Home > finance, news, rant > Raise capital gains and stop flying

Raise capital gains and stop flying

February 5, 2012

There are two totally unrelated stories I want to discuss this morning, I hope you’ll forgive me.

First, take a look at this post, written by David Brin, which argues for higher capital gains tax. He points out VC’s or angel investors, in combination with entrepreneurs, are the true “job creators”, and also invest their money in a truly risky way, whereas generic rich people who only invest in established companies are taking risks but not on the same level. Yet these two classes of people are taxed at the same rate. I guess the counterarguments would be that they, the VC’s, also get more payoff (when things work out) and that they couldn’t make their investments without the fleet of passive rich people ready to invest if and when the company succeeds. Even so I think there’s a real difference.

It reminds me that, when I worked at D.E. Shaw and Lehman fell, there were lots of discussions around the water cooler about what the reaction would be by policy makers and regulators. The consensus fear was that the capital gains tax rate for hedge fund workers would be removed within weeks, if not days. Note this tax loophole allows hedge fund quants and traders to pay less taxes on their take-home pay than bankers across the street doing the same job. I don’t really know anyone who defends it, not even people who benefit from it. Please correct me if I’m wrong. Update: mostly people below the MD (managing director) level at hedge funds actually don’t get this benefit. It primarily applies to “buy and hold” people like VC’s, private equity, and long term debt firms.

Another argument I enjoy from Brin’s post is the refutation of lowering taxes in general to entice investment by rich people. As he said:

Supply Side assumes that the rich have a zillion other uses for their cash and thus have to be lured into investing it!  Now ponder that nonsense statement. Roll it around and try to imagine it making a scintilla of sense! Try actually asking a very rich person.  Once you have a few mansions and their contents and cars and boats and such, actually spending it all holds little attraction.  Rather, the next step is using the extra to become even richer. Naturally, you invest it.  Whatever the tax rates, you invest it, seeking maximum return.

This is absolutely true, and one of the funny things about (many of) the rich quants I know: they are obsessed with growing their pile, to the point of focusing more on money now that they’re rich than they ever did when they were poor physics or math graduate students. To be fair, to make the whole argument for raising taxes you’d need to consider the global response, whereby rich people essentially arb the tax systems of the various countries in search of the maximum return. Even so, I’m pretty sure the answer is not to try to compete with Caribbean island nations on how low we can tax.

Second, check out this fantastic article from the Wall Street Journal about how people respond to environmental impact issues by consuming more. In the article they describe what’s called the “Prius Fallacy: a belief that switching to an ostensibly more benign form of consumption turns consumption itself into a boon for the environment”. I love it, first of all because it’s completely snarky and second of all because it’s really true and annoying. My favorite line:

Even if you think that climate change is a left-wing crock, this ought to be a matter of gnawing concern. Global energy use is growing faster than population. It’s expected to double by midcentury, and most of the growth will be in fossil fuels. Disasters like the BP oil spill attract world-wide attention, but the main environmental, economic and geopolitical challenge with petroleum isn’t the oil that goes into the ocean; it is the oil we continue to use exactly as we intend.

By the way, I don’t claim to be particularly low-impact on the world myself: I’m flying to Amsterdam in March with my entire family, which definitely puts me on the earth’s shit list (turns out it’s all about airplane travel). For that matter I work at a company that makes it easier for consumers to buy airplane tickets. But at least I don’t pretend that buying a Prius or replacing my kitchen counters with less eco-unfriendly material makes me a good person (by the way, once you’ve got eco-unfriendly kitchen counters the damage is done. The best thing you can do for the environment at that point is never ever remodel your kitchen again. Can you handle that?!).

If I had my way, we’d know the fossil-fuel impact of every activity we engage in, and we’d be able to put ourselves on a fossil-fuel diet. Those people who carefully recycle their milk containers and buy local but also fly to East Asia every chance they get would be in for some major belt-tightening.

Categories: finance, news, rant
  1. February 6, 2012 at 2:38 am

    I agree with you about the impact of air travel, and am guilty as charged. I live to travel to protected biological reserves, national parks, marine sanctuaries, wildlife refuges, to see and admire as much as possible of the planet’s remaining pockets of wilderness all over the globe. How ironic that my love of the biosphere is powered by fossil fuels. For an interesting article on the double-edged sword that is eco-tourism: http://www1.american.edu/ted/costa-rica-tourism.htm

    Have a good trip to Amsterdam!


  2. jerrydenim
    February 6, 2012 at 2:53 pm

    I fly more for pleasure more than most people you will meet, but I work for an airline and only travel as a space available non-revenue passenger.

    I live in a tiny apartment, I don’t own a car, I walk, ride a bike or take public transit to get around town. Once again, I never add to market demand by purchasing a ticket and I only fly if there is a empty seat going to waste so to speak.

    So do I have a really small carbon footprint or a gigantic one due to me working in the airline biz and supporting the industry?


  3. February 6, 2012 at 3:01 pm

    You’re forgiven! Also forgive me for my recent slightly off-topic comment on the ecosystem —
    “Disclosure: I’m fairly ignorant about these matters. Nevertheless, I’d like to suggest an area of investigation that might prove fruitful. How do Colleges and Universities stack up in terms of investment — maintenance of salvageable structures, added expense in new construction when deemed wise in the long term, etc.? I imagine such records are recoverable. I got kicked out of Notre Dame University more than 50 years ago (I still hold a grudge). However, one of my fondest memories while there was their almost European-like care of old buildings and an insistence on durable materials in new buildings. I’d bet that ‘cheap’ build-anew policies prove to be grossly inefficient, especially when externalities are taken into account.”


  4. February 6, 2012 at 10:34 pm

    Your argument about the rich seems right on, and I bet that one day, some arrogant Summers lke guy is gonna win an economics Nobel showing the obvious, that rich people are often driven, and they would probably be working 12 hours a day if you taxed them 102% of their income. (at least most of the successfull people I know, I’m in biotech in the boston area, got there by working darn hard)

    why are you so blase about flying to amsterdam ?
    Its a serious question; please give us a serious answer.
    The only answers I can think of are (a) you don’t really care about the environment, or (b) don’t think that we are endangering the environment, or (c) you are a totally selfess person who doesn’t care about others.
    which is why the right wing hates enviro ecoism so much: it really does mean changing our lives an doing with less – no personal automobiles, no airplanes, no lawn mowers other then solar powered ones,….

    And I must say, politely, that the attitude of the first poster, becky , is sort of revolting: I live to despoil the earth to gratify myself for a few moments….if you were really honest, keys on the table, isn’t that what you are saying ?


    • February 7, 2012 at 6:05 am

      I think you’re being overly judgmental both of me and of Becky. First of all, I don’t fly all the time. Second of all, we are going to see my husband’s family, which we do about once every two years. His mother is sick and this may be the last time we have a chance to see her. Second of all, although Becky does travel a lot, she also doesn’t have kids (I have three). The choice of having or not having kids surely is more meaningful than how often one flies (as my friend Jordan pointed out to me).

      On the other hand, does that mean I don’t want anyone to have children anymore? Certainly not. And I don’t want, personally, for people to stop traveling altogether either. For that matter I don’t think it makes sense to stop recycling! It’s not all about fossil fuels, it’s also about the garbage we create and the world we live in. Becky write beautiful poetry when she travels and she shares it with her friends. That’s a way I can travel with her. It’s a meaningful choice.

      You may turn around and say you’re not hypocritical like we are because you never travel and don’t have kids. But then I’d say what a pity, you should really learn to enjoy your life more.


  5. madalife
    February 12, 2012 at 5:49 pm

    It’s kind of scary to fly now after watching this PBS Frontline “Flying Cheaper” http://www.pbs.org/wgbh/pages/frontline/flying-cheaper/?autoplay. But anyway, anything can happen anytime, anywhere.


  1. February 6, 2012 at 6:59 am
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