Wednesday, December 05, 2007

Tax Free, For Profit Corporation Idea

At the Renaissance Weekend this past Labor Day, I proposed the creation of an "F Corporation" as an alternative corporate entity to the traditional "S Corp", "C Corp", and 5013c non profits. Several people asked me to post this idea, especially given the political fireworks around the elections. This isn't intended to be political, but I'd welcome criticisms to be posted on the blog.

This "F Corporation" would be Free of federal taxation, but would be allowed to operate for profit. The catch is that upon incorporation, and for any share issuances thereafter, the US Treasury receives 35% of the equity.
Why this could make things better:
The Directors and Officers of a corporation have a fiduciary duty to benefit shareholders. This is a real, legal obligation. That obligation requires that Directors and Officers take action to maximize the cash flow from the business that ends up in the hands of the shareholders. One way this obligation is met is by avoiding payment to other stakeholders in the corporation--in particular the tax authority--since that stakeholder provides no direct benefit to corporate interests.
A significant amount of inefficiency exists because of this lack of alignment of interests between the government and the shareholders, as evidenced by the existence of an entire industry for corporate tax accounting and consulting.
Over time, the shares held by the US Treasury generate cash flow in two ways: first, through the payment of corporate dividends, in the same way that other shareholders receive dividends; and second, through the cash payment for shares when a corporation is acquired.
If tax payments were retained within a corporation, that capital could be reinvested and grown at a rate equal to the return on equity, less dividends. In the time period from 1802 through 1998, a dollar invested in Treasury bills—the effective return on tax receipts, would have grown by a factor of 3,847 while a dollar invested in large cap equities would have returned 9,856,849 times. (Source: Pioneering Portfolio Management, Swensen, page 61). Few people appreciate the magnitude of compounded returns over long periods of time. Compounding our national wealth in such a way could easily erase a federal debt that is otherwise insurmountable. Existing corporations could elect to irreversibly convert into “F Corporations.” This strategy leverages one of the United States greatest assets—efficient, well developed capital markets.
Argument against: What about the other stakeholders, like employees and the environment? Government taxation of corporations allows these interests to be represented by #1 diverting cash flows directly to the government for allocation and #2 changing corporate behavior through implementation of tax incentives and penalties.
Counter argument: The cash flow to the government from the equity interest is significantly higher than from direct taxation for 3 reasons: 1) the elimination of loss from tax avoidance and deferral strategies 2) the compounded returns gained from corporate reinvestment of capital, 3) the increase in corporate profitability due to the increase in ability to make decisions solely based upon profitability uncompromised by the considerations of tax implications. This increase in ultimate tax revenue to the government, by growing the pie, will give other stakeholders more capital for their needs. Moreover, legislators can still influence corporate actions through non-tax oriented laws. A good example of a law which changed corporate behavior without a tax motivation is Sarbanes Oxley.

Tuesday, November 20, 2007

The Psychology of Making Money
I posted the article below as a guest author at, a startup that I've recently funded. Personalityzone is a pretty cool, because it allows content to be customized based upon personality type.

The goal of investing is to accumulate wealth.

However, the practice of investing is an exercise in cultivating self awareness. Knowing your own personality type and your how this effects your investing behavior can make the difference between sustained success and flaming out as you pursue your financial goals.

What does psychology have to do with making money? In short, almost everything. Most investing advice begins with something that tells you how to think about something. Changing your thinking requires an awareness of not only how you currently think, but an ability to be self aware, in the moment, to recognize unproductive thought patterns. Investing also requires mastery of the animal instincts—fight or flight—and their emotional manifestations—fear and greed. The emotions can have a strong impact on the outcome of otherwise objective, analytical judgment. Understanding how emotions color judgment can not only help you avoid cognitive errors, but also allow you to capitalize on such errors when they are made by others.

Through evolution, our brains are wired at the core (the amygdala to be exact) to respond rapidly to threats and opportunities. The amygdala triggers an emotional override of the rational brain because reflexes respond much faster than the slow process of cognition. Recognizing this mechanism and delaying a decision until the emotions settle and there is time for contemplation distinguishes the rational investor from the trader.

It is interesting that the amygdala also has a central role in memory processing. It ensures that memories associated with pain and pleasure are disproportionally burned into long term memory. This was an advantageous evolutionary adaptation when we needed to remember where the saber tooth tiger lived or where to locate food or a mate. However, this feature is a maladaptation when the brain is used to invest. It causes us to remember the painful loss on a bad investment far more than the steady, unexciting returns generated across the rest of the portfolio. In fact, psychological studies have proven that one dollar of financial loss is equivalent to three dollars of gain. Such asymmetry in psychological response to a quantitative event can create inefficiency in asset prices in times of crisis. Fortunately, we have the benefit of computers and historical datasets that represent a much better history of the facts than we can remember. However, it is incumbent on the investor to objectively look at the data and not bias it with their emotionally colored memories.

Recognizing the mistakes that our brain may create in the investment process is the first step in transcending its limitations. While the brain may not change in its physical form, we can reprogram it through the effort of conscious thought. With such mindfulness in practice, the rational investor can gain an advantage for accumulating wealth by recognizing opportunities that others do not. Being centered is the secret to buying low and selling high.

Signs the Dollar is near the bottom...for now

Gisele B√ľndchen is said to be keen to avoid the US currency because of uncertainty over its strength.
When nonsense like this gets press, it raises the likelihood that the trend is likely played out.

Thursday, September 06, 2007

Wiki Mind Map --UI for Wikipedia

I’ve found to be an extremely useful research tool. However, I’ve found something even better:

This site will create a “mind map” of a Wikipedia topic. The value of this map is that it provides a visual representation of the topics that are adjacently related to your primary search phrase. This reduces the amount of time it takes to find what you were actually looking for. It also increases the chance you will notice a related and relevant topic that you were not anticipating.

Tuesday, July 17, 2007

The Earth is Expanding

The following video makes a case for the idea that the diameter of the Earth is expanding. . What's not mentined in the video, is the observed evidence that supports such a theory--the slowing of the Earth's rotational rate, which is observed to be decelerating at about 2 milliseconds per day per century --

The deceleration of the Earth's rotational speed is caused by the conversation of angular momentum--mass stays the same, diameter increases, so rotational velocity must decrease.

Given how much the diameter has increased from dinosaur days, the cross-sectional area of the Earth as viewed from the sun would have increased significantly. This increase in thermal flux would result in an increase in the temperature of the Earth, all things being equal. This change in thermal flux over time may help explain a lot of open ended questions about the history of the Earth's climate.