Re: Taxation Thought Experiment

[ichudov@algebra.com (Igor Chudov @ home)]

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.

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.

> > >  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 New
> York State income tax plus the New York City income tax. I once had a job offer
> 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.

	- Igor.