IBM's Gerstner Favors Taxing Short Term Capital Gains

In an interesting overture to killing the current casino culture that is enveloping capital markets, none other than IBM former CEO Louis Gerstner is recommending taxing short-term (less than 1 year) capital gains at 80%. While such a proposal is sure to kill 90% of participants in the capital markets casino which lately trade only on an intraday basis and nobody cares about fundamentals that may justify a long-term buy or hold (simply because anything long-term in this economy will ultimately result in a 0 valuation). From Bloomberg:

“If you buy something -- a stock or a bond -- in the morning, and you sell in the afternoon, the tax probably ought to be 80 percent,” said Gerstner, also a former chairman of Carlyle Group, the world’s second-largest private equity firm.

“If you hold it for six months, maybe it ought to be 60 percent,” Gerstner told Bloomberg Television.

“We do have a greed or an inefficiency that comes out of excessive focus on the short term,” said Gerstner, who bemoaned an investment climate driven by quarterly earnings and a 24-hour news cycle. He was an executive at American Express Co. and RJR Nabisco Inc. before joining IBM.

Some other revolutionary ideas by Gerstner:

Gerstner, who approves of generous compensation for executives who add shareholder value, called for an end to golden parachutes for failed managers. “We have to see an elimination of pay for people who get fired and then wind up with these huge payments,” he said.

Gerstner acknowledged that Wall Street executives he knows wouldn’t like his plan for higher taxes on investment gains.

“They wouldn’t like it at all,” Gerstner said. “Wall Street is driven by transactions. That’s what they live by. They don’t live by long-term investment decisions.”

A good example of the short-term trading culture is yesterday's market action, where the S&P has gone from down 3 points to up 17 points (an intraday 20 point swing on nothing!) on a plethora of bad economic news, simply as a result of manipulated futures purchasing by visible and invisible hands, to preempt potential panic selling as a result of the impending termination of Ben Bernanke from his current post, compliments of several non-conformist Congressmen (click on chart to enlarge).

Presumably Goldman is cheering Summers' impending appointment to the former's post by buying every share it can find (as well as TSYs, Oil, Gold, and the dollar: we are back to global market beta = 1.000).

And while Gerstner's proposal is truly revolutionary, there is no way in hell that micro trade focused Goldman Sachs (GS), which is back to its hedge funds swing and momentum trading days, would ever allow this to become actual policy. With Larry Summers happy to have Ben keep his chair warm for at most a few more months, one can be certain that Wall Street's power interests will soon be maintained in perpetuity or until the S&P hits 0, whichever comes first (in the next 2 years).

Comments

[Moon Kil Woong:]

Sure, I'm sure he will love that idea until he finds out that his proposal leads there to being no market liquidity for him to dump his low cost stock option shares. Talk about an idiotic idea. he must be contemplating running for office.

Jun 26 06:52 AM

[VennData:]

"...simply because anything long-term in this economy will ultimately result in a 0 valuation..."

I'll take the other side of that. I'll take America.

Jun 26 07:25 AM

[MKW:]

The frequent mini-stick-saves on SPY yesterday positively reeked of "A Certain Large Bank's" shenanigans. Note how amid all this "bullish action", SPY basically didn't go up unless it shot up more than one point in a tick on a surge to at least half a million shares traded in that minute.

Jun 26 08:25 AM

[Yurasis_Dragon:]

Warren Buffet spoke of the same principle, only his recommendation was 100% tax on anything held for < 1 year.

Jun 26 08:26 AM

[kmf:]

Wasn't the stock market organized to provide capital for companies who would then use the money to produce products that were desired or needed by our society? The market allowed ordinary people to participate in our capitalistic system. The trading of shares allows people to exit or enter these investments. I don't think it was organized to bet every day on the price movements or to form pools to drive stocks up and down. How many of today's regulations such as prospectuses, uptick rules, etc. etc. were instituted to control the casino mentality that has become the rule rather than the exception in our markets. Banks used to be simple businesses run by average people getting paid average salaries. Now with program trading, bundling mortgages, trading default swaps, etc. we have to pay bankers millions of dollars and then use tax payers money to bail them out when they are wrong. We no longer have capital markets we have a capital casino.
What's wrong with a market that's not so "liquid"?

Jun 26 08:50 AM

[CLH:]

Why one year? Why not 20 years? I cant believe the stupidity of Gerstner or anyone else who believes in govt. confiscation. I believe capital gains should not be taxed. There is nothing more important then the need for capital for job creation.

Jun 26 08:55 AM

[americaninv...:]

The thieves in Washington disguised as representatives of the people will confiscate your money in any way they can. It sounds harsh, but it is a simple fact.

Jun 26 09:48 AM

[coreopsis:]

Please, CLH -- resist the Elmer Gantry-style emoting. Capital gains is not like (say) water -- a single thing. Capital gains in a concept embodied in the tax code. Capital gains and job creation are not obviously intertwined.

Gerstner is saying something very precise: that interday trading profits need to be taxed heavily to reduce the speculative component in financial services which has brought the world to where it is today. Or are you suggesting there should be more job creation among traders on Wall Street?

In short, are you running for political office with your campaign already filled up?

Really, this is Yanks at their worst -- calling Gerstner stupid is really rude and beyond the pale.


On Jun 26 08:55 AM CLH wrote:

> Why one year? Why not 20 years? I cant believe the stupidity of Gerstner
> or anyone else who believes in govt. confiscation.

Jun 26 10:20 AM

[stwo1:]

Well Tyler, I really like your posts, but S&P at 0? I am bearish too, but I am thinking more along the lines of 700.

Jun 26 11:40 AM

[joes:]

This sounds like a good idea to me, being a buy and hold guy anyway because paying only 15% on gains can make up for a lot of mistakes.

The casino element of the market isn't healthy, and the smart guys will figure out a way to bundle securities into an instrument that provides annual pay outs that will qualify for the lower rate while allowing the managers to trade more freely.

Jun 26 11:41 AM

[jerrydd:]

I have to agree that CG's need to be heavily taxed because it comes out of long term investors pockets and creates bubbles.

Another might be a 1/4point tax on each trade, loan, security, hedge or other transaction.

CEO pay should be based on how well they preform against a basket of similar companies with no comp for being fired, leaving. It just takes money from real investors.

Jun 26 11:50 AM

[PhillyDan:]

Agree strongly with Gerstner's recommendations on STCGs. Would tweak the tax rate down to 60% for less than one year. We need to put the focus back on long-term vs. short term. There is way too much market manipulation carried out by the "invisible hand" as Tyler call it, I would call it Hedge Funds and Market Manipulators who are "wealth destroyers" not "wealth creators", who only care about lining their pockets and the pockets of their wealthy investors. In addition to his recommendations, the SEC needs to forcefully enforce the "illegal naked short selling". Let's start throwing these crooks in jail. They have brought many hard-working "average" Americans to the brink of ruin to further their greed.

Jun 26 12:40 PM

[Genesis:]

They will just move to something else, like futures. The whole purpose of futures is to be able to lock in a future price without worry about seasonal price swings. They cannot be rationally extended into year-long holdings. On futures, they just need to impose and enforce strict limits on how many contracts any individual or business can buy or sell in each market.

Jun 26 03:12 PM

[TeaLeaves:]

Experts always say, "You can't time the market." If that's true, isn't day-trading (with its transaction fees) its own punishment?

Jun 26 04:58 PM

[dragonpaw:]

Where would we be without "liquidity;" our markets would fail . Where have we been with "liquidity"; our markets almost failed. Oxymoronic; only for those on Wall Street.
We can have banking and investment; or we can have Las Vegas, carny barkers, Wall Street, and puppet politicians. You spin the wheel, you take the chances.
Problem is; if we take the former, where does that leave the latter?
You quessed it-- we're screwed!
vote all the SOBS out !!!!

Jun 26 09:12 PM

[Alfredo Mar...:]

I really don't think our current economic problems are the result of insufficient taxation.

I agree that there should be a tiered system (as there is currently), where taxes are higher for short term gains as opposed to long term gains, but an 80% rate is absolutely ridiculous.

A policy like that would create all sorts of unintended consequences to get around it, from going offshore to new types of creative equity bundling. It would also destroy any type of liquidity in the market.

If you believe in the soundness of buy and hold, the day traders and speculators should have little effect on the long term trends of a solid company. The reason why everything is coming apart is because of companies and financial institutions being over leveraged, not because of day traders and speculators making too many short term gains.

Jun 26 09:24 PM

[Patrick Bat...:]

lol. so in other words, you'll take a loss. Great strategy.


On Jun 26 07:25 AM VennData wrote:

> "...simply because anything long-term in this economy will ultimately
> result in a 0 valuation..."
>
> I'll take the other side of that. I'll take America.

Jun 27 05:14 AM

[Patrick Bat...:]

Gerstner is a fool! If he believes in the buy and hold strategy than short-term swings will have little, if any, real affect on his investment. However, when the time does come to sell, a lack of liquidity and any potential gains that may materialize from selling in an upswing will no longer exist.

Jun 27 05:25 AM

[coreopsis:]

Patrick is sadly another dupe of EMT, but unwittingly because he doesn't know what that means. Fortunately, Mary Shapiro does, and she's just hired a Henry Hu who has shown what the effect of short-term profits in derivatives has on downward spirals in stock prices.


On Jun 27 05:25 AM Patrick Bateman wrote:

> Gerstner is a fool! If he believes in the buy and hold strategy than
> short-term swings will have little, if any, real affect on his investment.
> However, when the time does come to sell, a lack of liquidity and
> any potential gains that may materialize from selling in an upswing
> will no longer exist.

Jun 27 09:00 AM

[Between The...:]

I'm not for 80% marginal for the first dollar earned, as many employee stock purchase plans provide stock to the employee at a discount, with the ability to sell quickly. This enables the employee to sell and pocket the discount, encouraging participation and trading of the stock. At 80% marginal, the incentives would be completely changed, forcing one to hold too many eggs in the basket of the employer.
Secondly, many people hold mutual funds that distribute capital gains to shareholders, and a big tax on these would hurt those saving for the long term, not day trading. Mutual funds have to sell, move money from one stock to another, rebalance due to appreciation, etc, all of the time, so these capital gains can't be easily removed.
A better idea would be a progressive tax on capital gains, 0% for the first, say $30K (for a retired person living off savings), and then getting to the 50-80% "discouragement" level for those making significant income from short-term capital gains (say >$350K).

Jun 30 10:47 PM