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I think we're grokking the same here, but one disconnect: You're presupposing that the wealthy want _some_ return on their wealth, and I think that in many cas

I think we're grokking the same here, but one disconnect: You're presupposing that the wealthy want _some_ return on their wealth, and I think that in many cases, that simply isn't true. Take a look at all of the money stranded offshore that corporate America is waiting on Uncle Sam to allow into the US without taxing- that money is probably not earning much if anything; think of the tinpot dictator or the kleptocrat who squirreled away a nest egg in a Swiss or Cayman bank account, and think of the smuggling kingpin south of the border with a swimming pool full of cash. They all share the following in common- highly liquid and inefficiently invested wealth. They have little hope of increasing the value of this wealth by investing it or consuming with it because to do so requires a big hit to its dollar value (taxation or risk of seizure). The best return (for them) is to let it slowly (in our case very slowly) inflate until a rainy day comes. The only practical and sure-fire way to bring that money back to productive use is to redistribute it via inflation.

AnthonyMouse 14y ago
Why do you expect that capital held offshore for tax reasons is invested inefficiently? These companies are not (in general) in violation of the law, they're just exploiting transfer pricing[1] to accumulate capital in a foreign subsidiary in a low tax jurisdiction. That subsidiary can for the most part still invest it in whatever, including U.S. stocks and other securities. They can in many cases even loan it back to their domestic sister company so that it can use the money to grow its business (without paying tax on it, because it's a loan instead of income), which often provides even more tax benefits because the interest paid on the loan is often tax deductible in the higher tax jurisdiction. There are some restrictions, e.g. the U.S. company may not be able to issue a dividend or do a stock buyback unless it reports at least some taxable profits within the U.S., but as long as the foreign subsidiary's capital account keeps growing, it causes the parent company's stock price to appreciate accordingly and that provides investors with their ROI. There are ways that this can be less efficient. In particular, the parent company's investors may themselves have made more efficient investment choices than the company's executives investing the money on their behalf if their returns were provided in the form of dividends or stock buyback instead of stock price appreciation as the existing tax code strongly encourages. And this is actually very likely to be the case in practice, because e.g. Apple executives are now sitting on a huge mountain of cash that it likely will never be more cost effective to issue all of as dividends under the current tax code than continue to invest in situ, which means that computer company executives are now permanently in charge of picking stocks for however many hundred billion dollars worth of the world economy. That doesn't guarantee that those execs will make worse investment decisions (or will choose poorly in hiring someone to do it), but it seems at least plausible that someone hired primarily for their ability to sell iPhones or manage a global supply chain will be a worse hedge fund manager than an actual hedge fund manager. But this is just the capital gains tax debate all over again: As long as we tax even reinvested dividends immediately but allow unrealized stock appreciation to be tax deferred indefinitely we're going to spur that sort of crazy economic machinations. [1] http://en.wikipedia.org/wiki/Transfer_pricing http://en.wikipedia.org/wiki/Transfer_pricing

AnthonyMouse 14y ago

Why do you expect that capital held offshore for tax reasons is invested inefficiently? These companies are not (in general) in violation of the law, they're just exploiting transfer pricing[1] to accumulate capital in a foreign subsidiary in a low tax jurisdiction. That subsidiary can for the most part still invest it in whatever, including U.S. stocks and other securities. They can in many cases even loan it back to their domestic sister company so that it can use the money to grow its business (without paying tax on it, because it's a loan instead of income), which often provides even more tax benefits because the interest paid on the loan is often tax deductible in the higher tax jurisdiction. There are some restrictions, e.g. the U.S. company may not be able to issue a dividend or do a stock buyback unless it reports at least some taxable profits within the U.S., but as long as the foreign subsidiary's capital account keeps growing, it causes the parent company's stock price to appreciate accordingly and that provides investors with their ROI. There are ways that this can be less efficient. In particular, the parent company's investors may themselves have made more efficient investment choices than the company's executives investing the money on their behalf if their returns were provided in the form of dividends or stock buyback instead of stock price appreciation as the existing tax code strongly encourages. And this is actually very likely to be the case in practice, because e.g. Apple executives are now sitting on a huge mountain of cash that it likely will never be more cost effective to issue all of as dividends under the current tax code than continue to invest in situ, which means that computer company executives are now permanently in charge of picking stocks for however many hundred billion dollars worth of the world economy. That doesn't guarantee that those execs will make worse investment decisions (or will choose poorly in hiring someone to do it), but it seems at least plausible that someone hired primarily for their ability to sell iPhones or manage a global supply chain will be a worse hedge fund manager than an actual hedge fund manager. But this is just the capital gains tax debate all over again: As long as we tax even reinvested dividends immediately but allow unrealized stock appreciation to be tax deferred indefinitely we're going to spur that sort of crazy economic machinations. [1] http://en.wikipedia.org/wiki/Transfer_pricing http://en.wikipedia.org/wiki/Transfer_pricing