CHAPTER TWELVE TAXES AND INFLATION. TAXES IN THE U.S. n CORPORATE TAXES forms of business are taxed...
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Transcript of CHAPTER TWELVE TAXES AND INFLATION. TAXES IN THE U.S. n CORPORATE TAXES forms of business are taxed...
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CHAPTER TWELVE
TAXES AND INFLATION
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TAXES IN THE U.S.
CORPORATE TAXES•forms of business are taxed
differentlysingle proprietor and partnership income
is taxed at personal income ratescorporate income may be taxed twice
– once as it is earned using the corporate income rates
– again as dividend income using the personal rates
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CORPORATE TAX RATES
MARGINAL TAX RATES•are the most important for the
corporation and represent the tax on additional income earned
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CORPORATE TAX RATES
MARGINAL TAX RATES•are the rates on the next dollar
earned
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CORPORATE TAX RATES
MARGINAL TAX RATES: An ExampleSuppose a corporation earns $85,000It pays
.15 on first $50,000 = $7,500
.25 on next $25,000 = $6,250
.34 on next $10,000 = $3,400Total tax on$85,000 = $17,150
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CORPORATE TAX RATES
CALCULATING AVERAGE TAX RATE•the average tax rate =
TOTAL TAX PAID TOTAL TAXABLE INCOME
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CORPORATE TAX RATES
CALCULATING AVERAGE TAX RATE•the average tax rate is equal to theAn Example
$17,150 / $85,000 = 20.18%
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PERSONAL INCOME TAXES CALCULATING AFTER-TAX INCOME
GROSS INCOME- ADJUSTMENTSADJUSTED GROSS INCOME- DEDUCTIONSTAXABLE INCOME- TAXESAFTER-TAX INCOME
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PERSONAL INCOME TAXES EXAMPLE: A MARRIED COUPLE
ARE EVALUATING AN INVESTMENTAssume: No Bracket “Creep”Taxable Income = $80,000Marginal Tax rate = .28Possible Investment Income:
Tax (.28 x $3,000) = $840
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PERSONAL INCOME TAXES EXAMPLE: A MARRIED COUPLE
ARE EVALUATING AN INVESTMENTAssume: Bracket “Creep”Possible Investment Income: $20,000Tax .28 x 16,900 = $4,732
.31 x 3,100 = $ 96120,000 = $5,693
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PERSONAL INCOME TAXES TAX-EXEMPT BONDS
•DEFINITION: securities whose income is not subject to federal income taxes
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PERSONAL INCOME TAXES TAX-EXEMPT BONDS
•most income from bonds issued by states, municipalities, and their agencies need not be included in taxable income for federal returns
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PERSONAL INCOME TAXES TAX-EXEMPT BONDS
•to calculate fully-taxable-equivalent yield of a tax-exempt bond use the formula
yield = __i__1 - t
where t = the investor’s marginal tax rate i = the tax-exempt yield
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TAX TREATMENT FOR CAPITAL GAINS AND LOSSES CATEGORIES OF GAIN
•depend on holding periods and tax treatmentHOLDING PERIOD TAX
TREATMENT
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TAX TREATMENT FOR CAPITAL GAINS AND LOSSES CATEGORIES OF GAIN
•depend on holding periods and tax treatmentHOLDING PERIOD TAX
TREATMENT
•Less than one year ordinary income
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TAX TREATMENT FOR CAPITAL GAINS AND LOSSES CATEGORIES OF GAIN
•depend on holding periods and tax treatmentHOLDING PERIOD TAX
TREATMENT
•Less than one year ordinary income
• 12 to 18 months max rate = 28%
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TAX TREATMENT FOR CAPITAL GAINS AND LOSSES CATEGORIES OF GAIN
•depend on holding periods and tax treatmentHOLDING PERIOD TAX TREATMENT
•Less than one year ordinary income
• 12 to 18 months max rate = 28%
• more than 18 months 20%*
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TAX TREATMENT FOR CAPITAL GAINS AND LOSSES CATEGORIES OF GAIN
•depend on holding periods and tax treatmentHOLDING PERIOD TAX TREATMENT
•Less than one year ordinary income
• 12 to 18 months max rate = 28%
• more than 18 months 20%*
* unless taxpayer is in the 15% tax bracket in which case the rate = 10%
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TAX TREATMENT FOR CAPITAL GAINS AND LOSSES CATEGORIES OF GAIN
•depend on holding periods and tax treatmentHOLDING PERIOD TAX TREATMENT
•Less than one year ordinary income
• 12 to 18 months max rate = 28%
• more than 18 months 20%*
•five years or more 18%**
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TAX TREATMENT FOR CAPITAL GAINS AND LOSSES CATEGORIES OF GAIN
•depend on holding periods and tax treatmentHOLDING PERIOD TAX TREATMENT
•five years or more 18%**** Exception: If taxpayer is in
15% tax bracket, the asset must have been sold in the year 2001 or later, then rate = 8%
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TAX TREATMENT FOR CAPITAL GAINS AND LOSSES CATEGORIES OF GAIN
•depend on holding periods and tax treatmentHOLDING PERIOD TAX TREATMENT
•Less than one year ordinary income
• 12 to 18 months max rate = 28%
• more than 18 months 20%*
•five years or more 18%**
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INFLATION IN THE U.S.
INFLATION•DEFINITION: the percentage change
in a specific cost-of-living index at various points in time.
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INFLATION IN THE U.S.
INFLATION•cost-of-living index
the “overall” price level computed for a “basket of goods”
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INFLATION IN THE U.S.
PRICE INDICES•measure changes in prices relative to
a fixed period in time usually called the base period
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INFLATION IN THE U.S.
PRICE INDICES•the Consumer Price Index (CPI) is
calculated by the U.S. Bureau of Labor Statistics in the Department of Labor
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INFLATION IN THE U.S.
PRICE INDICES•the Consumer Price Index (CPI) is
calculated by the U.S. Bureau of Labor Statistics in the Department of Labor
• the Bureau uses a “market basket” of over 2000 U.S. consumer goods and services
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INFLATION IN THE U.S.
NOMINAL AND REAL RETURNS•Fisher Model of Real Returns stated
that real returns are important to investors
•they represented how much purchasing power has changed
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INFLATION IN THE U.S.
NOMINAL AND REAL RETURNS•price change may impact an asset’s
nominal return
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INFLATION IN THE U.S.
NOMINAL AND REAL RETURNS•adjustments to the nominal return are
needed to remove the effects on purchasing power of inflation or deflation
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INFLATION IN THE U.S.
NOMINAL AND REAL RETURNS•FORMULA FOR CALCULATING REAL
RETURNS
where C0 = CPI at the beginning of period
C1 = CPI at the end of the period
NR = the time period’s nominal return
RR =the real return for the period
10
1
C
NRCRR
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INFLATION IN THE U.S.
NOMINAL AND REAL RETURNS•a quick calculation of the real return
NR - IR = RR
where IR = the rate of inflation for the periodNR= the nominal returnRR= the real return
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INFLATION IN THE U.S.
THE EFFECT OF INVESTOR EXPECTATIONS•investors’ attitudes toward inflation
show they are concerned with real returns
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INFLATION IN THE U.S.
•THE EFFECT OF INVESTOREXPECTATIONS Looking to the future
E(RR) = E(NR) - E(CCL)where
E(RR) = the expected real returnE(NR) = the expected nominal
returnE(CCL)= the expected inflation rate
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STOCK RETURNS AND INFLATION OVER LONG PERIODS OF TIME
•common stocks generated large, positive real returns
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STOCK RETURNS AND INFLATION OVER LONG PERIODS OF TIME
•T-bills produced much lower, positive real returns
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STOCK RETURNS AND INFLATION OVER SHORT PERIODS OF TIME
•stock returns are not positively related to either actual or expected rates of inflation
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STOCK RETURNS AND INFLATION OVER SHORT PERIODS OF TIME
•stock returns are positively related to both actual and expected rates of inflation
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END OF CHAPTER 12