We can start my giving an example of an individual working in a steel mill which receives a salary (wage) and is taxed by the government in a certain way. Lets suppose that his salary is $1000 dollars. This amount is gross. Governments usually like to tax individuals on their gross salary, as it provides the government with basically free money to engage in any form of expenditure it deems necessary. After taking money for social security and any other coercive form of taxation and “insurance”, it places the individual in certain tax brackets according to his/her income.
Most countries have progressive taxes and the more he makes, the more he is marginally taxed at the higher level. We can assume that this individual doesn’t save, owns no additional form of income and therefore consumes his monetary balance entirely at the end of each month. What he is left with, he uses to consume.
What happens if this individual decides to invest in a bond? Well, he is then effected by the tax code that goes with that investment. The tax code my be as follows:
1.He is taxed for the interest he receives at the annual or semiannual coupon payment dates
2. He maybe taxed for unrealized capital gains on his investments (if these bonds tend to have junk status (speculative grade) or represent cash flows that may come from the pornography industry – the government hates when people invest where they deem fit and look to punish those who do)
3. He maybe taxed by special provisions in the tax code which states that if you invest more than X amount of your funds in this asset class, you will be liable for more taxes and so on.
In each of these cases, capital won’t be allocated in an efficient manner throughout the productive structure. As he will be taxed for the cash flow he receives semiannually, he maybe even taxed due to the accrued interest, which means that before he receives a the coupon payment, he will have a negative cash flow in the amount of the paid tax. He will certainly, to match his investment objectives of say 6% yield to maturity and a tax rate of 30% request a yield to maturity to equal 0,06/(1-0,3)= 8,57% yield to maturity. Due to the fact that he yearns for higher yield, a more unsuitable investment will be chosen.
If any capital gains will be taxed before he liquidates his holdings, he will again experience a negative cash outflow. If these taxes tend to be large at a relatively small taxable base, he will liquefy the investment. If one segment of the market is affected in this way, large amount of sell orders have the ability to suppress the present values of cash flows of these assets, leading to much higher funding costs.
And last but not not least, if the event of taxation occurs as a penalty for investment in a certain market segment, that market won’t provide the necessary goods and services, as it would because the cost of doing business is greatly overstated.
We should all thanks the government for in their unlimited wisdom. they have managed to keep some products of the market, because they deem it moral and know what’s really the best investment out there….
Nema komentara:
Objavi komentar