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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: steve harris who wrote (193907)	3/30/2009 12:12:18 AM
From: Stefan	Read Replies (1) \| Respond to of 306849

This guy gives a good explanation in a letter on Salon.com. "I have to confess -- and make a heretical suggestion I have been involved in a few tax structuring arrangements over the years, which gives me some insight as to how they work. It leads me to also say that trying to ban tax structures is a bit like prohibition or making marijuana illegal -- it won't work as long as the incentives to shelter are there. Most tax structures work by converting what would have been profits to expenses. Thus, what a business might have paid in dividends it now pays in interest or fees to an offshore entity. Why do they do this. Well the tax system for corporate taxes is a big reason. At the moment when a company in most industrial economies declares a profit, it pays corporate taxes at the prevailing corporate tax rate (less all the deductions it can take.) Then when it distributes the profits to the shareholders as dividends, the shareholders pay income tax on the dividend. The profits are in effect taxed twice. This detail has led companies to go out of their way to avoid declaring actual profits, leading to the acronym EBITDA - Earnings Before Interest, Taxes and Depreciation. To minimize taxable profits, companies look to maximize interest and depreciation. Instead of paying dividends, if they distribute anything to shareholders, it is by share buybacks (taxed as capital gain) financed if possible by borrowing money - increasing Interest, and that money is if possible lent through offshore vehicles situated in tax havens. If you look at stock exchanges such as the NASDAQ, only 32 companies in the NASDAQ 100 pay dividends, 68 don't -- and that's the bigger companies on the NASDAQ. Even when dividends are paid, the average dividend yields in most industrial countries is pretty small. It is considered a bad idea in fact to pay dividends -- a fact I have railed about, asking why a company that never makes a profit distribution has any share value at all? The usual answer is "you don't understand the theory of 'enterprise value.'" Huh! All of this is a big reason why this recession is so bad, and why companies are now laying off packs of workers. The issue is that in avoiding real profits and dividends, the companies have borrowed 'up to hilt.' Now in a downturn, the option of cutting the dividend is not there -- the interest HAS to be paid instead. "Gearing up/Leverage," i.e., increasing debt to equity ratios has turned reduced profits into outright losses, and huge ones at that. And when you understand that, it becomes clear why the banks are not lending -- why, to become junior creditors (they get paid last) to companies that are already precariously over-indebted? We are in serious trouble now, but the long term fix requires addressing the reason behind tax shelters. Frankly, I would make corporate taxes deductible against any income taxes payable on dividends. This would case companies to declare more profits, distribute more dividends and pay tax on Earnings they presently convert to expenses in the form of Interest, Depreciation and fees such as royalties. My objective would be to get the NASDAQ 100 to 95 companies of 100 paying dividends at a rate a little higher than the Federal bond yield. -- MacK.. "