Tax preference for debt leads to over-leveraged economy (bankruptcy, 2014, mortgage)
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This analogy is just some fleeting, superficial similarities. Altogether this thread is two things.
1. An incredibly overconfident display of serious misunderstandings of corporate finance; and
2. A poor solution to a non-existent problem.
Clearly you are motivated by some misguided hostility to debt. You really bend over backwards to attempt justifying away valid uses of debt and it shows.
This analogy is just some fleeting, superficial similarities. Altogether this thread is two things.
1. An incredibly overconfident display of serious misunderstandings of corporate finance; and
Ad hominem attack and not a serious point on your part. Please explain what the relevant dissimilarities are. Note that it is not sufficient to point to any difference - you must show that the difference in question it is sufficient to undermine the efficacy of the analogy in the argument.
Quote:
Originally Posted by celcius
2. A poor solution to a non-existent problem.
It's not a non-existent problem when the economy is over-leveraged! If you think it is not, in fact, over-leveraged, please explain your reasoning.
Quote:
Originally Posted by celcius
Clearly you are motivated by some misguided hostility to debt. You really bend over backwards to attempt justifying away valid uses of debt and it shows.
Appeal to motivation fallacy - sorry, this is not a good argument.
Zero-coupon bonds pay nothing until maturity. The implicit interest is retained by the issuer during the bond's lifetime. A coupon-bearing bond is analogous to dividend-paying shares, while a zero-coupon bond is analogous to shares of a company retaining its earnings.
A company could, if it so chose, issue a 30-year zero coupon bond, and then buy the bond back 1 month before maturity. In that case it technically paid capital gains, not interest. The "implicit interest" was in the form of a discount of the bonds from par value.
Dividends are not required, but shareholders have the power to elect new members to their company's Board of Directors if they are dissatisfied with management decisions, including whether to issue dividends or not. In this sense, shareholders do (indirectly) have a right to dividend payments, unless the majority choose to forgo it in favor of retained earnings (corporate reinvestment). Retained earnings are related to capital gains on the shares in an analogous way as the lack of interest on a zero-coupon bond contributes to its capital gain, if it is bought back shortly before maturity.
A couple of points here, although many others have given you good guidance:
Zero coupon bonds pay imputed interest over their life. Bond holders are required to recognize income and companies are able to expense this imputed interest, in the time period that it is accrued. A good place to learn more about this would be to read up on OID in IRS publication 1212.
Quote:
Including OID in income. Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer.
On dividends, it is unrealistic to expect that a rogue shareholder or even a group of rogue shareholders are going to 'fire' the board of directors simply because they aren't happy with the current dividend payout. The majority of shares of most US companies are held by institutional investors, managed by fund managers who have fiduciary responsibilities to vote the fund's shares in the best interest of their funds shareholders. In theory, I suppose, it could happen, but it seems very unlikely.
A couple of points here, although many others have given you good guidance:
Zero coupon bonds pay imputed interest over their life. Bond holders are required to recognize income and companies are able to expense this imputed interest, in the time period that it is accrued. A good place to learn more about this would be to read up on OID in IRS publication 1212.
Absolutely - our current tax code does indeed treat imputed interest as an expense to the bond issuer and income to the bondholder. However, if the tax code is what you are using to justify the differing tax treatment of debt and equity (the topic of this thread), then you are essentially just making a status quo argument - "it is, therefore it ought to be".
I would argue that any independent and open-minded economist should question the status quo, not just accept it as is.
On dividends, it is unrealistic to expect that a rogue shareholder or even a group of rogue shareholders are going to 'fire' the board of directors simply because they aren't happy with the current dividend payout. The majority of shares of most US companies are held by institutional investors, managed by fund managers who have fiduciary responsibilities to vote the fund's shares in the best interest of their funds shareholders. In theory, I suppose, it could happen, but it seems very unlikely.
Right, this is exactly why I said "if a majority of shareholders...".
I've sat through college courses on logical fallacies as well, and I don't feel the need to highlight every time someone makes an argument that could be construed as one. This is a public discussion board, not a university lecture hall. Attempting to belittle people by accusing them of various logical fallacies instead of simply addressing their concerns doesn't win you any points. In fact, some might even consider it to be one of the aforementioned logical fallacies...
You don't agree with the current tax code, and that's fine. Parts of it I don't agree with either. Taxation is as much about pushing people towards certain behaviors as it is about generating revenue.
I've sat through college courses on logical fallacies as well, and I don't feel the need to highlight every time someone makes an argument that could be construed as one. This is a public discussion board, not a university lecture hall. Attempting to belittle people by accusing them of various logical fallacies instead of simply addressing their concerns doesn't win you any points. In fact, some might even consider it to be one of the aforementioned logical fallacies...
You don't agree with the current tax code, and that's fine. Parts of it I don't agree with either. Taxation is as much about pushing people towards certain behaviors as it is about generating revenue.
So do you think debt capital should be tax-privileged over equity capital? Why or why not?
How does any of this address any of the points I made?
Quote:
Originally Posted by Mircea
You asked....
Quote:
Originally Posted by ncole1
Please explain how you justify the differing tax treatment.
Quote:
Originally Posted by Mircea
I gave you the justification.
What more do you want?
You couldn't connect the dots, even after I connected them for you?
Quote:
Originally Posted by ncole1
You did no such thing. You went off on five different rants about past policies and not once did you explain why interest dollars should undergo single taxation while dividend dollars should undergo double taxation.
I guess we need a Slow Learner icon for some posters.
Okay, let's do this in slow motion.
Quote:
Originally Posted by Mircea
...a lesson in Political Science,...
The Hopi Tribe...never changes, right? It's the same people all the time. The Hopi people are immortal.
No, of course not.
We need to make a distinction between the groups of many different peoples and the groups those people create, and how they relate to other such groups.
That is a political science theory known as Entity Theory.
Entity Theory is the origin of corporations.
What is implied by Entity Theory? Sovereignty. That's what allows Entities to enter into agreements or pacts with other Entities. This sovereignty may be limited.
Quote:
Originally Posted by Mircea
... Medieval History,....Religion....
After the collapse of the [Western] Roman Empire, you see the formation of distinct Entities by towns, cities and villages, and also later with trade guilds and trading companies.
The Imperial Roman Catholic Church then begins to push its hegemony and exert control over those Entities. In fact, you arrive at a point where the Church claims it is the only Entity on Earth with the authority to grant permission for lesser Entities (towns, villages, guilds etc) to exist.
As an aside, some commentators on the Book of Revelations claim the Papal Seal is the "Mark of the Beast," since without the Papal Seal, you are persona non gratis or a non-entity.
Quote:
Originally Posted by Mircea
...a lesson in Political Science,...Medieval History,...
Later, you have the Nobility also claiming they have the authority to confer power upon an Entity. As the Nobility evolves further and the feudal system solidifies, these towns, cities, guilds and trading companies are viewed as a threat to the supremacy of the Church and the "State."
The Church and the Nobility join forces to crush any challenges to their authority, but that sets up the later conflict between the Church and the States.
That leads to the evolution of Concession Theory.
Technically, corporations are a franchise of the State. That's why it's called Concession Theory, since the State is actually conceding certain limited powers to the corporation.
What powers might those be?
What did corporations do? They boarded their ships and sailed to other foreign States to conduct trade. Effectively, corporations functioned as a "State Department." It was the corporations making foreign policy, instead of the King/State.
Quote:
Originally Posted by Mircea
...British Colonialism,....
How was America colonized? By the granting of charters to form all manner of corporations and municipalities, and even colleges (see Dartmouth College). Then you had groups claiming to be corporations/Entities via grant by colonial governors.
What happens when British rule ends? The States move to take over the power of granting charters or articles of incorporation.
Quote:
Originally Posted by Mircea
...Case Law,....
A very important case was Dartmouth v Woodward. The chief justice of the US Supreme Court at the time was Marshall, who said:
A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence.
That view (read the entire decision) led to the belief that corporate charters could only be granted if the corporation performed a public service. If you read these early articles of incorporation, you;ll see they go to tremendous lengths to justify their usefulness to the public.
Quote:
Originally Posted by Mircea
....the 1st Amendment, Religion, Case Law,....
Which brings us to Amesbury Nail Factory Co. v. Weed, 17 Mass. 53 (1820)
In spite of the 1st Amendment's prohibition on establishing religion or preventing the free exercise thereof, Massachusetts permitted taxation to support churches.
Amesbury argued that the nail factory had no soul and so the tax didn't apply. The court ruled that the factory benefits in the same way an individual benefits from any tax, and so the tax must be paid.
That leads to Goodell Mfg. Co. v. Trask, 28 Mass. (1831).
The argument here was that since none of the shareholders lived in the church parish, the company could not be taxed. The court ruled that "a corporation is an independent legal person" and subject to the tax.
Quote:
Originally Posted by Mircea
... or the Civil War.
Quite a few things are happening here.
First, corporations offered limited liability (at that time partnership did not). That made corporations more attractive than partnerships.
Second, limited liability was necessary, due to the now highly speculative nature of businesses, which was demonstrated during the Civil War.
Third, even though stock markets did not exist, it was easier to transfer stock certificates than it was the interest in a partnership.
Fourth, the nature of the economy had changed at the personal level for wealth, with a shift from tangibles to intangibles.
Finally, that led to a new theory called "Natural Entity Theory."
The philosopher Durkheim had a huge impact on that: group behavior has to be evaluated as a real, independent phenomenon that cannot be reduced to the wills of individual actors.
So the theory is that when a company is formed by the union of natural persons, a new real person, a corporate "organism" is created. Consequently, as a Natural Entity, the corporation is entitled and subject to the same treatment as an individual.
That brings us to the 20th Century, and the fact the States are having a hell of time locating and taxing intangible assets.
Right?
A stock certificate is a freaking piece of paper. It's not a railroad box car, or barn or silo, or land or a ship. There's rampant tax evasion, because the shareholder reports the amount of stocks they hold, and also their value. It's very easy for shareholders to under-report the amount stocks or their value.
That's what leads FDR to tax stocks and dividends in 1936.
Why are they taxed now?
Quote:
Originally Posted by Mircea
Would it surprise you to know that "double-taxation" is in the best interest of corporations?
What are dividends?
Isn't it the corporate officers who exercise discretion over dividends?
If the corporation isn't handing out dividends, then what is the corporation doing with that money?
Corporations are reinvesting that money.
How?
As the corporations see fit, without any input from the shareholders.
You need to seriously work on your study of Tax Policy.
The healthcare tax boogie-man? It's cheaper for your employer to give you increased healthcare benefits than it is to increase your wages.
That's very similar here.
Corporate officers frighten you with "you'll pay more in taxes if we give you more in dividends, so let us keep the dividends" (and reinvest them as we see fit).
So.....to summarize:
1] your government justifies it as a means of clamping down on tax evasion; and
2] Corporations justify it so they can have more money to reinvest instead of handing it over to you.
Free Cash Flow Theory....read it, learn it, know, it, live it.
Quote:
Originally Posted by ncole1
I never said that the value of equity shares should depend only on EBIT. That is a straw man and irrelevant.
You were the sole investor in all dotcoms?
I don't freaking think so.
One of the bad things about the internet is that stupid people get stupid information and then get really stupid by acting on it.
Which brings us to Amesbury Nail Factory Co. v. Weed, 17 Mass. 53 (1820)
In spite of the 1st Amendment's prohibition on establishing religion or preventing the free exercise thereof, Massachusetts permitted taxation to support churches.
Amesbury argued that the nail factory had no soul and so the tax didn't apply. The court ruled that the factory benefits in the same way an individual benefits from any tax, and so the tax must be paid.
I guess we need a Slow Learner icon for some posters.
Okay, let's do this in slow motion.
The Hopi Tribe...never changes, right? It's the same people all the time. The Hopi people are immortal.
No, of course not.
We need to make a distinction between the groups of many different peoples and the groups those people create, and how they relate to other such groups.
That is a political science theory known as Entity Theory.
Entity Theory is the origin of corporations.
What is implied by Entity Theory? Sovereignty. That's what allows Entities to enter into agreements or pacts with other Entities. This sovereignty may be limited.
After the collapse of the [Western] Roman Empire, you see the formation of distinct Entities by towns, cities and villages, and also later with trade guilds and trading companies.
The Imperial Roman Catholic Church then begins to push its hegemony and exert control over those Entities. In fact, you arrive at a point where the Church claims it is the only Entity on Earth with the authority to grant permission for lesser Entities (towns, villages, guilds etc) to exist.
As an aside, some commentators on the Book of Revelations claim the Papal Seal is the "Mark of the Beast," since without the Papal Seal, you are persona non gratis or a non-entity.
Later, you have the Nobility also claiming they have the authority to confer power upon an Entity. As the Nobility evolves further and the feudal system solidifies, these towns, cities, guilds and trading companies are viewed as a threat to the supremacy of the Church and the "State."
The Church and the Nobility join forces to crush any challenges to their authority, but that sets up the later conflict between the Church and the States.
That leads to the evolution of Concession Theory.
Technically, corporations are a franchise of the State. That's why it's called Concession Theory, since the State is actually conceding certain limited powers to the corporation.
What powers might those be?
What did corporations do? They boarded their ships and sailed to other foreign States to conduct trade. Effectively, corporations functioned as a "State Department." It was the corporations making foreign policy, instead of the King/State.
How was America colonized? By the granting of charters to form all manner of corporations and municipalities, and even colleges (see Dartmouth College). Then you had groups claiming to be corporations/Entities via grant by colonial governors.
What happens when British rule ends? The States move to take over the power of granting charters or articles of incorporation.
A very important case was Dartmouth v Woodward. The chief justice of the US Supreme Court at the time was Marshall, who said:
A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence.
That view (read the entire decision) led to the belief that corporate charters could only be granted if the corporation performed a public service. If you read these early articles of incorporation, you;ll see they go to tremendous lengths to justify their usefulness to the public.
Which brings us to Amesbury Nail Factory Co. v. Weed, 17 Mass. 53 (1820)
In spite of the 1st Amendment's prohibition on establishing religion or preventing the free exercise thereof, Massachusetts permitted taxation to support churches.
Amesbury argued that the nail factory had no soul and so the tax didn't apply. The court ruled that the factory benefits in the same way an individual benefits from any tax, and so the tax must be paid.
That leads to Goodell Mfg. Co. v. Trask, 28 Mass. (1831).
The argument here was that since none of the shareholders lived in the church parish, the company could not be taxed. The court ruled that "a corporation is an independent legal person" and subject to the tax.
Quite a few things are happening here.
First, corporations offered limited liability (at that time partnership did not). That made corporations more attractive than partnerships.
Second, limited liability was necessary, due to the now highly speculative nature of businesses, which was demonstrated during the Civil War.
Third, even though stock markets did not exist, it was easier to transfer stock certificates than it was the interest in a partnership.
Fourth, the nature of the economy had changed at the personal level for wealth, with a shift from tangibles to intangibles.
Finally, that led to a new theory called "Natural Entity Theory."
The philosopher Durkheim had a huge impact on that: group behavior has to be evaluated as a real, independent phenomenon that cannot be reduced to the wills of individual actors.
So the theory is that when a company is formed by the union of natural persons, a new real person, a corporate "organism" is created. Consequently, as a Natural Entity, the corporation is entitled and subject to the same treatment as an individual.
That brings us to the 20th Century, and the fact the States are having a hell of time locating and taxing intangible assets.
Right?
A stock certificate is a freaking piece of paper. It's not a railroad box car, or barn or silo, or land or a ship. There's rampant tax evasion, because the shareholder reports the amount of stocks they hold, and also their value. It's very easy for shareholders to under-report the amount stocks or their value.
That's what leads FDR to tax stocks and dividends in 1936.
Why are they taxed now?
What are dividends?
Isn't it the corporate officers who exercise discretion over dividends?
If the corporation isn't handing out dividends, then what is the corporation doing with that money?
Corporations are reinvesting that money.
How?
As the corporations see fit, without any input from the shareholders.
You need to seriously work on your study of Tax Policy.
The healthcare tax boogie-man? It's cheaper for your employer to give you increased healthcare benefits than it is to increase your wages.
That's very similar here.
Corporate officers frighten you with "you'll pay more in taxes if we give you more in dividends, so let us keep the dividends" (and reinvest them as we see fit).
So.....to summarize:
1] your government justifies it as a means of clamping down on tax evasion; and
2] Corporations justify it so they can have more money to reinvest instead of handing it over to you.
Free Cash Flow Theory....read it, learn it, know, it, live it.
You were the sole investor in all dotcoms?
I don't freaking think so.
One of the bad things about the internet is that stupid people get stupid information and then get really stupid by acting on it.
How'd EBIT work out for Joe & Jane McTrader?...
Mircea
The tax evasion argument is an interesting one. I honestly hadn't thought of it but I like it.
I guess I'm now wondering if you think it is more rampant than it was in 1936?
So do you think debt capital should be tax-privileged over equity capital? Why or why not?
With regards to the treatment of interest as a tax deductible expense, I have no problem. It incentivizes companies to spend money and expand, which is overall very beneficial for the economy as a whole.
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