Small Portfolio XLF & IAU 14.69%
Position Date Return Days
DECK 6/15/2012 -35.53% 155
RIMM 7/16/2012 26.90% 124
SEAC 9/25/2012 6.98% 53
CAJ 9/25/2012 -3.60% 53
DDAIF 9/25/2012 -12.60% 53
WMK 10/22/2012 -6.48% 26
CFI 10/31/2012 -0.65% 17
CGX 11/5/2012 12.62% 12
MO 11/8/2012 -0.51% 9
EL 11/12/2012 -1.51% 5
S&P Annualized 0.74%
Small Portfolio Annualized 10.01%
Large Portfolio Annualized 15.68%
From: [url]http://market-mousetrap.blogspot.com/2012/11/11172012-how-to-really-soak-rich.html[/url]
Rotation: selling WMK, buying BOKF
As always, a bad gap (i.e. WMK down or BOKF up) will cancel the trade.
This week continued the bleeding in the market, while investors wait for a bottom. The market is oversold enough for a bounce, but a bounce and a recovery are two different things.
Do we blame Obama or the Congress? Yes to both. It takes two sides to compromise.
But there is something even more insidious going on here, because the President is either misinformed, or he is being deceitful. I’ll give him the benefit of the doubt and assume he is merely misinformed. So, if I had the President’s ear I’d walk him through the math with today’s post.
I haven’t calculated the Laffer Curve on income taxes, but it’s relatively simple to do on stock market capital gains. The Laffer Curve is a truism that a tax rate of 0% will raise 0 dollars of revenue, while a tax rate of 100% will ALSO raise 0 dollars of revenue. In other words, would YOU invest if you were guaranteed to have ALL of your gains taxed away? Of course not. The maximum revenue for the government is at a rate somewhere between 0% and 100%.
Well, that’s a big “somewhere between” to go through. How to calculate it? Do we just guess?
No.
I used the data for the S&P index from January 3, 1950 through November 15, 2012. It was a simple matter of creating two columns – one for a hypothetical trading account starting with the value of the S&P on 1/3/1950 at 16.66. The second column was a running tally on taxes raised, given whatever tax rate I specified.
Then I ran the numbers 100 times and recorded the results:
Rate Investor Government Aggregate Short Long
1% 1304.92 13.01 130.31 100 60
2% 1258.06 25.33 178.53 99 47
3% 1212.69 36.99 211.80 98 39
4% 1168.77 48.00 236.87 97 34
5% 1126.27 58.40 256.47 96 29
6% 1085.16 68.20 272.05 95 25
7% 1045.38 77.43 284.51 94 21
8% 1006.90 86.11 294.45 92 18
9% 969.70 94.26 302.32 85 15
10% 933.72 101.90 308.45 79 12
11% 898.94 109.05 313.09 73 9
12% 865.33 115.73 316.45 68 7
13% 832.84 121.96 318.70 63 5
14% 801.45 127.76 319.99 59 3
15% 771.13 133.14 320.42 55 1
16% 741.84 138.13 320.11 51 2
17% 713.55 142.74 319.14 47 4
18% 686.24 146.98 317.59 44 6
19% 659.87 150.88 315.53 40 8
20% 634.42 154.44 313.02 37 10
21% 609.85 157.68 310.10 34 11
22% 586.15 160.63 306.84 31 13
23% 563.28 163.28 303.27 29 14
24% 541.22 165.65 299.42 26 16
25% 519.95 167.76 295.34 23 17
26% 499.44 169.62 291.06 21 19
27% 479.66 171.25 286.60 18 20
28% 460.59 172.64 281.99 16 22
29% 442.22 173.82 277.25 14 23
30% 424.51 174.79 272.40 11 24
31% 407.45 175.57 267.47 9 26
32% 391.02 176.17 262.46 7 27
33% 375.19 176.59 257.40 5 28
34% 359.95 176.85 252.30 3 30
35% 345.27 176.95 247.17 1 31
36% 331.14 176.90 242.03 2 32
37% 317.55 176.71 236.88 4 33
38% 304.46 176.39 231.74 6 35
39% 291.87 175.95 226.62 8 36
40% 279.76 175.40 221.51 10 37
41% 268.11 174.73 216.44 12 38
42% 256.90 173.97 211.40 13 40
43% 246.13 173.11 206.41 15 41
44% 235.77 172.16 201.47 17 42
45% 225.81 171.12 196.57 19 43
46% 216.24 170.01 191.74 20 44
47% 207.05 168.83 186.97 22 45
48% 198.21 167.59 182.26 24 46
49% 189.73 166.28 177.62 25 48
50% 181.58 164.92 173.05 27 49
51% 173.75 163.50 168.55 28 50
52% 166.23 162.04 164.12 30 51
53% 159.02 160.53 159.78 32 52
54% 152.10 158.99 155.51 33 53
55% 145.45 157.41 151.31 35 54
56% 139.08 155.80 147.20 36 55
57% 132.96 154.17 143.17 38 56
58% 127.09 152.51 139.22 39 57
59% 121.47 150.82 135.35 41 58
60% 116.07 149.12 131.56 42 59
61% 110.90 147.41 127.86 43 61
62% 105.95 145.68 124.23 45 62
63% 101.19 143.94 120.69 46 63
64% 96.64 142.19 117.22 48 64
65% 92.28 140.44 113.84 49 65
66% 88.10 138.68 110.53 50 66
67% 84.10 136.92 107.31 52 67
68% 80.27 135.16 104.16 53 68
69% 76.60 133.41 101.09 54 69
70% 73.08 131.66 98.09 56 70
71% 69.72 129.91 95.17 57 71
72% 66.51 128.17 92.33 58 72
73% 63.43 126.44 89.55 60 73
74% 60.48 124.72 86.85 61 74
75% 57.66 123.01 84.22 62 75
76% 54.97 121.31 81.66 64 76
77% 52.39 119.63 79.17 65 77
78% 49.93 117.96 76.74 66 78
79% 47.58 116.30 74.39 67 79
80% 45.33 114.66 72.09 69 80
81% 43.17 113.04 69.86 70 81
82% 41.12 111.43 67.69 71 82
83% 39.16 109.84 65.58 72 83
84% 37.28 108.27 63.53 74 84
85% 35.49 106.72 61.54 75 85
86% 33.78 105.18 59.61 76 86
87% 32.15 103.67 57.73 77 87
88% 30.59 102.18 55.91 78 88
89% 29.11 100.70 54.14 80 89
90% 27.69 99.25 52.42 81 90
91% 26.33 97.82 50.75 82 91
92% 25.04 96.41 49.14 83 92
93% 23.81 95.02 47.57 84 93
94% 22.64 93.65 46.04 86 94
95% 21.52 92.30 44.57 87 95
96% 20.45 90.98 43.13 88 96
97% 19.43 89.67 41.74 89 97
98% 18.46 88.39 40.40 90 98
99% 17.54 87.13 39.09 91 99
100% 16.66 85.89 37.83 93 100
On 11/15/2012 the S&P closed at 1353.33. At a 1% capital gains tax rate an investor would have left 1304.92, while the government would have raised 13.01 dollars in taxes.
At a 100% tax rate the investor would have left 16.66 – in other words, he would make 0 dollars in profits during those 62 years – while the government would have raised 85.89 dollars in taxes.
The next thing I did was to speculate why there are different rates for long and short term capital gains, and this is what I came up with immediately:
1) Short term capital gains are generated by a trader who is making a stop loss or taking a quick profit, but is not basing his decisions on taxes. Therefore, the government can set the rate at the amount that generates the most tax revenue, regardless of how the trader is affected.
2) Long term capital gains are generated by an investor trying to save for retirement. If the taxes are too high the investor should simply hold forever and never sell (and thus pay no taxes). Also, if the taxes are too high then no one would be able to adequately retire, and therefore EVERYONE would be completely dependent on the government when they were too old to work. Obviously this would bankrupt the government even faster than is already happening, so the tax rate should be set at the maximum aggregate revenue for both the investor and the government together – which I calculated by giving the square root of the investor’s final returns multiplied by the government’s total tax revenue.
The maximum short term revenue for the government was generated at a 35% rate.
The maximum long term returns for the investor and government together was generated at a 15% rate.
I did not skew these results or rework them. I came up with those figures on the first try.
I don’t believe it is a coincidence that the Bush tax rates for capital gains were set at 15% for long term and 35% for short term. I believe someone else did the math and simply calculated the amount that would raise the greatest possible revenue for the government. And in fact the greatest tax revenues ever achieved in any President’s administration were during the Bush years of 2001-2008.
When President Obama says that he wants to raise the rates on capital gains to 20% and 40%, he uses the argument that the government needs more money. However, as I show in the RANKING of best to worst tax rates (the final two columns), the Obama rates are in 10th place. They bring in LESS money than the Bush rates.
By raising the rates, the government will get less revenue – and that’s assuming there is no effect on either market growth or investor behavior (which is as optimistic as one can get).
Here’s the chart:
[ATTACH=CONFIG]16418[/ATTACH]
You’ll also note that the optimal rate of 15% STILL cuts almost 50% from the investor’s pocket at the end of 62 years. He is left with 771.13 instead of 1353.33.
The President is either being deceptive when he says he will raise revenue or he is misinformed. I’ll be charitable and assume he is misinformed.
But that means that you, dear reader, are better informed than the President of the United States!
Isn’t that a little scary? Shouldn’t HE have better information?
Apparently not.
Enjoy the higher tax rates.
But how does that affect US in our trading?
I’ll save that for another post…
Tim
