for nye

[KrazyHorse]

Thank you, I hadn't realized that.

Stop being sarcastic. It's important to retain your intellectual honesty, even when simplifying things for your lessers.

[Al B. Sure!]

KH:

You get what I'm trying to say right? But it seems right to me. What is wrong in my thinking? Under a simplistic situation for ease of understanding (with the probability of a gain being equal to the probability of the gain's inverse loss), wouldn't it be wrong to simply say that ETR > NTR under all circumstances?

It seems to me that for a wide range of values, the positives and negatives cancel each other out.

For example, if I have an investment (this is just for simplicity sakes) that has a 50% chance of increasing in value by 10% and an 50% chance of decreasing in value by 10% and let's say the tax rates, the amount of the investment, etc. are all set up such that (note, the 10% loss' dollar value will be less than the $3000 cap),

NTR: let's say 20%
50% prob of losing 10%- ETR= 15%
50% prob of gaining 10%- ETR= 25%

I'm just making up numbers to keep it simple.

I would think that therefore, because the probability of either outcome is equal, that the differences in ETR cancel each other out so that the expected tax rate is 20% (the tax in aggregate [whether across buyers and sellers or across multiple investments in a portfolio] is 20%).

Now, of course, that means the expected value of this investment is 0 but it's just for simplicity sake to maybe see where I'm making a logic error.

Now, if it's 25% and 75% probabilities, then for this better investment with a positive expected value, the ETR > NTR, but the 10% loss on the downside is reduced by the capital loss deduction so the ETR while still greater than the NTR, is less great than under no capital gains tax. There is a benefit to having a capital gains tax with regards to ETR.

Get what I'm trying to say? What is wrong in my thinking?

(an aside, if we're talking the economic effect of the tax, maybe I'm wrong, but wouldn't the tax iterated repeatedly through sellers at a profit and sellers at a loss, equal itself out, constrained only by the limit of cap. loss deduction? I'm talking about as a broad effect on the economy.)

[KrazyHorse]

Can't you do that by providing making education spending deductible?

Ah, but now you're subsidizing signaling behaviour....

[Kuciwalker]

Stop being sarcastic. It's important to retain your intellectual honesty, even when simplifying things for your lessers.

I wasn't being sarcastic, though it would have been more accurate to say that "I hadn't thought about it in those terms, though of course I understood the actual distortionary effect of income taxes".

[KrazyHorse]

Okay then. It's a subtler point that there are two frontiers here...that's why I described explicitly the model.

[KrazyHorse]

All right, philly, I'll stop being mean and hold your hand here. let me actually read one of your posts all the way through instead of scanning it...

[KrazyHorse]

Now, of course, that means the expected value of this investment is 0 but it's just for simplicity sake to maybe see where I'm making a logic error.

Yes, and why the **** would you have an investment with expected value of 0 (this is a trick question! There is a VERY GOOD REASON to have such an investment....kuci, you answer)?

The government collects no taxes, assuming fully rebated tax on losses and identical rates on winners and losers.

In actuality, investments as a whole have some positive expected rate of return. The government taxes this (this is higher than the risk-free rate of course).

Which is where I got my relationship: under the simplifying assumptions I gave, unearned income tax = tax on risk-free rate + tax on risk + government softening the difference between good and bad investment

Your example is just the last two terms in this sum

[Al B. Sure!]

It's like if you interpret the price of the asset as a fee to play the game (i guess like an option). If I pay $1000, and it goes up 10%, my ETR is some value greater than the NTR. But it I pay $1000, and it goes down 10%, because of my tax rebate, while I'm still worse off, my 'fee' to play the game has been reduced.

The gov't in effect subsidizes me to take a risk.

Seems like a positive of the CG tax.

[KrazyHorse]

I lied about reading it all the way through. This seems to be the major stumbling point though.

[Al B. Sure!]

this is a trick question! There is a VERY GOOD REASON to have such an investment

Market return? Or if you're messing around with derivatives and trying to profit off of changes in volatility?

[Kuciwalker]

Yes, and why the **** would you have an investment with expected value of 0 (this is a trick question! There is a VERY GOOD REASON to have such an investment....kuci, you answer)?

It's called cash, and is subject only to inflation risk.

[KrazyHorse]

Market return? Or if you're messing around with derivatives and trying to profit off of changes in volatility?

Could you please reformulate the first answer into a form which I can judge?

[KrazyHorse]

Yes, and why the **** would you have an investment with expected value of 0 (this is a trick question! There is a VERY GOOD REASON to have such an investment....kuci, you answer)?

It's called cash, and is subject only to inflation risk.

There is a risky asset I would LOVE to hold at 0 expected return.

[Al B. Sure!]

Wait so KH, it is subsidizing losers (or softening the difference between gains and losses)?

So that seems like a positive of the CG tax though? My fee to play is reduced, so to speak if I lose. It's like risk mitigation.

[KrazyHorse]

If you understand this question then you understand 1/3 of the underpinnings of modern finance

EDIT: "This question" being the one I posed, not Albert's