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READING 11: TAX AND PRIVATE WEALTH MANAGEMENT IN GLOBAL CONTEXT - Coggle…
READING 11: TAX AND PRIVATE WEALTH MANAGEMENT IN GLOBAL CONTEXT
MODULE 11.1 APPROACHES TO TAXATION
03 Primary
categories of tax
Income tax
Wealth-based tax
Taxes on comsumption
marginal tax rate = thuế tính căn cứ vào phần thu nhập cao nhất
=> called
"progressive tax rates"
Example
https://cutt.ly/CyUVsWI
Seven Global Tax Regimes
https://cutt.ly/wyUVcsg
MODULE 11.2 ACCRUAL AND DEFERRED CAPITAL GAINS TAXATION
Accrual taxes (Thuế trích trước)
are a
periodic
(usually annual) tax at a
single tax rate
on income or return.
Accrual tax calculation
https://cutt.ly/3yUVSIN
Deferred capital gain tax
Capital gains taxes are applied only to the gain in value on an asset.
By deferring the tax, the benefits of pretax compounding of return can be realized to lower the tax drag
https://cutt.ly/RyUBwBi
For capital gains taxes, it can be generalized that:
Unlike accrual taxation, there is no lost compounding of return due to paying taxes periodically. All tax is paid at the end of the time horizon.
The tax drag amount will increase as the time horizon and/or rate of return increase because the tax will be on a larger pretax ending value.
The relationship of the tax drag percentage and stated tax rate will depend on the basis (B):
B equals 1.00, the tax drag percentage is equal to the tax rate.
B is less than 1.00, the tax drag percentage is greater than the tax rate because there is an additional initial gain subject to tax.
B is greater than 1.00, the tax drag percentage is less than the tax rate because the portion of the return earned during the period back to the cost basis is untaxed.
MODULE 11.3 ANNUAL WEALTH AND BLENDED TAXATION
COMPARING RESULTS ACCRUAL EQUIVALENT RETURNAND TAX RATE
Accrual equivalent return (
RAE
) can summarize the effects of any combination of tax rates and methods.
It is the
annualized single after-tax rate
of return that, if compounded, would produce the same after-tax future value after considering all tax issues
RAE = (FVAT / initial investment) ^1/n – 1
The accrual equivalent tax rate
TAE
is the simple accrual taxation rate that if applied to the pre-tax return equates it to the RAE.
r (1 – TAE) = RAE
TAE = 1 – (RAE / r)
A wealth tax is imposed on
total value
, not just on return.
The future value of an investment after-tax under wealth taxation is:
FVIF (AT) = [(1 + r)(1 – t (w))]^n
For the same tax rate, the effect of a wealth tax is much
larger
than for the other forms of taxation because the wealth tax applies to both start of period value and return earned.
=> wealth tax rates tend to be lower than accrual or capital gains tax rates
Key notes
Wealth taxes are more onerous than other taxes because they apply to total value, not just return.
The adverse effects increase as the time horizon increases
But at higher rates of return the tax drag percentage
declines
even as the dollar amount increases.
due to
(i)
due to a large part of the tax is on the beg. value & is essentially 'fixed'
(
ii)
tax drag percentage is related to gain
Tax drag amount increases with both longer time horizon and higher rate of return
Tax drag percentage is minimized at moderate time horizon and return
The effect of the
deferred capital gains
on
ultimate after-tax return
is
complex
More annual return that is taxed annually, the less the deferred taxes
the longer the holding period before the gain is realized, the greater the benefit of deferred tax compounding.
effective capital gains tax rate (T*)
reflects the capital gains rate that would apply to the deferred return.
reflects the effect of all taxes already paid on interest, dividends, and realized capital gains and that the stated CG tax rate only applies to a portion of the return
Treat this effective capital gains tax rate (T*) as if it applied to 100% of the after realized tax return (which considers the taxes already paid).
Like the CG tax computation, this must be adjusted for any initial unrealized gain or loss 5i.e., the basis (B)7
MODULE 11.4 TAX LOCATION
tax profiles of different types of investment accounts
specified limits
restricted to specified purposes such as retirement or health care
Tax-deferred accounts (TDA
Tax-exempt accounts (TEA)
Account subject to different tax treatment
https://cutt.ly/yyUM01C
:red_flag:alert Tax-Advantaged Accounts and Asset Allocations
=> due to tax effect, asset allocation analysis should be based on
after tax basis
Choosing Account Tax Type
W/o limits on contribution
https://cutt.ly/uyU1uuJ
:reminder_ribbon: Basically, decide whether to pay tax first or later
W/ limits on contribution
=> TEA is the best choice
https://cutt.ly/OyU1msM
MODULE 11.5 AFTER-TAX RETURN AND RISK
Taxes reduce return, => reduce the variability of return and the after-tax risk
r AT = r(1 – t)
SD AT = SD (1 – t)
Generating Tax Alpha
= value created from effective tax management.
both tax location and asset allocation can be optimized by using leverage.
Use leverage ( i.e issue same bonds to invest in equity) Generating tax alpha
https://cutt.ly/dyIHFBY
Investors types & after tax return
Trader => tax alpha is lost
Active investors => many of their gains are longer term and taxed at lower rates
Passive investors=> taxed at lower long term rate
Exempt investors => avoid taxation altogether
MODULE 11.6 MORE TAX ALPHA STRATEGIES
Tax Loss Harvesting
realizing losses to offset realized gains or other taxable income, BUT does not reduce eventual total taxes.
Highest-In/First-Out (
HIFO
+ Tax Lot Accounting
When an investor makes a partial sale and has acquired the stock on different dates, each at different cost basis, the investor
can select which tax lots are applied to the sale.
Lowestin/first-out (
LIFO
)
Where f
uture tax rates are expected to be higher
than current tax rate.
key issue to notice current higher tax payment in exchange for future even higher tax payment
Holding Period Management
Many tax authorities impose a higher capital gains tax rate on shorter-term versus longer-term holdings
TAX AND MEAN- VARIANCE OPTIMIZATION
The efficient frontier of portfolios should be viewed on an after-tax basis.
Accrual equivalent after-tax returns
would be substituted for before-tax returns, and
risk on an after-tax basis
would be substituted for before-tax risk.
