quote:

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The latest federal budget — which offered pennies a month in tax breaks for individuals — reveals just how much more of the tax burden individual taxpayers are carrying while the corporate share is essentially unchanged.

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http://tinyurl.com/6y8yb

The relevant concept is the incidence of taxes – that is, the distinction between those who pay the tax, and those who actually bear the tax burden. Suppose that the govt decides that Evil Widgets^TM are an Affront Against Humanity, and that those who produce them should be punished: a law is passed to the effect that firms who produce Evil Widgets^TM have to pay a tax equal to 100% of their sale price. But suppose also that consumers are so taken with Evil Widgets^TM that they’re willing to buy the same amount as before, even though the price has doubled. In this case, even though the producers are the ones who have to send the cheque to the government, they’re not the ones who pay the tax: the consumers do.

Same thing here. If investors require a minimal return on their investment, the firm’s reaction to an increase in corporate taxes could well take the form of a reduction in the demand for labour: jobs cuts and/or reduced wages. The people who ‘pay’ for corporate taxes may well be the firm’s workers, not its owners.

[ 13 March 2005: Message edited by: Oliver Cromwell ]

[ 13 March 2005: Message edited by: robbie_dee ]

I suppose we could follow the US model and finance our investments with foreign savings, but do we really want to finance our rates of investment by transferring Canadian assets to foreigners?

[edited to add:]
Again, the only way in which increasing corporate taxes wouldn't affect employment and/or wages is if savers didn't care about the rate of return they get on their investment. My impression is that investors care a great deal about their rate of return, and that the burden of proof is on those who would claim otherwise.

[ 13 March 2005: Message edited by: Oliver Cromwell ]

Here's something I posted in another thread:

quote:

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Suppose that an investor is offered a chance to invest $1000 in a project that is expected to generate a profit of $200 a year. That works out to a 20% expected return, and in a world without taxes, the project would almost certainly go ahead.

Suppose now that corporate taxes have to be paid out of profits. If the tax rate is 30% (the low end of the range in Canada), that leaves $140 to be paid out to the investors. And if the investors face a marginal tax rate of 50% (as would typically be the case for someone who has $1000 burning a hole in his pocket), he'll get $70. The rate of return to the investor is now 7% - and depending on how risky the project is, it may or may not go through.

That wedge between the rate of return on the project of 20% and the 7% rate that the investor sees is the problem. Suppose now that the corporate tax rate goes up to 40%, and the income tax rate goes to 60%. The rate of return on that project falls to 4.8%, and it becomes even less likely that the project will go through.

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Later on, I noted that these calculations aren't affected by the existence of consumption taxes.

They obtain a good many benefits from pretending to be human, let them have some of the obligations.

*These two groups are not mutually exclusive.

[edited to add the footnote]

[ 13 March 2005: Message edited by: Oliver Cromwell ]

Jean Monty, CEO of BCE, is sure to benefit handsomely. Martin's tax cuts will save him $1.9 million in taxes on his last round of stock options. Next time he cashes in stock options, he'll be looking at even more savings. The budget has also cut the corporate tax rate for banks from 28 per cent to 21 per cent. And Canada's banks were already black inking it without Paul Martin's pat on the derriere.

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Originally posted by Oliver Cromwell:
The thing is, when we do welfare analyses, we only look at people, that is, what happens to households. Corporations are only instrumental to these considerations. Investors care about their investment income, and workers care about their labour income*. The only role corporations play is that they serve as an intermediary between consumers and the owners of the means of production. Once the dividends and the wages have been paid out, who cares what corporate logo appeared on the cheques?

*These two groups are not mutually exclusive.

[edited to add the footnote]

[ 13 March 2005: Message edited by: Oliver Cromwell ]

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We could reduce the rate of return on all investments made by Canadians. But why would we want to do that? Lower rates of return mean lower savings and lower rates of investment.

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Hold on here. This just isn't reality. First of all, this assumes that rate-of-return (as in for-profit) investment is what stimulates further investment and drives the economy. That simply ain't true.

For-profit investment is dependent on the creation of markets--and markets ARE NOT created by the capitalistic for-profit investment, but rather on the utilitarian investment of consumer spending that comes mostly from working people (as in labour).

It is this type of investment, based on people exchanging their skills and labour for goods and services they need and want, that creates markets and stimulates economic activity.

And this type of investment comes mainly not from savings, but from earning power, as in wages and salaries (earning power fuels spending power).

So even if taxes on corporate revenues rise, as opposed to those on wages, and say the government invests the new money in job creation projects at higher wage rates, the economy will expand, as more cash will be available to working people as disposable income.

Many, depending on their situation, may choose to save a portion of that money, or use it to put into a pension plan or other long-term security.

This is largely how things went during and after World War II, which led to the most overly prosperous era in history.

Thwap said:

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This assumes that corporations' managers can't find creative ways to keep the money away from the shareholders and the workers, and to waste it on tax-deductible expense accounts, or to use it to finance reckless speculations.

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Oliver Cromwell said:

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Sure - but that's just a corporate governance issue. If investors want to get the most for their money, they - rather, the boards of directors that are supposed to represent them - have to pay attention to these sorts of things.
Doesn't affect my point about the irrelevance of corporations for welfare analyses, though

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Actually, it seems that it does make a big difference.

According to various stock reports, and summarized by Maude Barlow, about 80 per cent of investment capital has been taken out of the economy by corporate bosses and elite investment houses and put into useless areas like futures and speculative investment, mergers and acquisitions and real estate.

These areas are highly tax-exempt, which robs the real economy of much needed revenue. In addition, the capital that goes into these areas doesn't go into real job creation, which also deprives the economy.

Oliver Cromwell is right that this is a corporate governance issue. But it certainly does affect the economy--probably more than most other things.

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Originally posted by Oliver Cromwell:
Oh dear. You seem to have missed my repeated explanations of how income taxes - personal and corporate - reduce savings, investment and growth.

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Then why have savings rates and growth rates tended to fall in the industrial nations after 1973, around the same time the tax systems in all industrial nations started turning more regressive?

Capital investment has sagged badly in Canada compared to the 1970s, and in the USA, net investment as a percentage of GDP has hardly budged from the ~10% of GDP level since the 1950s.

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Then why have savings rates and growth rates tended to fall in the industrial nations after 1973, around the same time the tax systems in all industrial nations started turning more regressive?

Capital investment has sagged badly in Canada compared to the 1970s, and in the USA, net investment as a percentage of GDP has hardly budged from the ~10% of GDP level since the 1950s.

If this shift to a consumption-tax system produced the effects you say it does, why the above actual results?

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Skookums to the Good Dr. Conway. During the 40s, 50s and 60s, when working people's incomes were quite often rising faster than the cost of living, and taxes were more equitably distributed (as in corporations and capitalists paying a much larger share than today), we saw hugely expanding markets and opportunities, higher savings rates, growth of pension and other retirement plans, etc.

It's true that corporations got to accumulate less money. But expanding market demand required them to re-invest money into the real economy (not into speculative futures and mergers).

When tax burdens began to shift on to individuals, along with shelters for high-income earners, things began to slow down.

OC: Sure, it's a corporate governance issue, but like the economist on the desert island with a can of food: "Let's assume we have a can-opener."

Until all of the benefits of management over shareholders (laid out nicely by J.K. Galbraith lo' those many decades ago in The New Industrial State) can be overcome, we'll have to try to capture some of that corporate wealth through taxation.

And i really do think there's something to your push for consumption taxes to avoid possible distortions to investment caused by income taxes. But the comments of others make me think that you might be promoting the "oversavings" described by Hobson, that were pooh-poohed by everybody until Keynes looked at the subject again in the 1930s.

However, Dr. Conway and the Ethical Redneck are reminding me of the "demand maintenance" "incomes" and "consumption" positions that James Laxer complained about way back in 1980-something.

I'm torn, but i say stick it to corporations anyway.

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Two recent surveys of the mainstream economic literature -- by Philip Gerson of the IMF and Willi Leibfritz of the OECD -- show a very weak link between the size of a country's overall tax burden and its economic performance.

As OECD data show, the U.S. has a relatively low overall tax burden, but its economic growth throughout the 1990s was slower than that of notorious high-tax countries like Denmark, Norway and the Netherlands
Linda McQuaig, 2000

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I think that whatever the economic system or model, society has certain basic needs which need to be met in order to be a productive, efficient economy as well as maintaining civilised status. Our system needs taxes to pay for health care, education and basic infrastructure. Polanyi called it 'social capital', and it needs a proper accounting of. Concentrating vast wealth into the hands of few robs us of needed social capital.

[ 14 March 2005: Message edited by: Fidel ]

quote:

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Originally posted by DrConway:

Then why have savings rates and growth rates tended to fall in the industrial nations after 1973, around the same time the tax systems in all industrial nations started turning more regressive?

Capital investment has sagged badly in Canada compared to the 1970s, and in the USA, net investment as a percentage of GDP has hardly budged from the ~10% of GDP level since the 1950s.

If this shift to a consumption-tax system produced the effects you say it does, why the above actual results?

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quote:

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Originally posted by thwap:

Until all of the benefits of management over shareholders (laid out nicely by J.K. Galbraith lo' those many decades ago in The New Industrial State) can be overcome, we'll have to try to capture some of that corporate wealth through taxation.

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It is proven that investment dollars don't flow into the economy, as was pointed out, instead of Best Buy usings it's wealth to build new store(capital) it decided to buy Futureshop thus providing nearly no competition and prebuilt stores. Mergers and real estate aquisitions don't translate into jobs. They have the inverse affect. By loosing competition and consolidating market share it allows them to then fire "redundant" labour making the economy worse not better. Now this "redundant" labour has need of tax dollars to pay them while attempting to locate a new job. Thus putting higher pressure on those that already are working while those making "investments" actually get a tax deduction for "investing in the economy". My Bro-inlaw has his money parked in a labour mutual that has a 70% tax rightoff and has a very high return. Of course when you research the place where the money is at you notice it is often places that lay-off many people to avoid the cost of labour. While driving up it's profits on the back of the few.

In the old days, before stock markets were a big feature of our economy, or during the 1940s, 1950s and 1960s when people burned by the 1929 crash (there were only 18 million stockholders in a nation then of about 120 millions in 1955; 15% of the population is not very much) stayed out of the market, the Say's Law assumption that savings went back out as investment had some basis in fact since the only place the rich could stash their money, besides speculative investments in nascent stock markets or in gold or silver, was in Ye Olde Banke Accounte.

So saved money would be recirculated as lent funds which would stimulate investment, and so on.

Fair enough.

But today, the mechanism that connects savings to investment has been partially disconnected. Nowhere is this more evident than in the amazing divergence of the stock market (the "paper economy", as I often term it, (TM Jim Stanford)) from the "real economy".

The NASDAQ and the Dow Jones zoomed up something like, what, 10% a year or better in a decade, while the US economy measured in terms of GDP grew at an average (over the decade) of 3% per year.

This kind of disconnected behavior cannot long sustain itself and certainly the bust of 2000/2001 in the Dow and the NASDAQ injected some reality into the dotcom hysteria. However, the bust has been short-lived and the Dow still flirts with the 10,000 range when by all rights it should be back down at five or six thousand - where it sat before the dotcom craze of the late 1990s. This points to a broader context where people seem to be internalizing the message that it's easier to put your chips in the casino and gamble to make money than it is to follow the economically conservative dictum of working your buns off for 45 years.

You also continue to gloss over the salient point, that even if the stock market grows at 10% a year on average, that doesn't help people who get socked with a bad year. I think it is even more dangerous than treating the stock market as a casino, to seduce people into believing that the stock market is like a miraculous printing press that issues money for ever and ever, and all you have to do is cash your chits in and you will have more than what you started with, without exerting any effort harder than looking at your investor statements.

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Originally posted by Oliver Cromwell:

... suppose also that consumers are so taken with Evil Widgets^TM that they’re willing to buy the same amount as before, even though the price has doubled. ]

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I'll sue my Alma Mater for the fees I paid for Economics 101 - you know where they teach the thing about supply and demand and quantities sold at various prices.

Ceteris paribus only when it's useful?

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corporations aren’t people

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I agree but why do they have 'freedom of speech' in the USA?

[ 15 March 2005: Message edited by: VanLuke ]

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But my point is the term 'corporate wealth' is a meaningless expression - corporations aren't people.

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No Mr. Cromwell, it's not meaningless. It's true, as you say, corporations are not people. But it's also true that, thanks to our dictatorial Master-Servant Law, corporations do have the status of personhood.

That gives them the power to own and control wealth (or more accurately, the undemocratic elite of individuals in key positions that run them, to own and control wealth).

Capital is in fact fluid wealth that is created by separating it from the labour of people that creates it.

Corporations, for the most part, control capital. That gives them wealth. Trust funds, hedge funds, contingency funds, futures reserves and various holdings and static investments are all examples of capital wealth under the control of corporations--never mind all of the money that legally isn't even theirs that they often control, like pension and mutual fund, health and welfare and other employee benefit plans, etc.

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all other things being equal, increasing corporate tax rates will reduce savings, investment and growth.

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Actually, it seems lots of folks here, myself included, are providing all sorts of facts, history and examples to try to show you this isn't the case.

As you yourself said, "all things are not (usually) equal." But even if they were, it still wouldn't necessarily be the case.

For example, what about, as I pointed out, the most important (in fact the only real economy-stimulating form) investment known as consumer spending? That doesn't stop because of a corporate tax increase, even with "all things being equal."

Also, what about small business investment, or the co-op or non-profit sector? Even with all things being equal, these don't suffer because of a corporate tax raise.

If You Took An Airplane Recently, You Know Deregulation's A Loser.-- Robert Kuttner describes the recent failures of deregulation in airlines, power, and banking.

[ 15 March 2005: Message edited by: Fidel ]

Corporations aren't people. Nobody here disputes this, and we're actually happy to have OC on board on this one. Corporations get a lot of protections by pretending to be people, but they ain't.

They are sources of wealth. And here, OC and I part company. If all other things were equal [though OC admits they aren't], and if corporate governance issues were somehow changed so that shareholders got every penny their corporate investments owed them, I believe that corporations are still a worthy target for taxation, for the simple reason that they are places for human beings to hide money.

What prevents me from signing on to OC's 'consumption taxes are better than income taxes' unquestioningly are my doubts that every $ that's "invested" goes to a worthwhile investment. It seems to me that the zillions [note: inexact figure] of dollars sloshing around dangerously in derivatives, currency speculation, etc., is proof positive that some sectors of our economies have WAY MORE money than they know what to do with. Rewarding this class of "investors" even more seems to be passing the point of diminshing returns. Especially when vital portions of our society are going begging.

[ 15 March 2005: Message edited by: thwap ]

quote:

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Originally posted by Ethical Redneck:

In order to support the theory you mention, you would have to make so many assumption and exclude so many real factors, ...

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That is the essence of economics, isn't it?

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Originally posted by thwap:
[qb]To sum up:

Corporations aren't people.

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No they aren't but it's interesting to note that the French term for 'corporation' is 'person morale'.

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They are sources of wealth.

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How is that if they aren't persons?
Deus ex machina?

People are the source of wealth and people define what wealth actually is. (The USA is a wealthy country. Is it because of all the arms they possess?)

[ 15 March 2005: Message edited by: VanLuke ]

certainly other people within the corporations have put it there.

hedge-clippers don't clip hedges, people clip hedges. (people with hedge-clippers)

guns don't kill people, people kill people. (people with guns)

((... only people killed by people with guns are killed by the guns wielded by the people who wielded the guns that killed those people ...))

quote:

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Originally posted by thwap:

... if corporate governance issues were somehow changed so that shareholders got every penny their corporate investments owed them, I believe that corporations are still a worthy target for taxation, for the simple reason that they are places for human beings to hide money.

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Yes, that's a very good point. If income on dividends is taxed, and if (at least some)capital gains aren't, then the firm's owners will prefer to leave the money there in order to avoid paying income tax on the dividend. If you insist on having personal income taxes, you're pretty much obliged to have corporate income taxes.

But by now, you know where I'm going with that last 'if'.

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I mean fascism pretty much in the traditional sense, [analogous to] a system in which the state integrates labor and capital under their control. The ideal is top-down control with the public essentially following orders.

Fascism is a term that doesn’t strictly apply to corporations, but if you look at them, power goes strictly top-down. Ultimate power resides in the hands of investors, owners, banks, etc. People can disrupt, make suggestions, but the same is true of a slave society. People who aren’t owners and investors have nothing much to say about it.

That’s something of an exaggeration because corporations are subject to some legal requirements and there is some limited degree of public control. But corporations are more totalitarian than most institutions we call totalitarian in the political arena.- Noam Chomsky

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Originally posted by Oliver Cromwell:
The excessive power of corporate managers is at least partly due to the distortions caused by the existence of income taxes.

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[ 15 March 2005: Message edited by: Oliver Cromwell ]

quote:

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Originally posted by VanLuke:
so what does an investor who holds on to shares for years live on? No dividends, no income.

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If the value of the shares is increasing, they sell shares. (ie: $500,000 growing at 8% increases in value by $40,000 every year, sell $40,000 worth every year to live off of.)

Of course, for Cromwell's analysis you would also have to account for the portion of mutual funds / etc held inside RRSPs/RPPs/etc as opposed to outside RRSPs/RPPs/etc -- capital gains / interest / dividends are all treated identically when pulled out of registered investments.

Edited to add:

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And there're a bunch of other (more significant) problems with the analysis that I just don't have the time to worry about raising.

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Ceteris paribus -that blanket-all technique in economics- "solves" the problem

[ 15 March 2005: Message edited by: VanLuke ]

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Originally posted by VanLuke:
I deliberately picked investors who do not trade actively and hold on to their shares for years, like Buffet for instance (not that he's got a financial problem.)

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I would like to suggest one thing, though. Mr. Cromwell was mentioning that things would be better under the circumstances he's looking for because investors would be freer to pull their money out of corporation X and reinvest it somewhere else with a higher return at a moment's notice. Now I kinda take his point about the advantage it gives managers if there's a cost to pulling money out of the company they're managing. But it makes me wonder nonetheless. It's far from clear to me that funneling all investment as frictionlessly as possible towards the highest return is likely to produce positive results. There are many industries which never seem to produce really awesome returns--they plug along giving kinda-decent returns, but nothing all that sexy. These industries often tend to be fairly basic--steel, sewerpipes, so on and so forth. I worry about industries that form solid underpinnings getting undercapitalized because all the money rushes to the sexy high-fliers of the moment. And thinking of the sexy high-fliers of the moment, there are more general problems with making capital more high-speed in its movements. First, it will tend to make instability worse, generating dot-bombs and Asian crises and whatnot. I mean, there's always *something* that seems like it has the best returns. If everyone's money goes there, it probably won't be any more. Second, projects in the real world take time. If money starts zipping in and then out again at high speed, it will get bloody difficult to follow an idea through from plan to reality without getting caught by two or three changes in investor fickleness on the way. Come to think of it, that may well be why most corporate capital-improvement projects are undertaken through debt rather than by raising money on financial markets.

quote:

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Originally posted by Oliver Cromwell:

Is there any particular reason why you didn't explain what you actually wanted to know before I tried answering three separate times?

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I was quite specific. It's not my fault if you don't read carefully.

Just what is it that you don't understand in this sentence?

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so what does an investor who holds on to shares for years live on? No dividends, no income.

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Compare that to your unfounded statement (IMO):

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If income on dividends is taxed, and if (at least some)capital gains aren't, then the firm's owners will prefer to leave the money there in order to avoid paying income tax on the dividend

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And I don't ask you for what I want to know. I know you are not my personal research assistant and I can find out for myself. Besides, you're not the only one who studied economics.

I asked you to justify a statement you made That's not the same as asking you for information.

You also ignored my request to justify your statement about a vertical demand curve. Is it because you can't?

Edited to change 'horizontal' to 'vertical' ... as if it mattered on what axis you plot what specifically that effective demand is the same after the price doubled is what I'm reacting to. Lovely theory economics is, isn't it?

[ 17 March 2005: Message edited by: VanLuke ]

quote:

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Originally posted by Rufus Polson:
It's far from clear to me that funneling all investment as frictionlessly as possible towards the highest return is likely to produce positive results. There are many industries which never seem to produce really awesome returns--they plug along giving kinda-decent returns, but nothing all that sexy. These industries often tend to be fairly basic--steel, sewerpipes, so on and so forth. I worry about industries that form solid underpinnings getting undercapitalized because all the money rushes to the sexy high-fliers of the moment.

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Under present taxation regimes, re: mostly income (and payroll) taxes, i say corporations should pay taxes, and they should pay more than they are.

Debating the wider rationalizations behind not taxing corporations at all, is just too big.

(I'm aware this isn't an argument.)

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Originally posted by Oliver Cromwell:

Yes, I know consumption taxes are regressive; the solution to that is targeted transfers to low-income households. A GAI is my preference.

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quote:

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Originally posted by Oliver Cromwell:

There's not much reason to worry about that.

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Uh, yeah, sure. That would be another one of those theory things, right? Markets work perfectly, rational investors, all that drakh. In real life it seems quite clear that investment shows large swings towards what's currently fashionable, and indeed that brokerage houses etc. actively manipulate such behaviour. If you're going to operate your idea of markets based on the notion that bubbles don't exist, you're going to get weird results. Let's see, Asian crisis, dotcoms & hightech bubble, Japanese real estate bubble, smaller bubbles in third world stocks--those all had significant impacts.

Why are we so worried about discouraging investment. The alternatives are spending or saving, neither of which harm the economy.

The myth that the wealthy are discouraged from producing/working harder if their tax rates increase is equally nonsensical with the concurrent myth that the poor are discouraged from working if they receive income through welfare/EI etc.

quote:

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Originally posted by Oliver Cromwell:
I don't know where you got the idea that economics says that bubbles don't exist; bubbles are an integral part of asset price theory. What it does say is that they can't go on forever.

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Well that's good. I don't think Rufus imagines that they go on forever either. He was responding to what appeared to be a claim that speculative bubbles weren't a likely problem for a society that allowed maximum freedom of capital.

I think there's something to be said for the theory that when money goes from being a source of investment for real things, towards a means of making more money, we get deindustrialization, and speculative bubbles.

quote:

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Originally posted by arborman:

In sum - pay the rich less, they won't work. Pay the poor less, they will have the (heretofore absent) incentive to work. Balderdash.

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Yes, this was leading conservative thought during the 1970's. There was something wrong with the unemployed and idle poor at the time. We were lazy and had no incentive to work harder for the sake of enriching the few. There were too many working class slobs bumping into the well heeled on the world's best beaches. Everyone had a story about an unemployed ski bum who was having his UI cheques forwarded to Mount Tremblanc. UI and welfare would have to be made harder to qualify for. Not enough Canadian's were willing to work for the many low wage jobs that needed doing. Canadian's just weren't very efficient enough.

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Nobody said it would be easy averting our eyes from all that suffering at the side of the road. But we've learned to steel ourselves to the task, firm in the knowledge that we are ultimately making the right choice between compassion and economic efficiency. Distributing resources more equitably may be kind and warm-hearted, but where's that going to get us in the global economy?.

How surprising, then, to learn that the choice is a false one, that spending money on social programs does not undermine economic efficiency, that channelling money into the hands of investors is not a reliable recipe for economic growth. Perhaps leaving people suffering at the side of the road serves no higher purpose after all.
- Linda McQuaig

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Economists like Milton Friedman were essentially saying that unemployment was caused by people "choosing" poverty over employment. And if that wasn't believable enough, then worker desperation would have to be increased. Flexible labour markets should cause outbreaks of unprecedented prosperity. The world is still waiting for the economic long run to kick-in while more and more wealth is concentrated into he hands of a few.

[ 17 March 2005: Message edited by: Fidel ]

quote:

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Originally posted by arborman:
Just out of curiosity, what do the wealthy do with their money of they don't invest it? Sit on it, hide it in a sock, spend it?

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Spend it.

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Why are we so worried about discouraging investment. The alternatives are spending or saving, neither of which harm the economy.

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The myth that the wealthy are discouraged from producing/working harder if their tax rates increase is equally nonsensical with the concurrent myth that the poor are discouraged from working if they receive income through welfare/EI etc.

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quote:

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Originally posted by thwap:

I think there's something to be said for the theory that when money goes from being a source of investment for real things, towards a means of making more money, we get deindustrialization, and speculative bubbles.

It's always easier to invest in derivatives that pay 10% in a few months, than it is investing in any real manufacturing that takes a couple of years to get off the ground.

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Easier, perhaps, but only if you're willing to buy a lot of risk. That 10% may be a very attarctive average, but it's by no means a sure thing. If you don't have very deep pockets, you may well end up losing everything.

Derivatives are widely misunderstood. What they do is transfer risk from people who are willing to pay a price to avoid uncertainly to people who are willing to accept that uncertainty - at a price. Suppose you have an investment project (that is, the kind the hires workers and produces things) that requires you to buy USD 100m next year. Suppose also that if the CAD-USD exchange rate is greater than 0.90 next year, you'll lose money.

If you don't want to live with that risk, all you have to do is buy an option from someone who is willing to bet that the USD will stay below 0.90. If the CAD goes above 0.90, you get your USD 100m at the agreed price - and the person who sold the option loses money. If the dollar stays below 0.90, the seller of the option buys USD at the going rate, sells it to you at 0.90, and pockets the difference. The seller of the option takes all the risk.

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Saving is the same thing as investing.

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Derivatives are widely misunderstood. What they do is transfer risk from people who are willing to pay a price to avoid uncertainly to people who are willing to accept that uncertainty - at a price. Suppose you have an investment project (that is, the kind the hires workers and produces things) that requires you to buy USD 100m next year. Suppose also that if the CAD-USD exchange rate is greater than 0.90 next year, you'll lose money.

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Well, thanks. It's been a while since someone reminded me that derivatives were like commodities futures, serving a very real need. But just like futures, derivatives have gone speculation rotten. And once these early risks paid off, there was more money that needs an outlet to make still more money.

I'm just saying that we appear to be awash in paper money (and computer representations of paper money) and that the real economy and the real society's needs are going begging.

nother point: I don't think it's just tax policy that leaves investors at the mercy of corporate management. To a great extent, managers have a better grasp of the businesses' needs (and abilities to hide corruption and expense account irregularities) than do essentially passive "investors."

Your whole consumption-tax over income tax-again: While i can see the sense of distortions that you speak of: (the old chestnut of 'why should i work harder for a bigger income when it'll all be taxed away thing?') ... and while i realize that real economic activity can be harmed that way, .... I'm worried that by taxing consumption only, we risk the very real problem of 'over-saving.' ... and in a world at risk of speculative manias and dangerous bubbles, ... i'm not sure this is all so sweet n' easy.

what would the wider effects of this consumption-tax regime be? Would everybody buy smaller homes than now, less groceries, etc., would the consumer side of the economy shrink? and what effect would that have on "investors" looking for growth opportunities?

quote:

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what would the wider effects of this consumption-tax regime be? Would everybody buy smaller homes than now, less groceries, etc., would the consumer side of the economy shrink? and what effect would that have on "investors" looking for growth opportunities?

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You're asking a person who went on record (see above) that effective demand could remain the same even if prices doubled.

Not what they taught me in economics, but maybe that changed.