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the_roaring_nineties [2010/05/28 13:09]
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the_roaring_nineties [2019/11/08 10:39] (current)
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| Mergers offer a further case in which investment banks' incentives are poorly aligned. An investment bank that handles a merger always earns a sizeable commission, even if the merger turns out to destroy rather than add value. In fact, if the merger creates a less valuable company, then the investment bank is likely to be called in to handle the dismemberment of the company once it becomes clear. This explains why it is that mergers do not, on average, create value. It is always in the interests of the investment bank (and usually the CEOs, who will receive enormous bonuses or retirement packages for handling the merger) to argue that it will create value, since their income relies on this conclusion. | Mergers offer a further case in which investment banks' incentives are poorly aligned. An investment bank that handles a merger always earns a sizeable commission, even if the merger turns out to destroy rather than add value. In fact, if the merger creates a less valuable company, then the investment bank is likely to be called in to handle the dismemberment of the company once it becomes clear. This explains why it is that mergers do not, on average, create value. It is always in the interests of the investment bank (and usually the CEOs, who will receive enormous bonuses or retirement packages for handling the merger) to argue that it will create value, since their income relies on this conclusion. |
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| ====== Tax Cuts: Feeding the Frenzy ====== | ====== Tax Cuts: Feeding the Frenzy ====== |
| Although this field had been entirely discredited by Clinton's reign, there was one tax for which it was still thought to potentially work, primarily because of a distortionary accounting system. Capital gains tax is only paid when assets are liquidated, so at any one time a government has a pool of unrealised assets in the form of capital gains tax that will not be paid to government until the holder chooses to sell those assets.((The situation is clouded slightly by the fact that capital gains tax is not paid if the holder passes these assets on in his will, but the effects of this are not important.)) So, by reducing capital gains tax for a limited period, in effect offering a 'sale price' on capital gains, the government encourages early liquidation of these assets, increasing current revenue at the expense of future revenue. This is effectively a means of borrowing --- although it is not widely perceived as such. It is also an immensely regressive form of tax break. And it is destabilising --- it encouraged greater use of stock options by CEOs and for stockholders to sell and reinvest (more money than they would otherwise be able to) in stocks --- both having the effect of feeding the bubble. It also motivated CEOs to manipulate current share price, since there was now greater value in artificially inflate share prices and selling shares than holding on to shares and pursuing long-run improvements in profitability. | Although this field had been entirely discredited by Clinton's reign, there was one tax for which it was still thought to potentially work, primarily because of a distortionary accounting system. Capital gains tax is only paid when assets are liquidated, so at any one time a government has a pool of unrealised assets in the form of capital gains tax that will not be paid to government until the holder chooses to sell those assets.((The situation is clouded slightly by the fact that capital gains tax is not paid if the holder passes these assets on in his will, but the effects of this are not important.)) So, by reducing capital gains tax for a limited period, in effect offering a 'sale price' on capital gains, the government encourages early liquidation of these assets, increasing current revenue at the expense of future revenue. This is effectively a means of borrowing --- although it is not widely perceived as such. It is also an immensely regressive form of tax break. And it is destabilising --- it encouraged greater use of stock options by CEOs and for stockholders to sell and reinvest (more money than they would otherwise be able to) in stocks --- both having the effect of feeding the bubble. It also motivated CEOs to manipulate current share price, since there was now greater value in artificially inflate share prices and selling shares than holding on to shares and pursuing long-run improvements in profitability. |
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| > As the Clinton years came to a close, I wondered: What message had we in the end sent through the changes that had been brought about in our taxes? What were we saying ot the country, to our young people, when we lowered capital gains taxes and raised taxes on those who earned their living by working? That it is better to make your living by speculation than by any other means. The New Economy --- the innovations which continue to fuel that productivity growth and form the basis of this country's long-run strength --- depend on advances in science, on researchers at universities and research labs, who work sixteen-hour days and more in the tireless search to try to understand the world in which we live. These are the people we should be rewarding and encouraging. Yet it was these people who were being more highly taxed, while those who speculated were taxed more gently While we talked about incentives, most of the tax giveaway had no incentive effect at all. While we were teaching our young people something about our national values, we were also teaching our young people another lesson in political hypocrisy, or, some might say, in the ways of the world. | > As the Clinton years came to a close, I wondered: What message had we in the end sent through the changes that had been brought about in our taxes? What were we saying to the country, to our young people, when we lowered capital gains taxes and raised taxes on those who earned their living by working? That it is better to make your living by speculation than by any other means. The New Economy --- the innovations which continue to fuel that productivity growth and form the basis of this country's long-run strength --- depend on advances in science, on researchers at universities and research labs, who work sixteen-hour days and more in the tireless search to try to understand the world in which we live. These are the people we should be rewarding and encouraging. Yet it was these people who were being more highly taxed, while those who speculated were taxed more gently While we talked about incentives, most of the tax giveaway had no incentive effect at all. While we were teaching our young people something about our national values, we were also teaching our young people another lesson in political hypocrisy, or, some might say, in the ways of the world. |
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| ====== Making Risk a Way of Life ====== | ====== Making Risk a Way of Life ====== |
