Re: tax on capital

["James R. Olson, jr." <jhavok@xxxxxxxx>]

At 03:25 PM 6/2/03 -0700, John O'Donnell wrote:
>    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.

OK, so it's back to my original understanding, that paying down the debt
would take the tax to zero.  That would still favor gradual improvements
over debt-financed improvements, though not as much, and it would favor
debt over equity.

It would favor privately held companies over publicly held ones, since a
public company with a share value that was too low (in order to reduce the
tax) would be in danger of hostile takeover, while a privately held company
would have no danger of takeover due to being undervalued.

>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.

Sort of like the claiming rule in racing...that would take care of
undervaluing of private holdings.
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