Re: tax on capital

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

James R. Olson, jr. wrote:
> 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.
No. Paying down debt increases equity. Think about the circumstance of owning
a house with a mortgage. The total asset value is the debt [mortgage] plus
the equity. Pay off the mortgage and the equity is now the same as was the
total. The value has not changed as a consequence of the distribution between
debt and equity. The tax does not change as a consequence of the distribution
between debt and equity, the total value is the basis of the tax.  
>   That would still favor gradual improvements
> over debt-financed improvements, though not as much, and it would favor
> debt over equity.
No, equity is taxed the same as debt. Debt has the added cost of interest
so equity generally becomes favored over debt.

The advantage of debt to the equity holders is the leverage it provides and
the advantage of debt to debt holders is preference for fixed income securities
over the greater market risk of equity holdings. There are no tax consequences
as such.
> 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.
No. Publicly traded companies do not set their share value "too low" as the
market sets the trading price, not the company. Privately held companies
that try to set their price too low would face takeover by anyone willing
to pay the price set.
> > 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.
Yes.
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--
			-- jbod

		Tax Privilege, Not People
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