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29-1 taxes and private wealth management in a global context (2 overview…
29-1 taxes and private wealth management
in a global context
2 overview of
global income
tax structures
international comparisons of income taxation
common
elements
taxed differently based on nature: interest, dividends or capital gains andl losses
most countries have progressive
ordinary tax rate structure
provide special tax provisions for interes income
exemptions, special rates or exclusions
the marginal tax rate: tax paid on
additonal income
mitigating double taxation → tax credits
long term gains treated more favorably
general
income
tax
regimes
common progressive regime
favorable in all three
the most common
heavy dividend tax regime
heavy capital gain tax regime
heavy interest tax regime
light capital gain tax regime
the second most commonly
flat and light regime
flat and heavy regime
*progressive / flat // ordinary / favorable
other
considerations
a tax
deferred
account
defers taxation on investment returns
may permit a deduction for contributions
occasionally permit tax free distributions
major sources
of government
tax revenue
taxes on income
wealth-based taxes
taxes on consumption
3 after-tax accumulations and returns for taxable accounts
simple tax
environments
accrual taxes
on interest
and devidends
levied and paid on a periodic basis, usually annually
FVIF_i = [1 + r(1 – t_i)]^n
the effect
of taxed
annually
greater than nominal tax rate
increase over time
tax drag increase as return increase
return and investment horizon
have multiplicative effect on tax drag
deferred
capital
gains
usually deferred until realized
FVIF_cg = (1 + r)^n – [(1 + r)^n – 1]
t_cg
FVIF_cg = (1 + r)^n
(1 – t_cg) + t_cg
= entire sum subject to tax +
return the tax of untaxed cost
the value of deferred increase with
investment return and time horizon
the advantages can be offset / eliminated if taxed on acrrual basis have greater risk-adjusted returns
cost
basis
the amount padi to acquire an asset
determine the taxable capital gain
with low cost basis has a
current embedded tax liability
FVIF_cgb = (1 + r)^n(1 – t_cg) + t_cg – (1 – B)t_cg
FVIF_cgb = (1 + r)^n(1 – t_cg) + t_cg*B
wealth-based taxes
FVIF_w = [(1 + r)(1 – t_w)]^n
less sensitive to investment return
blended taxing
environments
r
= r(1 – p_i
t_i – p_d
t_d – p_cg
t_cg)
not capture tax effects of deferred unralized capital gains
the effective capital gains tax rate
T
= t_cg(1 – p_i – p_d – p_cg)/(1 – p_i
t_i – p_d
t_d – p_c
gt_cg)
FVIF_Taxable = (1 + r
)^n(1 – T
) + T* – (1 – B)t_cg
accrual equivalent returns and tax rates
optional segment