Category Archives: capital gains

Irrational Exuberance Can Be Managed Better With The Tax Code

In a recent article, “How Trump Happened” by economics Prof. Joseph E. Stiglitz,  he wrote: we need to rewrite the rules of the economy once again.

I agree. 

Why is so important that we change how we manage Irrational Exuberance in our economy?

Irrational exuberance has played a primary role in all of our economy’s boom/bust cycles. From the boom of the roaring 1920s to the bust of the Great Depression.  To the primary home bubble of 2000 to 2007 to the financial crisis implosion of 2008,  resulting in the Great Recession. Irrational exuberance has also played a part in all of the lesser boom/bust cycles that occurred between the Great Depression and the Great Recession.
We have a flaw in our economy’s guiding policies.  The problem being, tax policy does not change as the economy progresses through its cycles of boom and bust.  Because fiscal policy doesn’t change with the cycles of the economy, tax policy is contributing to the creation of irrational exuberance and the  destruction of the middle class, and the American Dream.

I have been a successful real estate investor and have sold many of my real estate investments myself for the last 46 years.  I started investing in real estate in 1970.  I have experienced many boom/bust cycles over the last 4 decades.  From the high inflation of the 1970’s to the financial crisis of 2008 and the so-called recovery that followed.

I want to explain an idea I had in 1980, which I wrote a book about, (Inflation The Economy Killer).  When the first Great Recession, in the early eighties, was created after the Federal Reserve used monetary policy to raise interest rates higher than 18% to purchase a home. I thought to myself, “There has to be a better way to guide our economy than with wide changes in interest rates.

The first Great Recession created a higher unemployment rate and as much misery as the second Great Recession for the middle class and the working poor.  Foreclosures and bankruptcies increased dramatically.  The nation’s  “safety net” was stretched to its limit. The Federal Government ran a huge deficit for years.

Is it necessary to use high unemployment, business failures, foreclosures, and bankruptcies to manage “irrational exuberance?”  The answer is NO!!!

What is ‘Irrational Exuberance’

If you are not an economist or an investor,  you may not know what “irrational exuberance” is.  The following is Investopedia explanation of what irrational exuberance is and who coined the words to explain investors behavior when asset prices are increasing excessively.

Irrational exuberance is unsustainable investor enthusiasm that drives asset {housing, land, commodities, stocks, etc.) prices up to levels that aren’t supported by fundamentals. The term “irrational exuberance” is believed to have been coined by former Federal Reserve Chairman Alan Greenspan in a 1996 speech, “The Challenge of Central Banking in a Democratic Society.” He said that low inflation reduces investor uncertainty, lowers risk premiums and implies higher stock market returns.

Greenspan gave this speech near the beginning of the 1990s dot-com bubble, a textbook example of irrational exuberance. “Irrational Exuberance” is also the name of a 2000 book by economist Robert Shiller that analyzes the broader stock market boom that lasted from 1982 through the dot-com years. Shiller’s book presents 12 factors that created this boom and suggests policy changes for better managing irrational exuberance. The book’s second edition, published in 2005, warns of the housing bubble burst.

Read more: Irrational Exuberance Definition | Investopediahttp://www.investopedia.com/terms/i/irrationalexuberance.asp#ixzz4Pu9ZEe2R

Read more: Irrational Exuberance Definition | Investopedia

What needs to be done to improve our boom/bust economy and manage irrational exuberance better.

We have “automatic economic stabilizer” programs to counteract recessions.  Unemployment insurance, food stamps, and Medicaid are three of the many automatic economic stabilizers programs that automatically expand when a recession occurs in our economy.  For our economy to work better for everyone, business owners, investors, and the working class, our economy needs an “automatic economic stabilizer” tax policy to counteract financialization, irrational exuberance,” and bubble formation as they begin to occur in our economy.

To correct this flaw in our economy’s guiding policies, we need to enact the 2% Appreciation/ Inflation Taxation Policy, to put tax policy in sync with monetary policy, and the economic cycles of the economy.  This change in fiscal policy will help prevent the financial bubbles, deep recessions, and financial crisis that are destroying our economy as the housing bubble did in the 2000’s.

The Fed’s monetary policies do not control the annual appreciation/inflation rate very well.  The increases in interest rates add higher cost of to production and consumption and reduce demand from the middle and working class.   As the middle class and the working poor become unemployed, because of these increased interest rates, state and federal government’s liabilities increase.

The Federal Reserve’s (Fed’s) monetary policies have not been able to maintain the annual increases in prices at the Fed’s stated annual target rate of 2%.  History has shown us that monetary policy alone cannot sustain an annual 2% appreciation/inflation rate. Prices have risen 1000% since 1960.  Wages have not increased 1000% since 1960. If prices do not rise too fast, wages do not have to increase very much to maintain a living wage.  A one thousand percent increase in prices is why our economy is not providing the “American Dream,” at an affordable price, as it did for the Boomer generation.  The flaws in our tax policy are causing our prices to rise too fast.  We need to fix the fiscal policy flaws first to prevent further deterioration of our economy.  Our economy needs more real growth, not higher prices, and more paper profits.  Workers need a living wage to maintain and improve their standard of living.  A living wage created by a stable economy where price increases are established after the enactment of the 2% Appreciation/Inflation Taxation Policy.  An economy where prices don’t rise too much and too fast annually.

How would the 2% Appreciation/Inflation Taxation Policy operate?

The tax rate changes would not be based on one person’s hard asset holdings but would be based on an index composed of things, that appreciate in price, and are commonly used for collateral to obtain mortgages and loans.  Since each state can have different appreciation/inflation rates, the appreciation/inflation index would be more accurate if an index was created for each state annually.  If we set a maximum annual target rate of appreciation at 4% for the “appreciation/inflation index,” then at that point interest income should have a tax rate of 0%, and the paid interest deduction should be decreased to zero.  If necessary, the top long-term capital gains (LTCGs) tax rate could also be automatically increased to the same rate as the top rate the taxpayer would pay on ordinary earned income to slow down an overheated economy.

What if the 2% Appreciation/Inflation Taxation Policy had been enacted in 2000 before the primary home bubble had been created?

When the Appreciation Index increased to 3%, the tax rate on interest earned would have decreased by 50%, or in other words, 50% of the interest earned would not be taxable income at the end of the year.  At the end of the year, the same thing would occur to the interest deduction, 50% of the interest paid would not be tax-deductible. The LTCGs tax rate would increase by 50%. If the 2% Index continued to rise the next year to 4%, the tax rate changes would be 100%.  When the 2% Appreciation Index returned to a 2% annual increase, the tax rates and interest deduction would again be as they previously were.  The change in tax rates would not decrease or increase tax revenue of the federal government. The debtor would pay more taxes, and the person who invested in the debt would pay fewer taxes.  It is known that during the high appreciation/inflation cycle, the debtor’s real capital investment is increasing in price and the debt (money) is losing purchasing power. The 2% Appreciation Taxation Policy will help rebalance this change in value between the lender and the debtor without increasing interest rates with monetary policy.

It is widely recognized that when tax rates and LTCGs tax rates are lowered after they have been raised, economic activity and tax revenues increase.  In this way, aggregate demand and employment will be maintained during all cycles of the economy.  If the automatic tax changes I am proposing had been used, to manage the irrational exuberance, that helped create the high appreciation/inflation cycle, of the primary home bubble during 2003/2007, we could have used the automatic reversal of the income tax changes to stimulate the economy when the economy cooled down. The lowering of the LTCGs, the higher taxes on interest income, and the 100% deductibility of paid interest would all be available to stimulate economic activity.  These fiscal policies have all been used in the past.  When the LTCGs tax rate and ordinary income tax rates were lowered in 1921, 1961, 1982, and 2003 to help end the recessions that occurred in the year before these years.

In recent history each time the economy “recovers” we have fewer jobs and fewer jobs that have a “living wage. ” The middle class has gotten smaller, and the number of people living at the poverty level has increased.  If we make this necessary tax policy change, we can rebuild the American economy and the American Dream.

It is time for new economic thinking.  We need to stop using increases in the unemployment rate and recessions to manage “irrational exuberance”  We need to reform the tax code, so investors and the general public don’t use excessive credit when real estate, single family homes, commodities, and other real asset prices rise more than 2% annually.  We need to enact the 2% Appreciation/Inflation Taxation Policy to help prevent financial bubbles and financial crisis in our economy.  We need to pass the 2% Appreciation/Inflation Taxation Policy to help make our exports more competitive in the world markets and to support full employment.  The 2% Policy will encourage people to have a balanced financial portfolio, so they have reserves to maintain themselves during downturns in the economy.

It is up to Congress to fix these flaws in our economic policies. They are the people who enacted the tax policies that created the problems.  It is our responsibility to inform and encourage Congress to change fiscal policy to improve our lives and our children’s future.

Leonard C. Tekaat

This article is a shortened version of the paper posted on this site (www.taxpolicyusa.wordpress.com) titled “Improve The Tax Code To Save The American Dream”

In a recent article, “How Trump Happened” by economics Prof. Joseph E. Stiglitz,  he wrote: we need to rewrite the rules of the economy once again.

I agree. 

Why is so important that we change how we manage Irrational Exuberance in our economy?

Irrational exuberance has played a primary role in all of our economy’s boom/bust cycles. From the boom of the roaring 1920s to the bust of the Great Depression.  To the primary home bubble of 2000 to 2007 to the financial crisis implosion of 2008,  resulting in the Great Recession. Irrational exuberance has also played a part in all of the lesser boom/bust cycles that occurred between the Great Depression and the Great Recession.
We have a flaw in our economy’s guiding policies.  The problem being, tax policy does not change as the economy progresses through its cycles of boom and bust.  Because fiscal policy doesn’t change with the cycles of the economy, tax policy is contributing to the creation of irrational exuberance and the  destruction of the middle class, and the American Dream.

I have been a successful real estate investor and have sold many of my real estate investments myself for the last 46 years.  I started investing in real estate in 1970.  I have experienced many boom/bust cycles over the last 4 decades.  From the high inflation of the 1970’s to the financial crisis of 2008 and the so-called recovery that followed.

I want to explain an idea I had in 1980, which a wrote book about, (Inflation The Economy Killer).  When the first Great Recession, in the early eighties, was created after the Federal Reserve used monetary policy to raise interest rates higher than 18% to purchase a home. I thought to myself, “There has to be a better way to guide our economy.”

The first Great Recession created a higher unemployment rate and as much misery as the second Great Recession for the middle class and the working poor.  Foreclosures and bankruptcies increased dramatically.  The nation’s  “safety net” was stretched to its limit.  The Federal Government ran a huge deficit for years.  Is it necessary to use high unemployment, business failures, foreclosures, and bankruptcies to manage “irrational exuberance?”

What is ‘Irrational Exuberance’

If you are not an economist or an investor,  you may not know what “irrational exuberance” is.  The following is Investopedia explanation of what irrational exuberance is and who coined the words to explain investors behavior when asset prices are increasing excessively.

Irrational exuberance is unsustainable investor enthusiasm that drives asset {housing, land, commodities, stocks, etc.) prices up to levels that aren’t supported by fundamentals. The term “irrational exuberance” is believed to have been coined by former Federal Reserve Chairman Alan Greenspan in a 1996 speech, “The Challenge of Central Banking in a Democratic Society.” He said that low inflation reduces investor uncertainty, lowers risk premiums and implies higher stock market returns.

Greenspan gave this speech near the beginning of the 1990s dot-com bubble, a textbook example of irrational exuberance. “Irrational Exuberance” is also the name of a 2000 book by economist Robert Shiller that analyzes the broader stock market boom that lasted from 1982 through the dot-com years. Shiller’s book presents 12 factors that created this boom and suggests policy changes for better managing irrational exuberance. The book’s second edition, published in 2005, warns of the housing bubble burst.

Read more: Irrational Exuberance Definition | Investopediahttp://www.investopedia.com/terms/i/irrationalexuberance.asp#ixzz4Pu9ZEe2R

Read more: Irrational Exuberance Definition | Investopedia

What needs to be done to improve our boom/bust economy and manage irrational exuberance better.

We have “automatic economic stabilizer” programs to counteract recessions.  Unemployment insurance, food stamps, and Medicaid are three of the many automatic economic stabilizers programs that automatically expand when a recession occurs in our economy.  For our economy to work better for everyone, business owners, investors, and the working class, our economy needs an “automatic economic stabilizer” tax policy to counteract financialization, irrational exuberance,” and bubble formation as they begin to occur in our economy.

To correct this flaw in our economy’s guiding policies, we need to enact the 2% Appreciation/ Inflation Taxation Policy, to put tax policy in sync with monetary policy, and the economic cycles of the economy.  This change in fiscal policy will help prevent the financial bubbles, deep recessions, and financial crisis that are destroying our economy as the housing bubble did in the 2000’s.

The Fed’s monetary policies do not control the annual appreciation/inflation rate very well.  The increases in interest rates add higher cost of to production and consumption and reduce demand from the middle and working class.   As the middle class and the working poor become unemployed, because of these increased interest rates, state and federal government’s liabilities increase.

The Federal Reserve’s (Fed’s) monetary policies have not been able to maintain the annual increases in prices at the Fed’s stated annual target rate of 2%.  History has shown us that monetary policy alone cannot sustain an annual 2% appreciation/inflation rate. Prices have risen 1000% since 1960.  Wages have not increased 1000% since 1960. If prices do not rise too fast, wages do not have to increase very much to maintain a living wage.  A one thousand percent increase in prices is why our economy is not providing the “American Dream,” at an affordable price, as it did for the Boomer generation.  The flaws in our tax policy are causing our prices to rise too fast.  We need to fix the fiscal policy flaws first to prevent further deterioration of our economy.  Our economy needs more real growth, not higher prices, and more paper profits.  Workers need a living wage to maintain and improve their standard of living.  A living wage created by a stable economy where price increases are established after the enactment of the 2% Appreciation/Inflation Taxation Policy.  An economy where prices don’t rise too much and too fast annually.

How would the 2% Appreciation/Inflation Taxation Policy operate?

The tax rate changes would not be based on one person’s hard asset holdings but would be based on an index composed of things, that appreciate in price, and are commonly used for collateral to obtain mortgages and loans.  Since each state can have different appreciation/inflation rates, the appreciation/inflation index would be more accurate if an index was created for each state annually.  If we set a maximum annual target rate of appreciation at 4% for the “appreciation/inflation index,” then at that point interest income should have a tax rate of 0%, and the paid interest deduction should be decreased to zero.  If necessary, the top long-term capital gains (LTCGs) tax rate could also be automatically increased to the same rate as the top rate the taxpayer would pay on ordinary earned income to slow down an overheated economy.

What if the 2% Appreciation/Inflation Taxation Policy had been enacted in 2000 before the primary home bubble had been created?

When the Appreciation Index increased to 3%, the tax rate on interest earned would have decreased by 50%, or in other words, 50% of the interest earned would not be taxable income at the end of the year.  At the end of the year, the same thing would occur to the interest deduction, 50% of the interest paid would not be tax-deductible. The LTCGs tax rate would increase by 50%. If the 2% Index continued to rise the next year to 4%, the tax rate changes would be 100%.  When the 2% Appreciation Index returned to a 2% annual increase, the tax rates and interest deduction would again be as they previously were.  The change in tax rates would not decrease or increase tax revenue of the federal government. The debtor would pay more taxes, and the person who invested in the debt would pay fewer taxes.  It is known that during the high appreciation/inflation cycle, the debtor’s real capital investment is increasing in price and the debt (money) is losing purchasing power. The 2% Appreciation Taxation Policy will help rebalance this change in value between the lender and the debtor.

It is widely recognized that when tax rates and LTCGs tax rates are lowered after they have been raised, economic activity and tax revenues increase.  In this way, aggregate demand and employment will be maintained during all cycles of the economy.  If the automatic tax changes I am proposing had been used, to manage the irrational exuberance, that helped create the high appreciation/inflation cycle, of the primary home bubble during 2003/2007, we could have used the automatic reversal of the income tax changes to stimulate the economy when the economy cooled down. The lowering of the LTCGs, the higher taxes on interest income, and the 100% deductibility of paid interest would all be available to stimulate economic activity.  These fiscal policies have all been used in the past.When the LTCGs tax rate and ordinary income tax rates were lowered in 1921, 1961, 1982, and 2003 to help end the recessions that occurred in the year before these years.

In recent history each time the economy “recovers” we have fewer jobs and fewer jobs that have a “living wage. ” The middle class has gotten smaller, and the number of people living at the poverty level has increased.  If we make this necessary tax policy change, we can rebuild the American economy and the American Dream.

It is time for new economic thinking.  We need to stop using increases in the unemployment rate and recessions to manage “irrational exuberance”  We need to reform the tax code, so investors and the general public don’t use excessive credit when real estate, single family homes, commodities, and other real asset prices rise more than 2% annually.  We need to enact the 2% Appreciation/Inflation Taxation Policy to help prevent financial bubbles and financial crisis in our economy.  We need to pass the 2% Appreciation/Inflation Taxation Policy to help make our exports more competitive in the world markets and to support full employment.  The 2% Policy will encourage people to have a balanced financial portfolio, so they have reserves to maintain themselves during downturns in the economy.

It is up to Congress to fix these flaws in our economic policies. They are the people who enacted the tax policies that created the problems.  It is our responsibility to inform and encourage Congress to change fiscal policy to improve our lives and our children’s future.

Leonard C. Tekaat

This article is a shortened version of the paper posted on this site (www.taxpolicyusa.wordpress.com) titled “Improve The Tax Code To Save The American Dream”

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