Open Source Notes: All-In Podcast Ep 30

Ramifications of Biden's proposed capital gains tax hike, founder psychology, and Covid-19 in India

In Open Source Notes, I share key insights, ideas and learnings from some of my favourite podcasts. None of the facts and opinions expressed herein are my own and I attribute full credit to the author(s) of these works.

Key takeaways

Doubling of US capital gains tax rate

  • Potentially a necessary outcome of the tremendous amount of debt taken on by the US government over the course of the Covid-19 pandemic

  • Likely to disrupt the capital allocation process by diverting risk capital from private investors to the government who decides (inefficiently) how it gets spent; on a marginal basis, it drives up consumption at the expense of investment

  • Symptom of the unsustainable debt burden taken on by the US and a wider lack of accountability issue with respect to returns on government spending

WeWork and founder psychology

  • Founder psychology can cause companies to go off the rails because founders need to be much more aggressive than the average person to drive forward their company (enabling extreme upside at the expense of high volatility)

  • The real edge in investing is figuring out the difference between window dressing / show and actual aggressive thinking, while also taking into account the maturation process that founders go through

Covid-19 in India

  • India is facing not only a vaccine supply issue, but also the issue of a lack of demand, fuelled in part by the widely proliferated media scare stories

  • Viral variants generally aren't vaccine-resistant, they just take longer for some people to fight off because everyone produces a different portfolio of antibodies, some of which are more (and others less) effective for defeating a particular variant


Capital gains tax hike and federal budget problem

What happened:

  • Biden proposes capital gains tax hike from 20% to 39.6% for those earning $1 million or more to raise $370 billion over the next decade to pay for social spending, improve equality, etc.

  • As a primer, capital gains taxes are a tax on profits from investments, with a lower rate on long-term (>1 year) capital gains to incentivise people to invest their capital into the economy and promote its long-term growth

  • Historically, the highest level that the long-term capital gains tax has been set is 40% in 1976-78. For the past 20 years it has stayed at 20%.

Chamath's view:

  • Current iteration of proposal is largely performative in that Biden does not expect it to pass and he is just appealing to the extreme left

  • On a marginal basis, an increase in the CGT rate shifts the risk/reward equation faced by investors and leads to greater propensity to consume versus invest (likely driving up inflation as a result)

  • In the VC space (early stage ventures and company formation), entrepreneurship is likely to drag because the risk appetite of investors has now been reduced. Part of the reason why the US has been so successful as a sink for capital is the incentive (i.e. rewards) it creates for investment and capital allocation, and a shift in CGT could disrupt that.

  • Changing the CGT rate may disproportionately punish the investing class while missing out the actual wealthiest people (e.g. Jeff Bezos, Elon Musk, Mark Zuckerberg) who don't pay capital gains taxes because they are unlikely to sell stakes in their companies

  • High US debt burden is a symptom of a wider accountability issue in that in a private company, the dollars can be traced through the entity and we know where it is being allocated and spent, and a 'return on capital' can be measured. There is no equivalent mapping of dollar flows / market return for government spending.

  • We should take lessons from other countries in terms of the outcome of different strategies with respect to government intervention in capital allocation, e.g. Singapore, whose government enables human capital outcomes but remains relatively non-interventionist, has seen tremendous growth; whereas Europe is a good example of how large spending in the public interest has actually led to undesirable outcomes

Sacks's view:

  • Bill will pass (albeit not necessarily at the 39.6% rate) as part of the wider package of social programs bucketed under "human infrastructure" investments

  • CGT rate was original reduced from 28% to 20% in the mid-90's by Bill Clinton and that led to some of the best years of GDP growth, productivity growth and deficit reduction.

  • A common misnomer is that CGT is the same as income tax. Income invested in capital has already been taxed once before. The reason it has a lower rate is it is a form of double taxation.

  • CGT is a diversion of risk capital from the hands of private, capitalist investors to the government and its legislators, who decide how it gets spent. When thinking about whether this is sensible, we should not only be thinking about who the tax punishes, but what benefit we as a society will capture from that change

  • One of the (perhaps only) really good things working in America right now is its ability to allocate risk capital to founders who have really good ideas, and a doubling of the CGT rate should be seen as an attack on that. Notwithstanding that, there needs to be a productive conversation around how to spread this system of opportunity to more people - punitive taxation is likely not the answer here.

  • Another problematic part of this bill proposes to max out taxes relative to historical levels, but the $370 billion raised won't actually achieve any of the big-ticket items on the progressive's wish list (universal healthcare, universal higher education, forgiveness of student loans)

  • Federal spending as % of GDP have been 20% in most years in US history, but now the government seems to be settling on 30% post-Covid-19 level as a permanent higher level of spending. There is a bipartisan issue of unsustainable levels of spending.

Friedberg's view:

  • Taking a step back, we should realise that the US has taken on a tremendous amount of debt over the course of the Covid-19 pandemic to fund a number of social programs to keep the economy moving. That was a massive accrued burden that can only be unwound in one of three ways:

    1. Take on even more debt and allow inflation to erode the face value of debt (undesirable and already at the economic limit of debt)

    2. Reduce government spending (very hard to implement given current fragility)

    3. Raise taxes (perhaps only real option - and capital gains is a sensible area where taxes might materialise)

  • CGT hike is not necessarily meant as an attack on the rich but rather a natural course of action for the government given the current circumstance we find ourselves in in this moment in time.

  • The problem is that the US has such a high debt burden and that it is effectively struggling to find a way to make ends meet.

  • The lack of accountability issue of the US government is particularly scary given the Federal government directly employs over 10 million Americas, and large numbers of the remaining population are supported by federal spending (e.g. defence and military, construction, healthcare and pharma).

Hulu WeWork documentary and founder psychology

  • Founder psychology can cause companies to go off the rails. Founders need to be much more aggressive than the average person because they need to push the company forward. But with increasing returns to aggression some go too far.

  • Cult of personality enables extreme outcomes (beta personality enables the alpha). Some founders are described as 'wild stallions' with tremendous upside but they are also highly volatile.

  • It's very difficult to identify people like this in the midst of things because the line between insanity and genius is so thin.

  • The real edge in investing is figuring out the difference between bluster / window dressing / show and actual aggressive thinking.

  • That said there is also a maturation process that founders take to get through, to learn to harness the talent they have. It's difficult to know whether to bet on these types of founders early on.

Covid-19 in India

  • New cases in India are surging and now hitting 250-300k per day (more than any other country has seen at their peak of the pandemic)

  • Number of daily deaths has 10x to 2000 in 30 days

  • Indian politician that had been double-vaccinated is claiming that he along with others in his family are testing positive, creating some fears about strain mutation

  • A country's success in defeating Covid is about how fast they can vaccinate their population, and this is not just a vaccine supply issue, but India also has the problem of demand (partly as a result of media scare stories)

  • We should reject media scare stories that don't accord with the science, e.g. the false idea that vaccinated people should wear masks - the probability of someone who has been vaccinated getting infected / being infectious in a meaningful way is so remote that it is not even worth considering

  • Timing of surge in India is unknown - there is some discussion about India having 100-200 unique variants that might be increasing transmission. People are also changing their behaviours, i.e. letting their guard down more so than they were six months ago.

  • Important lesson: whether a vaccine protects against variants is a non-binary statement. Vaccination allows your body to print the spike protein. Everyone's body reacts differently to create antibodies to that protein. Everyone will have tens of thousands of novel variants of antibodies in their body, some of which will be more effective for defending against Covid and others that will not. When it mutates, other antibodies in the portfolio will become more effective, and it is the portfolio that defines each individual's success in defeating a particular variant.

  • When viral variants take off in the population, it doesn't suddenly mean we don't have immunity (binary outcome), but it might mean that it takes longer for some people to fight it off.

  • Most of the variants that the press reports as vaccine-proof turn out not to be. Endemic problem of the press operating an opinions-based business model and retaining their viewership based on fear-mongering.


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Hi, I’m Park!

Open Source Finance is a blog to document my journey into the complex and fast-moving world of fintech. In this blog, I share ideas, insights and key learnings about companies, technology, entrepreneurship, innovation and more.

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