Doug said it first.

Rakesh Bhandari bhandari at phoenix.Princeton.EDU
Wed Mar 17 10:47:44 PST 1999

Jordan asked me privately:

>You mean by using increasing share price as the "reward" to
>shareholders instead of paying (taxed) dividends?

Chomsky wrote about Oskar:

"His tax legislation "closes many

loopholes enjoyed by industry without compensating cuts in the main rates"

for corporations, which "protested fiercely" against this outrage."

Here's an example of financial sabotage that even Thorstein may have considered out of this vurld.

"The US tax code provides an a simple incentrive for debt financing: corporate profits are taxed at a fairly high rate, while interest payments on laons are considered a deductible expense. Thus, one of the best ways to avoid taxes on profit is to avoid profits. Consider for example a hypothetical firm worth $1 mil with 100,000 shares of stock outstanding. Each share is worth $10. Thie firms makes $200,000 per year in pretax profits that are taxed at a 50% rate, netting an after tax profit of $100,000. THis leaves each shareholder with a share of profits valued at $1, or a 10% return on the $10 share value.

"Now suppose the company borrows $500,000 at a 10% interest rate. The firm uses this money to buy back half its outstanding shares at a market value of $10. To service the loan, the firm must now pay $50,000 per year to its creditors--leaving pretax profit of $150, 000. Taxed at the 50% tax rate, the firm with is left with $75,000 in after -tax profit. Since there are now only 50,000 shares outstanding, each shareholder realizes a profit of $1.50, or a 15% return on the original $10 stock value. This seeming magic is called leveraging."

Medoff and Harless then go on how to show this is even more profitable with some inflation.

Leveraging is the sort of Schumpeterian Innovation that creates profits while destroying the economy with debt.

yours, rakesh

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