Comments on: What’s Wrong With IOUs? http://www.taxrascal.com/whats-wrong-with-ious/301/ Where the taxosphere converges. Wed, 04 Aug 2010 20:14:41 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Does California Treasurer Bill Lockyer read Taxrascal? | Tax Rascal http://www.taxrascal.com/whats-wrong-with-ious/301/comment-page-1/#comment-9105 Does California Treasurer Bill Lockyer read Taxrascal? | Tax Rascal Tue, 07 Jul 2009 14:09:23 +0000 http://www.taxrascal.com/?p=301#comment-9105 [...] tax blog is to be believed, California’s treasurer is doing exactly what this site suggested: paying the bills with IOUs! As predicted, these IOUs aren’t exactly like that time your brother-in-law promised [...] [...] tax blog is to be believed, California’s treasurer is doing exactly what this site suggested: paying the bills with IOUs! As predicted, these IOUs aren’t exactly like that time your brother-in-law promised [...]

]]> By: California is Nearly Bankrupt — And They’re Printing Money! | RapidTax Blog http://www.taxrascal.com/whats-wrong-with-ious/301/comment-page-1/#comment-9104 California is Nearly Bankrupt — And They’re Printing Money! | RapidTax Blog Tue, 07 Jul 2009 13:50:24 +0000 http://www.taxrascal.com/?p=301#comment-9104 [...] ago, Taxrascal suggested that state IOUs aren’t so bad. Perhaps California’s treasurer read [...] [...] ago, Taxrascal suggested that state IOUs aren’t so bad. Perhaps California’s treasurer read [...]

]]> By: admin http://www.taxrascal.com/whats-wrong-with-ious/301/comment-page-1/#comment-223 admin Thu, 22 Jan 2009 00:40:24 +0000 http://www.taxrascal.com/?p=301#comment-223 Those solutions would be equivalent (ignoring transaction costs). I guess the difference is that if they issue the bonds, California's regular bond owners would get the message that the state needs to borrow a little more money. If they sent bonds to the taxpayers, it would instead get out the message that the state is in dire straits, which might lead taxpayers to change their behavior in useful ways. My point about the market price is that this would involve distributing something that does have the same market value -- not face value -- as the debt in question. It would clearly be a bad idea for California to pay people back X cents on the dollar by giving them debt instead of cash; much better to pay them off at 100 cents on the dollar by giving them debt that, at the market price, can be exchanged for the amount of cash the person would otherwise get. People who need the money can get it; people who don't can help support their state's finances. Those solutions would be equivalent (ignoring transaction costs). I guess the difference is that if they issue the bonds, California’s regular bond owners would get the message that the state needs to borrow a little more money. If they sent bonds to the taxpayers, it would instead get out the message that the state is in dire straits, which might lead taxpayers to change their behavior in useful ways.

My point about the market price is that this would involve distributing something that does have the same market value — not face value — as the debt in question. It would clearly be a bad idea for California to pay people back X cents on the dollar by giving them debt instead of cash; much better to pay them off at 100 cents on the dollar by giving them debt that, at the market price, can be exchanged for the amount of cash the person would otherwise get. People who need the money can get it; people who don’t can help support their state’s finances.

]]> By: Goose The Tax Dog http://www.taxrascal.com/whats-wrong-with-ious/301/comment-page-1/#comment-221 Goose The Tax Dog Wed, 21 Jan 2009 19:36:23 +0000 http://www.taxrascal.com/?p=301#comment-221 If they could give out bonds whose market value is equal to the value of the refund, then why not raise the cash on the bond market as usual and then pay it out to taxpayers? Probably because the market would demand more percentage points than the state is willing to pay. Then why should we expect the taxpayers to accept a lower risk premium than bond market investors are willing to accept? Issuing a bond with $50 face value does not mean that the market value is $50. But I should have said earlier that your general point that IOUs aren't such a bad thing probably has something to it. If the credit markets are out of whack, then promising to pay later with "reasonable" interest (as opposed to that being currently demanded by bond investors) seems to be a next-best-solution that most everyone can live with. If they could give out bonds whose market value is equal to the value of the refund, then why not raise the cash on the bond market as usual and then pay it out to taxpayers? Probably because the market would demand more percentage points than the state is willing to pay. Then why should we expect the taxpayers to accept a lower risk premium than bond market investors are willing to accept? Issuing a bond with $50 face value does not mean that the market value is $50.

But I should have said earlier that your general point that IOUs aren’t such a bad thing probably has something to it. If the credit markets are out of whack, then promising to pay later with “reasonable” interest (as opposed to that being currently demanded by bond investors) seems to be a next-best-solution that most everyone can live with.

]]> By: admin http://www.taxrascal.com/whats-wrong-with-ious/301/comment-page-1/#comment-220 admin Wed, 21 Jan 2009 16:19:12 +0000 http://www.taxrascal.com/?p=301#comment-220 There's no reason the state couldn't give out bonds whose market value is equal to the value of the refund (or close enough; they could, for example, give away bonds in $50 increments, and pay the rest in cash). When California can't borrow on 'reasonable terms', it means they need to pay a few percentage points more, not that they need to put everything on Arnie's Capital One card. There’s no reason the state couldn’t give out bonds whose market value is equal to the value of the refund (or close enough; they could, for example, give away bonds in $50 increments, and pay the rest in cash). When California can’t borrow on ‘reasonable terms’, it means they need to pay a few percentage points more, not that they need to put everything on Arnie’s Capital One card.

]]> By: Goose The Tax Dog http://www.taxrascal.com/whats-wrong-with-ious/301/comment-page-1/#comment-219 Goose The Tax Dog Wed, 21 Jan 2009 16:11:39 +0000 http://www.taxrascal.com/?p=301#comment-219 A third objection might go as follows: the reason that California cannot pay tax refunds in cash is that it is currently unable to borrow the necessary cash; that is, the state finds itself unable to entice anyone to lend it money on reasonable terms. Issuing bonds to taxpayers would be forcing those taxpayers into a bargain that nobody on the open market has been willing to enter. Thus, the value of the bonds would necessarily be less than the value of the refunds due the taxpayers. If I am a taxpayer owed $50, the state of California had better give me something worth something close to $50. A third objection might go as follows: the reason that California cannot pay tax refunds in cash is that it is currently unable to borrow the necessary cash; that is, the state finds itself unable to entice anyone to lend it money on reasonable terms. Issuing bonds to taxpayers would be forcing those taxpayers into a bargain that nobody on the open market has been willing to enter. Thus, the value of the bonds would necessarily be less than the value of the refunds due the taxpayers. If I am a taxpayer owed $50, the state of California had better give me something worth something close to $50.

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