Re: tax on capital

["John O'Donnell" <jackodonnell@xxxxxxx>]

James R. Olson, jr. wrote:
> At 12:37 PM 6/2/03 -0700, John O'Donnell wrote:
> > Again, no. Depreciation is both an accounting device and real decay of
> > asset value. Market value is market value as represented by the sum of the
> > equity and debt, not an accounting of the cost of the capacity less
> > accounting depreciation.
> >   
>
> OK, if I understand you right, the tax would not be on debt per se, but
> rather on the original cost of the production facility, measured by the
> original debt necessary to build it.  So there would be no depreciation due
> to either accounting practices, payment of the debt, or actual decay of the
> plant.
No. The tax would be on the market value of the corporation. That is, debt
plus equity. Debt is simply the sum of all outstanding bank loans, bond issues
at market price, preferred shares at market price, etc. The equity is the
market price of the common shares times the number of shares outstanding.
It is the same as the real [i.e. --  not "assessed"] value of your home.
It consists of the debt/mortgage plus your equity. It has nothing whatever
to do with the prices paid or any accounting devices to estimate the current
value. It is the value the market says it is.
> If a decayed plant was sold, the new owner would then be taxed according to
> the amount of debt he took on in order to make the purchase, and if he
> rebuilt it, then the tax would rise to match that investment.  That looks
> like it could be exploited by selling a plant back and forth between
> holding companies.  That is something that gets done today in order to
> inflate the apparent market value of properties.
Again, no. The tax is applied to the market value of the entire company,
not just the physical assets. The price paid for any of the assets is irrelevant,
only the current market value of the totality counts.
> Also, if upgrades were made out of the income stream, they would not be
> taxed, but if they were made using debt, there would be a perpetual tax on
> them, and if they were made using equity, there would be a tax which would
> be proportional to the success of the company.
Still no. You're thinking in terms of accounting practices that are the bane
of typical property taxes based on "assessed" value. The tax in this case
is based on market value as set by the free market auction for corporations
privileged to do business with limited liability. As a comparison, consider
the alternative tax [As described in _Three Steps to Economic Freedom_.]
to be applied to limited liability businesses that are not publicly traded.
In that case, the owners of a controlling interest [i.e. -- 50% plus some]
would be required to state their price for selling the equity of the business
and be required to sell to anyone offering to pay that price. 
> That would favor gradual improvements of existing facilities over new
> building, and slow expansion over fast.  I can see where that might have
> some benefits in the long term, although it would also tend to favor
> existing enterprises over new ones, and tend to inhibit radically new
> methods of production.
No. 
> With inflation, taxes on old debt would be lower than taxes on new debt.
> That would tend to make deflation more of a threat to established
> businesses.
No.
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--
			-- jbod

		Tax Privilege, Not People
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