RE: Neutral taxation?/was Re: questions about dividend tax cut

2003-01-16 Thread Grey Thomas
Dan,
even more than direct/indirect, you need to specify what is neutral.
Given democracy, one (adult) person, one vote, a strong case can be made
for a neutral poll tax.  
Of course it is not progressive like most income taxes.  Flat rate
taxes, sales/VAT taxes, even land taxes, affect some more than others.

My own preferences are more towards a flat(er) tax, with a large (poverty
level) deduction, and rates tending down (to zero?); a land tax, split 
between local, state, and federal (1/3 each? 50-25-25?); and ever increasing
taxes on pollution.  I am constantly annoyed at the greens wanting huge
regulation but unwilling to support higher pollution taxes.  
Um, to get rid of the last 5% of income taxes, I'd even support deficit spending
printing money (inflation, another fairly neutral tax, 
of about 2-3% per year).

But of the course the MAIN problem is on the benfit side -- so many voters
want, claim, demand, and only-vote-for those politicos who offer their
favorite benefits.  The demand for benefits drives the demand for tax
revenue.

And the coming (2020) Social Security baby boomer elephant-sized funding gap 
is gonna be a HUGE increase in benefit demand.  
Europe is even more vulnerable than the US or the UK.
Sigh.  What is to be done?  (someone said that... I know, what's is name
the commie!)  

Tom Grey


 But this assumes that taxes can be neutral.  I would tend to 
 agree with
 Larry Sechrest here -- viz., there are no neutral taxes.  (Sechrest's
 position is laid out in his Rand, Anarchy, and Taxes in _The Journal
 of Ayn Rand Studies_ 1(2).)
 
 Do any of you agree?
 
 Cheers!
 
 Dan
 http://uweb.superlink.net/neptune/
 
 
 




RE: Neutral taxation?/was Re: questions about dividend tax cut

2003-01-16 Thread Jacob W Braestrup
To Tom Grey (and others)

2 points:

1: why not retain land tax as a local tax, as this would ensure tax-
payers the possibility of voting with ther feet, end thus ensure some 
degree of fiscal competition between neigbouring counties / 
municipalities?

2: I believe Austrain Economic Theory does noit regard inflation as a 
neutral tax, as one of it's main beliefs is that the earlier you get 
your hands on new money, the more you benefit - and vice-versa. I don't 
know whether this holds true for constant (that is: expected) inflation 
as you are descibing as well - anyone?

Jacob Braestrup
Danish Taxpayers Association




 Dan,
 even more than direct/indirect, you need to specify what is neutral.
 Given democracy, one (adult) person, one vote, a strong case can be 
made
 for a neutral poll tax.  
 Of course it is not progressive like most income taxes.  Flat rate
 taxes, sales/VAT taxes, even land taxes, affect some more than others.
 
 My own preferences are more towards a flat(er) tax, with a large 
(poverty
 level) deduction, and rates tending down (to zero?); a land tax, 
split 
 between local, state, and federal (1/3 each? 50-25-25?); and ever 
increasing
 taxes on pollution.  I am constantly annoyed at the greens wanting 
huge
 regulation but unwilling to support higher pollution taxes.  
 Um, to get rid of the last 5% of income taxes, I'd even support 
deficit spending
 printing money (inflation, another fairly neutral tax, 
 of about 2-3% per year).
 
 But of the course the MAIN problem is on the benfit side -- so many 
voters
 want, claim, demand, and only-vote-for those politicos who offer their
 favorite benefits.  The demand for benefits drives the demand for tax
 revenue.
 
 And the coming (2020) Social Security baby boomer elephant-sized 
funding gap 
 is gonna be a HUGE increase in benefit demand.  
 Europe is even more vulnerable than the US or the UK.
 Sigh.  What is to be done?  (someone said that... I know, what's is 
name
 the commie!)  
 
 Tom Grey
 
 
  But this assumes that taxes can be neutral.  I would tend to 
  agree with
  Larry Sechrest here -- viz., there are no neutral taxes.  
(Sechrest's
  position is laid out in his Rand, Anarchy, and Taxes in _The 
Journal
  of Ayn Rand Studies_ 1(2).)
  
  Do any of you agree?
  
  Cheers!
  
  Dan
  http://uweb.superlink.net/neptune/
  
  
  
 
 

-- 
NeoMail - Webmail




Re: questions about dividend tax cut

2003-01-16 Thread Jacob W Braestrup
Fred Foldvary wrote:

 If there are zero taxes on corporate profits, but taxes on dividends, 
then the incentive is to retain earnings rather than pay dividends, and 
the shareholders get the profits tax-free until the shares are sold for 
capital gains.  The shares might never be sold, but passed on to heirs.
 
 For tax fairness, given the income tax, all income should be taxed 
equally, and for efficiency, the tax system should minimize the impact 
on decisions.
 So it is better to tax corporate profits and then credit that against 
tax liabilities of dividend income.  To achieve neutrality, unrealized 
gains should be taxed annually, and then we can forget about capital 
gains.
 
 That being said, the income tax is inherently unjust, complex, and
 burdensome, but that is another story.

I disagree (not with your last point of course ¡V and it is partly 
because I agree with you on this point, I disagree with you on the rest)

Below is an extract (rather lengthy, sorry) from my 
publication Simpler Taxes - A guide to the simplification of the 
british tax system (the whole publication may be downloaded free of 
charge here: 
http://www.adamsmith.org/policy/publications/pdf-files/simpler-
taxes.pdf)

¡§The first problem when taxing personal income is determining what it 
is, most importantly distinguishing it from capital gains.  Some will 
find such a distinction impossible and even unwanted, believing that 
any capital gain should be taxed as income.  To those it could be 
argued that:

„h There is a big difference between income and capital gains, and
„h While the former is easily identified and taxed, the latter is not.

The difference between income and capital gains is, in theory, clear 
enough: an income is a certain payment at a certain date, subject to a 
formal or informal contract, while a capital gain is uncertain and not 
guaranteed to be positive.  Thus work wages or interests on bank 
deposits are clearly incomes, while increases in house prices or shares 
are clearly capital gains.  The former are certain and guarantied by 
contracts, while the latter are uncertain and could just as well be 
negative.  Dr. Barry Bracewell-Milnes described the difference thus :

¡§It is rather like the difference between night and day.  Certainly 
there is a dusky time in the evening where it is difficult to say 
confidently whether night has fallen or not.  But at most moments 
within any 24-hour period, everyone is perfectly well aware whether it 
is night or day¡K If the otherwise insignificant boundary becomes 
important in some context, then we set an arbitrary cut-off point ¡V as 
we do with ¡§lighting up time¡¨, a convention to prevent people driving 
unsafely while the night is still deepening¡¨

But what about these borderline cases?  Clearly the problem of 
separating income from capital gains, and the possibility of 
transforming the first to the latter, have been the main driving forces 
behind treating capital gains as personal incomes subject to taxation.  
The problem overlooked by those who find the border between the two 
hard to police is, however, that the inclusion of capital gains as an 
income opens up a host of other boundaries to be policed.

To what extent should capital losses be deductible, if at all?  Should 
all capital losses in one¡¦s entire lifetime be deductible from any 
capital gains, or only those from within the same year as any gains?  
What about inflation in that period?  To what extent should running 
investments in physical capital, or the opposite as the case might be, 
be included in calculations of capital gains?  If a house is sold after 
20 years of decay for the same price as it was bought, indexed for 
inflation, then surely some capital gain must have been materialised 
along the way by the owner.  Should this gain be taxed?  How is it 
calculated?  If the same house is sold for twice the original price 
after being vigorously kept and refurbished, should this investment not 
be deductible?  What if the bottom has gone out of the housing market 
and the house, despite investments, is still only worth the original 
price?  Should the investments still be deductible?  

The list of questions is never-ending, and I shall not attempt to 
answer any of them.  Neither shall I attempt to answer the other 
question faced when including capital gains as taxable incomes: which 
capital gains should be taxed and which should not.  If policing the 
boundary between income and capital gains is difficult, this new 
boundary is even more so.  As interns or trainees, many young people 
work for low wages in the anticipation that their value as workers will 
rise from the experience, and other young people spend years in 
universities hoping the same.  Clearly these increases in ¡§personal¡¨ 
values are capital gains, but neither are taxed.  Only the part of 
personal values actually materialised as income (if any) is being 
taxed.  The capital gain itself is not, and 

RE: Neutral taxation?/was Re: questions about dividend tax cut

2003-01-16 Thread Susan Hogarth
I would tend to agree with
Larry Sechrest here -- viz., there are no neutral taxes.  (Sechrest's
position is laid out in his Rand, Anarchy, and Taxes in _The Journal
of Ayn Rand Studies_ 1(2).)

Do any of you agree?

I suppose there *could* be a neutral tax, but what would be the point?
It would be something like taking five dollars from everyone and giving
them back five dollars worth of 'services'.

Hmm, I guess that's truly not possible, though. Yes, I agree :)

Susan Hogarth 
Triangle Beagle Rescue of NC
www.tribeagles.org [EMAIL PROTECTED]





Re: questions about dividend tax cut

2003-01-16 Thread Fred Foldvary
--- Jacob W Braestrup [EMAIL PROTECTED] wrote:
 an income is a certain payment at a certain date, subject to a 
 formal or informal contract,

That is income from an accounting view, but not from the economic
perspective.  Economic income has no regard for contracts.  In economics,
income equals consumption plus the change in net worth during some time.

 while a capital gain is uncertain and not guaranteed to be positive.  

The ex-ante uncertainty is irrelevant.  Dividends are also uncertain
ex-ante.  For income, we take some time period, such as a year, and
calculate the change in actual net worth.  If the change in net worth is
negative, it gets subtracted from consumption.  It is possible for income
to be negative.

Fred Foldvary

=
[EMAIL PROTECTED]




Re: Neutral taxation?/was Re: questions about dividend tax cut

2003-01-16 Thread AdmrlLocke
Dear Tom,

I hope I got your definition of neutral right in the last post.  As I 
indicated, I'd support a poll tax (so long as I'm an armchair intellectual 
and not running for office, which with my abrasive personality would be a 
joke anyway).  I also support a flatter income tax. In fact  I'd like to see 
something along the lines of the Forbes flat tax with a single rate above the 
exemption.  I've got a master's degree in taxation and used to work as a tax 
practioner, and so saw first-hand some of the heavy cost of complying with 
the complex income tax.  A simpler system would reduce the compliance costs.

I don't really want to replace all the tax revenue generated by the current 
income tax; personally I'd like to see the federal government spend a fifth 
to a fourth of what it does now.  I agree that much of the problem comes on 
the benefit side, with almost everyone (except Democratic politicians in the 
federal government--I wonder why they lost the Senate?) supporting some sort 
of tax cuts but nobody wanting their own benefits cut.  I'd love to hear some 
good (or even some mediocre) suggestions on how to overcome the problem.

Under Gramm-Rudman, which lasted basically covered Reagan's second term, 
discretionary federal non-defense spending grew at its slowest rate since the 
1920s, so it may be that the threat of automatic across-the-board cuts have 
the most success by forcing competing interests to fight with each other 
rather than cooperate to raise federal spending in the aggregate.  It didn't 
last very long and only happened under the threat of huge deficits and indeed 
broke down when the automatic cuts got large, so I'm not actually too 
optimistic about the success of such things.

DBL

In a message dated 1/16/03 5:20:18 AM, [EMAIL PROTECTED] writes:

Dan,

even more than direct/indirect, you need to specify what is neutral.

Given democracy, one (adult) person, one vote, a strong case can be made

for a neutral poll tax.  

Of course it is not progressive like most income taxes.  Flat rate

taxes, sales/VAT taxes, even land taxes, affect some more than others.



My own preferences are more towards a flat(er) tax, with a large (poverty

level) deduction, and rates tending down (to zero?); a land tax, split


between local, state, and federal (1/3 each? 50-25-25?); and ever increasing

taxes on pollution.  I am constantly annoyed at the greens wanting huge

regulation but unwilling to support higher pollution taxes.  

Um, to get rid of the last 5% of income taxes, I'd even support deficit
spending

printing money (inflation, another fairly neutral tax, 

of about 2-3% per year).



But of the course the MAIN problem is on the benfit side -- so many voters

want, claim, demand, and only-vote-for those politicos who offer their

favorite benefits.  The demand for benefits drives the demand for tax

revenue.



And the coming (2020) Social Security baby boomer elephant-sized funding
gap 

is gonna be a HUGE increase in benefit demand.  

Europe is even more vulnerable than the US or the UK.

Sigh.  What is to be done?  (someone said that... I know, what's is name

the commie!)  



Tom Grey




Re: Neutral taxation?/was Re: questions about dividend tax cut

2003-01-16 Thread AdmrlLocke

In a message dated 1/16/03 11:57:03 AM, [EMAIL PROTECTED] writes:

AdmrlLocke wrote:



 The farmer felt no compunction at all about complaining that while 

under the income tax system he pays no tax, under a sales tax he'd pay


a hefty tax.  He pays nothing and he thinks he's entitled to pay 

nothing while everyone else pays something.)



This kind of rhetoric never seizes to amaze me. Why do people get away


with it?

I'm tempted to say that it's because America is dominated by WASP culture, 
and WASP culture promotes polite and confict-aversion over confrontational 
truth.  I don't really think, however, that that fully explains why such 
people don't get confronted more, although it might explain much of that 
particular story, since I was sitting in a WASPy country club in small-town 
Iowa.  :)

I think that in America certain groups of people have gotten benefits 
because, deservedly so or not, many other Americans believed that the 
beneficiaries deserved the benefits.  Much of the Great Society--occasional 
liberal protestations to the contrary notwithstanding--appealed to 
urban/suburban Northern white middle-income guilt over the treatment of 
blacks in America, particularly (but not exclusively) during slavery.  These 
voters believed (rightfully so) that blacks had been oppressed (slavery, Jim 
Crow, etc.) and that therefore someone should pay them, or their descendants, 
something (a rather tenuous conclusion, I'll admit, and the one behind the 
'reparations' movement these days).  These voters also saw having the 
government make these payments as an easy, cost-free way (a decidedly false 
assumption) to expiate their guilt for evils perpetrated by other people.  
Until the Great Society's heavy costs (inflation, welfare-dependence, 
destruction of black neighborhoods and families) started to appear clearly in 
the 1970s, very few of these voters felt any desire to criticize the 
programs, or the recipients who developed an entitlement mentality, or feared 
to express such criticizms for fear of being branded racist, as the 
Democrats routinely do and have done since the 1960s.

In the farmer's case, there's a centuries'-long American love-affair with 
rurality and the famer.  We start with the early colonial stories of America 
as a great garden, the Jeffersonian ideal of the sturdy yeoman farming his 
land, the American notion of the farmer as the salt of the earth, the 
non-economic notion that the farmer feeds us (as though out of the goodness 
of his heart for us poor, starving urban dwellers).  Indeed a hostility 
toward the sick, polluted, direct city and preference for the clean, growing 
countryside goes back to pre-colonial English (and Continental) roots.  
Farmers in America tried for decades starting in the late 19th century to get 
various types of government benefits, but only when their relative numbers 
had declined to less than half the population could they actually manage to 
start squeezing out some small benefits in the 1920s.  Now that less than 
half of a percent of the US population engages in full-time farming, 
taxpayers can afford to exempt farmers entirely from federal income taxation, 
pay then individually tens and sometimes hundreds of thousands of dollars, 
and yet barely notice.  For decades it hardly seemed worth the effort to 
debunk the noble farming myth in order to cut agricultural price subsidies, 
although in the mid-1990s the Democrats' allies in the media made cutting ag 
subsidies the key test of whether Republians were really serious about 
cutting entitlements.  (Note: Republicans did phase out the notorious ag 
price supports [though not all federal ag subsidies] but got not credit from 
the news media, whose members conveniently forgot they'd set up ag subsidies 
as the key test).

Civil War veterans, however, stand out as the first group to create a sense 
among the voters that they deserved to feed at the federal trough, and for 
the next half-century or so got increasingly large and wide benefits.  
Eventually Congress passed what some have called a Sneeze Clause or 
something like that:  if a Civil War veteran ever sneezed in your direction 
you got veteran benefits.  I understand that veterans today still get 
substantial, wide-ranging federal benefits, thought I'm not at all sure that 
having a separate, completely-socialized medical system doesn't hurt them 
much more than it helps.




Here in Denmark, we often hear similar rhetoric on welfare benefits. If


someone in the media is advocating a reduction (or more likely, 

advocating a lower increase) in welfare benefits, the interviewer will


gladly turn to someone, who will say: “I actually receive welfare 

benefits, and I think they are too low”. That’s it – end of 

discussion!! 



The general feeling is: “Well, this guy actually receives benefits, so


he’s gotta be the expert, right?” – “on the other hand, the idiot who 

proposed the cut (lower increase) doesn’t receive 

Re: questions about dividend tax cut

2003-01-15 Thread Robert A. Book
 On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote:
  There is also a supply-side effect from cutting the marginal tax rate, from
  less uncertainty about the company as it shifts to less debt and more
  equity, as well as more investor confidence when the profits are sent to
  the shareholders rather than retained by possibly theiving executives.
 
 Any idea why the dividend tax, instead of the corporate income tax, is
 being proposed for a cut? If we want to end double taxation of dividends,
 it makes more sense to me to eliminate the corporate income tax instead of 
 the dividend tax.

My guess is politics.  Cut taxes on Corporations! does not sound
like a winning issues, given the level of economic literacy of the
news media (as Bill pointed out).





Re: questions about dividend tax cut

2003-01-15 Thread Fred Foldvary
 why the dividend tax, instead of the corporate income tax, is
 being proposed for a cut?

If there are zero taxes on corporate profits, but taxes on dividends, then
the incentive is to retain earnings rather than pay dividends, and the
shareholders get the profits tax-free until the shares are sold for capital
gains.  The shares might never be sold, but passed on to heirs.

For tax fairness, given the income tax, all income should be taxed equally,
and for efficiency, the tax system should minimize the impact on decisions.
So it is better to tax corporate profits and then credit that against tax
liabilities of dividend income.  To achieve neutrality, unrealized gains
should be taxed annually, and then we can forget about capital gains.

That being said, the income tax is inherently unjust, complex, and
burdensome, but that is another story.

Fred Foldvary

=
[EMAIL PROTECTED]




Neutral taxation?/was Re: questions about dividend tax cut

2003-01-15 Thread Technotranscendence
On Wednesday, January 15, 2003 7:11 PM Fred Foldvary [EMAIL PROTECTED]
wrote:
 To achieve neutrality, unrealized gains should be
 taxed annually, and then we can forget about
 capital gains.

But this assumes that taxes can be neutral.  I would tend to agree with
Larry Sechrest here -- viz., there are no neutral taxes.  (Sechrest's
position is laid out in his Rand, Anarchy, and Taxes in _The Journal
of Ayn Rand Studies_ 1(2).)

Do any of you agree?

Cheers!

Dan
http://uweb.superlink.net/neptune/





Re: Neutral taxation?/was Re: questions about dividend tax cut

2003-01-15 Thread AdmrlLocke
Dear Dan,

I actually do agree, which is part of why when my conservative friends would 
support a national sales tax instead of an income tax as though a national 
sales tax were a panacea I'd just shake my head and tell them, there's no 
such thing as an unburdensome tax.  There's no unburdensome way for the 
federal government to confiscate a third of national income.  Some taxes 
bear more heavily on some people than others, so shifting between them may 
change how much of the burden a particular individual shares.  People 
naturally tend (and I do say tend) to support moving to a sytem that shifts 
some of the burden they bear to somebody else, or on keeping the status quo 
if the current system rests relatively little burden on themselves.  (As a 
case in point, a farmer showed up to listent to Indiana Senator Dick Lugar, 
campaigning for president in Iowa, speak about replacing the income tax with 
a sales tax.  The farmer felt no compunction at all about complaining that 
while under the income tax system he pays no tax, under a sales tax he'd pay 
a hefty tax.  He pays nothing and he thinks he's entitled to pay nothing 
while everyone else pays something.)

I can't imagine any tax that would be neutral, but some might be less 
injurious to economic growth than others.  I'm not persuaded, however, that 
taxing consumption more heavily than income will discourage economic growth 
any less than taxing income more heavily than consumption, since the ultimate 
goal of producing income is to consume it anyway.

In a message dated 1/15/03 10:51:58 PM, [EMAIL PROTECTED] writes:

 On Wednesday, January 15, 2003 7:11 PM Fred Foldvary [EMAIL PROTECTED]

wrote:

 To achieve neutrality, unrealized gains should be

 taxed annually, and then we can forget about

 capital gains.


But this assumes that taxes can be neutral.  I would tend to agree with

Larry Sechrest here -- viz., there are no neutral taxes.  (Sechrest's

position is laid out in his Rand, Anarchy, and Taxes in _The Journal

of Ayn Rand Studies_ 1(2).)


Do any of you agree?


Cheers!


Dan 





Cutting Corporate Tax Instead of Tax on Dividends (Was Re: questions about dividend tax cut

2003-01-14 Thread AdmrlLocke
Originally the federal income tax law sought to tax income closest to the 
source, presumably because the farther from the source, the more easily 
income might escape detection and therefore taxation.  In the hearings over 
the 1913 income tax law one member of Congress suggested simply taxing each 
shareholder on his pro rata share of corporate income, but got shot down.

As far as eliminating the corporate income tax today, look at all the furor 
the advocates of punitive taxation (notice I didn't say the advocates of 
statism ) have raised over Bush's proposal to cut taxation of dividends.  
Can you imagine the holy hysteria they'd raise over cutting the corporate tax 
instead?  It seems likely that even more people would agree that such a cut 
in tax constituted a tax cut for the wealthy since in their minds it would 
be going to corporations instead of people.  

David Levenstam

In a message dated 1/13/03 7:50:22 PM, [EMAIL PROTECTED] writes:

 On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote:
 There is also a supply-side effect from cutting the marginal tax rate, from
 less uncertainty about the company as it shifts to less debt and more
 equity, as well as more investor confidence when the profits are sent to
 the shareholders rather than retained by possibly theiving executives.

Any idea why the dividend tax, instead of the corporate income tax, is
being proposed for a cut? If we want to end double taxation of dividends,
it makes more sense to me to eliminate the corporate income tax instead of 
the dividend tax.

Cutting taxes on dividends while keeping taxes on capital gains seems to
provide a perverse incentive for companies to retain as little profits as
possible, leading to a higher rate of corporate bankruptcy in the future.
I predict we'll also see companies issue new stock and then immediately
distribute the capital as dividends in order to dilute their stock value - 
the opposite of the stock buy-back programs that companies undertake today 
to avoid paying dividends. 





questions about dividend tax cut

2003-01-13 Thread john hull
Howdy,

I have some questions about the dividend tax cut
(elimination).  Let's suppose that the elimination of
taxes on dividend income to stock holders is
instituded and it is a complete suprise to the public,
so that no adjustment can take place either in
expectation of it being passed, or after it is passed
but before it takes effect.  Let's also assume that
growth opportunities are not an issue, so the price is
wholly dependent on dividends.

If the price of a stock is the PV of the dividend
stream into the future, then should there merely be a
one time jump in the value of a stock as a result? 
More concretely, if the tax rate was T, then a
dividend was worth (1-T)D, where D is the amount of
the dividend.  And the present value of the
perpetuity, i.e. the dividend stream, would be
(1-T)D/r, where r is the interest rate (right?).  So
the price of the of the stock would be P=(1-T)D/r.  

Now the suprise tax cut comes into effect.  The price
of the stock should jump to P'=(1-0)D/r=D/r.  Thus,
there should be merely a one off jump in the share
price by the amount P'-P=[D/r]-[(1-T)D/r]=(D+T)/r.

Is this correct?  Should the tax rate on dividend
income be included in the pricing of the shares, and
should we see a jump in prices?  I suppose that
intstead of T:=tax rate on dividends, I could have
used T:=Td-To, where Td is the tax rate on dividends
and To is the tax rate on some other investment. 
Would that be correct?

Okay.  Assuming the above is correct, then the rate of
return on a stock should increase from (1-T)D/P to
D/P'.   The increase in the rate of return then is 

=[(1-T)D/P]-[D/P']
=[D/(D/r)]-[(1-T)D/{(1-T)D/r}]
=r-r
=0.

So the increase in the rate of return on stocks should
be equal to zero.  Stocks are no more profitable after
the tax cut than before--it shouldn't help the market
at all.

If dividend income tax is not priced into the stock,
then again, there should be no change in the
profitability of stocks, because P=P' and 1-0=1.

The same should be true if T:=Td-To, correct?

Is my conclusion that the dividend tax cut should have
no impact on the rate of return of stocks correct?  Is
the only effect of such a tax cut to provide a once
off permanent increase in the wealth of stock holders
as the price jumps from P to P', thus stimulating the
economy solely through the wealth effect of that
change?

If this conclusion is correct, how will loosening the
two assumptions, first that the cut is publicly known
before it takes effect and second that the present
value of growth opportunities are taken into account
in share pricing, affect the conclusion?  Will
loosening the second assumption change corporate
behavior viz. investing in growth vs. paying
dividends?  What should we expect that change to be?

Has this question already been asked on this list and
I missed it?

Curiously yours,
jsh


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Re: questions about dividend tax cut

2003-01-13 Thread Fred Foldvary
--- john hull [EMAIL PROTECTED] wrote:
 If the price of a stock is the PV of the dividend
 stream into the future, then should there merely be a
 one time jump in the value of a stock as a result? 

No.
There is also a supply-side effect from cutting the marginal tax rate, from
less uncertainty about the company as it shifts to less debt and more
equity, as well as more investor confidence when the profits are sent to
the shareholders rather than retained by possibly theiving executives.

Fred Foldvary

=
[EMAIL PROTECTED]




Re: questions about dividend tax cut

2003-01-13 Thread john hull
--- john hull [EMAIL PROTECTED] wrote:
Now the suprise tax cut comes into effect.  The price
of the stock should jump to P'=(1-0)D/r=D/r.  Thus,
there should be merely a one off jump in the share
price by the amount P'-P=[D/r]-[(1-T)D/r]=(D+T)/r.

Mistake #1, (D+T)/r is greater than the price itself. 
I don't think the rest depends on that.  Back to the
drawing board for that part.  Sorry about that.

-jsh


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Re: questions about dividend tax cut

2003-01-13 Thread Wei Dai
On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote:
 There is also a supply-side effect from cutting the marginal tax rate, from
 less uncertainty about the company as it shifts to less debt and more
 equity, as well as more investor confidence when the profits are sent to
 the shareholders rather than retained by possibly theiving executives.

Any idea why the dividend tax, instead of the corporate income tax, is
being proposed for a cut? If we want to end double taxation of dividends,
it makes more sense to me to eliminate the corporate income tax instead of 
the dividend tax.

Cutting taxes on dividends while keeping taxes on capital gains seems to
provide a perverse incentive for companies to retain as little profits as
possible, leading to a higher rate of corporate bankruptcy in the future.
I predict we'll also see companies issue new stock and then immediately
distribute the capital as dividends in order to dilute their stock value - 
the opposite of the stock buy-back programs that companies undertake today 
to avoid paying dividends.




Re: questions about dividend tax cut

2003-01-13 Thread THIA_Jang_Ping

Would any company give dividend then?






   

  Wei Dai  

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  Sent by: Subject: Re: questions about dividend 
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  14/01/2003 08:40 

  Please respond   

  to ARMCHAIR  

   

   




On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote:
 There is also a supply-side effect from cutting the marginal tax rate,
from
 less uncertainty about the company as it shifts to less debt and more
 equity, as well as more investor confidence when the profits are sent to
 the shareholders rather than retained by possibly theiving executives.

Any idea why the dividend tax, instead of the corporate income tax, is
being proposed for a cut? If we want to end double taxation of dividends,
it makes more sense to me to eliminate the corporate income tax instead of
the dividend tax.

Cutting taxes on dividends while keeping taxes on capital gains seems to
provide a perverse incentive for companies to retain as little profits as
possible, leading to a higher rate of corporate bankruptcy in the future.
I predict we'll also see companies issue new stock and then immediately
distribute the capital as dividends in order to dilute their stock value -
the opposite of the stock buy-back programs that companies undertake today
to avoid paying dividends.










Re: questions about dividend tax cut

2003-01-13 Thread Fred Foldvary
--- Wei Dai [EMAIL PROTECTED] wrote:
 Cutting taxes on dividends while keeping taxes on capital gains seems to
 provide a perverse incentive for companies to retain as little profits as
 possible, leading to a higher rate of corporate bankruptcy in the future.

My recollection from reading about it is that the proposal does indeed cut
the tax on capital gains to the extent it is due to retained earnings, as
the attempt is neutrality with repect to paying dividends or not.  However,
to truly do capital gains right, it needs to be indexed for inflation.

Fred Foldvary

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