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He's arguing semantics with you. You're arguing reality. Technically you are both right. You're just more based upon what actually occurs.
I don't see any "semantics" at all in this.
High tax rates cause business failures, lack of investment, and lack of startup. It raises the risk of investment - by making failure more likely and diminishing returns on investment - thus, those who do, want even HIGHER rates of return.
High tax rates cause business failures, lack of investment, and lack of startup. It raises the risk of investment - by making failure more likely and diminishing returns on investment - thus, those who do, want even HIGHER rates of return.
Go back and read his post. Or just stick with this-I think you are right and he is wrong. And given how I argue with you constantly that means I think you're pretty right
Risk & reward can't be separated in this discussion. You take the risk because you expect a certain reward.
Nobody's risking their capital without a high probability of being rewarded for taking that risk. No reward = no risk. Tax rate of 75% on that reward? Why bother?
I'll illustrate...
You have an opportunity to invest in some business deal. The required investment is a thousand dollars. The expected return on that thousand dollars is six thousand, including your original investment. You're being taxed 75% on the profit, so you net $1,250 on your $5k profit and $1k investment. Worth it? Probably, with that 600% return rate.
Now let's look at a scenario that would fit far more investment deals than the above example, which included a very high rate of return, compared with most investments.
You have an opportunity to invest in some business deal. The required investment is a thousand dollars. The expected return on that thousand dollars is fifteen hundred dollars, including your original investment. You're being taxed 75% on the profit, so you net $125 on your $500 profit and $1k investment. Worth it? Probably not, with that meager 150% return rate, which is stillfar higher than the typical real-world investment.
Get it now?
Do I get what? Reread my post.
It's most certainly about return, but has nothing to do with risk.
High tax rates cause business failures, lack of investment, and lack of startup. It raises the risk of investment - by making failure more likely and diminishing returns on investment - thus, those who do, want even HIGHER rates of return.
Imagine for a minute, that I have a cool million to invest in a new venture.
As equity owner, I realize my return from profits made by the company. I invest a cool 1 mil and in 5 years I want 1.5 mil return. At zero percent tax rate, I can recoup my investments in the first 1 million profit and my return in the next half million profit. Total profit required - 1.5 million. The chances of a 1 million dollar venture making 1.5 million in 5 years - not bad.
At 75% tax rate, the business will have to earn 6 mil for me to reach my goal. The chances of a business started with 1 million profiting 6 million in 5 years basically do not exist. Ergo, I will invest elsewhere, or not invest at all.
It seems you people forget that investors recoup their investments with AFTER TAX PROFITS.
What part of It's most certainly about return... aren't you comprehending? Your example is based on a specific timeline. The argument fails because, although you won't reach your specific goal, you will still show earnings. That is return, not risk. At the lower rate of return, you will still achieve your monetary goal. It will just take longer.
A business operating at 25% before-tax profit is less risky than a business operating at 5%, regardless of the tax rates for either.
Last edited by nvxplorer; 12-24-2014 at 12:46 AM..
You are both arguing the same thing, return is affected by taxes, although its not always the 1-1 ratio most folks assume.
Incorrect. I was addressing risk, not return. I was pointing out that risk is unaffected by tax rates. Risk is evaluated with operating budgets, which have absolutely nothing to do with after-tax earnings. Why they kept arguing return is beyond me.
Last edited by nvxplorer; 12-24-2014 at 12:31 AM..
It's most certainly about return, but has nothing to do with risk.
Do you get it now?
No, I don't.
Because he said this: the risk has already been realized by the time the tax collector comes around
Which is incorrect.
Risk is defined as the probability - in this case, of failure to achieve something.
From the perspective of the investor, risk has a direct proportional relationship to tax rates, because returns are all after tax. He's arguing that risk is all in the venture, but RETURN is not part of risk. But RETURN is the ENTIRE reason for investment. What's the investor's risk? Lack of return. The two are completely inseparable.
If you want to go deeper, tax rates also play a very high role in risk of the failure (inability to survive, regardless of return) of the venture itself. As growth, innovation, renovation - every aspect of the ability to survive uses after-tax dollars. Thus, tax rates are directly responsible for a sizable portion of the risk of the venture itself - even when not considering the investor's risk.
That's why I don't comprehend your or his argument as being anything but noise. It is simply rhetoric aimed attempting to decouple tax and economic performance in people's minds - when they are absolutely impossible to separate - as they are inherently homogeneous.
What part of It's most certainly about return... aren't you comprehending? Your example is based on a specific timeline. The argument fails because, although you won't reach your specific goal, you will still show earnings. That is return, not risk. At the lower rate of return, you will still achieve your monetary goal. It will just take longer.
And that is nonsense. Completely so.
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