It defines a tax regime in which the capital structure of companies has no influence on tax collection as 'capital structure neutral'. This deconstruction forms the basis for the general description of all capital structure-neutral tax systems. The repetitions in this example show that under the current corporate tax regime, taxpayers can – only through a varying capital structure – reduce the amount of tax collected by the Fisc.12 In the terminology of this article, the corporate tax regime is not capital structure neutral.3 .
A capital structure-neutral tax regime would not give taxpayers the ability to exploit post-issuance tax opportunities (and conversely would not burden taxpayers with the need to avoid post-issuance tax traps). Even a tax regime that is not capital structure neutral—for example, ours—can and does collect tax revenue from corporations. A capital structure-neutral regime would enable the government to set tax rates in a simpler and more transparent way.
By design, this article focuses only on the effects of capital structure on corporate tax collection. In certain capital structure neutral tax regimes, there will continue to be opportunities unrelated to capital structure to reduce the amount of corporate or even interest holder tax. If such a capital structure-neutral tax regime were to be introduced, it is certainly to be expected that significant resources would still be spent – wasted – trying to exploit such opportunities.
As will become clear in Part IV below, not all capital structure-neutral tax regimes are integrated.
A SOLUTION: DECOUPLE THE TAXES
34;locked in." (This is a form of deferral!) Using the terminology previously developed, post-issuance taxpayer behavior will affect total tax collections, contrary to the dictates of capital structure neutrality. At least one of the measures allows this probably then. a little messed up: If the corporation pays out a larger share of its earnings, it turns out to be a smaller tax base in November 20001. Since the wealth tax under discussion is intended to be a substitute for an income tax, and since the expected return on an asset is probably a better measure of income than a predetermined fraction of the asset's value, one can make a compelling argument for even ignoring it.
First, one could tax a fraction of an individual's net worth, determined at the beginning of the tax period. - play. I will not take this subtlety into account in the discussion about the possible investment effects of a 'pure' wealth tax. Every situation in the world – which is likely to occur – involves such a cash flow.
It follows that the expected value of the total cash flows of a company in all states of the world must be equal to the sum of the expected values of the cash flows of the various capital interests of the company.56 Moreover, the expected return of the total A company's asset mix should equal the weighted sum of the expected returns from its various capital interests. Add together the products of the instruments' beginning-of-period values with their expected returns and the result will always be the product of the firm's beginning-of-period value and its expected return. And this equality will obviously continue if each of the products is in turn multiplied by the applicable uniform tax rate.
A wealth tax imposed at a rate of T on an instrument's expected return will reduce the instrument's expected return from pre-tax ExpRet to (1 - T) * ExpRet. 34; dividend." And upon dissolution of the account, gain or loss will be able to be calculated and taxed. 61. A strategic redemption of a capital instrument will thus, for example, have no tax effect without further action from the interest holder.
However, no, as such dissolutions and conversions are independent of the existence of any particular type of corporate capital in a given account. A tax imposed at a rate T on the instrument's actual returns will reduce the instrument's expected return from ExpRet before tax to (1 - T) * ExpRet. It will also reduce the standard deviation of instrument returns from StDev to (1 -T) * StDev.
In order to determine whether to take additional into account, other tax rules must be known. Therefore, assume that X's interest holders pay tax at a blended 10% rate on dividends received from X. In that case, they would have paid $4 in tax in respect of the interest income even if such receipts had been denominated as a dividend.
Thus, the effect of the corporation's capital structure decision—to label the payment as interest instead of a dividend—is a $6 increase in the tax collected from interest holders. As this payment has not affected the collection of corporation tax, it has no tax implications. But we remember that part of the tax on interest collections was exempt from tax.
2, as such a portion would have been collected regardless of whether the payment was denominated interest or dividends. This portion also accounted for $4, and since it was not previously considered in the deconstruction, it is also by definition part of charge #3.
ALL SOLUTIONS ARE DECOUPLED
This is because in any neutral capital structure tax regime outlined in Part IV, there is no corporate-level tax effect at all due to capital structure. In each capital structure neutral tax regime outlined in Part IV, Levy No. 3 (i.e. all interest holder taxes other than those included in Levy No. 2) is itself capital structure neutral. That is, it must have a deconstruction where (1) levy #1 is capital structure neutral, (2) levy #2 is identically zero, and (3) levy #3 is capital structure neutral.
The sum of the things that are capital structure neutral will themselves be capital structure neutral. A CFO can take advantage of this disparity by placing the preferred form of capital into his capital structure. Thus, any neutral capital structure tax regime must have a deconstruction of the type offered.
This does not mean that a capital structure-neutral tax scheme cannot contain an interest deduction. Assume that the goal is to introduce a corporate interest expense deduction that does not deprive the regime of capital structure neutrality. It is exactly the same net result as in the capital structure neutral regime I started with, but now in a world with deductions for corporate interest.
Merely having interest holders with such different tax rates does not in itself undermine the neutrality of the capital structure. That is to say, unraveling the neutrality of capital structure in the corporate interest deduction world arose solely from the assumption that all of A's tax rates had to be higher (indeed, four times higher) than B's. But this just shows the folly of including a business interest deduction in a capital structure neutral tax regime.
In a capital structure-neutral world with multiple interest-owner tax rates, a corporate interest deduction must be exactly reversed by an incremental single-rate interest-owner tax on interest income.
PART VIII - CONCLUSION
This means that whenever a corporation is allowed a deduction in respect of income - express or implied - to any holder of an equity interest (broadly defined), all of the above analysis applies.” Notable examples include deductions for interest-like accruals included in a lease. payments or deferred compensation arrangements and participation deductions disguised as compensation (eg employee stock options) or royalties. In addition, it would have the effect of reducing the marginal benefit of tax shelters for legal entities and thus their prevalence. Similarly, the empirical question is how low interest-holder tax rates could be if we wanted to maintain current interest-holder tax collections, but in a market value environment. dividend receipts in 1996 were $270 billion, or 10.5% of AGI.7 Taxes on this amount were $69 billion.
Net realized capital gains, in turn, totaled $252 billion, and at an assumed 20% tax rate, generated $50 billion in tax revenue. If we assume, admittedly arbitrarily, that realized capital gains reflect on average 50% of annually accrued capital gains, the tax base for capital gains would have been DKK 504 billion. USD in 1996. Given the political realities, it is unlikely that a move all the way to capital structure neutrality is possible.
If only a partial step is taken – for example abolishing the deduction for business interest costs or taxing listed securities on a market value basis – it will be necessary to weigh the benefits of the step against its costs. This rate reduction is intended to be provocative; the actual reduction would be lower (although still significant). So if the goal is to tax corporate income only once, then any consolidation plan must ensure that interest paid by one company to another has no net effect on the corporate tax base.
Thus, the amount of the interest expense deduction that is relevant is not the entire $771 billion, but merely the portion of such amount paid to persons other than domestic C corporations. I backed $252 billion of capital gains out of taxable income of $3090 billion, leaving $2838 billion of non-capital gains taxable income. It assumes that tax receipts from interest and dividend income are proportional to tax receipts from other types of income.
15% of $272 billion in interest and dividends and $504 billion in capital gains equals $119 billion in tax currently collected.
