Tax moneys

A great deal of tax money is spent in support of fundamental research, and this is often defended as having an intrinsic virtue. To take the present topic as an example, however, the study of just how molecules adsorb and react on a surface is fascinating and challenging, yet the tax-paying public should not be asked merely to support the esoteric pleasures of a privileged few. The public should expect the occasional major practical advance whose benefits more than pay for the overall cost of all research. The benefits in the present case come from the discovery and development of catalytic processes of major importance to an industrial society. 

Headden, Susan. Guns, Money and Medicine The Proliferation of Powerful New Weapons Has Sent the Cost of Crime Spiraling. Here s Why You Pay. U.S. News World Report, vol. 121, July 1, 1996, pp. 30ff. Analyzes the health costs caused by gun crime, using a variety of example cases. The costs are increasing due to the proliferation of more powerful weapons. All consumers end up paying more for these health costs because tax money must be used to care for the majority of victims, who are uninsured. 

Taxes on legalized drugs could create a black market supported by people who want to avoid paying the tax. Money would be needed for more police and courts to combat this black market. Taxes paid on drugs might not even be economically beneficial. The tax on alcohol today amounts to far less than the money spent caring for alcoholics. 

If supply prices are held down by regulation, the investments will need to be subsidized — tax money. But at what subsidy level In turn, the required use of more efficient systems will have to be legislated. But at what efficiency levels ... 

Why should I waste valuable energy writing this when I can quote someone else The DEA has a website (http //www.usdoj.gov/dea/) with very, very limited information. But there is a little report by the Office of Diversion Control titled The Diversion of Drugs and Chemicals A Descriptive Report of the Programs and Activities of the DEA s Office of Diversion Control (05/96). Your tax money paid someone to type it, so you d better read it ... 

Those of us here on Valisk have seen what the power which comes of possession can really do when it s applied properly. Not when it s turned to destruction, but when it s used to help people. That s what frightens President Haaker, because it threatens the whole order of his precious world. And if that goes, he goes, along with all his power and his wealth. Because that s what this is really all about money. Money buys people, money lets companies invest and consolidate their markets, money pays for weapons, tax money pays for bureaucracy, money buys political power. Money is a way of rationing what the universe has to offer us. But the universe is infinite, it doesn t need to be rationed. 

From an overall economic viewpoint, any investment proposal may be considered as an activity which initially absorbs funds and later generates money. The funds may be raised from loan capital or from shareholders capital, and the net (after tax and costs) money generated may be used to repay interest on loans and loan capital, with the balance being due to the shareholders. The shareholders profit can either be paid out as dividends, or reinvested in the company to fund the existing venture or new ventures. The following diagram indicates the overall flow of funds for a proposed project. The detailed cash movements are contained within the box labelled the project . 

From the oil company s point of view, the balance of the money absorbed by the project (capex, opex) and the money generated (the oil company s after-tax share of the profit) yields the project cashflow. 

The project cashflow s constructed by performing the calculation for every year of the project life. Atypical project cashflow is shown in Figure 13.9, along with a cumulative cashflow showing how cumulative revenue is typically split between the capex, opex, the host government (through tax and royalty) and the investor (say the oil company). The cumulative amount of money accruing to the company at the endof the project is the cumulative cash surplus or field life net cash flow. 

The Nobel Prizes also come with a monetary award, which that year amounted to close to a million dollars. Besides paying taxes on it (the U.S. is the only country that taxes the Nobel Prizes), we donated part of it to help endow a chair in chemistry at USC as well as a chemistry prize 111 Hungary. The balance was shared with our children. It was thus not difficult to dispose of the prize money, but money, of course, is really not the essential part of the Nobel. 

Ref 91. Discounted cash-flow models account for use of capital, working capital, income taxes, time value of money, and operating expenses. Real after-tax return assumed to be 12.0%. Short-rotation model used for sycamore and poplar. Herbaceous model used for other species. Costs ia 1990 dollars. Dry tons. 

A (DCFRR) of, say, 15 percent imphes that 15 percent per year will be earned on the investment, in addition to which the project generates sufficient money to repay the original investment plus any interest payable on borrowed capital plus all taxes and expenses. 

The same money invested in a project with a (DCFRR) of 10 percent would, by Eq. (9-108), obtain an entrepreneurial return i = 8.37 percent on the whole investment, i.e., 8.37/ 100. Investment of the entrepreneur s own money would only achieve an aftertax return of (0.1)(1 — 0.40) = 6 percent on 50, or 3/ 100 of total investment. The incentive to the entrepreneur to manage the projeci thus corresponds to a tax-free income of 5.37/ 100 of total investment. In practice, money is borrowed from more than one source at different interest rates and at different tax liabihties. The effective cost of capital in such cases can be obtained by an extension of the above reasoning and is treated in detail by A. J. Merrett and A. Sykes Capital Budgeting and Company Finance, Longmans, London, 1966, pp. 30 8). 

Table 9-15 shows that the total amount of tax actually paid over the 5-year period was 988,320. This becomes 5.34,272 in uninflated-money terms when the tax for each year is corrected to its purchasing power in Year 0, using / factors for the 20 percent inflation rate employed for the example. Calculations for other rates of inflation can also be made, and the results plotted as in Fig. 9-.30. 

Similarly, the distinction between current and long-term liabihties is also not clear-cut. Current liabilities include accounts payable (money owed to creditors), taxes payable, dividends payable, etc., if due within a year. Long-term liabihties include deferred income taxes, bonds, notes, etc., that do not have to be paid within a year. The owners equity includes the par, or face, value of the capital received from stockholders and any retained earnings. The balance sheet shows only the nominal value and not the current or real value of this capital. 

Depreciation. This is a noncash cost that accumulates money to rebuild the facilities after the project life is over. There are usually two depreciation rates. One is the corporation s book depreciation, which reflects the expected operating life of the project. The other is the tax depreciation, which is usually the maximum rate allowed by tax laws. To be correct, the tax depreciation should now be called Accelerated Capital Cost Recovery System (ACRS). 

The efficient heat pump reduces energy use by 1,676 kWh per year on average. Is the efficient model heat pump a good investment Suppose the incremental cost of the efficient unit, as compared with the less efficient unit, is 1,000, and electricity cost 10 cents per kWh. With this price of electricity, the efficient heat pump reduces electricity costs by 167.60 per year. Taking a simplified approach for purposes of illustration and assuming that each unit lasts indefinitely and has no repair, maintenance, or replacement costs, and ignoring possible tax effects, the internal rate of return may be calculated as 1,000= 167.60/r, which is 16.76 percent per year. If the household can borrow money at, say, 10 percent per year and earn 16.76 percent, the investment makes economic sense. If we assume a 10 percent discount rate, the present value of the investment is 1,676, which exceeds the initial investment cost. The net present value is 676, which indicates that the investment is feasible. 

Often the reason a given plant site is chosen is that special incentives have been offered by local authorities. In the mid-1960s, when money for financing was hard to obtain and interest rates were high, tax-free municipal bonds were an important lure. Tax-free means the investor does not need to pay taxes on his earnings. This means the bonds can be sold at lower interest rates and the company saves money. In 1967, 1,500,000,000 worth of these industrial bonds were issued. In 1968 the Department of Internal Revenue announced that in the future bonds used to finance private industry would be taxed regardless of who issued them. However, since then various loopholes have developed. Municipal bonds used to finance public projects such as schools, roads, and fire stations are still not taxed, since many communities would be unable to finance these projects at commercial interest rates. 

There are as many types of taxes as there are ways to raise money. Each state has different regulations and they change frequently. To keep up with these, reference 22 should be consulted. A brief explanation of a number of different types of taxes follows. The first six are the most common within the United States. 

The return on investment is the expected profit divided by the total capital invested. This is the percentage return that an investor may expect to eventually earn on his money. Since the federal corporate income tax rate is around 48% on all profits, it must be stated whether the profit is the before- or after-tax earnings. 

Both methods assume that the money earned can be reinvested at the nominal interest rate. Suppose the rates of return calculated are after tax returns and the company is generally earning a 5% or 6% return on investment. Is it reasonable to expect that all profits can be reinvested at 23% or even 20% No, it isn t Yet this is what is assumed in the Rate of Return method. Sometimes the rate of return may be as high as 50%, while a reasonable interest rate is less than 15%. Therefore if a reasonable value for the interest rate has been chosen (this is discussed later in this chapter) and the two methods differ, the results indicated by the Net Present Value method should be accepted. 

To determine the average cost of money, the cost for each source must be multiplied by the fraction of money obtained from that source. All rates must be either on a before-tax or after-tax basis. Example 10-22 illustrates how this can be done. 

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