Bill Gross ... says tax policy shouldn’t favor capital over labor

[Mr. Big Dog 10,747]

Oh man, now PIMCO's bond guru catches the socialism.

Nah, not really. He's just stating the obvious.

Bill Gross, feeling bad he’s so rich, says tax policy shouldn’t favor capital over labor

Add this to Bill Gross’s growing list of life reflections.

The bond guru and co-chief investment officer at Pimco devotes his latest investment letter to the question of wealth inequality. More precisely, the wealth inequality exemplified by the fortune that he’s amassed over the years. The 1%-er writes:

“Having gotten rich at the expense of labor, the guilt sets in and I begin to feel sorry for the less well-off, writing very

public

Investment Outlooks

that “dis” the success

that provided me the soapbox in the first place. If your immediate reaction is to nod up and down, then give yourself some points in this intellectual tête-à-tête.”

To that end, Gross has a public-policy prescription for us:

“If you’re in the privileged 1%, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates.

Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals. The era of taxing ‘capital’ at lower rates than ‘labor’ should now end.”

Gross is fairly direct with advice in this one, but he does go on one of his trademark tangents, and in the process risks the ire of activist investor Carl Icahn. He compares the U.S. economy to a nameless company that has stagnant revenue but gives its stock price a shot of adrenaline through share buybacks. Both the U.S. economy and the company need organic growth, rather than this type of “financial wizardry,” in Gross’s view.

We’ll get back to the main point eventually, but the theme dovetails with his recent, momentary spat with Icahn. Gross called out Icahn for demanding buybacks from Apple Inc. AAPL , saying the activist would do better spending his time helping the world. Icahn shot back:

In his investment letter, Gross doesn’t suggest that he’ll take the Giving Pledge, which asks the richest people to devote the majority of their earnings to philanthropic causes, though he said on CNBC that he has joined a different pledge to give away all his money. However, his point here seems to be that the push for higher marginal tax rates, which in turn helps lower wealth inequality, will also provide its own philanthropy in the form of broad-based economic growth.

– Ben Eisen

[The Nature Boy 4,224]

Oh man, now PIMCO's bond guru catches the socialism.

Nah, not really. He's just stating the obvious.

If I was the kid of one of those rich fat cats and he became a moralist and decided to give all his money away, I would be so pissed.

[Mr. Big Dog 10,747]

Bill Gross writes in his letter: Admit that you, and I and others in the magnificent “1%” grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living. Yes I know many of you money people worked hard as did I, and you survived and prospered where others did not. A fair economic system should always allow for an opportunity to succeed. Congratulations. Smoke that cigar, enjoy that Chateau Lafite 1989. But (mostly you guys) acknowledge your good fortune at having been born in the ‘40s, ‘50s or ‘60s, entering the male-dominated workforce 25 years later, and having had the privilege of riding a credit wave and a credit boom for the past three decades. You did not, as President Obama averred, “build that,” you did not create that wave. You rode it. And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions.

Good stuff. He really gets it.

[Pinocchio Liberal 268]

Kinda like Bill Gates calling for higher taxes. Notice how these folks never give more than they have to? They say the words but never act. Why? cuz they don't want to be on the wrong side of Obama. The oracle of Omaha wants higher taxes while he is in a lawsuit over not paying taxes.

[Mr. Big Dog 10,747]

They say the words but never act. Why?

Because the action is up to the government - the legislative branch, specifically. Buffet, Gross, Gates and many, many others in leading positions in our economy know that our economic path of the past few decades is not sustainable. They know that in order for the economy to really grow again, for there to be a viable future for the US and global economy, you can't continue to rig the system to concentrate wealth at the very top. We've been there roughly 100 years ago and it didn't work well then either. We're in for a repeat of that unless there's a course change.

There was a time in Pimcoland long, long ago; so long ago that it now seems like a fairytale – except it wasn’t. I had criticized a large Fortune 500 company about its balance sheet and use of commercial paper. It wasn’t really meant to be company-specific but more indicative of the growing amount of leverage that our credit system was accommodating. The company took it personally. Sorry about that. I mention it now in the age of the golden Scrooge McDuck because another large company – I shall name it Company X to be safe – is again representative of an excess that may haunt America’s future. X is a well-known corporation that, to put it simply, has grown earnings and earnings per share accompanied by nearly flatline revenues. This troubling trend began nearly a decade ago – sales having increased by only 9% since 2003 – barely a percentage point a year. Its most recent quarter in 2013, as a matter of fact, showed no improvement, with revenues actually declining by 1% instead of moving up.

Profits, however, increased because the company cut expenses along the way. Earnings per share (EPS) did even better, because X used some of its cash flow to buy back stock instead of reinvesting much of it in new plant and equipment. What struck me was not this unmasking of company X’s secret sauce to elevate its stock price, but the similarity of this corporation to the plight of the broader U.S. and even global economy. Never have American companies sent a greater share of their sales to the bottom line. Even when S&P 500 companies have witnessed a decline in corporate earnings, as shown in Chart 1, they have still experienced EPS gains. X and many companies in the S&P 500 are remarkably similar.

The U.S. economy and Company X are lookalikes as well, perhaps even twins. Revenue growth in the U.S., for instance, can best be shown by national income or its proxy, more commonly known as nominal GDP. While our annualized nominal GDP growth rate has been a tad better than the 1% that Corporation X has shown over the past 10 years, our five year moving average has slowed from nearly 7% to just above 3% in recent years and struggled to do just that, as shown in Chart 2. “Expenses” have been cut significantly as the share of wages to GDP has declined from 47% to 43% during the past decade. Before-tax profits as a percentage of GDP on the other hand have increased from 10% to 14% over the same period, mimicking what has happened with Company X. And here’s a rather incredible kicker to this theoretical comparison. The U.S. economy – thanks to the Fed – has been operating a 1 trillion dollar share buyback program nearly every year since late 2008, buying Treasuries but watching much of that money flow straight into risk assets and common stocks instead of productive plant and equipment. My goodness! If X can’t grow revenues any more, if X company’s stock has only gone up because of expense cutting and stock buybacks, what does that say about the U.S. or many other global economies? Has our prosperity been based on money printing, credit expansion and cost cutting, instead of honest-to-goodness investment in the real economy?

The simple answer is that long-term growth for each company, and for all countries, depends not on balance sheet alchemy and financial wizardry, but investment and the ultimate demand for a company or a country’s “products.”

...

And back to my original point. Developed economies work best when inequality of incomes are at a minimum. Right now, the U.S. ranks 16th on a Gini coefficient for developed countries, barely ahead of Spain and Greece. By reducing the 20% of national income that “golden scrooges” now earn, by implementing more equitable tax reform that equalizes capital gains, carried interest and nominal income tax rates, we might move up the list to challenge more productive economies such as Germany and Canada.

Our problems are significant, Mr. President, and “Obamacare” and the signing up for it is far down the list of what we need to correct in order to move in the direction of “old normal” growth rates. Surely a few astute observers in Congress know that as well. Until we can more equitably balance “Scrooge McDuck” tax rates to rebalance wealth and “GINI coefficients,” while at the same time focusing on investment in the real as opposed to the financial economy, then the prospects for markets – whatever the asset class – are anything but “golden.”

Scrooge McDucks Speed Read

1) Growth depends on investment and investment in part depends on an equitable rebalancing of personal income taxes, capital gains and carried interest.

2) The era of taxing “capital” at lower rates than “labor” should end.

3) Investors in the U.S. and elsewhere must look for investment in the real economy, not share buy-back maneuvers that artificially elevate stock prices.

[himher 634]

Oh man, now PIMCO's bond guru catches the socialism.

Nah, not really. He's just stating the obvious.

Of all the dribble that you have posted on this site this is the only gem worth keeping. Trading, swapping, and flipping, though they do add wealth to individuals, do not build real, measurable value in society. These activities build bubbles.

Short-term capital gains should be taxed at a higher rate than labor and long-term capital gains should be taxed at the same rate.

Investment of capital in measurable assets of value should continue to be rewarded by tax policy through depreciation of the asset.

[SMOKE 1,426]

Because the action is up to the government

BS! if I want to pay more for something, out of the goodness of my heart. the action is up to me.

[Mr. Big Dog 10,747]

BS! if I want to pay more for something, out of the goodness of my heart. the action is up to me.

[SMOKE 1,426]

[Mr. Big Dog 10,747]

I see, because you are incapable of capturing the essence of Bill Gross' argument, liberals have their heads up their arses. Yeah, that's a strong and convincing rebuttal. Or are you just justifying your screen name by blowing, well, smoke?

Edited November 1, 2013 by Mr. Big Dog

[Teddy B 17,252]

[JohnR! 5,495]

You are much too kind...

[SMOKE 1,426]

I see, because you are incapable of capturing the essence of Bill Gross' argument, liberals have their heads up their arses. Yeah, that's a strong and convincing rebuttal. Or are you just justifying your screen name by blowing, well, smoke?

no. you don't seem to understand. if you want to give something. its up to you to give it. not for the government to take it from someone else, while you don't take the action yourself.

'Because the action is up to the government'

does obamacare provide treatment for your napoleon complex?

Edited November 1, 2013 by SMOKE

[Mr. Big Dog 10,747]

no. you don't seem to understand. if you want to give something. its up to you to give it. not for the government to take it from someone else, while you don't take the action yourself.

You haven't gotten an inch closer to the actual point. Bill Gross' investment letter has zip, zilch, nada to do with him wanting to give something. That's not the point at all. Surely you can read. Try it and see if you can grasp what it is that he's talking about. The subject matter is not gifting money to the IRS.

[Teddy B 17,252]

This is one of the better zingers I've seen in a while. Couldn't help but laugh my ####### off.