Note:  This was originally published over at WordPress during my most recent pouting-fest. The picture above is a detail from a vase from  Exekias CA 540-530 BCE Greek- Archaic Vase of Ajax and Achilles playing dice

Josephus is one of my friends and he still out there, trying to nail down his first billion.  I support him completely in this endeavor and wish him the best.  Mostly is this is because he has put him money where his mouth is and went out, started a company, worked his butt off, and stands to lose if the deal doesn’t go down.  He is in the first stage of clinical trials after stellar performances in animal and toxicology studies, I have my fingers crossed and keep him in my prayers.

He had some fine news about his business recently, and after I had called him to congratulate him, I got to thinking about what it is we call “Investment” here in the good old USA.  Ponzi scheme keeps coming to mind.  But it is a diffuse sort of Ponzi, not run like the good Mr. Madoff ran his, nope it is a Ponzi scheme where the early-adopters cream the benefits and the firm just is there to provide the press releases essential to the pump and dump operation that we call Wall Street.

In this pump and dump scheme, the actual company gets a very limited amount of the money involved.  They get the share price off of the initial IPO to build the firm and to make the ideas happen in the real world.  Once a share has passed the IPO stage, the stock price increases accrue solely to the person(s) who bought the shares in the IPO.  The firm gets nothing.  This is good and fair and the way that it should be.  It is what happens after that is what is wrong.

Now that the share has been sold post IPO, it is a piece of paper that accrues nothing to the firm.  Now I realize that the firm will retain additional shares and sell them at need, so the rise in stock price will provide value to the firm, but really, the money made after the IPO from the passing back and forth of these initial shares is gambling by others.  The current state of the American economy reflects this penchant  for gambling.  Nothing is really built, the wealth of the past is traded back and forth between people trying to make a little money selling to greater and lesser fools.  No productivity is enhanced, no new ideas are built.  Just a big casino where people live and die at the roll of the die.

The management of the firm is playing another game entirely.  The give themselves compensation in shares for the job that they are being paid to do.  The shares that they are given are a time honored way of looting a company that you work for.  The management gets coin that doesn’t show directly in the W2 and they don’t pay taxes at the “Income” rate, they pay taxes at the “capital gains” rate, which is a pretty big savings.

So what say we just get rid of the capital gains tax on this no capital gain capital gain.  Now, I can imagine you all squealing out there….read on.  Lets start looking at capital gains as only applying  on the money that accrues directly to the firm in the case of an IPO or sale of the stock from the firm to the public or any subsequent money made by the firm selling retained shares .  If the money from the sale is from the first iteration of stock sales, that it, the money that allows the firm the capital base to expand it operations, the profit from the sale of these shares should be tax-free.  Once the shares have been sold by the initial purchaser of the shares from the IPO, all proceeds would be taxed at full income tax rates. 

The profits made by any compensation to an individual in terms of shares would be taxed at income taxes.   All stock issued as compensation would be entered as income at the share price of the day of award and taxes paid upon the the value of the shares.  All profits made from the sale of the stock in subsequent years would be subject to income tax.

Now there are going to be a bunch of people who will give any number of good reasons why this shouldn’t be done.  One of the big ones is that the share prices themselves will come crashing down.   I will even allow this as a truth.  The prices of shares, if they are treated as a means for firms to accrue money for the development of capital would be significantly less than the amount of money that they fetch as casino chips.  So the IPO share price would decrease and the amount of money available for capital projects would be decreased.  As a response to this I merely smirk and point to the recent IPO of facebook to make my point.

The other reason people will throw out is that people will be effected by the loss of their savings in the stock market if this plan is put into place.  Well, it is the stock market, people lose their shorts all the time.   The loss would be hellish at first, but it looks like we are heading that way anyway, maybe some folks smarter than me could create a system to cushion an inevitable fall.