Tax
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* <math>T_c</math> ''is the tax rate.'' | * <math>T_c</math> ''is the tax rate.'' | ||
| − | Therefore, the higher the tax rate, the lower the effect of leverage has on the cost of equity. Assuming the unlevered cost is higher than debt<ref>Most of the time they are, otherwise they can simply lend money to obtain an arbitrage profit.</ref> | + | Therefore, the higher the tax rate, the lower the effect of leverage has on the cost of equity. Assuming the unlevered cost is higher than debt,<ref>Most of the time they are, otherwise they can simply lend money to obtain an arbitrage profit.</ref> higher taxes lead to a reduction of cost of equity. As such, values of investments made by the corporation can thus be computed at a lower required rate and have their {{wpl|net present value}} increased (so they can make more profitable investments). |
===Investment tax=== | ===Investment tax=== | ||
Revision as of 07:18, 12 February 2013
| The dismal "science" |
| Key concepts |
|
$ Economics |
| More about economics |
| Notable economists |
“”I don’t mind taxes, I use them to buy civilization.
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| —Slacktivist[1] |
A tax is any fee levied by a government (excluding direct payments to the government for a service). Sometimes the tax is a fixed amount and sometimes it is calculated as a percentage of the value of the action. Examples of actions that are often taxed include earning income, buying cigarettes, buying anything, adding value to raw materials, owning a house or property, and occasionally dying.
Taxes are used by governments to generate revenue to support public services and as a tool of economic policy. Governments may both overtax or undertax their citizens. Arguably the Federal and state governments in the U.S. levy too little tax on motor fuel.[2]
Taxes are commonly used as an instrument of social policy. In the United States, renters are encouraged to become homeowners with mortgage tax credits. For decades, environmentalists have urged that tax credits be granted for investments in solar power, which would lead to less pollution and a decrease in dependence on imported fossil fuels.[3] More recently, a one cent tax on each e-mail was proposed as a way to eliminate virtually all spam, which may constitute more than three-fourths of all incoming e-mail messages.[4]
Contents |
Progressive and regressive
There are generally three categories of taxation. For example, a progressive tax is a tax with the goal of shifting the tax incidence ("burden of taxation") onto those with a higher purchasing power, and away from those with a lower purchasing power. On the flipside, a regressive tax is a tax with the goal of shifting the tax incidence onto those with a lower purchasing power, and away from those with a higher purchasing power. In between, a proportional tax is a tax with the goal of the entire population carrying the same effective tax incidence.
To the layman, this may seem contradictory: how does a proportional tax achieve equal tax incidence? This misconception relies on a misunderstanding of the term tax incidence. When we look at the flat-rate tax, we expect to see it achieving that instead, after all, if everyone's paying, say, 20%, then the richer are paying more than the poor. Whilst this is true, it fails to account for the fact that the value of money for the poor is a lot higher than that of the rich due to a higher percentage of their money being allocated into needs rather than wants. Whereas the 20% taxed of the rich person will come out of a second home or third yacht, the 20% taxed of the poor person will come out of food and other such necessities. It is for this reason that flat-rate taxation is deemed regressive, and why, when the Iron Lady tried to implement it in the UK, widespread riots occurred that led her down the road to her own party kicking her out of power.
Types of taxation
- Income taxes are levied on a percentage of income.
- Real estate taxes are levied on land and homes, and are often used by localities to pay for schools.
- Sales taxes are calculated as a percentage of consumer purchases, often with many categories of item excluded, or sometimes with a "rebate" to offset their regressive nature.
- "Sin" taxes are, on top of sale taxes, are meted out to sinners, usually at the time of purchase of goods considered sinful, like cigarettes, alcohol, and non-Christian religious paraphernalia.
- Estate taxes are levied on the wealth left behind by the deceased, usually with a relatively huge "deductible" to spare the middle class from them.
- Poll taxes are fixed taxes (as opposed to taxes based on a portion of one's income). In some countries, notably the United States, the term applies to taxes that were historically tied to exercising the right to vote.
- "User" taxes are fees charged for services nominally provided by government, in the case where the government can no longer afford to pay for the service.
- Stupidity taxes are a fee charged people who are "on the internet being wrong" too often. The tax often takes the form of fees from service providers to cover the huge volume of traffic ("over 90 million pageviews!") caused by those who drop by to gawk at the stupidity.
- A "Value Added Tax" (VAT) is charged to manufacturers and other processors on the difference between the cost of their raw materials and the resulting product.
Effects of taxation
Corporate tax
Modigliani–Miller theorem[wp] dictates that, with taxes,
where
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is the required rate of return on equity, or cost of levered equity = unlevered equity + financing premium.
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is the company cost of equity capital with no leverage (unlevered cost of equity, or return on assets with D/E = 0).
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is the required rate of return on borrowings, or cost of debt.
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is the debt-to-equity ratio.
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is the tax rate.
Therefore, the higher the tax rate, the lower the effect of leverage has on the cost of equity. Assuming the unlevered cost is higher than debt,[5] higher taxes lead to a reduction of cost of equity. As such, values of investments made by the corporation can thus be computed at a lower required rate and have their net present value[wp] increased (so they can make more profitable investments).
Investment tax
For investment accounts that are taxable, which the losses are tax-deductible, the tax has an effect of reduction of risk through the following mechanism:
- In case you make money, the taxable income is increased by the gain (net any legal deductions);
- In case you lose money, the loss reduces your taxable income.
As such, the magnitude of both gains and losses are reduced by the effective tax rate. This can be viewed as an reduction of risk (using most measurement that involves variation and magnitude of gains/losses).
If the interest expense on investment loans are tax-deductible, taxation can be seen as a device that encourages leverage, assuming the investor wants to keep the risk constant.
Post-Keynesian Perspective
As far as an entity with control over the issuing and distribution of currency (i.e. monetary sovereignty) is concerned taxes are completely irrelevant to generating revenue. That is, government does not need your taxes to pay for things. An analogy might be helpful here: for a government without monetary sovereignty, if the shipment of tax money gets waylaid by Robin Hood, Nottingham can't fund the army because they cannot (or will not) create more money. For a government that does have it, when the supposed tax money gets carried off in Santa sacks by the Merry Men and destroyed in a battle by Guy of Gisbourne's troops Prince John can just shrug and print more money. There's no difference economically speaking between a government 'collecting' money then spending it and destroying the supposed tax money then issuing money.
So what are taxes used for in a Post-Keynesian world?
- The first and most important is to put a base level of value on the currency. If the government makes certain taxes mandatory and will only accept payment in this denomination, the currency will have some value.
- To destroy money in the case of runaway inflation.
- Income redistribution to level the effects of income inequality. Redistribution is something of a misnomer since the government doesn't literally need another segment's money to give to another. Of course since people are sniveling and self-interested, PKs prefer to use inflation to accomplish the same thing to garner significantly less political resistance. Isn't omission bias just the cat's meow?[6]
- As mentioned above, taxes are also used to regulate social and political activity.
See also
Footnotes
- ↑ Fred Clark. "Milestones: The Yaris, the IRS, and a growing Bonfire." Slacktivist. 2013 February 11.
- ↑ Georgia's Gas Taxes Are Too Low
- ↑ Consumer Energy Tax Incentives
- ↑ Mike Berners-Lee. 2011. How Bad Are Bananas?: The Carbon Footprint of Everything. Vancouver: Greystone Books. pp. 20-21.
- ↑ Most of the time they are, otherwise they can simply lend money to obtain an arbitrage profit.
- ↑ So you can either let the Great Satan of inflation (either directly or by funding programs that target the poor and middle class; the outcome is the same) reduce the relative holdings of the rich, take the rich's money out back and set it on fire to directly close the gap, or just stick your thumb up your ass and facilely moralize about benefit scroungers while income inequality eats away at your society like cancer-powered acid. Pick your poison, Austrians.