It seems difficult to prevent a politician with a surplus to do anything but spend it. As a result of such spending, California is about to default on its debt. The few politicians who choose to cut taxes or repay government debt -- and thus create little new spending -- end-up being rather unpopular.
It would seem that capping government spending increases to long term GDP growth makes much more sense than just forcing the government to balance the budget each year.
Tuesday, July 7, 2009
Saturday, June 13, 2009
Baffled by tobacco
A thought struck me today as I was walking down St-Denis street, seeing all those smokers huddled on terrasses. How did governments across the world manage (politically) to revoke such an in-your-face right from a very high percentage of the population? Normally such a move is political suicide.
Perhaps many decades of negative publicity got the best out of smokers.
I also find it odd that smokers have not successfully contested taxation of tobacco, since smoking has a positive externality on the bulk of society (people dying quickly after retirement consume less state sponsored resources). Even adopting a paternalistic point-of-view, all taxation of tobacco should be given back to smokers in one form or another, not redistributed equally to everyone.
Perhaps many decades of negative publicity got the best out of smokers.
I also find it odd that smokers have not successfully contested taxation of tobacco, since smoking has a positive externality on the bulk of society (people dying quickly after retirement consume less state sponsored resources). Even adopting a paternalistic point-of-view, all taxation of tobacco should be given back to smokers in one form or another, not redistributed equally to everyone.
Friday, March 20, 2009
It's time for a single, all-long market
The time for regulation and nationalization of many activities is upon us. An overlooked market that deserves nationalization is that of all-long trades, where no credit risk is born by the exchange. Private exchanges for trades of shares have become affordable, though they remain oligopolistic (ie. they are still charging too much). Other forms of trades remain very expensive: currency and bond trades are a good example of this.
The logistics behind an all-long trading platform have become trivial and cheap because of the advent of computing. I would suggest that two all-long trading platforms be created and maintained: one by the US and one by the EU. The platforms would be all electronic and would be offered to everyone. Obviously only very liquid securities with large capitalization would be traded on these platforms. Trade costs could be kept very low (0.01$) and fractional ownership of securities should be allowed.
Banks would no longer be able to charge disproportional fees for currency transactions. Low transaction fees and fractional ownership would render many ETFs obsolete, saving carrying costs.
The logistics behind an all-long trading platform have become trivial and cheap because of the advent of computing. I would suggest that two all-long trading platforms be created and maintained: one by the US and one by the EU. The platforms would be all electronic and would be offered to everyone. Obviously only very liquid securities with large capitalization would be traded on these platforms. Trade costs could be kept very low (0.01$) and fractional ownership of securities should be allowed.
Banks would no longer be able to charge disproportional fees for currency transactions. Low transaction fees and fractional ownership would render many ETFs obsolete, saving carrying costs.
Wednesday, February 18, 2009
Fair Accounting of Capital Losses
As previously posted, fiscal laws are messy. Not only that, but some are unfair in the sense that they penalize low-income taxpayers. Capital losses are a very good example of this. Using the settlement method (which is the standard method used to calculate capital gains and losses on shares in Canada), the value of securities is only taken into account when an individual executes transactions. Though this method has the advantage of being very simple, minimizing tax liability with it requires a crystallization of losses through actual transactions. When dealing with shares, such transactions cost about 20$ per security (plus management fees).
Individuals with valuable portfolios can crystallize losses on a daily or monthly basis, maximizing their capital losses at all times, whereas their poorer compatriots can't afford 20$ per crystallization (this number may seem low, but someone who owns many different securities will see the 20$ multiplied by the number of securities that he holds).
Since market data can easily be collected for actively traded securities, I would recommend amending the capital taxation laws so that losses are automatically crystallized without needing to sell and buy back the securities for any holding of less that 0.1% of the outstanding number of that security. An even better method would be to bring transaction costs down to 0$, but that's more complicated.
Individuals with valuable portfolios can crystallize losses on a daily or monthly basis, maximizing their capital losses at all times, whereas their poorer compatriots can't afford 20$ per crystallization (this number may seem low, but someone who owns many different securities will see the 20$ multiplied by the number of securities that he holds).
Since market data can easily be collected for actively traded securities, I would recommend amending the capital taxation laws so that losses are automatically crystallized without needing to sell and buy back the securities for any holding of less that 0.1% of the outstanding number of that security. An even better method would be to bring transaction costs down to 0$, but that's more complicated.
Keeping USDs on Income Account
Fiscal laws are always a mess. In Canada, superficial loss and stop loss rules make them even more so.
Upon selling a property, the taxpayer always has a taxable gain or loss. This allows the taxpayer to choose which instruments he wants to sell in order to defer taxable gains for as long as possible. For very liquid instruments, transaction costs involved in selling and then immediately buying back instruments are low. This allows taxpayers to crystallize losses when instruments are trading at a low value.
The Canadian government tried to somewhat patch this loophole by enacting the superficial loss and stop loss rules. In short if you buy back the same instrument within 30 days of selling it, the loss is denied, but can be claimed when the instrument is sold later on. Gains are always taxable immediately.
It was easy to get around this rule by having an affiliated party do the buying: your spouse, your RRSP, your trust or your company could be the other party. These loopholes were patched as well: any affiliated party that buys securities sold within +/- 30 days also triggers the superficial or stop loss rules.
When the selling party is a physical person, the denied loss is transferred to the affiliated person. When the affiliated person sells the instrument, he can claim the loss. When the selling party is a moral person (RRSP, trust or corporation), the loss stays with the seller. It can be claimed by the seller only when the buyer disposes of the security.
This rule is particularly unfair when a person sells an instrument at a loss and buys this same instrument within his RRSP. The loss is transferred to the RRSP, but since the RRSP does not pay any taxes, the loss cannot be claimed against any gains. Worse yet, it's not possible to transfer the loss out of an RRSP, since the RRSP is not a physical person.
Though it's a logistic burden, it's very easy to hold different instruments in RRSP and non-RRSP accounts. The one instrument which is very likely to be held in both accounts is the USD. You can't get around holding cash when trading stocks! So any foreign exchange losses resulting from USD trades have a tendency of being transferred to an RRSP and die there!
Well, there is good news on this front. One can elect to place a given instrument in the income account forever. That's right, once you've elected to hold USD in the income account, you can never bring them back into the capital account. Superficial loss and stop loss rules don't apply to property held in the income account, for some obscure reason. The downside is that gains are taxed as income rather than as capital (at full rate rather than half rate). The upside, is that losses can be applied against other income including salary at the full rate (rather than not at all). Since foreign exchange fluctuations have an a priori expected value of zero (as compared to shares or bonds which nominally increase in value over time), holding USD in the income account results in a better hedge than holding them in the capital account! When factoring in utility, there is absolutely no reason to hold USDs in the capital account. Thank God!
Upon selling a property, the taxpayer always has a taxable gain or loss. This allows the taxpayer to choose which instruments he wants to sell in order to defer taxable gains for as long as possible. For very liquid instruments, transaction costs involved in selling and then immediately buying back instruments are low. This allows taxpayers to crystallize losses when instruments are trading at a low value.
The Canadian government tried to somewhat patch this loophole by enacting the superficial loss and stop loss rules. In short if you buy back the same instrument within 30 days of selling it, the loss is denied, but can be claimed when the instrument is sold later on. Gains are always taxable immediately.
It was easy to get around this rule by having an affiliated party do the buying: your spouse, your RRSP, your trust or your company could be the other party. These loopholes were patched as well: any affiliated party that buys securities sold within +/- 30 days also triggers the superficial or stop loss rules.
When the selling party is a physical person, the denied loss is transferred to the affiliated person. When the affiliated person sells the instrument, he can claim the loss. When the selling party is a moral person (RRSP, trust or corporation), the loss stays with the seller. It can be claimed by the seller only when the buyer disposes of the security.
This rule is particularly unfair when a person sells an instrument at a loss and buys this same instrument within his RRSP. The loss is transferred to the RRSP, but since the RRSP does not pay any taxes, the loss cannot be claimed against any gains. Worse yet, it's not possible to transfer the loss out of an RRSP, since the RRSP is not a physical person.
Though it's a logistic burden, it's very easy to hold different instruments in RRSP and non-RRSP accounts. The one instrument which is very likely to be held in both accounts is the USD. You can't get around holding cash when trading stocks! So any foreign exchange losses resulting from USD trades have a tendency of being transferred to an RRSP and die there!
Well, there is good news on this front. One can elect to place a given instrument in the income account forever. That's right, once you've elected to hold USD in the income account, you can never bring them back into the capital account. Superficial loss and stop loss rules don't apply to property held in the income account, for some obscure reason. The downside is that gains are taxed as income rather than as capital (at full rate rather than half rate). The upside, is that losses can be applied against other income including salary at the full rate (rather than not at all). Since foreign exchange fluctuations have an a priori expected value of zero (as compared to shares or bonds which nominally increase in value over time), holding USD in the income account results in a better hedge than holding them in the capital account! When factoring in utility, there is absolutely no reason to hold USDs in the capital account. Thank God!
Sunday, October 26, 2008
The Externalities of Speed Limits
Speed limits on highways are setup to reflect externalities linked to damage caused by accidents (affecting other drivers' cars and bodies). Clearly a balance must be struck between the frequency and severity of accidents, and efficiency of transits. Given that not all transits bear the same costs in lost time, properly matching the cost of going slowly with the harm caused by accidents requires some form of adaptive pricing of speed.
If cars were equipped with some form of time, position and speed tracking device (a GPS), the cost of causing accidents could be adjusted based on actual risks measured in recent years. With basic statistical methods, we easily could account for weather, time of day, moose activity, traffic conditions, etc. With enough data, prices could even be adjusted based on the type of vehicle (4x4, car, truck) and the driver's history.
When you are really in a hurry, you won't mind paying the extra 0.20$ per kilmeter to drive at 130 km/h. To make the scheme revenue neutral, slow/safe drivers should actually be paid to compensate them for the risk they are taking sharing the road with their speedy neighbors.
If cars were equipped with some form of time, position and speed tracking device (a GPS), the cost of causing accidents could be adjusted based on actual risks measured in recent years. With basic statistical methods, we easily could account for weather, time of day, moose activity, traffic conditions, etc. With enough data, prices could even be adjusted based on the type of vehicle (4x4, car, truck) and the driver's history.
When you are really in a hurry, you won't mind paying the extra 0.20$ per kilmeter to drive at 130 km/h. To make the scheme revenue neutral, slow/safe drivers should actually be paid to compensate them for the risk they are taking sharing the road with their speedy neighbors.
Wednesday, September 17, 2008
US unemployment will be 6.6% by June 2009
I recently fell upon a blog that was arguing for the link between new housing starts and unemployment. He showed a graph that looked a lot like this one:
I tend to be very skeptical when people find correlation between two sets of data, but it turns out that housing starts are the real deal. Not only do housing starts correlate well with the unemployment rate, but they are that rarest of animals: a reliable leading indicator. The number of new housing starts can predict 40% of the variation of the unemployment rate 10 months ahead. More specifically, you can predict the unemployment rate 10 months ahead using the following equation:
UE = (2520 / HS) + 3.71
The following graph shows the predicted unemployment rate and the realized rate:
Given the data just released of the number of new housing starts at 854 for August, this predicts an unemployment rate of 6.6% for June 2009. The pain isn't over yet.
Side note: I would have assumed that the absolute number of housing starts would have trended up over time as the population increased, but this hasn't really been the case. I'm guessing this is for demographic distribution reasons: the number of young families buying houses has stayed more constant than the total population.
I tend to be very skeptical when people find correlation between two sets of data, but it turns out that housing starts are the real deal. Not only do housing starts correlate well with the unemployment rate, but they are that rarest of animals: a reliable leading indicator. The number of new housing starts can predict 40% of the variation of the unemployment rate 10 months ahead. More specifically, you can predict the unemployment rate 10 months ahead using the following equation:
UE = (2520 / HS) + 3.71
The following graph shows the predicted unemployment rate and the realized rate:
Given the data just released of the number of new housing starts at 854 for August, this predicts an unemployment rate of 6.6% for June 2009. The pain isn't over yet.
Side note: I would have assumed that the absolute number of housing starts would have trended up over time as the population increased, but this hasn't really been the case. I'm guessing this is for demographic distribution reasons: the number of young families buying houses has stayed more constant than the total population.
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