September 19, 2012
In Debt We Trust

The essential political divide in the United States is between lenders and borrowers. Here’s one of the ways it plays out between those who charge interest and those who pay it. Or between the job creators and the moochers, as Romney would put it.

Companies that pay out all their cash flow as interest do not pay income taxes on this diversion of revenue, because interest is a tax-deductible expense. As for the financial engineers at the top – the class that has replaced industrial engineers – they aim to get rich not by earning profits, but by capital gains. These are taxed at much lower rates. So the financialized tax system encourages speculation rather than profit-making direct investment.

Suppose that a company earns $1 million dollars of profit in a year. About $400,000 must be paid in income tax. A corporate raider will buy the company’s stockholders (equity owners), for $10 million in junk bonds. The entire $1 million dollars of profit will now be paid to the banker or the bondholder in the form of interest. The company won’t report a profit, so there is no tax payment. The financial manager will hope to increase the company’s price (to re-sell it on the stock exchange) by cutting costs or selling off its pieces to make a capital gain. This is how Republican presidential candidate Mitt Romney’s Bain Capital made money. It is “balance sheet” engineering, not aimed at raising production or living standards…

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Posted by Jerome Doolittle at September 19, 2012 05:49 PM
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It's organized and legalized fraud.

Posted by: Peter on September 20, 2012 7:02 AM
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