Interesting republican tax bill

Dave Camp Bank Tax Bill Would Punish Obama-Friendly CEOs: via HuffPost I’m not sure what to make of the juvenile article or the juvenile behaviour it alleges. When analysing a bill the starting place is what the legislation says and whether that is desirable. The traditional treatment of assets for tax purposes is that you look at profit at time of sale. That works great for selling things that are things. Derivatives aren’t things, they are an abstract concept on a piece of paper in somebody’s office. It may have come to the attention of legislators that companies are declaring losses on derivatives but never declaring profits. If so that asymmetry does need to be removed. As for the general concept of a derivative, it’s a failure. They are supposed to reduce risk but instead increase it. Some of what derivatives protect against is not capable of actuarial calculation. Actuarial calculations depend on systems staying intact. Such calculations are premised on a predictable system and large numbers to average out as a source of data. So that method can be very reasonable for calculating a spouses entitlement to a portion of a pension, for instance. But in that case, factors such as whether the pension will self destruct are beyond the scope of the actuary, unassessed risks of unknown value. The actuary can say what age you are most likely to die at, but can have no opinion on whether the pension will still be there when it happens. Risk calculations only make sense within a stable system. Derivatives that cover e.g. exposure to a country’s debt, do not have an adequate basis for assessing the risk. Predicting whether a given Greek debtor will default in a stable economy is not difficult with a sample size of millions. Predicting whether a country will default with small sample size, changing identity of leading factions, individual risk factors and culture that make the history of other nations inapplicable, is very inexact. It is said that at 7% bonds become unsustainable, but if I were insuring government bonds I wouldn’t be doing so for less than 10% of the face value per year. In other words the derivatives backing e.g. government debt are dangerous. So if the republicans are looking at ways to put the brakes on derivatives that is worth looking at. The flip side of the supposed bill, protecting marginal home owners, sounds useful. As for the alleged motivation for the bill, if the republicans really are motivated by a personal vendetta to tax corporations that disagreed with their fiscal cliff position, they are running out of bridges to burn.


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