IMAGES THAT CONNECT TO SOMETHING REAL

Should you move to NYC?

Posted in Uncategorized by a1icey on May 20, 2013

You should live in NYC if… You are nocturnal and/or your circadian rhythm is totally shot, and you don’t want to get that treated.

You should live in NYC if… You can’t feed yourself like an adult and/or feel too glamorous for grocery shopping.

You should live in NYC if… You’re a dude and you want to find a wife with really low expectations.

You should live in NYC if… You’re a woman with low self-esteem and getting hit on by strangers every morning helps with that.

You should live in NYC if… You like crying in public.

You should live in NYC if… You still like to pretend Europe is relevant.

You should live in NYC if… Even your sundresses are black.

Securities Law Practice is a Racket

Posted in Uncategorized by a1icey on November 26, 2012

American securities law is formidable. In order to access capital markets, you must comply with securities law. In order to comply with securities law, you must be a law abiding corporation, which must be certified by lawyers and accountants. Those lawyers and accountants must do excessive due diligence in order to certify you for the purposes of the securities laws. If you do not have proper certification, the SEC might not catch it but any investor can sue under the private causes of action created by securities laws.

As a result, we have an extremely high number of technically law abiding business organizations in the US. I say technically, because you only have to be law abiding in literal senses that would be visible in due diligence. Hence Enron, who was able to use tax shelters (generating fake losses) and creative accounting (generating fake profits) which are both technically compliant actions. Enron was publicly traded and had full access to the capital markets.

Investors rely on boards of directors who rely on management who rely on investment banks who rely on law firms to actually do due diligence, to do all their jobs. This immense structure of oversight eventually falls on some overworked junior associate who doesn’t give a damn.

But all you need to gain access to those capital markets is a law firm and accounting firm rubber stamp. To provide that rubber stamp all Vinson and Elkins had to do to evade liability was spend a lot of time. The fact that they conducted an investigation, even though it was inept, was enough. Time means billable hours, but the quality of the work is sort of irrelevant (we really don’t want anyone preventing a client from accessing the capital markets and paying our fee).

But so long as you have hired from the top law firms, your business is in the clear. As long as the SEC knows you paid for the best, they probably will be easy on you – both before and after you implode. So the magical alchemy that makes up an effective securities practice: charging as much money as possible for the most inexperienced people to do total busywork.

Thankfully this also the source of the unimpeachable $160,000 entry level salary at such firms. If they decrease it, the firms are going to fall out of these upper ranks that can rubber stamp SEC filings. But that also means they can’t afford enough new associates to cover the same work.

This may sound familiar to law students because it is a continuation of the story we’ve known our whole academic careers: get a top LSAT score and schools will accept you to maintain their US News rank (yes, 0L friends – your GPA is irrelevant). Then, leave a top school and a firm will pay you $160,000 to maintain their AmLaw rank. No one really cares what happens after that because they are supplied with endless work by the SEC just to give access to capital markets.

And you thought securities law practice is the most prestigious! Lol!

Jim Chanos knows what I am talking about: http://dealbreaker.com/2012/11/autonomys-bankers-were-a-little-too-good-at-their-jobs/

Poll

Posted in Uncategorized by a1icey on November 11, 2012

Edit: The poll has been up for a few weeks. It’s interesting to see the results. I think it is hard for people to know what tax problems they have. For the record, the most useful classes are: Transfer Pricing, Taxation of Affiliated Corporations, International III, Multistate Sales, and M&A. Three of those got zero votes!

Real talk: In your 20s, think 20-30 years ahead.

Posted in Uncategorized by a1icey on November 9, 2012

One of the worst things that can happen to a human being is to lack whatever formal badges are necessary in order to fully realize their potential.

I basically mean degrees. You only have one opportunity to do this. If you miss the boat, you can end up in your 40s and 50s completely unfulfilled by whatever employment you landed up in, underutilized and underemployed. I see it over and over. It is probably the most serious psychological harm that can be incurred at that age. I know in your twenties there seem to be much worse things (like not having an identity, not being accepted, not feeling loved). But those things fade, the angst of your 20s fades and if you spent your 20s obsessing over that instead of collecting the necessary degrees and driving hard in the direction of a career, you will find yourself spinning wheels when you hit middle-age.

This happens so often because the more complex and intellectually curious people are more likely to struggle in their 20s with angst, and not feel like they belong in school, and not feel like they belong as a part of the establishment.

I am so thankful that I have had the life experiences that showed me the necessity of this, and when I was 23 I was finally treated for depression, I immediately started to work on getting my formal badges. Fortunately I come from a privileged background so I hadn’t gotten too far behind. I may not have great degrees. But I have at the very least foreclosed the possibility of drifting through employment opportunities and landing up in my 40s either not in a management role, or with one that does not provide any intellectual stimulation (to me).

One of the real life examples of people who are going to get skewered by this are those pursuing “art” careers. Poetry, fiction, photography. I know one girl who is from a very privileged family, so she does not need to work. But I know her to be clever and driven. She’s taking photos now, it gives her quick professional fulfillment. But in 20 years I guarantee that if I check back in on her via Google, she will be chaotically under-stimulated.

I thought I was going to land up as a freelance journalist because I felt like, on account of my angst, there was nothing else I was capable of.

When you’re helpless on the national level, consider making a difference on the local level.

Posted in Uncategorized by a1icey on November 1, 2012

People don’t know anything about their local candidates. Local government has a far greater impact on their daily lives (if not their daily news programming) and should be MORE important than the presidential elections. However, since every block in the city is part of six different political districts, there’s no easy way to learn about candidates and no one to discuss your candidates with. So I’m going to try a new method:

HOW TO LOOK UP YOUR LOCAL CANDIDATES

First, you have to find out your districts. On the left hand side of the board of elections website there is a form for your address (http://www.vote.nyc.ny.us/html/voters/guide.shtml or http://whosontheballot.org/). Once you type in your address you will get a list of districts, and a sample ballot. You can Google each of the districts to find out who is currently there, what the scope of the district is, and whether it has been recently redrawn. Except the civil court district, which has no website or further information online.  My results:

Political Districts

here’s what my ballot will look like: http://www.vote.nyc.ny.us/pdf/sample_ballots/G/MN/2012G1V1_Style_275.pdf

COMMENTARY AND BACKGROUND OF LISTED CANDIDATES

President and Vice President of the United States

  • No comment.

United States Senators

  • Kirsten Gillibrand – Former lawyer who attended a rural all girls boarding school, she is not a career politician but it’s in her family background. Close ties with the Clintons and handpicked to replace Hillary. Has made some progress with transparency but not near Amash levels. Moderate with a utilitarian approach to political theory – but has an aggressive public health position. Deserves a few more years before any harsh criticism, especially since she is not a member of the engrained establishment. Though the names are often misleading, here is a chart of her votes: http://votesmart.org/candidate/key-votes/65147/#.UJPsEIWYsco
  • Wendy Long – Lawyer, with a career that seems eerily similar to Gillibrand. She’s a white-pearls Republican and unlike Gillibrand has no female role models in politics. Seems deeply against stimulus spending (refuting Gillibrand’s description of her record) and is against green energy spending. Argues that Gillibrand does not think independently even though she is viewed as anti-establishment by many.  Claims she will return to principle every time in making votes but says very little, in the end, about how she plans to vote. http://www.wendylongfornewyork.com/why_i_m_running
  • Colia Clark – The green candidate, who also ran in 2010. Described as a civil rights activist, and specifically references key problems she wants to address: our criminal justice system, wars overseas, and specific education projects. However, she advocates the cancellation of student loan debt, a deeply irrational point of view that creates a hole in her platform. She understands that in order to enact a public healthcare system, we will need to recognize/enact a right to healthcare expressly. She supports open primaries. If you can agree with a significant portion of her views, a vote for her is much more likely to influence members of major parties in office. http://www.coliaclark.org/?page_id=92
  • Chris Edes – The NYCLU candidate, a notoriously anti-libertarian branch of the ACLU. Like Clark, he lists extremely specific positions and issues as his platform. He’s against abuse of war powers, wants transparency from the government, and is in favor of privacy for individuals. He views current policies as a form of mass intimidation. He is against controlling the internet and is the only candidate who has a position on this issue, and by extension appears to want to limit the reach of intellectual property rights. Like Clark, it appears that a vote for Edes would be a good way to convince entrenched members of major parties that we take these issues seriously. http://www.vote-for-chris.net/issues/
  • John Mangelli – Mangelli is a pro-law enforcement candidate with some libertarian characteristics.  Specifically, he will be transparent about his votes and espouses that he will read the bills before he votes on them (for more information on why this is an issue, learn about the Read the Bills Act). He’s got a lot of opinions but they form a less coherent platform than Clark’s or Edes’ (“No more borrowing on the backs of taxpayers…. We need to stop foreclosure.”) http://johnmangelliforsenate.com/Platform.html

Members of the House of Representatives

  • Carolyn B. Maloney – A career politician who is not originally from New york, she has held positions in many lower tiers of government, unlike Gillibrand or Long. She has about zero respect for big business and is happy to regulate from an entirely consumer-centric perspective. She seems to have lost touch with her base, voting in favor of farm subsidies which couldn’t be more in conflict with the interests of her urban electorate. She’s well respected for conservation efforts, which do nothing for her voters. She dedicated a lot of energy to giving Sandra Fluke an audience. She is the incumbent on this list that truly deserves a second thought. See her voting record here: http://votesmart.org/candidate/key-votes/26978/carolyn-maloney#.UJP1ooWYsco
  • Christopher R. Wight – Wight is neither a lawyer nor a career politician, and has a background working for big finance. He is young and has only been in New York for 15 years. Wight has a detailed, sophisticated platform that hits all the moderate high points on healthcare and economic issues. Deceptively referred to as a Republican, perhaps his only “conservative” position is to be in favor of starting wars in the middle east. He has a better grasp on technical issues of finance than most candidates for public office, but his virulent warmongering is probably going to be a dealbreaker for most. http://wight2012.com/solutions/
  • Consider writing in a candidate for this position.

State Senators

  • Liz Krueger – Krueger hits a lot of liberal high points with her platform and position on issues. However, she claims to be ready to get her hands dirty reforming our bureaucratic nightmare of a state government. She is the only candidate on the ballot that has founded a successful business (albeit a non-profit business). She’s not so partisan that she can’t see the benefits of movements like charter schools, public audits of the MTA, and returning control over housing regulations to New York City. In short, she portrays herself as a pragmatist with strong liberal ideals who appears to be working hard. However she seems to spend an awful lot of time getting embroiled in petty issues. Here’s her position on tax policy: http://nypress.com/albany-tax-deal-a-start-but-far-from-done/ and this is her votiing history: http://votesmart.org/candidate/key-votes/55235/liz-krueger#.UJP9noWYsco
  • David Paul Garland – It’s hard to tell what Garland’s platform is and how he is different from Liz Krueger, partly because local candidates show their worth through their actions much more than federal candidates. He does seem to be concerned with the level of regulation in the city but does not have a coherent plan to reduce regulations and their harmful effect on business. Maybe he’s more able to lift his head out of the muck of petty landlord-tenant feuds, but then again, anyone who lives on the East side in Manhattan knows that the miserable state of housing is a significant issue for them, and a bigger part of their budget than the inflated prices of local shops. http://garland2012.com/issues/

State Assembly

  • Dan Quart – He is brand new, and should be scrutinized because he was chosen in a special election last year. His commitment to air quality is an important issue for our neighborhood, which famously has the worst air quality in the city. He seems to be a part of the political establishment, and has been trying to get elected for a while. I am concerned that he doesn’t have a position on some of the “bleeding stump” library cutbacks. And what’s with all the union endorsement? Here is his very short voting record: http://votesmart.org/candidate/key-votes/135257/dan-quart#.UJQCEoWYsco
  • David B. Casavis – Not a real candidate… his website is defunct and his only personal profile online goes on about how he wants to eliminate borough presidents. He’s a college professor.
  • Consider writing in a candidate for this position.

Surrogate Judges, State Supreme Court Judges, Civil Court Judges

  • Uncontested.

Guest Post: Prioritizing the Issues that Matter to the Millennial Generation

Posted in Uncategorized by antidirigiste on May 14, 2012

Last week, downtrodden college graduates from parent’s basements around the nation seized upon a rare occasion to celebrate. This was bigger than Occupy Wall Street or the Ron Paul Revolution – of course I’m talking about President Obama’s evolution.

According to my Facebook news feed, a good sample of recent college graduates, the most important issue facing our republic is gay marriage and whether or not the President publicly expresses his honest or politically expedient opinion on the matter.

President Obama wore his official position on civil unions about as well as Mike Dukakis wore his tank helmet. Does anyone really believe that the President hadn’t supported gay marriage in private from the start? Do those believers also think that the President’s miraculous epiphany coincidentally came to him a day before a $15 million Hollywood fundraiser?

President Obama only publicly stated what everyone else already knew about him without substantively changing any policies. It’s political gimmickry, a total sideshow to more important problems, and frankly an insult to the intelligence of his supporters and the general electorate.

As a1icey observed:

“[the President] said North Carolina should be allowed to ban gay marriage and showed no inclination of fixing the effects of DOMA on the internal revenue code, federally regulated benefits, HIPAA and family and medical leave, among other federal regulations he controls…”

In short, the President has backed his words with zero actions.

The sycophants in the media and the elite apply to Mr. Obama a type of pro forma Enron-styled accounting for honors and accolades. Therefore it is hardly surprising to see that Newsweek has already beatified the President and titled him “the First Gay President.” So confident were they in their proclamation that they even dispensed with the customary equivocating question mark.

A politician’s pandering and the media’s response should not perplex anyone. What is confusing is the effusive reaction of young people. It is fascinating that people care very little about the rights they exercise the most frequently, but care very deeply about the rights they will never exercise.

How can a demographic group with 50% under/un-employment feel so strongly about gay marriage, which like abortion, global warming, school prayer, and national language is a luxury issue? Surely less than 50% of our generation is planning to gay marry any time soon. But it’s a certainty that 100% of our generation daily exercises the rights to property, trade, and freedom from coercion. Yet the Administration’s war on these fundamental rights has hurt most the very young people who seemingly care little about their protection. The youth response to Mr. Obama’s views on gay marriage is akin to North Korean peasants celebrating their leader’s decision to legalize private jet travel.

You need not have any opinion on gay marriage or its legal nuances to find our generation’s (or the religious right’s) attitudes troubling. Whether or not this country has gay marriage or not doesn’t really concern me. What is worrying is the total lack of prioritization of issues in the national political debate. Agitators on both the left and right encourage politicians like Mr. Obama and Mr. Santorum to deflect important dialogues in favor of resurrecting hot-button social issues in the midst of an economic depression.

One of my friends suggested that our generation reacted so strongly to the President’s empty gesture on gay rights because it is the last major issue that divides us from our parents’ generation. However, this is hardly the major issue that puts us at odds with our parents.

Young people overwhelmingly support gay marriage.

Our generation should be more upset that our parents’ and grandparents’ generations designed a lavish welfare system for themselves at our expense. To add insult to injury, they couldn’t be bothered to rear enough of us to pay for all of it. These inter-generational fissures are most visible in places like Southern Europe in which our generation faces 50% unemployment (not under-,un-) while their parents demand that they be able to retire in their 50s with “free” healthcare and fat pensions.

Government transfers as a percentage of GDP have tripled since 1960.

My fear is not only that Americans face a fate similar to that of Europeans, but that these are not just economic issues. A large number disaffected young men, prolonged recession, large debts, and cross border imbalances increase the likelihood of global conflict and even a world war. That to me is a lot more important than forcing North Carolina to legalize gay marriage and why it is disturbing to see that many of young people care more about gay marriage than the issues that keep them unemployed.

Young people favor bigger government 60/40.

Young people favor expanding government intervention in health care.

Little differentiation in opinion between the young and old on entitlements for the elderly.

I had a rant against the Federalist Papers, and then this article ran in the WSJ

Posted in Uncategorized by a1icey on May 8, 2012

There have been two anti-millenial pieces posted in the last two days in the Wall Street Journal: “Why Colleges Don’t Teach the Federalist Papers” and “To the Class of 2012.” They deserve to be discussed together, but I have very separate issues with them.

Regarding the Federalist Papers, I have had the misfortune of reading them in recent months. Why we revere propaganda pieces in this day and age is beyond me. The only possible reason for reading the Federalist Papers is to laugh riotously at all the “promises” the nationalists made to those devoted to freedom and independence. My favorite is Number 46. I can save you the time and energy of reading the whole thing as Number 46 shows you all you need to know. The topic, according to modern compilations, is “The Influence of the State and Federal Governments Compared.” I chose this one because the particular logical fallacies involved was so completely disproven by the end of the 20th century, and they were disproven party by the operation of the modern tax system.

And not even our greatest legal minds understand what these documents contain. Recently Justice Scalia made headlines by mocking the Healthcare Act, saying it was so long it could hardly be considered a law at all. Scalia might be pained to be reminded of Hamilton’s words in the 78th Federalist Paper, “It has been frequently remarked with great propriety that a voluminous code of laws is one of the inconveniences necessarily connected with the advantages of a free government.” Or, in modern English, free governments need a lot of laws. Original intent clearly shows that our notion of freedom anticipates long pieces of legislation, and the accompanying interpretative case law and regulations. Sorry Scalia.

The truth is no one can read these documents. I would have said anymore, but they were not really designed to be read for their content to begin with. In fact, their goal was an absence of content. The goal, as with most propaganda, was to repeat themselves over and over with blatantly false statements and convictions and preposterous predictions of the future. They repeated themselves until people were embarrassed into thinking they must be true. We should be ashamed of their role in our history. These documents do not have any bearing on truth, either then or now. Some may specialize in the propaganda used to create Phase One of the American Republic. But it will not serve to create a healthier conservatism in our young people to continue to expose them to suspicious statements of opinion.

And the second article. The second article made me all the more furious about these issues. The author criticizes mid-20th century knowledge of recent college graduates. I am sick and tired of every conversation and every opinion piece beginning in this manner. Face it: I am 25 and I have no idea who was president in 1956 (disregard that I went to school in England as a child). We live in a knowledge economy that encourages specialization. I do not need that information, therefore I have efficiently left it out of my brain. If I ever need it, I will go to Wikipedia and learn it. Depth is ranked over breadth these days. And that is because the depth is so much deeper than it ever was before.  If you are really judging candidates by this criteria, you are not an efficient consumer of intellectual labor.

I am a certain kind of conservative, and because we are so rare, I spend a lot of time among a related group of conservatives who are obsessed with our lack of civic knowledge as a generation. The author of the article goes on to say we are competing globally. What good does it do to my global knowledge to hold extraneous facts about American history that are little more than trivia? It’s just not relevant to the kind of questions I address and raise on a daily basis. These paternal rants are really getting out of control and need to stop. These authors are right to require such historical rigor of their children but not of the generation as a whole. In fact, my parents didn’t emphasize learning mid-20th century American history. We learned about economics at the dinner table, and how market forces work. That is our niche.

I’m sorry that Mr. Berkowitz and Mr. Stephens feel so woefully out of touch. But they should keep that between themselves and their psychiatrists.

je lui demandai où ils allaient ainsi. Il me répondit qu’il n’en savait rien, ni lui, ni les autres

Posted in Uncategorized by a1icey on April 29, 2012

Sous un grand ciel gris, dans une grande plaine poudreuse, sans chemins, sans gazon, sans un chardon, sans une ortie, je rencontrai plusieurs hommes qui marchaient courbés.

Chacun d’eux portait sur son dos une énorme Chimère, aussi lourde qu’un sac de farine ou de charbon, ou le fourniment d’un fantassin romain.

Mais la monstrueuse bête n’était pas un poids inerte ; au contraire, elle enveloppait et opprimait l’homme de ses muscles élastiques et puissants ; elle s’agrafait avec ses deux vastes griffes à la poitrine de sa monture ; et sa tête fabuleuse surmontait le front de l’homme, comme un de ces casques horribles par lesquels les anciens guerriers espéraient ajouter à la terreur de l’ennemi.

Je questionnai l’un de ces hommes, et je lui demandai où ils allaient ainsi. Il me répondit qu’il n’en savait rien, ni lui, ni les autres ; mais qu’évidemment ils allaient quelque part, puisqu’ils étaient poussés par un invincible besoin de marcher.

Chose curieuse à noter : aucun de ces voyageurs n’avait l’air irrité contre la bête féroce suspendue à son cou et collée à son dos ; on eût dit qu’il la considérait comme faisant partie de lui-même. Tous ces visages fatigués et sérieux ne témoignaient d’aucun désespoir ; sous la coupole spleenétique du ciel, les pieds plongés dans la poussière d’un sol aussi désolé que ce ciel, ils cheminaient avec la physionomie résignée de ceux qui sont condamnés à espérer toujours.

Et le cortége passa à côté de moi et s’enfonça dans l’atmosphère de l’horizon, à l’endroit où la surface arrondie de la planète se dérobe à la curiosité du regard humain.

Et pendant quelques instants je m’obstinai à vouloir comprendre ce mystère ; mais bientôt l’irrésistible Indifférence s’abattit sur moi, et j’en fus plus lourdement accablé qu’ils ne l’étaient eux-mêmes par leurs écrasantes Chimères.

 

The Only Guide You Need to Being A Tourist in NYC

Posted in Uncategorized by a1icey on April 29, 2012

(i.e., follow these rules and we promise we won’t kill you and barbecue your remains).

Walking on the sidewalks:

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  • Do not stop suddenly or stand still in the middle of the sidewalk, particularly at the corner. Move right up against a building or all the way to the edge of the curb if you need to stop for any reason. If you need to send a text message, stop!
  • Generally, car rules apply. That means slow walkers stay to the right. In general, if there is heavy foot traffic, you switch to two lanes going into opposite directions, just like a regular two-way road. Never make sudden movements without looking behind you. This includes slowing down or stopping.
  • It is generally unacceptable to walk side by side in a group of more than two – even if it isn’t crowded, you will take up the entire sidewalk. Once it becomes crowded, you should walk in single file, even if you are only two people. If you can’t handle this (because you have too many children, for example) don’t come to New York.
  • Remember that a lot of New Yorkers commute by foot. We have to put up with you every day and often have to walk and take the subway through many crowded areas just to get to work. Be considerate, think of the traffic jams you sit in for you commute. You are the bad driver in our traffic jam.
  • These rules primarily apply near the World Trade Center, in Soho, near Union Square, and in all of Midtown.

Hailing a Cab:

  • Do not do this standing in front of a bus stop. That’s for people who need to hail buses. The cabs get easily confused if you get into this habit.
  • If you try to hail a cab and a black car stops, this is not a limo. You do not pay extra for these cabs. You must negotiate the price before getting into the cab. Never pay more than what you would pay a yellow cab for the same route. They are illegal and do not pay for medallions, so you should be able to pay less. If they change the price during the route, ignore it and pay what you agreed to. They cannot force you to pay because they are illegal.

Subways:

  • Always stand all the way back to let people get off the trains if you are on the platform. Do not simply provide a small funnel-shaped space for people to get off as this slows down the process. Make sure every single person has exited before you begin to get on. If others violate this rule, do not panic and rush to violate it also. You will be able to get on, it is rare that there is not space for everyone.
  • People exiting the subway car have absolute priority over you. There is always another train for you (particularly as this is usually during rush hour) but they may have to pay again if they miss their stop and have to turn around.
  • Move all the way into the car. Unless you are under 5 feet tall, you can reach the bar that runs parallel to the ceiling. If you cannot move all the way into the car, get out of the subway car when people need to exit, or stand aside as best as you can.
  • If someone gets out of the subway car to let others exit, that person must be permitted to get back on first. If you get off temporarily and feel nervous that others will violate this rule, stand to the side and block others with your body and hold onto the side of the car door.
  • Take off backpacks and large bags and put them on the floor, or hold them down by your legs.
  • Never lean on a subway pole or hook your arm around it. A pole that could otherwise permit five people to hold on then becomes usable by one person. This is extremely unacceptable during rush hour.
  • Always remember that many of the people around you are commuting to and from difficult jobs with long hours. They have to put up with you every day, all year round. It is considerate not to yell or speak loudly, and to take the time to observe who is commuting and give them priority for seats.

Obama doesn’t understand Corporate Tax

Posted in Uncategorized by a1icey on February 20, 2012

Obama had my vote in November but after he released his budget, I am less sure. His budget maintains capital gain rates but increases dividend rates back up to ordinary income levels. He could have increased both, but kept them the same. This tax policy decision was beyond retarded – it exhibits cowardice, a very short memory, and a lack of conceptual sophistication on his administration’s part.

About ten years ago, they stopped taxing dividends at the rate of ordinary income and started taxing them like capital gain. For 80 years, trying to avoid dividend tax was the primary drive of corporate financing decisions, business form choices, and controlled many areas of tax and accounting. But CAPITAL GAIN AND DIVIDENDS ARE THE SAME. We made a mistake when we first created the modern corporation. We made a massive mistake in distinguishing between the two for tax purposes. We made a really good choice when we removed that distinction ten years ago. Tax law should never control business decisions.

Interestingly this same shift in perception had already occurred in the area of trusts and estate planning. A notoriously archaic area fixed this problem before our tax system did.

To explain why dividends need to be treated the same as capital gain, it’s best for me to explain the logic of the unitrust.

First: dividends are payments out of the current and accumulated profits of a corporation, based on the number of shares you hold. Capital gain is the increase in value of the corporation, based on the number of shares of the corporation you hold. A corporation can pay out profits as dividends, or they can hold on to them increasing the value of the corporation. Some rules require the corporation to pay dividends, but generally shareholders can dictate whether or not this happens. Really their net benefit is the same either way, aside from the fact that for capital gain some shares must be sold.

Trusts are written to last fifty years. Various estate tax rules and planning needs lead to standard ways to structure a trust. Typically, the income is paid to one person and the principal is paid out at the end of the life of the trust. Income was defined by state governments according to how it was perceived at the time these trusts became popular: rental income on property, interest on bonds (loans), and dividends paid on shares. Principal was the property, bond, or share held by the trust. But money is invested differently now and for mostly tax reasons, dividends are rarely paid. Investments make money through capital gain, purchasing low and selling high.

The unitrust is simply a redefinition of income. Any existing trust, written without anticipating the changes in investment behavior, could only pay out whatever paltry sum came through as dividends or bond interest. People were supposed to live off of this money and couldn’t-the trust sat around basically useless until it ended. Income under unitrust statutes is simplified to 4% of what the trust owns – an assumed rate of growth for a conservative portfolio over the course of several decades. Thus the trustee is authorized to sell some shares to pay income to the person benefiting from the trust.

Unitrusts essentially accept that capital gain and dividends are the same, they are the result of choosing to invest in strong companies. This problem is made worse for high tech investors. Tech companies have such massive R&D costs that they generally have to reinvest all profits into R&D (until they reach the level of stability of Microsoft). Dividends are not just uncommon because of decades of punitive tax. They’re going out of style.

However, dividends were designed to provide a useful purpose. Arguably, leaving stockpiles of cash in the hands of a corporation is not an effective distribution of economic power. Arguably, shares held for dividend payments are held longer and the shareholder will take a more active interest in the company. Arguably, encouraging dividend payouts may help to combat short-termism which is harmful to our culture and economy.

Increasing dividend tax without increasing capital gain is just going to punish less-informed or conservative investors (retired people, small business owners) over people making more risky investments. However we all know Goldman Sachs was the top contributor to Obama’s 2008 campaign. Since in a lot of ways, dividend or capital gain is a choice that a company can make in distributing profits, maintaining capital gain rates just ensures companies advised by Goldman can help shareholders avoid the higher tax, while others less fortunate or well-advised cannot.

 

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