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Strategies & Market Trends : Value Investing
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To: Bob Rudd who wrote (16139)1/11/2003 3:58:32 AM
From: Don Earl  Read Replies (1) of 78576
 
Bob,

I'd pretty much picked up on that part from this article Paul posted a few days ago:

forbes.com

The real twist is in these paragraphs:

<<<A company's earnings are only eligible for tax-free distribution to the extent that the company actually paid taxes to the Internal Revenue Service the year before. So if you own shares in a company that generates lots of cash but pays little to the IRS--say, because it issues a lot of stock options, claims a lot of tax credits or makes aggressive use of dicey tax shelters--you may not benefit.

This is highly significant because, in recent years, the gap between what companies report as earnings to shareholders and the lesser amount they report to the IRS has become a chasm. The Bush plan wisely makes a point of only rewarding the shareholders of companies who actually are forking over some cash to the Treasury. The object is to eliminate the double taxation of earnings at the corporate and then the individual level--not to make them tax-free at any level.>>>

Aside from the paperwork headaches, the real kicker is GAAP goes bye-bye, and distributed and/or retained earnings are the amounts reported to Uncle Sam. All of a sudden a whole lot of light gets shined into those dark little corners where expenses are capitalized as assets, and equipment is still on the books years after its useful life is over. The potential impact on earnings ratios and credit ratings is almost too ugly to imagine.
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