6 ms·
That reasoning is correct if the investment is risk-free. But what if you are investing in stocks or corporate bonds or a broadway play or a promising health t
by SaintGhurka 8y ago
That reasoning is correct if the investment is risk-free.
But what if you are investing in stocks or corporate bonds or a broadway play or a promising health technology company like Theranos? There is a non-trivial chance that your reward will be less than 0 - and it could even be a complete wipeout. The low capital gains rate is meant to encourage people to put money at risk rather than sit on it.
- perfunctory 8y agoWe are talking about risk-adjusted return. That's right. So as I long as expected risk-adjusted return is positive, a rational investor is supposed to invest regardless of the tax rate. I would think.
- socketnaut 8y agoIt's not that simple because taxes modify gains but not losses. Imagine we bet $1 on a coin toss. The expected value for either of us is $0. Now imagine the winner is required to pay 10% tax on his proceeds. The expected value becomes (-$1.00 + $.90)/2 = -$0.05.
- brorfred 8y agoBut aren't business losses tax deductible?
- perfunctory 8y agoVery good example. Let's look at it. Note that the new expected value will be negative regardless of the tax rate. No matter how low it is. Even if the tax is 0%, the expected value is still, as you pointed out, $0. So a rational investor would not bet on this coin toss regardless. Also, as brorfred pointed out, capital losses are deductible, afaik.