----- Original Message ----- From: "Erik Reuter" <[EMAIL PROTECTED]> To: "Killer Bs Discussion" <[EMAIL PROTECTED]> Sent: Saturday, March 01, 2003 5:20 PM Subject: Re: Wealth trends and Bush's tax cuts L3
> On Sat, Mar 01, 2003 at 12:15:18PM -0600, Dan Minette wrote: > > > > From: "John D. Giorgis" <[EMAIL PROTECTED]> > > > > > At 10:02 AM 2/22/2003 -0600 Dan Minette wrote: > > > And, of course, all earned income about 75k (or so) for an individual > > is excluded from SS taxes. So, this further concentrates the tax. > > or so = +$9,900.00 (the cap is $84900 for 2002, and goes up in 2003) > > > > > It depends on exactly what they mean by that. What distortions would be > > eliminated? The one that I see is the one that encourages companies to > > earn profits, but not pay dividends. Why would this be bad? > > I'm having trouble parsing your statement above. My best guess is that > you are saying that you think it is good for companies to earn profits > and not pay dividends? I disagree with such a statement. I'll explain. > > Here's the way I understand the system as it is now: > > -corporate earnings are taxable to corporations > > -interest payments made to corporate bond-holders are taxable to > individuals (at income tax rates) and tax DEDUCTIBLE to corporations > > -dividends paid are taxable to individuals (at income tax rates) and > are NOT tax deductible to corporations > > -capital gains (from selling stock) realized by individuals are taxable > at capital gains rates, which are less than income tax rates > > So, there are two biases apparent to me: > > 1) Corporations should tend to favor debt financing (selling bonds) > over equity financing (selling stock). > > 2) Corporations would tend to favor not paying out earnings to > shareholders as dividends because executives argue that the > corporation can invest the earnings, make an acquisition, or buy back > their stock, thus increasing the value of the company and creating > capital gains for the shareholders. > > If you think that corporate debt is too high, as many people do these > days, then (1) is providing the wrong incentive. Corporate debt as a > percentage of earnings is at historically high levels, and corporate > bankruptcies have been frequent. I think providing a disincentive (or > less of an incentive) for corporate debt would be prudent. The measures of performance that I know of do not appear to favor debt financing. Maybe RONCE does, because its net capital, but other figures, such as equity, PE ratio, the Acid test, all favor lower debt. see http://www.accountz.com/ratios.html >From what I've seen personally and in general, leadership teams tend to work to make stock analysts write good reports that drive stock prices up. The only strategic reason for massing debt that I've seen have been attempts to become a less attractive takeover candidate. Indeed, I've heard many times that a company cannot afford to have too low of a debt ratio for just this reason. But, that is quite different from a finance by debt vs. finance by stock question. Indeed, it seems clear to me that the decrease in going public is a reflection of low stock prices not tax policy. In addition, business taxes (as a fraction of GDP) have gone down by more than a factor of 2 (the average for the '50s was 4.8% of GDP, the average for the '90s was 2.0%) over the last 40 years or so. During the same time, social security taxes have gone from 2.0% to 6.6% of GDP. So, if business taxes are the issue, why is corporate debt higher than it was when business taxes were higher. > If the corporation cannot make better use of the money than the shareholders, > than the corporation should pay the money out as dividends. I really don't have an argument with this statement, just a passing observation that the most successful corporation of the late 20th century that I can think of (M$) has yet to pay a dividend. > > And his strong belief that it is the euentrerprenure class that > > creates wealth and gives jobs to everyone else. > > You say this like you disagree, Dan? Or did I not read your implication > correctly? While it seems "trickle-down" economics doesn't work so well, I don't > think it follows that entrepreneurs are not responsible for creating a > great deal of wealth and jobs. I'd interpret it to mean that tax breaks > for the wealthy don't strongly effect the level of entrepreneurial > activity. Well, let me explain in more detail. I think that the foundation of the creation of wealth is improvement in productivity. At the very least, improvements in productivity are at the foundation of the creation of per capita wealth. An example of this is Greenspan looking at the improvements in productivity as a guide to what is a non-inflationary growth rate. Improvements in productivity can, but need not come from business owners. An example that I give is the $5.00/barrel cut in the price of oil came from the work of engineering groups. I happen to know the two people who were most responsible for one of the two innovations that are at the foundation of this. They were employees, not owners. But, engineers and scientists are not the only ones, I'll agree to that. Sam Walton provided a tremendous increase in productivity with his use of computers to monitor inventory nationwide. He chose the right place to invest his company's money, and retailing productivity soared as a result. But, by the same token, the folks around me who had a third of a million, a half million, a million of stock in their portfolio who believed that we were in a new economy where the market would always go up were part of the "euentrerprenure class" and would benefit more by this tax cut than an across the board tax cut. I don't see them as a major source of economic growth. > > This is an interesting concept to think about. One thing to consider is > that the less wealthy will always have some incentive to work or create > or innovate in order to move into the more wealthy classes. While most creative people that I know like to make more money, it is not the prime reason for creating. The satisfaction of being able to see the product of one's own work rates higher. Indeed, most studies on workplaces that I've seen stated that work conditions tend to have a greater impact on job satisfaction than anything else. >But what about the already very wealthy? Where is their incentive? Well, maybe it > comes from "taking" away some of there wealth and keeping them on their > toes, working and innovating, to try to get it back! Presumably the > wealthy classes will have a large proportion of skilled entrepreneurs > and capital allocators, so providing them with adequate incentive is > important to the health of the economy. But is giving them tax cuts > going to provide that incentive? There is also the point that having wealth is a positive feedback mechanism. With the elimination of estate taxes and the fertility rate of the wealthy being at or below 2, we have a situation where family money can be passed on to the next generation without a serious reduction. This is a risk to the stability of the US. If we get to the point where 5% of the people have 99% of the net wealth, and 1% have over 50%, what stake in the system will the other 95% have? Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
