This is the fourth discussion of the ModernGraham Book Club‘s reading of Business Adventures: Twelve Classic Tales from the World of Wall Street. This week we are discussing the third chapter of the book, titled “The Federal Income Tax.” I encourage you to purchase the book (preferably by clicking the link to Amazon, because a purchase through that link will help support the club) and join in with us as we read through a chapter each week; however, even if you don’t have the book I think you will find our discussions to be very useful in your own understanding of value investing, and you can still bring a lot to the discussion from your own experiences as an investor. Whether this is the first day you’ve ever been interested in investing, or you have decades of experience with the stock market, we’d love to hear your thoughts in the comments below!

For this particular book’s discussion, frequent ModernGraham commentator John Michler will lead the discussion. John brings experience in banking to the discussion, and his passion for value investing will drive some great commentary as we read through Business Adventures. It is planned that each post will include thoughts about the chapter followed by some discussion questions.

Please feel free to leave a comment on this post with your own responses to the questions, along with any other thoughts you have, and return throughout the next couple of days to see what others have said.

Business Adventures ModernGraham’s Comments

Business Adventures John

What is your favorite quote(s) from this chapter?

“Here is the exciting story of the largest most efficient tax collection organization the world has ever known – the United States Internal Revenue Service!” I am no tax expert, but it is clear that low income earning people pay a high proportion of their income to taxes simply because they must consume their entire income. While on the other hand, high income earners get to put money into various vehicles and get to avoid paying tax on income.

What do you think of how income tax history in the US and the world has changed?

We see so much talk about taxes in the news and elections, but until rather recent modern times, tax collection was not relied upon for a country to operate. I do find it interesting that tax collection and lotteries would come up mainly to finance war. It seems that the very nature of tax legislation is just supporting job creation for politicians and people working in the field of taxes. How efficient is this use of resources going just to the creation of implementation of taxes? I suppose it must be done to keep it as fair as it can be. It seems like relying on self reporting at 95% of the time is not really relying on self reporting.

What do you think of the high income earners inequality with tax deduction ability compared to the real tax rate is low income earners pay?

Tax loopholes seem to be a necessary evil to try to level the playing field of low income and high income earners. I find it interesting that government feels the need to give oil producing ventures a depletion deduction that goes above and beyond their cost incurred. This is justified in that they need to be compensated for the excessive risk involved with the oil industry, but this risk is not unique to oil. Why can’t it be applied to intellectual property too? Such as the case with writers or other creative ventures – they don’t all have an endless supply of compelling stories to write. Access to professional tax advice as a hindrance to equality. Until the recent expansion of tax preparation services at a lower cost, it seems that the complexity of the tax system is the biggest injustice to the low income earner. The very thing that is supposed to help level the playing field actually puts up one of the biggest hurdles.

Discussion Questions

Please leave a comment below and feel free to answer any of these questions, or just give your general thoughts.

  1. Please introduce yourself, if you are new to the discussion, giving particular emphasis on your background in investing.
  2. What was your favorite quote(s) from this chapter?
  3. What do you think of how income tax history in the US and the world has changed?
  4. What do you think of the high income earners inequality with tax deduction ability compared to the real tax rate is low income earners pay?

Next Week’s Discussion: Chapter Four

Chapter Title – A Reasonable Amount of Time

What are some other ways to participate?

If you are a blogger, you can give your thoughts in a post on your own site, link to the discussion here on ModernGraham, and I will be sure to let our readers know that the conversation is going on over at your site as well.

In addition, you can use the hashtag #MGBookClub in social media to talk about the book on Twitter or Facebook!