Untaxing-I (Introduction) ch 1:     Equity

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Earnings categorized as dividends is the basis for the public company’s market value or market capitalization. When debt or taxes attack the earnings of a public company, they attack the public company’s ability to produce equity values that can be taxed.

Let’s make no mistake about the following fact: Debt is a tax on capitalism. Debt reduces corporate earnings, decreasing the amount of dividends that should be paid to the shareholders and therefore suppressing the market value of the public company.

Before we begin to examine tax policy, let’s compare Debt and Equity. Table 1 below compares what happens when a $1,000 is loaned to a borrower to what happens when a $1,000 dividend is received or earned from an equity investment. A $1,000 savings deposit is actually a $1,000 loan to the bank receiving the deposit.

A lender receives $7.70 in interest on the $1,000 loan (disguised as a savings deposit) to the bank. On the other hand, the asset yielding the $1,000 dividend (to an investor) is valued at $38,168 (= $1,000 ÷ 0.0262).

Clearly, the economic value involved in the case of Equity is much bigger than its equivalent in the case of Debt. In comparing $7.70 of interest (created by a savings deposit) with $38,167.94 of equity value, we see a higher return in the case of Equity. Comparing a $37,168 return ($38,168 minus $1,000) with a $7.70 return gives us a 482,601% difference. Equity’s larger economic value is the reason for using the nuclear power analogy to describe the power of true capitalism.

Note that the case of Equity (2nd line of Table 1) can also describe a $1,000 investment to own an asset worth $38,168. In both situations — receiving a dividend from an asset or making an equity investment for asset ownership — Equity is more powerful than Debt.

The results of this simple Debt-Equity comparison should shock anyone who thought they understood economics, capitalism and finance. This is just the beginning of exposing the equity-producing power of the public company for tax purposes.


Dividend Yield Rates are tracked at Barron’s (online.barrons.com)

Go to (part I) chapter 2: Risk