Couple tax questions

[Jon Miller]

My understanding of leverage is that it allows someone with assets to take out a loan on those assets of excess worth than those assets. The banks use their deposits as assets to take out a loan which they then invest. Except I think that they don't have to take out a loan from another bank, that they can loan out against their own assets without involving other parties.

???????????????

I have NO idea what you mean by this. How can they borrow money without another person being involved?

They are borrowing YOUR money and lending it to OTHER PEOPLE!

The idea of leverage is PRECISELY THIS.

Wouldn't that imply at most a 1:2 for assets to liabilities? How do they get up to 1:30 or whatever for assets to liabilities?

JM

[KrazyHorse]

Regarding capital gains/dividend taxes, this is one way to make the federal tax code significantly more progressive. Helps to balance out regressive state and local taxes. The net ends up being roughly a flat rate.

I'm not in favor of progressive taxes as a redistributive mechanism. I'm in favor of flat taxes coupled with a per-capita lump distribution.

[KrazyHorse]

Wouldn't that imply at most a 1:2 for assets to liabilities

??????

No, Say I start a bank with 100$ of my own money.

I take deposits of 10000$

I lend out 9500$ of those 10000$

my leverage is 10000$/(100$+500$) = 16.7

(there are different definitions of leverage etc. but this is a good first estimate)

[KrazyHorse]

I was pretty certain that the bank loans out far more than it has on hand?

Of course. That's because once it lends it, it no longer has it on hand.

Deposits are LIABILITIES. When people make deposits the offsetting ASSETS are the cash they give the bank. The bank uses this cash to purchase other ASSETS. Now they have illiquid assets and liquid liabilities. There can be real problems managing this duration mismatch.

[KrazyHorse]

Jon, I seriously suggest you read up on how banks work. You honestly aren't thinking very clearly about it.

[Ramo]

I'm not in favor of progressive taxes as a redistributive mechanism. I'm in favor of flat taxes coupled with a per-capita lump distribution.

As I was saying, total taxes are basically flat. Progressive federal and regressive state/local.

http://www.ctj.org/pdf/taxday2009.pdf

[KrazyHorse]

The problem is much more severe than that chart demonstrates. The difference in total MARGINAL rates is much bigger than the difference in total AVERAGE (effective) rates.

[Jon Miller]

I Think I might have misunderstood what people referred to as 30:1 or whatever. When I refer to 2:1 I refer to some situation like this:

Person A invests 10$ in bank B with the promise that bank B will return 11$ later (this is 1:1 (Basically) as the bank has 10$ and is promising to return 11$). The bank B then loans the 10$ to person C now with the promise that that person will return 12$ to the bank later.

I would call this a 1:2, the bank is left with 1 asset (the loan for future payment of 12$ to bank B) and two liabilities (they owe 11$ to the person A in the future and owe 10$ to person C now).

If the definition is how you say, then OK. I don't think I misunderstand how banks work in general, more that I don't understand the lingo and have some misconceptions due to that (possibly).

JM

[KrazyHorse]

Person A invests 10$ in bank B with the promise that bank B will return 11$ later (this is 1:1 (Basically) as the bank has 10$ and is promising to return 11$). The bank B then loans the 10$ to person C now with the promise that that person will return 12$ to the bank later.

Unless the bank has shareholder equity or other reserves this is an INFINITE leverage ratio.

[KrazyHorse]

Leverage is basically Liabailities/(Equity+Reserves)

[Jon Miller]

So why can't banks do like what I suggested?

I can take a loan out based on my assets (of a house, for example). This leaves me with both the house and the cash on hand from the loan, with just the liability of having to pay the loan back in the future.

Why can't banks do that to have increased (infinite?) leverage ratios?

I mean, loans or money deposited in them are both assets... like a house?

I understand the issues that can arise from it, but it seems to be an issue with taking out a loan with something else as collateral that you keep on hand in general.

JM

[Jon Miller]

By the way, do you have a response to my post 60?

JM

[KrazyHorse]

Ramo, they're also extremely misleading because they include investment income every year in the denominator.

In reality, the chart I'm interested in would be:

average present value of TOTAL taxes paid per dollar of marginal earned income

So if the marginal savings rate was 10% for a given income level I would add together the average taxes paid on a dollar of earned income plus the average taxes paid on the 10 cents which is saved over the lifetime of that 10 cent investment.

[KrazyHorse]

I don't understand what you're trying to say in post 60, Jon.

Different deposit types yield different amounts. Most of the "yield" in a chequing account is convenience/commercial banking services.

There is no tax charged on this

Some other interest bearing investments (CDs, money markets, coupon bearing bonds) have higher monetary yields, and their interest income is taxed at ordinary income rates. I don't think it should be taxed at all because it introduces a distortion between propensities to spend and to save.

[KrazyHorse]

So why can't banks do like what I suggested?

????

Do what? That's what they do. Borrow money from people. Lend it to others. They keep some reserves to satisfy regulatory and liquidity constraints, which keeps them from an infinite leverage ratio.

Seriously, I've explained this to you three times. And I have work to do. Read up on it in an intro finance or micro book.

I can take a loan out based on my assets (of a house, for example). This leaves me with both the house and the cash on hand from the loan, with just the liability of having to pay the loan back in the future.

Dude, what asset is the bank going to borrow against? The asset they get when they accept liabilities (deposits) is cash. And this cash is offset by the liabilities.

I understand the issues that can arise from it, but it seems to be an issue with taking out a loan with something else as collateral that you keep on hand in general.

Dude, the cash can't be used as collateral because IT ALREADY HAS A CLAIM AGAINST IT (deposits). You can't take out as many mortgages as you want against your house (up to multiples of its original value)!