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First, let me repeat that I am not claiming that taxation drives no behavior. I'm saying that the degree to which it drives behavior is frequently overstated.

First, let me repeat that I am not claiming that taxation drives no behavior. I'm saying that the degree to which it drives behavior is frequently overstated. >You're basically questioning the efficient market hypothesis... No, I'm not. Your example is specious. If you posit an overly-simplistic scenario that allows Company X to easily save $5M, then of course they will do it. Anyone would agree that's just rational behavior. What I am saying, however, is that many (including you) opine that individuals/corporations will suddenly begin to engage in completely irrational or counter-productive behavior because, you know, taxes. >There is mathematically no non-tax difference between issuing a dividend and using the same money to have a share buy-back... Except that the net income that flows to me is greater as a shareholder. If corporations want to maximize shareholder value (and hence drive demand/stock price up), then paying dividends is certainly one means of doing that. If I can effectively earn that dividend while continuing to hold the underlying stock as it continues to appreciate in value, then when I finally cash out, I will have earned more while also enjoying the use of the money (dividends) along the way. This is irrespective of tax consequences. Many "rationally-acting" shareholders recognize the appeal of dividends. Perhaps this is why, for instance, dividends have contributed to at least 45% of the total return of stocks in the S&P 500 since 1926. >That doesn't make any sense. If a shareholder wants cash then they can sell that portion of their shares and the tax event would be smaller than receiving a dividend... Sure, it makes sense. For one, with dividends the shareholder still retains the underlying asset vs. by selling portions of his stock. This discussion is off-track though. You're correct that the tax treatment is the same but my initial point with dividends was to simply refute your assertion that companies might suddenly stop paying "dividends at all" because, taxes. Instead, I provided an example of rational, "healthy" behavior that might result from tax changes. This vs. the typical knee-jerk overstated response that "any taxes are evil and will cause otherwise rational people to suddenly and completely lose their minds". >Then explain the multi-billion dollar cash hoards held by most large successful corporations I don't get your point here in the context of this discussion. Companies frequently accrue cash when profitable and they haven't allocated it for re-investment, acquisitions, etc. Depending on the company and degree, this may or may not be desirable, as it may well-represent an under-utilization of resources. But, your initial implication was that companies will hold on to cash simply to avoid taxation, as if they'd do so even in light of investment or other opportunities. This is the kind of thinking to which I am taking exception. It attributes to actors these completely irrational behaviors that are supposedly generated by the tax code. >But they can make bad or less good investments than the real parties in interest Sure, anything can happen. But, this is a huge leap on pure conjecture. The company is going to do what it thinks best, given the environment, period. There are a whole host of influencing factors. It's an unrealistic overstatement to say that they will suddenly become irrational because, taxes. >I'm not sure why that should make the investors want to pay it any more. That's a trite response. Obviously, people don't enjoy paying taxes. The point is that the other end of the argument overstates the "damage" caused to the investor psyche by taxation. And, that overstatement is an important part of assigning this outsized behavioral effect to taxes overall. It's as if there's now zero-benefit to investing or even that it's actually punitive to do so because, taxes. >Not necessarily. You might just hold onto it until your kids inherit it... Sure. But, your example implied that I'm ready to cash out but simply (and automatically) won't to avoid taxation. My point, again, is that's overstated. Will the tax event impact my calculus? Sure. But, it's far from automatic. >It has not zero value. You can take a loan against it and then deduct the interest... If you know of a way to do this as a personal investor, please share! The bigger point though is that you're moving the goalposts. If you are holding the stock for other reasons (company control, etc.), then that's a different calculus. You're probably not interested in cashing out irrespective of the tax scenario. I was following the thread you'd started, that essentially assumed that people who are ready to cash out won't do so simply to avoid taxation.

AnthonyMouse 13y ago
>First, let me repeat that I am not claiming that taxation drives no behavior. I'm saying that the degree to which it drives behavior is frequently overstated. And I think you are underestimating how much it does drive behavior. Rational economic actors will do what they can to avoid costs, including taxes, right up to the point where the cost of avoidance measures exceeds the cost being avoided. When you impose a significant tax rate (e.g. 25-50%), you make it rational to spend significant effort on tax avoidance, all of which is wasted resources that could have been put to some other more productive use. > What I am saying, however, is that many (including you) opine that individuals/corporations will suddenly begin to engage in completely irrational or counter-productive behavior because, you know, taxes. Nonsense. The behavior is completely rational -- it's just massively inefficient. Companies will spend several million dollars to build a "presence" in Ireland or Bermuda or wherever else. They will hold wealth off shore rather than repatriating it. Companies do such things because it is less expensive than the taxes they're not paying. It is completely rational to do that, even though it would be "irrational" otherwise. > Except that the net income that flows to me is greater as a shareholder. No it isn't, that's what I'm saying. Let's put some numbers into it. Suppose the company has 100,000 outstanding shares valued at $100 each at the beginning of 2000. They do well from 2000 to 2010 and make ten million dollars in profits, so now their shares are worth $200 and the company has ten million dollars in cash on hand. Let's go through what they can do with the ten million dollars. First, they could issue it as a dividend. So you get a $100 dividend and now instead of having a $200 share of stock you have a $100 share of stock and $100 (because you can't get something from nothing -- having issued the dividend the stock value goes down because the company has less cash on hand), a total value of ~$200. Now all the stockholders have to pay tax on $100/share, even the ones who just use the dividend to buy more stock because they like the company. An alternative is for the company to buy back some of its own stock. So the company buys back ten million dollars worth of outstanding shares. All the shares continue to be worth ~$200/share (because even though the company has less cash on hand after the buyback, there are now that many fewer outstanding shares, so each remaining share represents more of the company). At this point the stockholders who tendered their shares in the buyback don't pay taxes on the money they receive, they only pay tax on the difference between what they received for the shares and what they paid for them (which no matter what it was will have been less than the full amount). Now you may object that you don't want to sell your shares, you just want the profits as cash, so I'm going to explain how this is the same thing. The company is transferring the same percentage of its total value to the stockholders either way. If they pay a dividend, you get the money, and you own the same percentage of the company that you did originally. If you tender that percentage of your shares to the company in the buyback, you get the money, and you own the same percentage of the company that you did originally (because you own fewer shares of a company that has fewer outstanding shares) -- but now you pay less in taxes, and stockholders who don't want any cash right now don't pay any taxes. And the company can do a stock split so that you end up with the same number of shares you had originally, so that you can do this again and again without ever having to sell the last share. So there's that. But let's go to one other alternative: Instead of transferring cash directly to the stockholders at all, the company holds the cash as some kind of securities (stock or bonds or what have you) held by an offshore subsidiary. The stock price continues to be worth $200, because the originally $100/share company is still (indirectly) holding ten million dollars of securities. But now they don't have to pay corporate income tax on the money, because the profit doesn't belong to the U.S. subsidiary, it belongs to the subsidiary in the place where there is no or minimal corporate income tax. If they repatriated the money so that they could buy back stock or issue a dividend they would have to pay 35-40% of it to the tax man. So instead of getting $100 (before you pay your own taxes) you would get $60 (before you pay your own taxes), which is quite a loss. So instead they can just keep holding the money offshore and do a stock split. So you bought a share for $100, the company earned money so that the share is now worth $200, then they do a stock split so that you have two shares each worth $100. If you want cash you can sell a share and get $100 (instead of $60). If you want to avoid taxes then you keep the shares. This is effectively the same result as with a buyback. It isn't irrational, it's just inefficient. And now as a side effect you can't buy stock in "Apple" anymore, you have to buy stock in "Apple + a large pile of unrelated market securities chosen and held offshore by Apple executives." That's bad, but it's what the tax system causes to be rational, because the alternative (losing some 35-40% of your profits to Uncle Sam) is "worse." > If you know of a way to do this as a personal investor, please share! The usual method is to take out a mortgage loan, either on your house or by buying some kind of rental property. It's obviously a lot easier for business entities. Your whole premise seems to be that if taxes don't produce some kind of irrational fury in an overwhelming majority of the taxpayers then the consequences must be negligible and we shouldn't worry our heads about it. A thing can cause economic consequences that are Very Bad without causing panic in the streets or mass casualties.

AnthonyMouse 13y ago

>First, let me repeat that I am not claiming that taxation drives no behavior. I'm saying that the degree to which it drives behavior is frequently overstated. And I think you are underestimating how much it does drive behavior. Rational economic actors will do what they can to avoid costs, including taxes, right up to the point where the cost of avoidance measures exceeds the cost being avoided. When you impose a significant tax rate (e.g. 25-50%), you make it rational to spend significant effort on tax avoidance, all of which is wasted resources that could have been put to some other more productive use. > What I am saying, however, is that many (including you) opine that individuals/corporations will suddenly begin to engage in completely irrational or counter-productive behavior because, you know, taxes. Nonsense. The behavior is completely rational -- it's just massively inefficient. Companies will spend several million dollars to build a "presence" in Ireland or Bermuda or wherever else. They will hold wealth off shore rather than repatriating it. Companies do such things because it is less expensive than the taxes they're not paying. It is completely rational to do that, even though it would be "irrational" otherwise. > Except that the net income that flows to me is greater as a shareholder. No it isn't, that's what I'm saying. Let's put some numbers into it. Suppose the company has 100,000 outstanding shares valued at $100 each at the beginning of 2000. They do well from 2000 to 2010 and make ten million dollars in profits, so now their shares are worth $200 and the company has ten million dollars in cash on hand. Let's go through what they can do with the ten million dollars. First, they could issue it as a dividend. So you get a $100 dividend and now instead of having a $200 share of stock you have a $100 share of stock and $100 (because you can't get something from nothing -- having issued the dividend the stock value goes down because the company has less cash on hand), a total value of ~$200. Now all the stockholders have to pay tax on $100/share, even the ones who just use the dividend to buy more stock because they like the company. An alternative is for the company to buy back some of its own stock. So the company buys back ten million dollars worth of outstanding shares. All the shares continue to be worth ~$200/share (because even though the company has less cash on hand after the buyback, there are now that many fewer outstanding shares, so each remaining share represents more of the company). At this point the stockholders who tendered their shares in the buyback don't pay taxes on the money they receive, they only pay tax on the difference between what they received for the shares and what they paid for them (which no matter what it was will have been less than the full amount). Now you may object that you don't want to sell your shares, you just want the profits as cash, so I'm going to explain how this is the same thing. The company is transferring the same percentage of its total value to the stockholders either way. If they pay a dividend, you get the money, and you own the same percentage of the company that you did originally. If you tender that percentage of your shares to the company in the buyback, you get the money, and you own the same percentage of the company that you did originally (because you own fewer shares of a company that has fewer outstanding shares) -- but now you pay less in taxes, and stockholders who don't want any cash right now don't pay any taxes. And the company can do a stock split so that you end up with the same number of shares you had originally, so that you can do this again and again without ever having to sell the last share. So there's that. But let's go to one other alternative: Instead of transferring cash directly to the stockholders at all, the company holds the cash as some kind of securities (stock or bonds or what have you) held by an offshore subsidiary. The stock price continues to be worth $200, because the originally $100/share company is still (indirectly) holding ten million dollars of securities. But now they don't have to pay corporate income tax on the money, because the profit doesn't belong to the U.S. subsidiary, it belongs to the subsidiary in the place where there is no or minimal corporate income tax. If they repatriated the money so that they could buy back stock or issue a dividend they would have to pay 35-40% of it to the tax man. So instead of getting $100 (before you pay your own taxes) you would get $60 (before you pay your own taxes), which is quite a loss. So instead they can just keep holding the money offshore and do a stock split. So you bought a share for $100, the company earned money so that the share is now worth $200, then they do a stock split so that you have two shares each worth $100. If you want cash you can sell a share and get $100 (instead of $60). If you want to avoid taxes then you keep the shares. This is effectively the same result as with a buyback. It isn't irrational, it's just inefficient. And now as a side effect you can't buy stock in "Apple" anymore, you have to buy stock in "Apple + a large pile of unrelated market securities chosen and held offshore by Apple executives." That's bad, but it's what the tax system causes to be rational, because the alternative (losing some 35-40% of your profits to Uncle Sam) is "worse." > If you know of a way to do this as a personal investor, please share! The usual method is to take out a mortgage loan, either on your house or by buying some kind of rental property. It's obviously a lot easier for business entities. Your whole premise seems to be that if taxes don't produce some kind of irrational fury in an overwhelming majority of the taxpayers then the consequences must be negligible and we shouldn't worry our heads about it. A thing can cause economic consequences that are Very Bad without causing panic in the streets or mass casualties.