I have been thinking about investment quite a bit lately. After losing $30,000 in three weeks around a month ago, I decided to pull out of the market for a while. I will remain out until the hysteria over corporate responsibility shakes out and the prospects for the economy improve in an unequivocal sense.

Of course, there is a way to change investor psychology that would help offset these factors almost overnight.

Government loves to collect taxes. Here is a section of a report from the Congressional Budget Office that speaks to likely causes for the decline in income tax receipts; the full report is here :

The Usual Suspects

The first likely factor is capital gains income. Realizations of capital gains are not part of national income or GDP. But they are taxable income to individuals and corporations. Consequently, they can grow more rapidly or fall more precipitously than national income, resulting in changes in revenue proportionately greater or smaller than changes in overall economic activity. CBO's analysis indicates that rapid growth of capital gains realizations explains about 30 percent of the growth in individual income tax receipts relative to GDP from 1995 to 1999, so they may be playing a major role in the decline in FY 2002 receipts.

When projecting gains receipts in its January 2002 and March 2002 baselines, CBO already had good estimates of the calendar year 2001 level of the stock market and GDP--big influences on the level of gains realizations that would help determine final tax liability payments in April 2002. As a result, the March baseline, in comparison to the baseline of January 2001, projected a 23 percent decline in realizations and a $27 billion decrease in gains receipts. But because realizations are so volatile, the decline may be greater than econometric analyses of past behavior would suggest. Distributions of capital gains from mutual funds were down in calendar year 2001--reportedly by about 80 percent. Total gains realizations differ from those in mutual funds: stocks are the principal component of mutual funds, but only about half of total taxable gains come from stocks, with the rest coming from other capital assets, such as real estate. As a consequence, total gains would likely have fallen less than gains in mutual funds. Thus, while realizations almost certainly explain some of the FY 2002 shortfall, they very likely do not account for all of it.

A second likely factor is the slower growth of very high incomes in comparison to that of overall income. Those incomes are taxed at the highest rates and produce a disproportionate amount of income tax revenues. From 1995 to 1999, very rapid growth in very high incomes accounted for about 16 percent of the growth in the revenues in excess of GDP. A reversal could very well reduce receipts by a significant amount.
In addition, enough changes occurred this year--including the tax cut, the recession, and the drop in the stock market--to have altered the usual division of tax liability between withholding and estimated payments on the one hand and final payments and refunds on the other. In the 2001 tax year, the ratio of refunds to withholding departed from its previous, relatively stable, pattern. The larger-than-usual role played by final payments and refunds may mean that taxpayers were surprised by economic developments in 2001 and continued to withhold higher-than-necessary amounts. That overwithholding could have been simply the consequence of lower capital gains realizations; but it could also have been because earnings weakened over the course of calendar year 2001, and taxpayers paid withholding at a higher marginal rate than would have been the case had their earnings been steady throughout. In either case, the overwithholding suggests that shortfalls in receipts from two different years could have been bunched into a single year's collections, making the reduction look more ominous than it really was.

Noticeably absent from this list of likely causes are stock options and bonuses, because bonuses are a form of wage income, and most options are included in wage income measures when exercised. They also reduce taxable corporate profits at the same time that they increase taxable wage income. Nevertheless, options and bonuses may play a role in the distributional effect just described. To the extent that they accrue primarily to people with very high income, their rise and fall can affect the receipts-to-GDP ratio. The lower the proportion of income coming from bonuses and options of high-income individuals, the lower the receipts from a given level of wages and salaries. And because options income is typically withheld below the top marginal tax rate, it can disproportionately affect April payments when taxpayers settle up on their liability. Some early evidence suggests that options income may have fallen by 50 percent in calendar year 2001, in contrast to the 30 percent decline built into CBO's projections.

I believe that the drop in capital gains income is due to factors that include 1) lower receipts from the sales of stock, mutual funds, businesses, etc. and 2) a decline in dollars invested in these instruments.

One factor that could help increase investor interest in putting more capital to work is equal treatment of capital gains and capital losses in income tax law. If your investment earns a dollar today, that dollar is fully taxable less applicable deductions. However, under current law, if your investment loses money, you cannot fully deduct those losses on a dollar for dollar basis. The government allows you to write off a maximum of $3,000 per year until your loss is deducted completely. If you lost a little, this may only take a year or so. In my case, and I believe in the case of many people nearing retirement age, the losses cannot be deducted in the investor’s remaining lifetime.

This is unfair, and stacks the deck against those willing to put capital at risk.

Please take the time to read this and this. There may be better indictments of some of the most stupid behavior and ideas in America, but these will do for today.

This story does an even better job of exposing Terry McAuliffe. I wonder if he'll crawl under a rock for a few months until the dust settles on all the "corporate responsibility" and insider trading scandals.

This analysis of the PC economy and the Microsoft anti-trust ruling is the best I have read--I wish I had written it.

This should be especially interesting for all those Democrats who try to claim that the government had a role in the growth of the stock market in the 1990s; maybe this will enlighten you as to the government's power to damage the true engine of growth--hard working businessmen and women. Usually, the government's role is similar to that of the amazed mother-in-law who stares incredulously at the success her no-account son-in-law became--despite her warnings to her daughter.

From FoxViews at the Fox News site:

Sam Donaldson interviewed Terry McAuliffe on This Week. Appearing to be enjoying an adrenaline rush, the Democratic party leader stood by his criticism of Bush and the upcoming economic forum.
He also defended his Global Crossing investment by saying he was a "venture capitalist."

A jovial Donaldson appeared to enjoy McAuliffe’s energy level and failed to press him on the issues.

Now that's funny. Terry McAuliffe, the venture capitalist? As this story in Business 2.0 points out, McAuliffe was simply offered a chance to buy pre-IPO shares that were frequently flipped--sold for a quick profit after the IPO date--in the 1990s. McAuliffe was smart enough--or lucky enough--to hold onto his shares until 1999 and sell them for $18 million.

If McAuliffe were a "venture capitalist", he'd have done due diligence, reviewing start up business plans. He would have stayed awake at night worrying about the money he had at risk, about tough personnel decisions he might have to make. Nope, Terry is just a friend of a contributor to the Democratic party who got in on one of the most lucrative opportunities of the past century. Whether McAuliffe did anything wrong or not, he is certainly stretching the truth by calling himself anything but a crony of a fat cat.

Will there be a baseball strike? Reports out of the player representative meetings in Chicago today seem to indicate that the answer is yes. That is sad news indeed for all of us baseball fans.

My wife was offered a chance to buy Mariner’s playoff tickets for this season. I would jump at the chance, despite the slender lead the team is clinging to, if not for the threat of a strike.

We bought SeaHawk season tickets earlier in the month. Although Seattle’s star quarterback, Trent Dilfer, sprained his knee in an exhibition game Saturday, I’m still cautiously optimistic about the season.

Football—college and pro—is the number one sport in America. NASCAR appears to be well on its way to breaking into the top three, if not the top two. A baseball strike will only hasten the change. NASCAR drivers do not strike. Neither do professional golfers.

In an era of declining discretionary income, baseball cannot afford to take fan loyalty for granted. My wife and I had a great time on a tour with the BMW club on Saturday. We may decide that our spare time—and dollars—are all accounted for with SeaHawks and driving adventures.

Baseball, be careful. Will the networks pay for rights to games no one watches?

Now we read that Saddam plans to draw US forces into Iraq’s cities rather than deploy his armies in the desert. Apparently, he thinks that he can bog us down in house to house fighting, popping up to shoot at us from a rabbit warren of tunnels and bunkers underground.

Hmmm.

As I recall, a favorite tactic in modern mobile warfare is to bypass enemy strongholds in order to capture and hold strategic chokepoints. If Saddam hides his army, we could set up an interdiction plan to control his borders, destroy his media outlets (and replace them with ours), secure his oilfields, and generally starve him out in the open. This would take more than a few weeks of bombing followed by a few days of combat, as in Bush vs. Saddam I, but would be even more effective. We could create an UN-administered zone containing the captured territory and leave him the ruler of a land-locked, resource poor slum.

As for using his Scuds to launch terror weapons from Baghdad at Israel or Kuwait, does anyone think that we have not improved our ability to shoot down his largely ineffective missiles since the Gulf War?

$6 per barrel oil, anyone?

Things move more slowly in summer. The pace of the war against terrorism seems to be moving slowly in Afghanistan, but moves all too quickly if Israel’s battlefront is included. Moreover, it should be--the PLO and Arafat’s "government" are no less bent on genocide now than at any time in its sad history. The Israeli government must feel profoundly bitter and torn as they transfer funds to the Palestinian "government" in the aftermath of the recent university bombing.

Russia is assisting Iran with the construction of nuclear plants. That bears repeating. Russia is assisting Iran with the construction of nuclear plants. Fortunately, the Russian government is reconsidering its plans after pressure from the Bush administration.

Iraq now says that it may readmit UN weapons inspectors. Of course, Saddam Hussein has had years to perfect his camouflage techniques for his weapons stores and death factories.

Jordan’s King Abdullah says that talk of deposing Saddam is "somewhat ludicrous". Of course, Jordan depends heavily on support from Iraq, making the King’s motives subject to question.

The Saudi royal family is lead by a man near death in a hospital in Switzerland. Will his successor be friendly to the West? Or will his successor do anything to retain power, continuing to tolerate and even finance religious extremists up to the minute of his execution?

Indonesia, the largest predominately Muslim nation in the world, has its share of terrorists and revolutionaries who threaten its stability. The same is true of the Philippines. The US is trying to shore up these governments with aid, including anti-terrorism training for their armed forces.

The Russians are trying to exact heavy tolls and establish virtual control over oil shipped across the Caspian Sea from land-locked countries in the region. It recently held a series of naval exercises there that are clearly efforts to intimidate its oil-producing neighbors.

The list of truly serious problems goes on and on almost without end. Our nation, which seemed to want to turn inward after the 1992 election, cannot shirk its role in the world. However, we must accept that simple solutions are not to be found in any of these cases. Europe is long on criticism of US policy, but short on action--except in support of Arafat and Saddam. When and where we act, and act we should in many of these cases, we must accept that long-term US commitment to each of these regions is required to help foster stability and peace.

A slow summer indeed.