Thoughts on a Sunday – 1/22/12

It’s a football Sunday here in San Francisco.

Thought #1 – High Speed Rail
A High Speed Railroad system in California. I cannot believe that we are having to fight for this one here in California. I lived in Baltimore, MD for about one year in the ’99/’00 timeframe. I loved the MetroLiner railroad system they have on the East Coast. My family and I could jump on the train and get to NYC in 2.5 hours. We would never have done so many trips if we had been required to take a plane. I really don’t care what the cost is for the system. It will be expensive, it will cost more than what we are told/want and it is still worth it. The downstream benefits of that system running in California is huge.

Thought #2 – Taxes
The talk of taxes is in the air. The ‘Romney Effect’ is in full view, especially after his discussion about how he probably is closer to 15% for his tax rate. I’ll leave aside the carried interest discussion for a later day. I think a more interesting line of discussion is around 1) Why do we tax capital gains differently than wages/salary?; 2) Why do we tax short term capital gains differently than long term capital gains at the federal level? As an aside, California state taxes are the same for both; and 3) Since when is 12 months considered long term? I remember when long term cap gains was 3 years then it became 2 years and then we got to 12 months.

Follow my logic here: we tax long term capital gains at a lower rate than wages b/c it it promotes an economic ‘good’ i.e. Investment. We wish to promote long term thinking so we discriminate b/t long term and short term gains. Long Term = ‘Good’ and Short Term = ‘Not As Good’. In a completely arbitrary assessment, Congress has decided that 12 months is the demarcating line b/t short term and long term capital rates.

It seems to me that increasing the time required to hold securities before qualifying for long term rates would go a long way in reorienting the discussion around what matters most. Long term capital that creates new businesses is an absolute ‘Good’, but we shouldn’t kid ourselves that 12 months is enough time for that societal good to be realized and warrant a much lower tax rate.