Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
It's not dilution, it's leverage. That said, if the company can borrow more cheaply than you and your risk tolerance is larger than that of corresponding unlevered asset(s), then it makes sense for you to want the company to take on debt.
More accurately, holding a corporation with debt also gives you the advantage of downside protection - if the company goes bust you end up with nothing, whereas if you borrow money as an individual you might end up with less than nothing. In this sense, it might make sense even if the corporation's borrowing rate is somewhat higher than yours (or the rate at which you lend, if you hold fixed income assets that you would sell in lieu of borrowing.), since the difference in interest costs could be considered as an "insurance premium" against the downside.
So it is certainly true that there would still be corporate debt in a world with no tax advantage; but less of it. My argument is that a little corporate debt is much better for society as a whole than a lot of corporate debt, because excessive leverage destabilizes the economy and it takes much less of a slowdown in the economy to cause a big recession than would be the case if the companies held less debt (but still some debt).
To this I might add, the downside protection is only worthwhile if the net interest expense is less than the cost of getting the same protection by buying a put option (if one exists on that business.)
The real problem was that rates were being held too low for too long and banks were allowed to hold risky asset off-balance sheet to hide the leverage.
The fault lies with Congress for giving the banks exemption from the Enron rule in 2002 and the Federal Reserve and other federal banking regulators for aiding and abetting the banks in hiding the excessive leverage.
A simple way to fix the Ponzi financing for housing would've been to get rid of the owner financing of downpayments and to enforce consumer protections such as ensuring a borrower can pay the terms of a home loan as if it were a standard 30-year mortgage. All of these protections were discarded during 2001-2003 by the captured banking regulators.
It is not another layer of double taxation - it is just applying the double taxation to debt dollars as well as equity dollars rather than just to equity dollars.
Of course it is. Generally, with the exception of dividends and the ACA employer penalty, you aren't going to get taxed twice as double taxation is typically frowned upon. Though the double taxation of dividends does lend credence to the idea that corporations are people. Anyway, what you are proposing would tax interest twice. Interest will be first taxed at Corp A as income (but not deducted, so tax is paid on the money paid out as interest) then would tax interest again as the bank's income and then if the bank declares a dividend the money gets taxed yet again.
Quote:
Originally Posted by ncole1
The argument would be that retained earnings also benefit the shareholders; they simply mean the shareholders are taking the company's profits in the form of capital gains on their shares rather than dividends.
Now if you are addressing the fact that the company might fall on hard times and cause the equity investor to lose money all things considered, then the response is that they are already compensated for that via the equity premium.
I'm not sure how your 1st sentence relates to what I said.
Of course they are, but if the company falls on hard times the bank/bondholders seize the assets, so there isn't any reason to treat bondholders and shareholders as the same.
Quote:
Originally Posted by ncole1
Ok, I'm fine with getting rid of double taxation and just increasing tax rates to compensate...
Okay, but where does your argument now stand? Still in favor of removing the interest deduction if dividends could also be deducted?
Quote:
So it is certainly true that there would still be corporate debt in a world with no tax advantage; but less of it. My argument is that a little corporate debt is much better for society as a whole than a lot of corporate debt, because excessive leverage destabilizes the economy and it takes much less of a slowdown in the economy to cause a big recession than would be the case if the companies held less debt (but still some debt).
This premise relies on the assumption that corporations are excessively leveraged, but that hasn't been established. However, even if corporate USA was overly leveraged the solution would be to tighten lending standards and that can be done by increasing the bank reserve requirements. Another option would be for the banks to increase their lending standards, but that's on the banks and their shareholders as private institutions (too big to fail notwithstanding).
There aren't too many things that can't be expensed. The only thing I can think of are bribes and illegal payments and that's because we don't want those to occur.
The real problem was that rates were being held too low for too long and banks were allowed to hold risky asset off-balance sheet to hide the leverage.
The fault lies with Congress for giving the banks exemption from the Enron rule in 2002 and the Federal Reserve and other federal banking regulators for aiding and abetting the banks in hiding the excessive leverage.
A simple way to fix the Ponzi financing for housing would've been to get rid of the owner financing of downpayments and to enforce consumer protections such as ensuring a borrower can pay the terms of a home loan as if it were a standard 30-year mortgage. All of these protections were discarded during 2001-2003 by the captured banking regulators.
You are assuming that corporations are not excessively leveraged in order to argue that they aren't excessively leveraged - thus, this is a circular argument.
It's not dilution, it's leverage. That said, if the company can borrow more cheaply than you and your risk tolerance is larger than that of corresponding unlevered asset(s), then it makes sense for you to want the company to take on debt.
More accurately, holding a corporation with debt also gives you the advantage of downside protection - if the company goes bust you end up with nothing, whereas if you borrow money as an individual you might end up with less than nothing. In this sense, it might make sense even if the corporation's borrowing rate is somewhat higher than yours (or the rate at which you lend, if you hold fixed income assets that you would sell in lieu of borrowing.), since the difference in interest costs could be considered as an "insurance premium" against the downside.
So it is certainly true that there would still be corporate debt in a world with no tax advantage; but less of it. My argument is that a little corporate debt is much better for society as a whole than a lot of corporate debt, because excessive leverage destabilizes the economy and it takes much less of a slowdown in the economy to cause a big recession than would be the case if the companies held less debt (but still some debt).
If I own shares in GE and they raise funds via a secondary offering instead of debt issuance my ownership goes down. Your response is off in left field to my point
Of course it is. Generally, with the exception of dividends and the ACA employer penalty, you aren't going to get taxed twice as double taxation is typically frowned upon. Though the double taxation of dividends does lend credence to the idea that corporations are people. Anyway, what you are proposing would tax interest twice. Interest will be first taxed at Corp A as income (but not deducted, so tax is paid on the money paid out as interest) then would tax interest again as the bank's income and then if the bank declares a dividend the money gets taxed yet again.
Yes, on the basic point we agree, I just thought your earlier statement was phrased strangely.
Quote:
Originally Posted by lycos679
I'm not sure how your 1st sentence relates to what I said.
Of course they are, but if the company falls on hard times the bank/bondholders seize the assets, so there isn't any reason to treat bondholders and shareholders as the same.
How does the priority of bondholders in a liquidation justify interest deductibility?
Quote:
Originally Posted by lycos679
Okay, but where does your argument now stand? Still in favor of removing the interest deduction if dividends could also be deducted?
No, I'm in favor of either removing interest deduction or adding dividend deduction, but not both.
I just suspect that phasing out interest deductibility is preferable, because "hiking tax rates" is very difficult to do for political reasons! (If only more voters understood economic theory.....)
Quote:
Originally Posted by lycos679
This premise relies on the assumption that corporations are excessively leveraged, but that hasn't been established. However, even if corporate USA was overly leveraged the solution would be to tighten lending standards and that can be done by increasing the bank reserve requirements. Another option would be for the banks to increase their lending standards, but that's on the banks and their shareholders as private institutions (too big to fail notwithstanding).
How is this relevant? These solutions are not mutually exclusive with what I am discussing here.
Quote:
Originally Posted by lycos679
There aren't too many things that can't be expensed. The only thing I can think of are bribes and illegal payments and that's because we don't want those to occur.
If I own shares in GE and they raise funds via a secondary offering instead of debt issuance my ownership goes down. Your response is off in left field to my point
Sure, but your position is not more dilute if they issue debt than it would be if they issued equity. That's all I meant by "it isn't dilution, it's leverage". Thus the dilution is not a reason to prefer an issuance of debt over an equivalent issuance of equity.
Sure, but your position is not more dilute if they issue debt than it would be if they issued equity. That's all I meant by "it isn't dilution, it's leverage". Thus the dilution is not a reason to prefer an issuance of debt over an equivalent issuance of equity.
Ownership is diluted via secondary offerings unless you purchase more shares. Debt issuance does not lower your % of ownership. It is a valid reason to prefer debt of equity secondary fund raising
Ownership is diluted via secondary offerings unless you purchase more shares. Debt issuance does not lower your % of ownership. It is a valid reason to prefer debt of equity secondary fund raising
All you are really saying is that you can own more with leverage than without...
All you are really saying is that you can own more with leverage than without...
And? Maybe you don't like the point even though it's a valid point. The leverage/debt can be retired while my ownership stays the same. Having a discussion with you is nearly pointless unless someone sees everything your side.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.