Why are capital gains taxed differently from gambling winnings?

With the notable exception of IPOs and Private Equity purchases, most financial ‘investments’ in the stock market, FOREX market or derivatives market are not truly investing in a company or asset. Second hand transactions (after an IPO or initial offering) are glorified speculation, largely driven not by that asset’s underly performance, but by what other investors will pay for that asset. In this light, there is not much difference between buying a stock on the NYSE and putting money into a slot machine. Why then are most capital gains taxed at the 15% rate, while gambling earnings are taxed at the 25%+ rate?

You can draw rhetoric about the ‘double taxation’ of corporations all you want, but the fact is that open market stock purchases have little to no impact on the performance of a corporation unless they issue new stock, which is a very rare occurrence. All of the benefit of stock price fluctuations goes to stockholders, who only face the capital gains tax. We’ve also seen in my earlier analyses on effective tax rates that capital gains are largely a game for the rich, with up to 80% of the upper cohort’s income arriving through this avenue. It’s not a stretch then to say that the only reason capital gains are taxed lower than gambling winnings is that the rich want it that way, and make their opinion known through campaign donations and lobbying efforts.

SoftShoring – Improving Productivity with Automation

This article covers the second concept that I classify under the banner of SoftShoring, and is a follow-up to my last post about the strategy of mobile work locations as a way to improve the efficiency and productivity of your organization.

Introduction to Automation

By far the best way to improve the efficiency of an organization is simply to do things smarter, and one of the most effective ways to do things smarter is through a good automation strategy. Automation is a broad topic, and can mean a lot of different things depending on who you ask. Some people might think of robots building cars, or an HVAC system that turns itself off at night. For my purposes, I am talking about a very generic interpretation of automation, which is simply to reduce the amount of labor intensive work, mainly through the use of software.

While automation in the IT sector has received the most hype in the marketplace, my focus is on other areas. Across enterprises, across functions, one constant that I see is employees throwing their time away on manual, tedious tasks. Small or large, these activities add up, and can take away a majority of the day if you’re not careful. This could be someone in finance manually creating the same PowerPoint report every month, someone in HR manually looking up 50 email addresses in the people directory, or someone in operations manually combining 50 spreadsheets of data. Why not write a macro or create a script instead?

Automation and Offshoring

Automation should be a part of any offshoring strategy. So often, I see manual, tedious work pushed to offshore locations and left there because hey, it’s cheap, right? It may be inexpensive, but it’s not cheap, not when compared to doing it right. If you were to re-invest some of that savings from moving work offshore into the development of solutions to automate that work, you’re compounding the benefits of labor arbitrage.

One simple idea is to embed a technical, developer type resource within every group of business analysts, with the sole task of observing what they do on a day to day basis, and searching for ways to automate that effort. There are a myriad of ways to tackle this issue, and depending on the organization the benefits can be enormous.

Implementing Automation

Why doesn’t this get done more often? I see two major reasons. The first is ignorance around what technology is capable of doing. That’s good, because ignorance can be cured. The second is a talent void, especially at companies with an older workforce. I rarely encounter other employees that have both the mindset of looking for opportunities to automate what they do, and the technical expertise required to create a solution.

My official role right now is a Project Manager. I’m not a programmer. But I have picked up enough to write simple programs and scripts that save me a lot of time in my day to day activities, giving me the freedom and time to work on the stuff that really matters. I’m going to start posting various automation solutions that I’ve created as real life examples of how to implement this strategy, and to hopefully get you thinking about how you can automate what you do.

SoftShoring – Offshore in your own back yard

You’ve heard of Offshoring, but it’s unlikely that you’ve ever heard of SoftShoring. That’s okay, because I just made that term up. However, if you are responsible for your organization’s strategy or improving efficiency, you should be familiar with the two concepts that SoftShoring describes. They both have tangible, significant impacts for your bottom line, and clear execution paths for implementation. I will cover the first one today, and the second in a subsequent post.

Mobile Work Locations

The first concept is that of mobile or remote work locations for employees – primarily for onshore employees. As a departure from the “office” model where employees commute to a central location to perform their 9-5 job, Softshoring refers to a “soft” as in malleable or flexible work location. That is, letting employees work from their home or remote location of their choosing, with the option to work from a central office when necessary. With the ubiquitousness of cellphones, and low cost of collaborative communications such as conference lines and virtual meeting rooms, a large amount of work becomes location agnostic. Obviously this strategy isn’t feasible for many jobs where proximity is necessary, such as working on an assembly line, but for corporate functions it can easily be implemented for immediate savings.

Implementing this strategy impacts efficiency in two main ways. The first is that it raises productivity. This may sound counter-intuitive, as common sense would cause you to think that if an employee was working from home they would be more prone to ‘shirking’ or doing non-work activities since there is no boss nearby. However, research finds that employees are actually more productive when they work from home or remote locations. This could be due to many factors, such as an increased sense of responsibility or ownership of their work, increased comfort, or reduced distractions. The second way that this strategy improves efficiency is that it lowers the cost of infrastructure. If you allow employees to work remotely, then you can cut back on your office space and related utilities, furnishings, and connectivity. One study finds that these savings could amount to over $20,000 per employee per year.

While this same strategy could be applied to offshore employees in countries such as China or India, the underlying infrastructure largely isn’t there yet, so it’s likely better to have a consolidated work location.

Effective Tax Rate Across Income Cohorts 2007 Update

I re-ran my prior analysis of effective tax rates across AGI (adjusted gross income) cohorts using updated data from 2007. We see the same trend as in 2006 – the extremely rich pay a lower effective tax rate than the not-quite as rich, due to most of their income coming from capital gains which is taxed at a flat 15% rate. This analysis makes a great case for tax reform – both in higher marginal tax rates for cash income on the rich, and for an rate increase or even rate marginalization on capital gains. Since households have a large degree of flexibility for when they realize capital gains (they aren’t taxed until you close the position), a lifetime marginal rate would be a solid approach. An example would be your first $50k of lifetime capital gains being untaxed, then each $50k after that being taxed at an additional 5% until you reach the cap.

While the results are nearly identical, but it did provide the opportunity to build some new data visualizations. The “average total income and effective tax rate” graph was generated using Think-Cell, and the “% of income by type and associated tax rates” graph was generated using Excel 2007.

Data available at the IRS website here, published as Individual Complete Report (Publication 1304), Table 3.5

Effective Tax Rate Across Income Cohorts

Here is a quick analysis of effective tax rates using official IRS tax data from 2006. I segmenting the population into cohorts based on their AGI (Adjusted Gross Income), then split their earnings and tax burden into regular income and capital gains categories.

These graphs clearly show that higher AGI cohorts receive a significantly bigger portion of their income from capital gains, which are generally taxed at a flat marginal rate of 15%, compared to the top marginal rate of 33% on normal income. This reduces their effective tax rate relative to lower AGI cohorts, distorting the tax burden.

Visualizing the US Military Budget

Here are a few graphs that compare the national military spend in the US with other developed countries. I used several distinct data sources to pull this together so the numbers may not be exact, but they will be close. The main take-away from this analysis is that if the US military spend per capita or as a percentage of  our national budget was at a level comparable to other developed countries, it would save between $500B and $600B annually.