Subject: Re: back to topic (was Re: a stocks and dividends question)
From: "Benjamin J. Tilly " <>
Date: Sat, 11 Jan 2003 00:31:33 +0500

"Stephen J. Turnbull" <> wrote:
> >>>>> "Benjamin" == Benjamin J Tilly <" <>> writes:
>     Benjamin> Thus the theoretical difference for this common type of
>     Benjamin> investor is entirely whether they experience periodic
>     Benjamin> redistributions of wealth back to shareholders as
>     Benjamin> capital gains later or as personal income now.  Since
>     Benjamin> taxes are higher on personal income, many prefer to take
>     Benjamin> this in the form of capital gains.
> Sure.  Distortionary taxation distorts.

Heh.  How true.  More on that in a bit.

> However, unlike lma, I wasn't (and am not) particularly interested in
> that truism.  I was concerned with the "to distribute or not to
> distribute" decision, not the "how to distribute" decision.

My uninformed opinon on that goes like this:

"A company should redistribute money back to shareholders
when its probable returns from re-investing that money
within its business fall below what shareholders think
that they can get elsewhere."

However realistically companies often don't do that.
For instance in a corporation the board of directors may
have more say about what actually happens than the
shareholders, and what they want is to run a big company,
not to run a profitable one.  Therefore they have a
tendancy not to redistribute as much as they might

> IOW, on FSB, we can leave that discussion up to the accountants and
> lobbyists;[1] that's what they're good at.  The "growth stock" vs "blue
> chip" question, on the other hand, cuts to the core of the new
> business funding issue, and therefore is relevant (somewhat) to FSB.

Now more on your "distortionary taxes distort" comment,
here is a bit more uninformed theorizing.

If dividends are no longer taxed, while capital gains
are, then there will be pressure on companies to issue
dividends to avoid capital gains.  This is much easier
for a blue chip than a growth stock (the growth stock
often does not have money on hand to issue those
dividends).  One can speculate on how this will change
the dynamics of venture capital.  My speculation is that
we will see more of a tendancy to form medium sized
companies by having them be spun off from big ones that
grew too much than by having them grow from small ones.
The big company thereby turns unwanted growth into
cash and then dividends, people can then buy the new
company with those dividends without incurring capital
gains.  And later, of course, the big company can grow
through mergers...

What does this mean for FSBs?  Well for tech in general
it is bad because tech tends strongly towards opportunies
for growth.  But for creating pure FSBs it might be very
good because as was discussed a while ago, FSBs lend
themselves to low profit-margin, service heavy
businesses.  (Like consulting.)  So someone with good
connections in large profitable companies like IBM might
want to start thinking how to pitch this, "generate cash
by spinning me off into a viable business" line to upper

At least until the resulting distortions are pointed to
by outraged investors as horribly distorting, causing the
long-term stagnation of the DOW, and the only solution is
to stop treating capital gains differently from dividends,
clearly we need to stop taxing them as well!  I predict
that if Bush succeeds, calls for this reform will come
within 2 decades.

> Footnotes: 
> [1]  I take Larry's post as an attempt to unleash the lobbyists.


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