[blackjackblax]

Questions.

Is our financial services often a product of our tax laws... like they wouldn't be needed if the choice wasn't between:
1. Paying some smart person 10+% (or profits?) to invest your money for you.
2. Paying the government ~30% to be able to do whatever you want with your money. People would be less likely to pay an additional amount to have someone else invest for them.

Isn't this distorting the savings/etc rate by encouraging people to invest in a pension/etc fund rather than buy a new boat or a new TV? It seems like this is just as distortionary as mortgages being a tax right off, if not more so.

JM

[NanoGordeno]

Okay, so why should I care whether people invest in stocks or pension plans? And Americans are definitely not saving too much, so I don't see why I should care if the current tax policies promote saving.

[ranndomderr]

How do income taxes create a disincentive to save? I know and understand that capital gain taxes do (Although I think it is a much smaller factor than this distortion). Because if you save, and you have an income tax, you are going to be taxed initially when you earn the income and also be taxed on any interest/capital gains/etc you earn by saving the money. Moreover, taxing returns to saving drives a wedge between the social return on savings and the return the tax payer receives by saving, therefore saving under an income tax will be below the optimal level. But like you said any tax is going to create distortions, if you tax returns to savings less then you are going to have raise the tax rate and this would distort labor-leisure time more than it is now.

[FilmCriticAwezume]

A few things here, Jon:

1) The basic premise is probably true; 401(k) plans generally do not (never?) offer brokerage account functionality, i.e. the ability to buy and sell individual stocks, bonds etc. For that reason, money which goes into a 401(k) will have to go through to some money manager

2) However, most 401(k)s do offer very low-cost index funds which charge between 5 and 25bps per annum, which is a pretty cheap way of getting high diversification. I am quite happy to pay, IIRC, 6bps to State Street for my large cap US exposure, 10 bps for my small and midcap US exposures and 20bps for my emerging markets exposure in my 401(k)

3) IRAs are not limited in the same way that 401(k)s are, therefore anybody with income under ~160k can put something like 5k a year into a brokerage account which has similar tax benefits to a 401(k)

4) Investment management existed before 401(k)s and would exist even if 401(k)s offered brokerage account functionality. And the comparison of the makeup of equity owners in 1945 and today is disingenuous; mutual funds were still pretty new in 1945, and since then people have come to understand far better the benefits of diversification that a small investor can only efficiently achieve through a money manager (whether an index fund or an active money manager)

5) Investment management for the retirement accounts of individuals is only a small part of what most financial companies do. There are, of course exceptions (who are money managers first and foremost), but the average firm on the Street is not reliant on the revenues from 401(k) management fees

[Lyikmcmb]

Okay, so why should I care whether people invest in stocks or pension plans? And Americans are definitely not saving too much, so I don't see why I should care if the current tax policies promote saving.

Current tax policies do not "promote saving". Exemptions to the policy of taxing earned income AND the time value of saved earned income simply reduce some of the current distortion in favor of immediate consumption.

The reason somebody might care about the form the savings take (mutual fund versus the purchase of individual securities) is that actively managed mutual funds are quite expensive for investors in terms of fees.

[Gulauur]

I don't think I have a clear picture here, although I learning.

A question I now have is what percentage of the market are:

Institutions
Corporations
Individuals
Pensions/etc
Countries

If Individuals went from 90% to 30%, other portions would have to increase, a lot. If it isn't mostly pensions, what is it?

Obviously Corporations, Institutions, and Countries would all require managers (either in house or in a special firm) and wouldn't be replaceable. I guess my expectation is that a lot of the market is still really owned (through intermediaries) by people, and not by independent institutions. The larger the market there is for financial services, the greater the competition/innovation/cost in that sector and so on. There have been statistics I have seen showing an increase in the amount of money going to financial services. A large decrease in the ownership of stock by individuals, and increase by institutions/etc which need management would increase the share of gdp going towards financial services. Also very wealthy people will want managers (in order to have reasonable diversification).

If I am wrong, and we are seeing a large increase in the ownership of capital by institutions/etc as a share of total ownership in the last 50 years, then this would have profound social implications which I don't completely understand.

There are current parts of the tax policies (the capital gains tax mentioned in this thread and the exemption for 401k/etc) which do have distortionary effects. It isn't clear to me which form the distortion takes. I know many people who seem to have long term savings which are primarily of exempted types.

The costs of active management are combined with the costs of inflation and capital gains taxes when determining whether to save or not (once the necessities have been acquired, which is actually a large part of most people's income).

I am not sure what to count social security as (it should definitely be counted in individual saving rates). It is also a pension of a sort, but isn't invested in the market... is rather given to the country in the expectation that the country will give back later in life.

Jon