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Returns to Alternative Savings Vehicle

Returns to Alternative Savings Vehicle. Key Words / Outline. Distinguishing Alternative Savings Vehicles. Alternative savings vehicles are distinguished by their tax attributes :

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Returns to Alternative Savings Vehicle

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  1. Returns to Alternative Savings Vehicle Key Words / Outline

  2. Distinguishing Alternative Savings Vehicles Alternative savings vehicles are distinguished by their tax attributes: • Tax-deductibility of the investment: whether deposits into the savings accounts give rise to an immediate tax deduction [tax-deductible or tax-nondeductible] • Frequency of taxation: the frequency with which investment earnings are taxed [tax-deduction at source, annual taxation, deferred taxation] • Applicable tax rate: the rate at which the investment earnings are taxed [ordinary tax rate, special high tax rate, or concessionary rate]

  3. Alternative Savings Vehicles (Intertemporally Constant Tax Rates)

  4. Alternative Savings Vehicles (Intertemporally Constant Tax Rates)

  5. Alternative Savings Vehicles (Intertemporally Constant Tax Rates)

  6. Alternative Savings Vehicles (Intertemporally Constant Tax Rates)

  7. Alternative Savings Vehicles (Intertemporally Constant Tax Rates)

  8. Savings Vehicles I and II(Intertemporally Constant Tax Rates) • Comparison: • For investment horizons of only one period (n=1), Vehicle I and Vehicle II are equivalent. • Except for n=1, the after-tax accumulation in Vehicle II always exceeds that in Vehicle I. • The longer the holding period, the greater the difference in accumulation.

  9. Savings Vehicles I and II(Intertemporally Constant Tax Rates) • Comparison: • All the after-tax annualized rates of return (r) are 4.9% in Vehicle I. • But these rates increase in Vehicle II with the number of holding periods. • In fact, in case of Vehicle II, as the number of periods becomes large, the after-tax rate of return per period approaches the before tax rates of return (R) of 7%.

  10. Converting Income from One Type to Another ????This is done through having income converted from one type to another: • Ordinary income vs. Capital gain • Regular income vs. Windfall income • Domestic income vs. Foreign income • Income from actively managed business vs. Income from speculation business

  11. Shifting Income from One Pocket to Another ???? This is done through having income shifted from one pocket to another: • Taxable sources vs. Tax-exempt sources • Income earned by high-tax-bracket taxpayers themselves vs. Income earned by their low-tax-bracket children or low-tax-bracket business entities

  12. Shifting Income from One Time Period to Another ????This is done through having income shifted from one time period to another: • Delaying recognition of income • Deferring paying taxes

  13. Restriction on Income Shifting • ????‘Restriction’ means “Tax-rule Restrictions”, i.e., placing limits by tax authority under the provision of income tax law. Thus, restrictions are the restraints imposed by the tax authority that prevent taxpayers from using certain tax arbitrage techniques to reduce taxes in socially undesirable ways • For example, restriction on taxpayer’s ability to deduct interest only from the income out of investment by the borrowing

  14. End of the Chapter Thank you.

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