunderstand j-r again.
So perhaps j-r will clearly state whether or not he thinks he has some knowledge on what we’re talking about, (And possibly whether or not he thinks he knows more than me, to stop future confusion.) and we can move forward.
(Also perhaps j-r could refrain from commenting via just saying ‘You don’t know what you’re talking about on this topic and thus your ideas are wrong’ and instead comment by saying ‘Here is the fact you are incorrect about and thus your ideas are wrong’, or even ‘You are incorrect about these several facts, which means you need to do more research before we will take your ideas seriously’, either of which would seem to fit our commenting guidelines much better)
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Now, if this about tone of the _entire comment_, if you’re worried because I started getting a bit ranty in my comment, well, I did. That comment is really long, and somewhat meandering, and a bit angry.
But it’s a rant about capital markets, not j-r. I promise, I’m not angry at him. I generally expect him to do this. In fact, I’ve criticized him in the past for writing economic articles here where his goal appears to be ‘insult any commenter who say slightly incorrect things on the topic of economics, and not actually discuss the topic of the thing he supposedly wanted to discuss’ and also his general commenting behavior of ‘superiority where everyone is demonstrated wrong by the fact j-r knows more than them WRT economics, Q.E.D, no need for evidence or documentation’.
His bullshit was just just a little too rich this time, when he couldn’t even be bothered to figure out some negative hypothetical of the topic, despite claiming I didn’t understand the thing ‘[I] want to reform’, which will result in ‘bad policy’. (Which is a bit nonsensical as a stock transaction tax is a real policy proposal that actual economists have weighed in on, and not something I just came up with. But whatever.)
So he fell back on the default ‘Look, we don’t understand capital markets well enough to predict their behavior in response to…stuff.’ nonsense, which is a pretty common excuse by defenders of said markets…well you read the rant. It was just funny hearing it come from him after he spent days asserting that _I_ didn’t know anything. Apparently, none of us know anything! Kinda pointless discussion, when you think about it.
Edit: Oh, since you think I’m a bit worked up from this, and it’s hard to tell from the text that I’m really not, I’ll happily stay away, because I really am apathetic about all of this, and honestly, Dark Matter’s actual discussion was a lot more interesting than j-r’s stuff. I just sorta wanted to point out where j-r had ended up for the record.Report
@davidtc I was actually worried that you’d get worked up enough that you’d end up crossing the comment policy lines, and advising against doing so. It didn’t work though, since you have.
For example, this:
“His bullshit was just just a little too rich this time, ” is not ok. I would normally censor it and/or warn you that a suspension would be imminent. (It’s not the only thing I’d censor, either. I might just delete the whole comment rather than try to parse out the ok from the not ok.)
That said, since you’ve agreed to step away from the topic, I won’t pursue it further if you don’t.Report
We can discuss advantages and disadvantages of public vs. private ownership and its interactions with company leadership, but that seems off topic.
This is no more true for stocks than it is for other assets (maybe less because of dividends). Example: Joe has a thousand shares of a tightly held company, they’re not traded (although they could be), their value increases.
The company’s value increased, ergo Joe’s stock increased. What is it that you’re claiming has happened? The money on his spreadsheet just went up, a lot, and he didn’t get that money by taking it from someone else. He has to sell them to cash out, but that’s true for land to so whatever.
Disaster how? Put a dollar figure on the problem you’re trying to solve here.
How much money is lost on these panic attacks, vs how much is saved by preventing a 7% trading loss on every single trade out of the gate? Although the cost savings numbers are spread out to everyone, they’re big numbers, applying every market day. We don’t have a panic every day, nor does it even affect all stocks on the days when it does happen, nor was the previous system free of that sort of thing.
Also I don’t understand what “moving in the wrong direction” means here.
Then open your own market and see how that works out for you. Maybe what I view as absurd handicaps will be an advantage. It’s very possible to open a new market (note this is probably not a good thing for your idea).
The market BATS was founded in June 2005 and became operator of a licensed U.S. stock exchange in 2008. BATS quickly became huge because they didn’t impose many of the dinosaur (i.e. market maker favoring) rules the NYSE was using. BATS was created to make trades easier and cheaper.
BATS’ example is a big reason I think your idea, if made into law, would result in the entire industry moving overseas. Your idea’s disadvantages are FAR heavier than what the NYSE was imposing (i.e. BATS advantages) the displacement would be a lot quicker. Good products displace bad products. You’re suggesting making the markets deliberately bad because… actually I don’t understand why you’re suggesting this.
Or BATS relocates to Europe and people have the choice of being profitable in 6 months if they trade on the NYSE in the USA or they can be profitable tomorrow if they trade on BATS in London.
If the tax follows the person then they can create a “trust” or “company” located in London which lets them do the same thing.
And you haven’t even attempted to point to math in terms of what’s bothering you. For all the talk of “Casino” trading, you’re imposing hundreds of Billions of dollars of economic destruction (possibly more) to prevent the a few-times-a-decade one-day panic sell off of one stock.
This seems like a really expensive solution in search of a problem.Report
This is no more true for stocks than it is for other assets (maybe less because of dividends).
Dividends do not come out of the ‘stock market’. They come out of stock ownership.
The company’s value increased, ergo Joe’s stock increased. What is it that you’re claiming has happened?
What do _you_ claim is happening? I mean, you literally just explained that the _company_ increased in value, which make it very confusing why you think that has anything to do with the market.
‘Ted grew more tomatoes this month than last month, ergo the value of the stuff he took to farmer’s market was higher. This is to the credit of the farmer’s market, somehow!’
The stock market is a _market_. A market is a places where buyers and sellers collect to buy and sell things to each other. It doesn’t actually _do anything_ except make it easier for buyers and sellers to find each other.
The money on his spreadsheet just went up, a lot, and he didn’t get that money by taking it from someone else.
He…didn’t get any money at all.
He has to sell them to cash out, but that’s true for land to so whatever.
Land ownership, weirdly, doesn’t generate wealth either. That can be used to general wealth in a lot of ways, (or even collect money from rent without wealth-creation), but _owning_ it isn’t what does that…all real estate is owned by someone, just like all stock.
Let me pause and point out this from another direction: The stock market clearly does not create companies. Anymore than the real estate market creates real estate. It just transfers ownership from one owner to another
Thus, people who happen to own real estate or stock or any sort of capital can use that capital (Or hire people to use that capital) to create wealth, but it is not the ownership doing that. Or, more specifically, it isn’t any _specific_ ownership to do that.
Yes, yes, some owners might be very good at managing capital to whatever level they are allowed, including exerting control via the really indirect level of stock ownership…but the average owner is, well, average.
And thus the fact there is a market to trade ownership of the capital is almost completely irrelevant to what the capital is doing.
How much money is lost on these panic attacks, vs how much is saved by preventing a 7% trading loss on every single trade out of the gate?
Who the hell cares how much money is lost on a trade? Is this loss somehow bad enough to render people unwilling to purchase stock from the original investors in corporations?
If not, if that very specific thing isn’t true…it matters not a damn to the actual economy.
Moreover, this is just nonsense. If the spread actually became that bad, there’s no point in keeping it a dealer market. Just go straight up auction.
Hey, fun fact: A hell of a lot of trades are made during closing auctions on NASDAQ. Why, it’s almost as if serious investors have figured out that having a spread is just paying money for slightly more liquidity.Report
I’m very pleased for you that this good fortune has come into your life and provided you with the extra security you describe.
One thing that I counsel some of my clients, when they are getting to a point that they are approaching an influx of cash as a result of their litigation, is that there’s a fair amount of evidence out there that people who receive “unearned” money value that money less than they do money that they personally feel like they’ve earned. This may be an inheritance as in your case, a gambling win as in the case of someone who lives out the happy fantasy of winning the lottery, or in the case of my clients, many people who get settlements or judgments in litigation feel like that money is “unearned” (even though it is not; litigation is hard work and emotional strain for the party). Or to use your phrase, it’s “windfall.” All the same concept, really.
Basically, because they consider it “found” or “bonus” money, they blow it. They were getting along in life just fine without that money and now suddenly there’s more, and they simply don’t know what to do with it, so they have a little fun, then they have a little more fun, and soon enough it’s just gone. Perhaps they were prudent enough to pay their debts away first; perhaps they were even more prudent enough to not incur any more debts while having their fun.
We all have heard of the stories of “trust fund babies” who grew up without material want and never really learned what it is to work hard and only earn a (relatively) small amount of money that they then must budget and marshal, making choices about how to survive until the next paycheck. Such people sometimes fall directly on their financial asses when the safety net set up by other, more prudent people, is removed from them. These are stories that especially the estate planning department of my firm tells our clients with regards to how generous people want to be to their children or grandchildren, and how quickly that generosity is to be delivered.
It sounds like in your case, there are some strings tied to the boon which render the money not simply liquid, and you’re prudent enough from some time spent without this money to understand a thing or two about when to trade equities, and what to trade them for. Reading between the lines, it also sounds like you’ve got some professionals involved in managing the money. This is very very encouraging from the perspective I’ve just described.
Having described the portfolio in general terms as based largely in traded equities is the idea of transferring some of that money into real estate. Rather than profiting off of the sale of incrementally harmful products, you could — profitably — provide housing to others. I don’t find the idea of renting property at a profit to people who need shelter immoral in the slightest, so long as you charge fair market value for the rest and are successful in providing quality housing.
Some things to consider: 1) real property values move on a different rythym and with different variations than do traded equities, but as 2008 demonstrated, they are most certainly not static nor ironclad in their safety; 2) real property is significantly more illiquid than stocks and bonds, in the event that you need to draw on its value on short notice for whatever reason; 3) under existing tax law, and I’m not aware of this facet changing with the recent tax “reform,” income property typically requires a 1031 exchange every five years or so to avoid or at least defer capital gains tax liability; 4) some amount of cash reserve and diversion of the income flow to professional managers is strongly advisable, particularly for newer landlords; 5) you have a lot more flexibility renting out single-family homes, or duplex/triplex/quadplex units, than whole blocks of apartments; 6) in my opinion, real estate prices particularly in urban areas are in a bubble that is likely to deflate in the foreseeable near future, so I would time to sell now and buy later — but that’s a bit of a Catch-22, because if there is deflation in real estate prices in the future as I predict, your equity holdings are also likely to decrease in liquidatable vaue at the same time as you look to enter into the property market; and 7) while I very very much hope you don’t have to go through a marital separation as I’ve learned to my pain, it could happen to anyone, and thinking about using this money to invest in real estate instead of the stock market needs to at least consider that a transaction like that likely transmutes individual property into community property and so perhaps a thought ought to be given to what might happen in the event of a separation and how you what disposition of that illiquid asset resolved in such an unfortunate event.
Yes, lots of stuff to think about. But also, the wealthy people I know all own income property. There’s surely a reason for that.Report
When the windfall happened to me, I was so afraid of the scenario you describe – of just blowing it all – that I changed as little about my life as I could. I was also afraid of alienating friends and neighbors and just becoming incredibly isolated.Report
Thanks for the free advice! As far as real estate is concerned, you’re probably right. However, it just seems like too much work to us. And frankly, our windfall probably isn’t that big, although maybe real estate is cheaper than I think.
There aren’t any formal strings attached to the windfall, but because it’s mostly in equities, it’s more illiquid than if it were in cash. And we do seek the advice of a planner. Also, my spouse is very familiar with investing and while the amount is much greater than she’s had to deal with before (hence our need to have a planner), her experience helps out a lot.
As for blowing it all….we’re afraid of that, too. Whether we’re sufficiently afraid might be another story. Our first major step after getting the money (even before selling off the Big Tobacco Company stock) was to pay off all our student loans, which was our only debt. We’ve also upped our 401(k) contributions. However, we have indeed spent more and while I think we’re cautious about it, I can see how it could get out of hand.Report
My semi-informed and non-expert (but, I’m discovering, widely-shared) suspicion is that in most markets, real estate is going to become significantly “more affordable” in the near future. “Near future” means, roughly, “before the next Presidential election.”
This is not a happy prediction.Report
Lots of people get stupid when they get windfalls. You didn’t; that’s over half the battle. I expect you will work things out.Report
Thanks!Report
Actually if concerned about individual companies the us stock market or total world stock market index funds make a lot of sense. Then you are betting about the way the world will go, not individual companies. If the market tanks badly it is likley the entire world or us economy is tanking with it. Its the the Boogle philosophy, you can’t beat the market but just keep even with it and minimize the expenses of managing the money.Report
Vanguard has done so fabulously well for a reason.Report
That’s my inclination, too.
At the same time, I actually think you can time the market. Just find out what time it opens and get there five minutes early 🙂Report
I don’t know about your family/extended family situation, but one thing I’ll say is that there’s value in putting the money to more direct use if your circumstances permit.
My grandmother died suddenly, and although she was never wealthy she had not yet spent the money that would have covered the last 15-20 years of her life (or end-of-life medical expenses). There was thus a very meaningful amount of money in her estate. I wasn’t a direct beneficiary, but my parents (like you) didn’t need it, so used a chunk of it to help me put together a down payment on my first bit of real property. That substantially accelerated my family’s path forward, not least because real estate did well in the next few years, and we would have been chasing those increases from the outside had we remained renters.
Anyway, worth thinking about whether there’s a way to put the windfall to direct productive use for you and yours.Report
We did this for our grown kids. They both seem to agree that a more modest sum at this point was probably much more valuable than a bigger sum 20 years down the pike.Report
@michael-cain One of the few infusions of cash I’ve ever experienced paid for my 2nd year of college at McGill (it was just over $2000, yay Canadian tuition in the 90s). An equal amount bought my sister transportation between her 2 jobs, school, and home. Both of those things were immeasurably helpful, far beyond the dollar value itself, and beyond the 10,000 it might be worth (at most) now.Report
My spouse and I are fortunate enough not to have children (“fortunate” because we don’t want children….obviously others do). I do have numerous nieces and nephews and great-nieces and great-nephews, some of whom have vert few resources. So we’re investigating ways to help them. (Almost none of my own family knows about the inheritance…..it’s complicated.)Report
As someone who periodically handles trust litigation, tread carefully with people who may feel slighted by the inheritance.
That said, I completely agree with @maribou that a small amount to a young person might dramatically change their financial trajectory than some larger amount when you pass. Worth considering.Report
I recall reading a Reddit post that was, effectively, “what to do if you win the lottery”. In addition to a lot of financial advice, one thing that stuck out was the advice to tell no one (save your spouse) that you won until all the money decisions had been made.
Complete with a link to someone who had approached one family member for advice on what to do with a windfall, then promptly been sued by another under the grounds that the first person had unduly influenced and prejudiced the newly rich person’s decisions.
The advice in general was sobering. Stick in in a trust, discuss it with no one — accept the fact that you will have to move if you can’t keep your windfall secret and change your phone numbers, preferably to a gated community. (And even explaining why lawyers often collect the winnings, and if you have to do it yourself, rent a Mascot’s suit or something — the last thing you want is your photo and name attached to it)
Also linked reasoning — if you don’t move and it’s known you won the lottery, you will find not just relatives looking for money, not just random people you know or who recognize you on the street, but even the local PD might just make it a habit to regularly ticket you because whats the harm, you have all that money.
And everyone seems so angry when you won’t share it (even though if you said yes to everyone, you’d be broke again) because it’s not like you earned the money.
Inheritances are better than lotteries, in that much of the details are often obscured. Other people might know you inherited the “bulk of X’s estate” but not know how much (or little) that was. But even then, I watched a nasty little fight between siblings over some worthless land in west Texas, because one of them was certain it was worth 20 times it’s actual value, and (per the terms of the will) completely blocked sale of the land for over a decade determined to “get her fair share”.Report
Kinda similar here… my grandma passed and left money earmarked for our undergrad, with the remainder to be invested and distributed when we turned 40 or something. There wasn’t much left over after. We ultimately decided to liquidate the trust and each took about $25K (there are four of us) when we were all done with undergrad but not yet 30. I paid for my masters degree and finished all my schooling debt free. That was much better than getting whatever that $25K would be several years from now.Report
As other people in the comments have shown, this isn’t an uncommon occurrence, though it is a felicitous one.
It happened to my wife and I a few years back. The circumstances were tragic (she lost both parents within 9 months, while I was in a serious work accident around the same time) but the end result was the same. Anyway, as we saw it, there is no guilt unless you want there to be some. If you feel you should pay more in taxes, then do so. If you want more in charity, that is also up to you. Or, you could look at it as a way to help others in your family get where they feel they need to go. Set up another trust, putting nieces and nephews in it, to help them. Set up a scholarship (we are looking into this) to put it to good use, FCVOGU. But keep working, and saving, and investing, and so on, to grow that windfall for those reasons, if you so choose.Report
Those are all good points. The only place where I think I see it differently is when it comes to taxes. To me, taxes are systematic issue. It’s not so much that I want to pay more in taxes as that I’d want taxes to work differently (in my case, that means more progressively…..but if a flatter tax works better overall, I’d in theory support it) from how they do now.Report
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