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Author Topic: Corporate tax rate has no effect on tax revenue or profit to investors???  (Read 906 times)
Rassah
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November 10, 2011, 03:33:33 PM
 #1

Am I doing this right?

Corp Tax Rate
10%30%
Revenue
$15,000,000$15,000,000
Cost of Goods Sold
$10,000,000$10,000,000
Bond Interest
$0$3,333,333
Net Income
$5,000,000$1,666,667
Taxes
$500,000$500,000
Profit to Shareholders
$4,500,000$1,166,667
Profit to Bondholders
$0$3,333,333
Total to Investors
$4,500,000$4,500,000

If Bond Interest is tax deductible, then wouldn't an increase in the Corporate Tax Rate just incentivize the corporation to sell more bonds to reduce taxes, and in the end the government will still take in the same amount in taxes, and investors will still get the same amount of money? (with only difference being the corporation is now more risky due to having more bond debt)

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Hawker
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November 10, 2011, 07:22:37 PM
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The calculation is wrong as you forgot to include Bond interest in the 10% column.

Also bond interest does not get a tax credit - its deducted from gross income.

Rassah
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November 10, 2011, 09:13:19 PM
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The calculation is wrong as you forgot to include Bond interest in the 10% column.

Also bond interest does not get a tax credit - its deducted from gross income.

No bonds have been sold in 10% tax rate example, so zero bond interest.
Net Income is Revenue minus Cost of Goods minus Bond Interest. The interest gets deducted from Net Income, so the taxable NI is reduced, and thus tax payments are reduced too, but those interest payments are going directly to investors, same as dividends would have been.

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November 10, 2011, 09:30:30 PM
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The calculation is wrong as you forgot to include Bond interest in the 10% column.

Also bond interest does not get a tax credit - its deducted from gross income.

No bonds have been sold in 10% tax rate example, so zero bond interest.
Net Income is Revenue minus Cost of Goods minus Bond Interest. The interest gets deducted from Net Income, so the taxable NI is reduced, and thus tax payments are reduced too, but those interest payments are going directly to investors, same as dividends would have been.

If you are charging bond interest against profits, you are talking corporate bonds, not treasuries.  So the tax level makes no difference.

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November 11, 2011, 05:06:34 PM
 #5

The calculation is wrong as you forgot to include Bond interest in the 10% column.

Also bond interest does not get a tax credit - its deducted from gross income.

No bonds have been sold in 10% tax rate example, so zero bond interest.
Net Income is Revenue minus Cost of Goods minus Bond Interest. The interest gets deducted from Net Income, so the taxable NI is reduced, and thus tax payments are reduced too, but those interest payments are going directly to investors, same as dividends would have been.

If you are charging bond interest against profits, you are talking corporate bonds, not treasuries.  So the tax level makes no difference.

Of course the topic is about bond interest.  INTEREST A COMPANY PAYS ON ITS DEBT IS TAX DEDUCTIBLE.

Hence if a company pays $1M in interest it has $1M less profit and thus has $1M less taxable income.
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Gerald Davis


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November 11, 2011, 05:11:16 PM
 #6

If Bond Interest is tax deductible, then wouldn't an increase in the Corporate Tax Rate just incentivize the corporation to sell more bonds to reduce taxes, and in the end the government will still take in the same amount in taxes, and investors will still get the same amount of money? (with only difference being the corporation is now more risky due to having more bond debt)

Yes.  Higher corporate tax rates make bonds more attractive than equity.  Still it is unlikely companies will load up on that much debt just to avoid paying higher tax rates because of the risks to cashflow that high debt load creates.

Honestly all corporate taxes are illusionary anyways.  Corporations don't benefit from their profit.  Corporate taxes are indirectly paid by employees, customers, and owners/investors anyways.   Taxing corporate profits and then taxing shareholders is stupid and has no value over simply taxing corporate profits and making all investments tax free or making corporate profits untaxed (like S corp) and taxing investors gains more.

You can raise the same amount of revenue, cutting it into "two checks" is merely done to obfuscate.
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November 12, 2011, 11:49:19 AM
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If Bond Interest is tax deductible, then wouldn't an increase in the Corporate Tax Rate just incentivize the corporation to sell more bonds to reduce taxes, and in the end the government will still take in the same amount in taxes, and investors will still get the same amount of money? (with only difference being the corporation is now more risky due to having more bond debt)

Yes.  Higher corporate tax rates make bonds more attractive than equity.  Still it is unlikely companies will load up on that much debt just to avoid paying higher tax rates because of the risks to cashflow that high debt load creates.

Honestly all corporate taxes are illusionary anyways.  Corporations don't benefit from their profit.  Corporate taxes are indirectly paid by employees, customers, and owners/investors anyways.   Taxing corporate profits and then taxing shareholders is stupid and has no value over simply taxing corporate profits and making all investments tax free or making corporate profits untaxed (like S corp) and taxing investors gains more.

You can raise the same amount of revenue, cutting it into "two checks" is merely done to obfuscate.

This is why any proper restructuring of tax code would have to be done alongside increased work protections and/or depending on the industry, price controls.
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November 12, 2011, 01:07:49 PM
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The calculation is wrong as you forgot to include Bond interest in the 10% column.

Also bond interest does not get a tax credit - its deducted from gross income.

No bonds have been sold in 10% tax rate example, so zero bond interest.
Net Income is Revenue minus Cost of Goods minus Bond Interest. The interest gets deducted from Net Income, so the taxable NI is reduced, and thus tax payments are reduced too, but those interest payments are going directly to investors, same as dividends would have been.

If you are charging bond interest against profits, you are talking corporate bonds, not treasuries.  So the tax level makes no difference.

Of course the topic is about bond interest.  INTEREST A COMPANY PAYS ON ITS DEBT IS TAX DEDUCTIBLE.

Hence if a company pays $1M in interest it has $1M less profit and thus has $1M less taxable income.

Yes.  So the interest charge should be in the 10% column as well - he got his calculation wrong.

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Gerald Davis


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November 12, 2011, 02:48:39 PM
 #9

Yes.  So the interest charge should be in the 10% column as well - he got his calculation wrong.

No.  You are simply confused.  Try re-reading the OP.
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November 12, 2011, 04:02:42 PM
 #10

Yes.  So the interest charge should be in the 10% column as well - he got his calculation wrong.

No.  You are simply confused.  Try re-reading the OP.

OP shows bond insterst for 10% tax rate and 30% tax rate.

Bond Interest $0   $3,333,333

It should be same for both.  Or am I missing something?

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Gerald Davis


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November 12, 2011, 04:06:04 PM
 #11

Yes.  So the interest charge should be in the 10% column as well - he got his calculation wrong.

No.  You are simply confused.  Try re-reading the OP.

OP shows bond insterst for 10% tax rate and 30% tax rate.

Bond Interest $0   $3,333,333

It should be same for both.  Or am I missing something?

No OP is comparing ISSUING BONDS under 30% tax rate vs NOT ISSUING BONDS under 10% tax rate.  The point is for any tax rate from 1% to 99% one could keep the taxes paid by the company THE SAME by changing how much debt the company issues (how smart that is, is another issue as I indicated upthread).
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November 12, 2011, 04:12:46 PM
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Ah yes I see what he's getting at now.  Thanks.

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