The secondary market and a new Retirement Savings Program

I was talking to the Taxi driver taking me back home yesterday. As these conversations go, we started talking about the politics and the economy. At one point, I said that losses in the stock market weren't validated until the stocks were sold. He replied that people using their RRSPs during their retirements have no choice but to sell to be able to use their assets.

This got me thinking. The stock market is a secondary market. It is set up so that owners of a company can sell their parts in a company to others that want to be part of the company's future. Well, that was the idea. What is happening now is that most people (and I'm included in this) buy shares of a company with the hope that their value will go up so that they will be able to sell them for profit afterwards. This is creation of wealth without effort¹ or real production.

The basis of capitalism is to create wealth through production. The idea is that the market will regulate what gets produced through supply and demand. The production is essential for the growth of a country but our economic system is based on the increase in money rather than physical or virtual products (IP or the like). I can't say the current financial crisis or the resulting economic slowdown was inevitable. I just think that from a political perspective, there should be a way to uncouple the economy from the financial secondary markets. We need to bring back the incentives on production. Also, we need to make sure that people's wealth doesn't disappear because of someone else's mistake.

The creation of a beefier savings program by the government, one that would give guaranteed returns as high as mutual funds, would help tremendously. This program would not need to be tax deductible like the current RRSP, but you wouldn't be able to remove the money before retirement or a certain age. I'm not sure such a plan would be profitable but the government is not there to make a buck. It is there to ensure that citizens live as well as possible.

 

¹There is of course intellectual effort in choosing the right stocks or mutual funds, but it is theoretically possible to make money by just picking random securities.

Andra Rush

It's been a long week for me and I hadn't been able to update. At any rate, I found out about Andra Rush this Monday during a Case Study. I found the story so incredible that I thought it was made up. It wasn't. Here is a little background on her thanks to Inc.com

http://www.inc.com/magazine/20040401/25rush.html

One part of the story not included in the article is that during the 2001 attacks she had a shipment of car parts to deliver to customers on the Manhattan Island. All the bridges were closed and I think most people would have just turned around and said: "I can't do it". Instead, she managed to find and rent a barge to make sure that her parts were delivered as she promised.

On Corporations and Taxation

I was reading last week a letter from McGill Economist Christopher Ragan published in the Gazette. He was saying that he would vote for whoever promised to remove all corporate income tax. The idea was that the owners are already being taxed on their personal income tax. Also, since companies are much more sensitive to tax fluctuations the corporate tax cut would have a greater effect on the economy than an equivalent general or personal tax cut.

To make a proposition like this work it seems that you would need to make sure that the owners (stockholders) of the company are Canadian. This led me to think about how you could implement differential tax rates for Canadian Vs Non-Canadian companies. Basically, you would have different tax rates for corporations depending on the level of their Canadian ownership. The more Canadian the company, the less tax they would pay culminating with 0 taxes for those with 100% Canadian ownership. This is one way to ensure that the income lost by cutting corporate taxes is recuperated afterwards.

    There are still many unknowns in this idea (to me anyways). The first is whether all of this is legal per our international agreements. We are part of several Free Trade Agreements and this could be seen as unfair competition. The second is whether or not this is even worth it. We must go towards more social services, not less, and there is no guarantee that the government will end up with more money in the end. It will increase the level of retained earnings in companies and the idea is that even these will trickle out in wages and investments. What happens, if those investments are made oversees? We could add an "Oversea tax" but that would increase bureaucracy and costs for the government. It might also end up preventing Canadian companies from setting up shop in other countries to become more competitive and better serve their target markets.

An Introduction in Creativity

I want to welcome all visitors to this blog. This is a political blog without politics. Its purpose is to generate ideas and look at their feasibility. This might sound cliché but there are no wrong ideas. We can gain something from any creative exercise!