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Demand for credit is driven mostly by inflation, with only a minimal driving force being tax incentives.
It is inflation that provides a disincentive to save, and drives the economic culture of debt.
This is easily proven by any recession in which deflation occurs, credit purchases immediately fall off a cliff, despite no changes in tax policy.
You're talking about personal debt, not corporate debt, although you can make a similar argument for both.
And it's not even clear how much of the lack of demand for credit during a recession even requires deflation - in the Great Recession, we did not even have deflation, at least not in the core CPI which excludes the notoriously volatile and unpredictable oil, energy, and food prices.
If you take the value of the company to consist of book assets and goodwill, retained earnings increases book value by the same amount. Hence you get capital gain unless goodwill is substantially reduced.
I am having a tough time understanding this. Please help me out with the following example:
A new company begins business on January 1st, and in their first year, they generate $1,000,000 of net income. The pay no dividends, so their R/E at the end of the year is $1,000,000. How exactly does that R/E become (or create) dividends for the stockholder(s)?
I am having a tough time understanding this. Please help me out with the following example:
A new company begins business on January 1st, and in their first year, they generate $1,000,000 of net income. The pay no dividends, so their R/E at the end of the year is $1,000,000. How exactly does that R/E become (or create) dividends for the stockholder(s)?
Depends on what the business does with the $1,000,000 in new earnings. We would assume that given competent management, it would be used for something that would increase the business's value by more than $1,000,000.
Depends on what the business does with the $1,000,000 in new earnings. We would assume that given competent management, it would be used for something that would increase the business's value by more than $1,000,000.
So, is this more of a general concept, along the lines of, "An increase in book value, will (at some future point in time) result in (some increased level of) capital gains" or is there an implementable trading strategy associated with this?
A related question is, what is the relationship between changes in book value and market returns?
So, is this more of a general concept, along the lines of, "An increase in book value, will (at some future point in time) result in (some increased level of) capital gains" or is there an implementable trading strategy associated with this?
The capital gains should happen once it is clear to the investors that the profit has been made and reinvested in something profitable.
Quote:
Originally Posted by TaxPhd
A related question is, what is the relationship between changes in book value and market returns?
This is much less clear. Increased book values of pre-existing assets impact share prices to the extent that the company would sell the assets. However if the company will keep the assets, then it is the income stream that contributes the value rather than resale price of assets.
You're talking about personal debt, not corporate debt, although you can make a similar argument for both.
And it's not even clear how much of the lack of demand for credit during a recession even requires deflation - in the Great Recession, we did not even have deflation, at least not in the core CPI which excludes the notoriously volatile and unpredictable oil, energy, and food prices.
We had a ton of deflation in the great recession, although it was concentrated mostly in leveraged assets like real estate and equities. We had so much deflation that the banks had to be bailed out to keep the deflation from spreading throughout the entire economy. Along with the financial industry the middle class lost trillions.
You're overthinking this. Corporate reinvestment is simply the alternative to dividends - usually, but not always, when the corporation is funding new capital projects.
How does any of this address any of the points I made?
You asked....
Quote:
Originally Posted by ncole1
Please explain how you justify the differing tax treatment.
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
Huh? The dot-com craze was occurring because investors had incredibly unrealistic ideas about the future of online domains, websites, and businesses. Not because they used EBIT as their measuring stick for a company's profitability as opposed to some other metric.
Because EBIT made them look better than they really were.
How did EBIT work out for WorldComm and Enron shareholders?
You couldn't connect the dots, even after I connected them for you?
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.
Quote:
Originally Posted by Mircea
Because EBIT made them look better than they really were.
How did EBIT work out for WorldComm and Enron shareholders?
Not.
Dotting...
Mircea
I never said that the value of equity shares should depend only on EBIT. That is a straw man and irrelevant.
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'll take a stab at it. Interest is an expense, dividends aren't. They don't have the same treatment, because they aren't the same thing.
I'll take a stab at it. Interest is an expense, dividends aren't. They don't have the same treatment, because they aren't the same thing.
Right, but dividends are also an expense for the company - once it distributes dividends it no longer has the money, therefore it is an expense.
On paper, it isn't an expense, but that is only because the definition of profits is asymmetric with respect to stockholders and bondholders.
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