Tuesday, November 30, 2010

Extending time to qualify for the long-term capital gains tax to overcome short-termism

For the past few years I've been advocating that the long-term capital gains tax rate of about 15% (to move up if the Bush tax cuts expire) be shifted so that the "long-term" holding requirement is 5 or even 10 years rather than 1 year. The tax rates should be staggered so that very short-term trading is taxed high (more than the income tax, perhaps by 10%), 1 year is taxed less (perhaps 5%+ of the income tax), and so on. Of course, there are other things that need to be addressed - for example, shareholders and institutional investors have to rise up and start voting their shares instead of leaving the managers to essentially own companies with a high turnover in ownership. This is one of the reasons I like extending long-term capital gains tax: it encourages people to stick with a company and act like an owner, and therefore hold management accountable to the long-term stability and profitability of a company.

I haven't heard many people repeating the idea. A while back I heard one guy on Bloomberg say that maybe there should be an 80% tax on short-term trading, and saying that his comrades on the Street would probably kill him for saying that. However, I was very happy to see the Aspen Institute's Overcoming Short-Termism report released in September 2009.

Of course, there are other things that need to be done - executives and employees doing risky deals (e.g., traders on Wall Street) should be rewarded with restricted stock or, if options are necessary, LEAPS (plus clawback arrangements). But I tend to think that these things can happen if more individual investors take long-term stakes in companies. The recent SEC rule which allows investors to access the proxy statement is nice, but really it's not such a big deal with the notice and access rules which allow investors to spend a relatively small amount of money to mount a proxy contest. Steve Nieman and Richard Foley have run proxy contests against Alaska Airlines in the past few years with only a few hundred dollars, and his votepal website offers some guidance on how to do it. He hasn't won, but that's probably more because he runs a slate of director composed of himself and his friends and family. Plus he seems to want to turn the company into a cooperative. I've been thinking about running a proxy contest, but generally I don't hold onto companies where there's reason to be highly dissatisfied.

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