Unstoked

Observer

9 Perspectives

New  •  Old  •  High  •  Low
Unstoked
Do you support the ongoing impeachment inquiry against President Trump? Curious to hear what the community thinks about what’s happening in Washington.
1mo ago  •  2 comments




Unstoked
Observer
on Taxes
The key to understanding tax policy is in how it drives human behavior. Nobody likes paying taxes. It’s a cumbersome process with volumes of rules and severe penalties for breaking those rules. Not to mention, it’s money out of our pockets going to a government that’s often clueless on how to spend it.

That being said, there’s a lot to like about our current tax policy, as complicated as it is. And it comes down to how it drives certain behaviors in our economy.

Take for example the capital gains tax. It’s broken up into short-term capital gains, which are taxed at our federal tax bracket for gains realized within 12 months, and long-term capital gains, which are taxed at a lower rate for gains realized on longer term investments. The incentive here becomes to hold an investment for a longer period of time in order to pay less taxes. This in turn provides stability to financial markets and reduces volatility on a slew of asset classes. Take away the capital gains tax, and then what happens? The incentive to hold is no longer there, and investors are free to rock the market with short term sales and speculation.

Now let’s consider what happens when we raise the rate on the wealthiest members of society. It sounds great in practice, but we must also consider the resulting change in behavior. As we’ve seen from history, a high tax rate encourages top earners to find other, non-taxable forms of income and create entities that help mitigate their tax liability. Suddenly, we find that only middle-class earners are truly affected by the increased rate.

In conclusion, the nuances of how tax policy affects behavior helps explain why we’re slow and cautious in making significant changes to the system. And understanding how one change impacts other facets of the economy is the key to understanding tax policy itself.
4mo ago  •  2 comments

Unstoked
Observer
on The Economy
When math meets psychology, we get signals that could mean something or could mean nothing. Historically, when the yield curve inverts, a recession is looming. In layman's terms, the yield curve plots how much can be earned by investing in U.S. treasuries.

As an example, you'd expect that if you're investing in a 10-year treasury bond, you'd earn more than investing in a 2-year treasury bond. After all, you're putting your money away for a longer period of time and should be compensated accordingly, right? But when investors are concerned about the economy, a funny thing happens. They start piling money into long-term bonds for safety. As the demand for long-term bonds increases, so does the price, causing the expected return (yield) to come down. And that's exactly what's happening now. For a brief time, we saw that the 10-year treasury yielded less than a 2-year treasury. Here's the scary part: this inversion has accurately predicted every recession of the last 50 years.

But like I said, when math meets psychology something could mean nothing. The U.S. economy is stronger than it's ever been and is showing no signs of slowing down. Human psychology is a difficult thing to predict, and it's hard to say whether this historically accurate indicator still holds water in a market driven by outrageous headlines and nonsensical worries. So don't let the headlines scare you. Even if we do experience a recession, it's all part of the same old business cycle we've experienced over the past several decades. Nothing new under the sun.
5mo ago  •  4 comments




Onesaid - Explore new perspectives
Welcome to the global library of thoughts and perspectives. Together, we'll broaden our understanding of one another and discover new points of view. Join the effort.
Discover something new. Explore a random topic or journey into a random perspective.