Something doesn’t add up for me, maybe I’m missing it.
The stock market (as I understand it) works on the premise that you buy some shares of the company. That money goes to the company, and they use it to improve their tools/processes/etc, in order to better compete with the rest of the market and turn a higher profit. This in turn makes your shares worth more, because the company is worth more.
You’re saying people can get taxed yearly on the growth of the shares - okay, understood. But here’s my question:
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If the market dips this year (or the company has a bad year) and the stock owner doesn’t sell the shares, they are now worth less. Will the government reimburse the tax at the end of the year?
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If yes - then we fix nothing, right? We even make it worse, because now we have to track everyone’s stock. That’ll generate a lot of meaningless work.
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If no, then we’re taxing every yearly gain no matter how small, but still asking stock owners to take a risk and continue to own that stock. Who would ever want to invest anymore, when potential gains are taxed before you even have a chance to withdraw them (not to mention where do you come up with the money to pay taxes if you don’t sell the stocks) but losses are not compensated, and you still hold all the risk? Every stock exchange would crash and burn, with nobody investing anymore, but even worse - selling all stock before that first year runs out and they’re taxed for it. All companies that are publicly traded would basically be worthless overnight. It’d lead to another great depression, no?
I’m really not very understanding of this field, but I can’t find another option here that would actually end well. Am I missing something?
So maybe a few examples, because I won’t pretend to know every little aspect of the stock market myself:
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You buy 1 share of company X at $1000. Unless this company X is currently offering new shares, you buy this single share directly from someone else. The person on the other end of this trade would then have to pay e.g. 25% of their gains over the year so far (that’s the capital gains tax in Germany).
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Company X’s business is going great, and the stock price goes up to $1050 over the next year, and up to $1100 over the second year. You decide to sell your one share again, at this price, so you get $100 in profit. Right now, you would then pay $25 to the government. That’s $25 over 2 years. With the change, you would owe the government ($1050 - $1000) * 25% = $12.50 after the first year of holding your one share. It would be treated as if you would have sold your share after one year, paid your tax, and then re-bought the same share right away. Where does this money come from and how do you pay your owed taxes? The price of this stock would be set to $1000 + ($1050 - $1000) * 75% = $1037.50, and the $12.50 in profits of every share in circulation would be paid directly to the government (your government, wherever you pay your taxes). This way you already paid your taxes. So the stock gets to “keep” 75% of the profits it has made over the year. The stock is now at $1037.50, and again goes up by $50 over the second year. Same as above, price is reset to accommodate for profit taxes. After two years, the stock would have paid a total of $25 for every share, and would be set at ($1037.50 + $50 * 75%) = ($1037.50 + $37.50) = $1075.
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If you decide to sell your share after 1.5 years, because you want to avoid the second year’s reset, you pay no taxes after the first year (because the stock would just be valued for 75% of profits), and you just pay 25% of whatever profits the stock made in the last six months. Maybe the price at that point in time is at $1060, so you “pay” ($1060.00 - $1037.50) * 25% = $5.625 in taxes for this trade, and get to keep $16.875 in profits for the six months. I wrote “pay taxes”, because the government would not see a single cent from that because of the other side of that trade:
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Maybe you are the other person, who buys that one share at some point during the year for $1060. However, what you are really paying is only $1600 - $5.625 = $1054.375, because that’s what this stock would be worth right now after taxes. By the end of the year the stock has climbed to $1087.50, but is reset to $1075. You sell it again at $1075. $1075 - $1075 = $0, so you pay no more taxes to sell it. Your profit over these six months is ($1075 - $1054.375) = $20.625. To compare: Right now, you would have paid $1060 for the share, the price would have gone up to $1087.50, and you would have paid ($1087.50 - $1060) * 25% = $6.875 in taxes, and thus would have made ($1087.50 - $1060) * 75% = $20.625 in profits, exactly the same.
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If people value company X less after a year, and the stock goes down, nothing would change in comparison to what happens right now.
To sum it all up: Every year, each stock would be forced to realize profits and pay taxes that way.
Does this solve the problem of risk though?
Let’s say I buy a share for $1000. It grows in the first year to 1100. In the second to 1200. And so on, and so forth.
Let’s say the stock does really well over the next 10 years, and it doubles in value, 100 at a time - at some point I (as an investor) will have paid 25% of that, so I’m virtually paying 1250 for that $2000. Cool, that’s what would’ve happened if I had sold.
But if the stock tanks in year 11, I’m out 1250 instead of 1000. So… Where is the incentive for me to not sell?
And this is an example for a longer time, just so the loss is visible. But I should actually sell instantly whenever I have a small profit before the yearly tax gets taken, otherwise I am risking not only losing my initial investment, but also the tax I already paid. Whereas with the current system, I only pay tax for the gains, and I can justify the risk of continuing to hold that stock for the higher gains in the future.
With your system, I have no incentive. My risk is higher the more the stock is worth. It could go down at any point, and I’m not only out the initial investment, but also the tax that the government took for doing nothing.
And now let’s apply this to someone who is investing in the stock market to save money long-term (10-20 years). They will have a pretty diversified portfolio. Some companies will do well, some will stagnate, some will go under. Overall, they will statistically be turning a profit.
But that’s with the old system. Because with the one you propose, the losses will be even higher. All the companies that eventually go under and don’t turn a profit for your stocks will be not only costing you the initial investment, but also the subsequent profitable years. So people holding on to the stock can end up costing immeasurably more.
And an even worse scenario: stock “fads”. Look at gamestop, or better:nvidia’s recent rise. If I’m an Nvidia stockholder, I’m selling instantly. Otherwise I’m stuck paying the tax at the end of the year, and then am left holding worthless stock, once the price normalizes. Which is something that might happen anyway, but at least I have the choice of when to pull out, instead of it being forced onto me by the government.
And now let’s extend that example to the company itself. With everyone causing the price to rise, selling will be forced on everyone as well. In today’s system, some investors will ignore the price jumps and stick with the company. In your proposed system, those investors won’t be able to afford that, because the tax they would pay at the end of the year will be unreasonable. So they will ALL sell. The company stock will be worthless. Nobody will even buy it for a while, until it normalizes - you can’t risk the spikes and the tax that comes with them.
And let’s look at those billionaires now, and how this would affect them. In the first instance, they’d need to pay billions in taxes. How will they do that? They’ll probably sell stock. So the prices will drop for that stock, since the market will be overflowing with it. And this will hurt every single other small-time investor who bought stock in that company some years ago, paid tax for the increases, only to now have that stock worth a lot less. Except those guys aren’t billionaires and won’t have a few billion dollars remaining, they’ll get shafted by the state and be left with a lot less.
And none of those things even approaches the probably biggest problem of all: we’re taxing virtual gains, not actual gains. If I’m a person on the stock market and need to pay taxes for all my stock, okay, the state gets a bunch of money. And now let’s consider the stock market crashes and all my stock is worth less than before. All the money I paid to the state is actual cash, but it’s based on a value that doesn’t exist anymore. So it’s not real. We literally introduce money into the economy. Forget the risk to the end-user, we’re actually causing inflation here. If I spend $1000 on shares, the company improves its practices and this results in it turning a profit therefore making it worth $2000, I pay $250 on tax, and the company then goes back to its original practices, they sustain losses and the price drops back to $1000, for all intents and purposes everything about the situation has stayed the same, but the economy now has $250 more, for no reason. Forget about my personal loss, but this is the type of shit that can bury a country within the year. We devalue the currency because we added to it without having any actual change to attribute to the increase. There’s more money in circulation out of nowhere. Prices rise and salaries rise and inflation wreaks havoc. Today this type of action is already existing, but it’s in a controlled environment. A bank will provide x% interest on a deposit, but they will use that money to make more than what they give you on different markets. The government will tax you x%, but will tax your actual salary, not pretend money in the sky. Assuming these entities follow the law, inflation should be low enough to be manageable in those scenarios. But this? This is a net gain of currency. This is pure inflation, with no rhyme or reason.
I see very many downsides, with the only upside being that the state can get its money a bit faster, and even get money when the consumer loses (stock prices fall after tax is paid). But that just means consumers won’t participate in the stock market anymore, or that they will and it will backfire into inflation eating the country up.
I will honor all of this with by reading it.
Just for a first response to your second paragraph
Let’s say the stock does really well over the next 10 years, and it doubles in value, 100 at a time - at some point I (as an investor) will have paid 25% of that, so I’m virtually paying 1250 for that $2000. Cool, that’s what would’ve happened if I had sold.
You will have “paid” $250 after the ten years, not $1250. So if the stock tanks, as it can with the current system, nothing would change. The point though is, that you have not actually paid that $250 out of your pocket, the stock has just gone up by a total of 1000-250 instead of the whole 1000.
So in my eyes, the risk for you is exactly the same as it is now. You still gain $750 over 10 years, and the government still gets its $250 in taxes.
– I will read the rest of your reply now, that’s just my first thought. Thanks for taking your time to think this all through :)
Second thought: Yes, I think I get what you are trying to say.
- If the stock price rises in year 1, after the yearly tax cutoff it will have paid taxes. 1000 + 50 * 75% = 1037.50 [1050 with the current system]
- The stock tanks in year 2, losing 50% of its value, and ends at 518.75. There would be no taxes owed, because losses > profit. [525 with the current system]
- In year 3, the stock rises again, by 100% this time. Would end at 1037.50, but after the tax cutoff ends at 907.8125 [1050 with the current system]
- You decide to sell. With the new system, you get exactly 907.8125, as you already “paid” your tax. With the current system you get 1050-(1050-1000)*25% = 1037.50
– this means the new system would have to do something during loss-years. yes, I see that now
Third thought: This makes me feel like there should be a loss-counter that could be carried over the years. This counter would have to be held for every single share, so that you would start “paying taxes” or lowering the stock price again only after you were at ± 0 again.
