Taxation Thought Experiment

[Dr.Dimitri Vulis KOTM]

ichudov at algebra.com (Igor "FUCK MNE HARDER" Chudov @ home) writes:
> Dr.Dimitri Vulis KOTM wrote:
> > > >  3) Company pay shareholders and costs, $30 is left
> > >
> > > Again, no.  Shareholders come AFTER payroll and costs.
> >
> > Dividends are NOT tax-deductible in the U.S. On the other hand, interest is
> > Therefore it's sometimes more profitable for a company to raise money by
> > issuing bonds (debt) and paying tax-deducuble interest than by selling its
> > stock (equity) and paying non-decuctible dividentds to stockholders.
>
> This statement is very questionable. Various classes of shareholders
> (such as pension funds and IRA account holders, among others) pay no
> taxes on dividends. Corporations pay taxes only from about 30% of
> dividend income that they receive.

Igor, you begin to sound like an American - i.e., even more stupid than the
50%sovok that you are.

I never said anything about the taxes paid by the dividend _recepients.

> There is, in fact, a neat theorem that says that (*_under certain
> assumptions_*) the value of a firm does not depend on its capital
> structure.

Igor, you begin to sound just like Timmy May - talking about things you know
nothing about. Yes, there's a famous theorem by Franco Modigliani and Merton
Miller, the Nobel prize winners which says that ABSENT TAXES, the value of the
firm doesn't depend on its debt-to-equity ratio. M&M also show that under U.S.
tax laws the best capital structure is 100% debt (again, ignoring other
available deductions, such as depreciation, and increased risk and cost of
borrowing as the debt increases).

"The value of the levered firm is the value of the levered firm plus the
interest tax shield (the amount of debt times the tax rate)."

Companies would borrow less (and people would take out mortgages on their
residences less) if the interest payments weren't tax-deductible.

> > > >  5) I pay 40% in taxes, so $18 left
> > >
> > > I'm afraid you are conflating the MARGINAL rate (and when you consider
> > > federal, state and local taxes varies by state) with the AVERAGE rate.
> > > Here in FL. for example there is no state or local income tax.  With tax
> > > sheltering, mortgage deductions etc. no one pays 40% -- the middle class
> > > pay a lower average rate, the upper class pay a much lower average rate.
> >
> > That varies with the locale - here I pay the federal income tax plus the Ne
> > York State income tax plus the New York City income tax. I once had a job o
> > from IBM at $79K/year in Boca Raton (which I eventually didn't take anyway)
> > it's a ridiculous salary in NYC, but a decent one in Florida.
>
> You forget about alligators.

And sharks.

---

Dr.Dimitri Vulis KOTM
Brighton Beach Boardwalk BBS, Forest Hills, N.Y.: +1-718-261-2013, 14.4Kbps