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Macro Roundup


Wednesday, September 3, 2014

AI Summary. Companies have sold about $994.9bn of bonds in the U.S. this year, up more than 4% and approaching a record $1tn in a third straight year of growth. Low interest rates have driven the surge, with $315bn issued for debt repayment or refinancing, up 35%, and capital-spending issuance up 90% to $40bn.

Mike Cherney Street Journal
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U.S. corporate-bond issuance is approaching a record $1 trillion, driven by low interest rates & firms refinance debt, fund share buybacks & bolster cash reserves.

Are low interest rates pushing corporate bond issuance to record levels?

Core argument: Companies globally have sold about $994.9 bn of bonds in the U.S. this year, up over 4% from last year, approaching a record $1 trillion in a third consecutive year of significant growth.

U.S. corporate-bond issuance is approaching a record $1 trillion, marking the third consecutive year of significant growth. Companies globally have sold approximately $994.9 bn in bonds in the U.S. this year, up over 4% from last year, with sales on track to surpass the $1 tn mark at an unprecedented pace. This surge is driven by low interest rates, prompting firms to refinance existing debt, fund share buybacks, and bolster cash reserves. Notably, $315 bn of bonds have been issued for debt repayment or refinancing, a 35% increase from the previous year. Additionally, bond sales for capital spending have risen 90% to $40 bn, reflecting a strategic shift towards long-term investments amid uneven economic growth and low returns on traditional investments.

Takeaways by Macro Roundup® AI

  1. Companies globally have sold about $994.9 bn of bonds in the U.S. this year, up over 4% from last year, approaching a record $1 trillion in a third consecutive year of significant growth.
  2. Low interest rates are driving the surge in U.S. corporate-bond issuance, with firms refinancing existing debt, funding share buybacks, and building cash reserves.
  3. Bonds issued for debt repayment or refinancing total $315 bn, a 35% increase from the previous year, while bond sales for capital spending rose 90% to $40 bn.

From the article the annualized numbers are roughly:

$1.4 T (= 995 x 12/8) total
$600 B share buy back
$ 60 B capex
$500 B repay debt
$150 B mergers

Very little is used for investment. Half is refinacing to get a lower rate and half is share buy back. Acquisition are just refinancing and share buybacks (of other companies). Given the size of the share buy backs there doesn't appear to be much net cash on corp balance sheets. Yes, companies build up cash to avoid repatriation taxes but then they borrow against that cash and buy back shares which is economically equivalent to paying dividends.

"U.S. corporate-bond issuance is hurtling toward a record for the third consecutive year...Companies around the globe have sold about $994.9 billion of bonds in the U.S. this year as of Thursday morning....up more than 4% from a year ago, with sales on pace to cross the $1 trillion mark at the fastest clip on record. A $4.5 billion sale Thursday from Bank of America Corp. put the total closer to that milestone....Acquisitions have about doubled in the U.S. from last year to a recent $1.1 trillion, and U.S. bond sales earmarked for capital spending—purchases or upgrades of long-lived assets such as plant and equipment—have risen 90% from a year earlier to $40 billion...Capital expenditures fell by 1% globally in real terms in 2013, according to Standard & Poor's.About $315 billion of corporate bonds have been sold in the U.S. to repay or refinance existing debt, an approximately 35% increase over last year."U.S. Bond Issuance Nears $1 Trillion Companies Take Advantage of Low Interest Rates to Issue Bonds By MIKE CHERNEY Updated Aug. 21, 2014 7:59 p.m. ET

Cherney, Mike, "U.S. Bond Issuance Nears $1 Trillion," Wall Street Journal, August 21, 2014. Available at:http://online.wsj.com/articles/u-s-bond-issuance-nears-1-trillion-1408651952

Monsanto didn't immediately respond to a request for comment.

MonsantoCo. this summer sold $4.5 billion of bonds to help pay for a $6 billion share buyback plan. Bond analysts often take a negative view on such so-called leveraged buybacks, because they potentially reward shareholders with higher stock prices at the expense of bondholders, who face higher debt-service costs on the same revenue base and could lead to a downgrade.

Share buybacks have been another popular use of bond proceeds. S&P 500 companies bought back about $158.4 billion in the first quarter, the third-largest quarterly amount since 2005, according to FactSet.

"Management teams are looking to increase shareholder value in a slow-growth environment," said Jim Keenan, head of credit atBlackRockInc.

According to Dealogic, about $109 billion in bonds has been sold globally this year that identified mergers as a use of proceeds, up from $84 billion at this time last year.

This year's Numericable bond deal was the largest junk-rated offering on record, and was sold to help finance the company's acquisition ofVivendiSA 's telecom unit SFR.

AppleInc. sold $12 billion in April, the largest corporate deal this year. French cable operatorNumericable Groupsold $10.88 billion, also in April, andOracleCorp. sold $10 billion in June, according to Dealogic. Last year, Verizon CommunicationsInc. sold a whopping $49 billion, in what remains the largest corporate deal on record.

"I can't think of an environment where people have been more on the wrong side of the boat from where they think rates are going to go," said Tom Murphy, senior portfolio manager at Columbia Management, which has been buying some 30-year corporate bonds recently.

Investors have been lapping up the new debt offerings. Bankers on some deals say they received many more investor orders than bonds available, as portfolio managers seek out securities that offer more yield than Treasurys and bet that the improving economy will ultimately be good for American companies.

Instead, rates have fallen, with the 10-year U.S. Treasury yield recently hitting a 14-month low at 2.3%. Analysts said the decline reflects the uneven domestic growth outlook, geopolitical unrest in Ukraine, Israel and Iraq and fears that Europe is facing a new economic slowdown.

The flurry of bond deals has caught many Wall Street analysts off guard. Market experts broadly expected benchmark U.S. Treasury rates to tick up from 3% at the end of 2013 as the economy grew and the Federal Reserve prepared to end its monthly stimulus, developments that were expected to hit the prices of bonds and trim demand for new debt issues.

At Continental Resources, Mr. Hart said May's bond sale also helped the company reduce costs by refinancing existing, higher-rate bonds.

"We looked at the markets, and we wanted to take advantage of the compelling opportunity that we saw in lower interest rates," said Linda Sullivan, senior vice president and chief financial officer at American Water.

American Water WorksCo., the largest publicly traded U.S. water utility, sold $500 million in 11-year and 28-year bonds earlier this month, with rates of 3.4% and 4.3%, respectively. Some of the proceeds went to pay off existing long-term debt that carried rates of between 4.9% and about 6%.

"There is still a level of uncertainty in the executive suite," said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management, which oversees $124 billion.

The sums raised to refinance debt, bolster corporate cash and pay shareholders underscore the difficulty of finding high-returning investments five years after the financial crisis, amid uneven U.S. growth and low interest rates. Central-bank officials are gathering this week in Jackson Hole, Wyo., to discuss the economic outlook and the pace of potential Federal Reserve rate increases among other issues.

While bond sales tabbed to capital spending have risen, they remain below their pace about a decade ago, Dealogic said. Capital expenditures fell by 1% globally in real terms in 2013, according to Standard & Poor's.About $315 billion of corporate bonds have been sold in the U.S. to repay or refinance existing debt, an approximately 35% increase over last year, according to Dealogic.

At the same time, much of the cash is being used to refinance existing debt, being sent back to shareholders as dividend payments and share buybacks, or banked in the corporate treasury as executives consider how to potentially deploy funds as the economy expands.

Also in May, a subsidiary ofCheniere Energy PartnersLP sold 10-year bonds to help pay for an expansion at a natural-gas facility in Louisiana. The company initially intended to sell $1.5 billion but was able to increase the size of its offering to $2 billion.

Without the favorable bond-market environment, "potentially, our capex would be less," Mr. Hart said.

Mr. Hart said the company tapped the debt markets this year because "we've viewed them as an attractive source of financing." He added, "It has certainly been a very attractive market for us."

Continental ResourcesInc. sold $1.7 billion of debt with 10- and 30-year terms in May, with some of the money helping to fund the Oklahoma City, Okla., company's oil-drilling and development operations in North Dakota and Oklahoma, said John Hart, chief financial officer.

Investors and analysts say companies are raising funds partly with an eye to investing in fresh projects as the U.S. economy gains pace, a move that can further help along economic growth. Acquisitions have about doubled in the U.S. from last year to a recent $1.1 trillion, and U.S. bond sales earmarked for capital spending—purchases or upgrades of long-lived assets such as plant and equipment—have risen 90% from a year earlier to $40 billion, Dealogic said.

Companies around the globe have sold about $994.9 billion of bonds in the U.S. this year as of Thursday morning, according to data provider Dealogic, which has figures dating back to 1995. That is up more than 4% from a year ago, with sales on pace to cross the $1 trillion mark at the fastest clip on record. A $4.5 billion sale Thursday fromBank of AmericaCorp. put the total closer to that milestone.

U.S. corporate-bond issuance is hurtling toward a record for the third consecutive year, as companies take advantage of a surprising interest-rate decline to stock up on cash.

AI Summary. Bond market pricing shows inflation expectations holding near a 2.5%/year break-even while real yields fall, with the 5-year inflation-protected Treasury yield reaching -1.4%/year and the 6-10 year expected real rate plus term premium near 0%/year. The author argues this decoupling signals pessimism about the real economy rather than normalization with recovery.

Brad DeLong Reason
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The bond market conundrum highlights a divergence btw inflation expectations and real interest rate forecasts, with the 5-Year TIPS yield collapsing to -1.4%/year by mid-2013 and the 6-10 year expected rate+term premium dropping to 0%/year. @delong

Do falling real yields with steady inflation expectations signal economic pessimism?

Core argument: The 5-year TIPS yield collapsed to -1.4%/year by mid-2013 while the 6–10 year expected real rate plus term premium fell to 0%/year, which the author reads as pessimism about the real economy's future.

The bond market conundrum highlights a divergence between inflation expectations and real interest rate forecasts, with the 5-Year TIPS yield collapsing to -1.4%/year by mid-2013 and the 6-10 year expected rate+term premium dropping to 0%/year. This suggests a decoupling of inflation expectations from real growth, indicating pessimism about the real economy's future state. Despite tapering expectations, long-term interest rates have trended downward, challenging traditional views that rates would normalize with economic recovery. The persistence of a 2.5%/year inflation break-even since 2004 further complicates interpretations, as it suggests stable inflation expectations despite falling real yields. This conundrum raises questions about the reliability of market signals as indicators of future economic conditions and the effectiveness of monetary policy in achieving targeted inflation and growth rates.

Takeaways by Macro Roundup® AI

  1. The 5-year TIPS yield collapsed to -1.4%/year by mid-2013 while the 6–10 year expected real rate plus term premium fell to 0%/year, which the author reads as pessimism about the real economy's future.
  2. Inflation break-evens have held near 2.5%/year since 2004 even as real yields fell, suggesting inflation expectations have decoupled from expectations for real growth.
  3. Long-term interest rates trended downward despite tapering expectations, challenging the traditional view that rates would normalize as the economy recovers.

on inflationary expectations. had to read this closely, I don't really"believe" in a natural rate of interest (if that makes sense) but I get it "...Over 2007 to mid-2010, a constant 6-10 year expected rate+term premium of 2.3%/year (save for the height of the financial crisis itself, with the yield spike from fears of TIP illiquidity). Ms Market appears confident that whatever happens, by 6-10 years out the ocean will be calm and flat again at the global savings glut Wicksellian real natural rate of 2.3%/year. And over 2007 to 2010 we have (a) the steep fall in the 5-Year TIPS yield as Ms Market expects aggressive monetary policy over a five-year horizon, (b) the step rise in the yield as Ms Market thinks something very bad might and then is happening to TIPS liquidity, (c) the return to normal slow-recovery views of the 5-Year TIPS yield like these previously seen over 2003 to mid-2005, and (d) the further collapse of the 5-Year TIPS yield to zero as Ms Market recognizes that this is not your normal slow recovery, that there are few if any of Tim Geithner’s “green shoots”, and that it will be a long slog...Over mid-2010 to mid-2013, the collapse in the 5-Yr TIPS yield to -1.4%/year and the collapse in the 6-10 year expected rate+term premium to 0%/year as Ms Market recognizes that this time-with QE∞, permanent underemployment, and secular stagnation-really is different... Since late 2013, a belief by Ms Market that the Federal Reserve is still planning to start serious normalization-but with a start date that seems to be pushed out an extra week for every week that passes-coupled with a dawning recognition that we are unlikely to be anywhere close to normal in years 6-10, hence the late-2013 belief that you should bet on the economy being at a semi-normal Wicksellian real natural interest rate in 2020 was probably wrong...If I were an inflation hawk I would say that right now Ms Market expects us to get the economy in five years to a place where it is then doing its normal thing that it does when we target 2%/year inflation-and that is a powerful sign that our current taper policy is on the right track.But when I look at the sub-zero 5-Year TIP and at the 0.6%/year 6-10 Year TIP I read that as Ms Market decoupling its inflation expectations from its real growth and real interest rate expectations, and not in a good way..." Does the New Bond Market Conundrum Tell Us Anything? If So, What?: Tuesday Focus for September 2, 2014 byBrad DeLongPosted on September 2, 2014 at 12:26 pm

We are very far away from anything I would like to call “social science” or even “forecasting” here-“haruspicy”, or perhaps“plastromancy”captures it better…

With that caveat, I have been struck for a while by what we see when we break up the 10-Year TIPS rate into its 5-Year TIPS and its 6-10-Year Forward TIPS components:

If you read this graph as showing the expectations of Ms Market over the next five and the subsequent five years, we get the following for the market’s ideas about the real interest rate:

1) Over 2003 to mid-2005, a constant 0-5 year rate and a 6-10 year expected rate+term premium that falls from 3%/year to 2.3%/year, presumably as Ms Market adjusts to the idea that there might actually be a global savings glut and hence a lower Wicksellian real natural interest rate in the long run:

2) Over mid-2005 to 2006, a rise in the 0-5 year rate to 2.3%/year or so and a 6-10 year expected rate+term premium that remains steady, presumably as Ms Market now expects more of a full-employment economy and a stronger demand for funds to finance real investment than had seemed likely before mid-2005:

3) Over 2007 to mid-2010, a constant 6-10 year expected rate+term premium of 2.3%/year (save for the height of the financial crisis itself, with the yield spike from fears of TIP illiquidity). Ms Market appears confident that whatever happens, by 6-10 years out the ocean will be calm and flat again at the global savings glut Wicksellian real natural rate of 2.3%/year. And over 2007 to 2010 we have (a) the steep fall in the 5-Year TIPS yield as Ms Market expects aggressive monetary policy over a five-year horizon, (b) the step rise in the yield as Ms Market thinks something very bad might and then is happening to TIPS liquidity, (c) the return to normal slow-recovery views of the 5-Year TIPS yield like these previously seen over 2003 to mid-2005, and (d) the further collapse of the 5-Year TIPS yield to zero as Ms Market recognizes that this is not your normal slow recovery, that there are few if any of Tim Geithner’s “green shoots”, and that it will be a long slog:

4) Over mid-2010 to mid-2013, the collapse in the 5-Yr TIPS yield to -1.4%/year and the collapse in the 6-10 year expected rate+term premium to 0%/year as Ms Market recognizes that this time-with QE∞, permanent underemployment, and secular stagnation-really is different:

4) In 2013, taper-talk: Bernanke’s announcements interpreted as signaling that the FOMC thinks the question is not whether but when to normalize, and the consequent rapid semi-normalization of the 6-10 year expected rate+term premium and rapid rise of the 5-Year TIPS to near 0%/year:

5) Since late 2013, a belief by Ms Market that the Federal Reserve is still planning to start serious normalization-but with a start date that seems to be pushed out an extra week for every week that passes-coupled with a dawning recognition that we are unlikely to be anywhere close to normal in years 6-10, hence the late-2013 belief that you should bet on the economy being at a semi-normal Wicksellian real natural interest rate in 2020 was probably wrong:

Is there actually an intelligent entity-some kind of distributed anthology intelligence suffering from some sort of aphasia-that we call Ms Market that actually has expectations and whose expectations we can read off of bond yields? And if there is such an entity, is there any reason we should pay any attention to her expectations either as guides to some central tendency of investor sentiment or as forecasts that are in their own right worth incorporating into our own information sets, and hence into our own forecasts? Who knows? I don’t.

What I do know is that if we are willing to divine some market-sentiment-macro-expectations factor out of TIPS and other yields, the past eight months or so have seen Ms Market become much more pessimistic about the state of the real economy and thus of real interest rates six to ten years hence.

The one thing casting doubt on this interpretation is the failure of the 6-10 year inflation break-even to decline. It has been hanging out there at 2.5%/year (with notably rare exceptions) since 2004:

If I were an inflation hawk I would say that right now Ms Market expects us to get the economy in five years to a place where it is then doing its normal thing that it does when we target 2%/year inflation-and that is a powerful sign that our current taper policy is on the right track. But when I look at the sub-zero 5-Year TIP and at the 0.6%/year 6-10 Year TIP I read that as Ms Market decoupling its inflation expectations from its real growth and real interest rate expectations, and not in a good way.

The new bond market conundrum is thus yet another reason for the sun to appear dark in my eyes…

David Beckworth uses a decomposition of the long term interest rate into an average expected real short-term interest rate, average expected inflation, and a term premium to argue that it’s the term premium has been steadily falling…. James Hamilton writes that… while the… 10-year Treasury has been falling… the 5-year yield has held fairly steady…. Something happened this year to persuade people that rates in the future (for 5 to 10 years from now) were going to be lower than they had been expecting. Robin Harding and Michael Mackenzie write that this is unprecedented…. James Hamilton writes that it’s hard to attribute it to changing perceptions about the Fed… DeLong, Brad, "Does the New Bond Market Conundrum Tell Us Anything? If So, What?" Washington Center for Equitable Growth, September 2, 2014. Available at:http://equitablegrowth.org/2014/09/02/new-bond-market-conundrum-tell-us-anything-tuesday-focus-september-2-2014/

Jeff Sommer… David Beckworth… Marc to Market…. James Hamilton writes that as the U.S. economy returns to healthier growth, many of us expected long-term interest rates to return to more normal historical levels. But the general trend has been down…. In… 2005… Greenspan noted that long-term interest rates trended lower in recent months even as the Federal Reserve raised the level of the target federal funds rate by 150 basis points… to the expectations theory of interest rates were long rates are the geometric average of expected future short rates plus a risk premium that would usually increase with duration of the instrument….

Jérémie Cohen-Setton:Blogs review: The bond market conundrum redux:“Are we seeing a new version of the Greenspan 2005 conundrum?… Fed tapering was widely expected to push up US yields. Instead, US yields have fallen since the beginning of the year…. A successful explanation of this new conundrum cannot just rely on a flight to safety… it also needs to rationalize why 5-year… and 10-year yield have diverged….

The extremely-sharpJérémie Cohen-Settonhas a roundup:

AI Summary. American household debt is distributed unevenly within and across metro areas, and the Federal Reserve Bank of Cleveland finds that debt reduction has been concentrated in the most indebted neighborhoods, where foreclosures cut mortgage balances more than repayment did. At the housing bubble's peak, the average Nevadan carried 2.5x the mortgage and consumer debt of the average Texan.

Matthew Klein FT Alphaville
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@MattKlein via @FTAlphaville: US debt is highly uneven, concentrated in extremely indebted neighborhoods where foreclosures have reduced mortgage balances more than paydowns.

How unevenly is household debt distributed across American neighborhoods?

Core argument: At the peak of the housing bubble, the average Nevadan carried 2.5 times the mortgage and consumer debt of the average Texan.

The distribution of American debt is highly uneven, with significant variation both within and between metro areas. According to the Cleveland Fed, debt reduction since 2007 has been concentrated in extremely indebted neighborhoods, where foreclosures have reduced mortgage balances more than paydowns. A study by the New York Fed highlights that many ultra-borrowers did not reduce their debt burdens solely through income, indicating a reliance on foreclosures. During the peak of the housing bubble, the average Nevadan had 2.5 times more mortgage and consumer debt than the average Texan. This concentration of extreme indebtedness among a small subset of the population may explain the limited political response to foreclosure damage. The uneven distribution of debt underscores the need for targeted economic policies to address these disparities and prevent future crises.

Takeaways by Macro Roundup® AI

  1. At the peak of the housing bubble, the average Nevadan carried 2.5 times the mortgage and consumer debt of the average Texan.
  2. The Cleveland Fed finds debt reduction since 2007 has been concentrated in extremely indebted neighborhoods, where foreclosures cut mortgage balances more than paydowns did.
  3. A New York Fed study finds many ultra-borrowers did not reduce their debt burdens through income alone, indicating reliance on foreclosures; the concentration of extreme indebtedness in a small subset of the population may explain the limited political response to foreclosure damage.

"...is that the amount of variation within metro areas was often as big as, if not greater than, the variation between them....These variations affect who ended up cutting their debt loads the most. Debt reduction since 2007 has been heavily concentrated in extremely indebted neighborhoods, also according to the Cleveland Fed. Many of these ultra-borrowers did not reduce their debt burdens solely out of their income. According to a study from the New York Fed published at the end of last year, foreclosures (red) reduced mortgage balances more than paydowns (green)..."Where are Americans’ debts?

Klein, Matt, "Where are Americans’ debts?" FT Alphaville, September 3, 2014. Available at:http://ftalphaville.ft.com/2014/09/03/1954961/where-are-americans-debts/

The concentration of extreme indebtedness among a relatively small subset of the US population may help explain why politicians had relatively little interest in doing anything to mitigate the damage caused byforeclosures. Hopefully the research produced in the aftermath of the crisis will help limit a repeat performance.

Many of these ultra-borrowers did not reduce their debt burdens solely out of their income. According to a study from the New York Fed published at the end of last year, foreclosures (red) reduced mortgage balancesmore than paydowns (green):

These variations affect who ended up cutting their debt loads the most. Debt reduction since 2007 has been heavily concentrated in extremely indebted neighborhoods, also according to the Cleveland Fed.

Even parts of Las Vegas, which gorged itself on widely available credit during the go-go years, were relatively free of debt during the peak of the bubble:

Consider Columbus, Ohio, which is about average in terms of household indebtedness. The chart below looks at debt-to-income ratios by census tract for the city and its suburbs. As you can see, some parts of the city carry very little debt, while other areas — both in the suburban periphery and in the core — borrow a lot relative to what they earn:

What’s striking to us, from aResearch notepublished by the Federal Reserve Bank of Cleveland, is that the amount of variationwithinmetro areas was often as big as, if not greater than, the variation between them.

During the peak of the bubble, the average Nevadan carried about two-and-a-half times as much mortgage and consumer debt as the average Texan, according to theFederal Reserve Bank of New York:

Excessive US household borrowing of the 2000s was not evenly distributed.

Friday, September 12, 2014

AI Summary. The Congressional Budget Office estimates the effective tax rate on capital income averages 13.8%, but varies widely: -6.4% for debt-financed corporate investment versus 36.1% for equity-financed, and tenant-occupied housing is taxed 23.3 percentage points more than owner-occupied. Eliminating individual-level capital income taxes with full expensing would yield a -15.1% rate, subsidizing capital returns.

Paul Burnham and Larry Ozanne Congressional Budget Office
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CBO analysis reveals significant disparities in effective tax rates on capital income, with a base case rate of 13.8%.

How much do effective tax rates on capital income vary?

Core argument: CBO estimates the base-case effective tax rate on capital income at 13.8%, with debt-financed corporate investment taxed at -6.4% and equity-financed corporate investment at 36.1%.

The Congressional Budget Office (CBO) analysis reveals significant disparities in effective tax rates on capital income, with a base case rate of 13.8%. Debt-financed corporate investments face a -6.4% rate, while equity-financed investments are taxed at 36.1%. Corporate investment rates are 5.7 percentage points higher than noncorporate, and tenant-occupied housing is taxed 23.3 percentage points more than owner-occupied. Eliminating individual-level capital income taxes and allowing full expensing of new investments could result in a -15.1% effective rate, subsidizing rather than taxing capital returns. This approach would reduce disparities between corporate and noncorporate investments but increase differences between equity and debt financing. Removing interest expense deductions could standardize rates at zero, achieving uniformity across capital income types.

Takeaways by Macro Roundup® AI

  1. CBO estimates the base-case effective tax rate on capital income at 13.8%, with debt-financed corporate investment taxed at -6.4% and equity-financed corporate investment at 36.1%.
  2. CBO finds corporate investment faces effective tax rates 5.7 percentage points higher than noncorporate investment, and tenant-occupied housing is taxed 23.3 percentage points more than owner-occupied housing.
  3. CBO estimates that eliminating individual-level capital income taxes and allowing full expensing of new investment would yield a -15.1% effective rate, subsidizing capital returns, while also removing interest expense deductions could standardize rates at zero.

note the report doesn't cover the second order effects on the real economy beyond directional moves (comparative advantage of say debt versus equity financing)
please tag under marco/other.“…In addition to analyzing the level of taxation currently applied to capital income, the Congressional Budget Office (CBO) considered the composition of capital income taxes: how uniformly capital is taxed under the present system and how potential steps toward eliminating the tax on capital income would affect that uniformity. A lack of uniformity can signal the potential for distortion in economic decisions….CBO’s find…Under a tax regime that assumes the indefinite extension of provisions in place in 2008 (the base case), the overall effective tax rate on income from capital is 13.8 percent, about midway between the zero percent tax rate under a consumption tax or a wage tax and the average statutory marginal rate in the current income tax (approximately 27 percent for noncorporate business income)… Effective tax rates on capital income under the base case are highly uneven.For instance, whereas the effective tax rate on debt-financed corporate investment is -6.4 percent, it is 36.1 percent on equity financed corporate investment. Using typical mixes of debt and equity financing, the effective tax rate on corporate investment is 5.7 percentage points higher than that on noncorporate investment, and the rate on tenant-occupied housing is 23.3 percentage points higher than that on owner-occupied housing. Effective tax rates also differ significantly across different asset types…. Eliminating individual-level taxes on capital income and allowing businesses to expense new investments would produce an effective tax rate of -15.1 percent because of the continued deductibility of interest by businesses and homeowners. Thus, instead of taxing the return on capital investment, the tax systemwould, on balance, subsidize it. The above combination would also alter the unevenness of capital taxation.Not taxing capital income at the individual level would reduce the difference in tax rates that exists between corporate and noncorporate investment but would increase the difference between equity-financed and debt-financed corporate investment and between tenant-occupied and owner-occupied housing.Furthermore, adding the full expensing of the acquisition cost of capital assets would significantly increase the difference in rates between equity financed and debt-financed corporate investments, although it would eliminate the variance across asset types. Eliminating the deduction for interest expenses in tandem with the above combination would set effective tax rates on all capital income to zero and achieve complete uniformity…” Burnham, Paul and Larry Ozanne. “Taxing Capital Income: Effective Rates and Approaches to Reform,” Congressional Budget Office, October 2005. Available at:http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/67xx/doc6792/10-18-tax.pdf