American Taxation Association

JATA - Spring 2002

JATA - Spring 2002

Volume 24, No. 1

Public Utility Old Money Preferred Stocks
T. J. Atwood

Toward a Better Measure of Horizontal Equity
Peter J. Westort and Janet M. Wagner

Taxes and the Choice of Issuing Preferred Stock vs. Debt
David P. Ely, Arthur L. Houston, Jr. and Carol Olson Houston

The Impact of the Source of Changes in Marginal Tax Rates on Participation in Individual Retirement Accounts
David H. Eaton


Public Utility Old Money Preferred Stocks

T. J. Atwood

Abstract

Public utilities can claim a partial dividends-paid deduction on "old money" preferred stock (OMPS) but the 42 percent dividends-received deduction (DRD) allowed to corporate investors is lower than the 70 percent DRD allowed on other types of preferred stock. This study provides evidence that the implicit tax borne by OMPS is lower than that of other preferred stock and that the estimated implicit tax associated with the 70 percent DRD is much higher than prior research suggests. Evidence is also presented indicating that marginal investors in OMPS are corporations with marginal tax rates between 26.3 percent and 27.2 percent. Finally, this study provides evidence that public utilities use OMPS financing in addition to, rather than as a substitute for, other types of preferred stock. This result suggests that tax considerations influence public utility managers' capital structure decisions even though tax savings flow through to ratepayers in the rate-making process.  Top


Toward a Better Measure of Horizontal Equity

Peter J. Westort and Janet M. Wagner

Abstract

The coefficient of variation (CV), a commonly used measure of horizontal equity, has several important limitations. First, comparing CV for income groups with different average incomes is problematic because groups with larger incomes, by construction, will have lower CV values. Second, groups of unequal width are not comparable because standard deviation can be affected by the interval width. These two limitations make summary measures such as average CV or weighted average CV inadvisable for comparing overall changes in horizontal equity between tax regimes. To remedy these limitations, we propose the ratio of the CV of tax liability to the CV of expanded total income (CV Ratio) for groups of equal width. The advantages of using CV Ratio are demonstrated in an analysis comparing the current tax system and the proposed Armey flat tax system. We observe, using CV Ratio, that there is less horizontal equity at the higher income levels of the current tax system. This is contrary to prior studies using the traditional CV measure.  Top


Taxes and the Choice of Issuing Preferred Stock vs. Debt

David P. Ely, Arthur L. Houston, Jr. and Carol Olson Houston

Abstract

This study provides descriptive evidence on the link between a firm's expected marginal tax rate and its use of preferred stock as an alternative to financing with long-term debt. Regressions are estimated on a sample of industrial firms that issued preferred stock and a control group, matched on industry and size, that contemporaneously issued long-term debt. Substantial tax effects are found for a full sample of firms that issued any type of preferred stock, as well as a large subsample that issued only convertible preferred stock, frequently used to facilitate mergers and acquisitions. For the typical firm, a decrease in its expected marginal tax rate from the 75th to the 25th percentile is associated with a 33 percent increase in the likelihood it will issue preferred stock. This financing behavior is consistent with a goal of enhancing tax benefits.  Top


The Impact of the Source of Changes in Marginal Tax Rates on Participation in Individual Retirement Accounts

David H. Eaton

Abstract

This paper uses a series of two-year panels of tax return data to estimate the effects of two sources of tax rate changes on the participation in Individual Retirement Accounts (IRAs). This paper uses a panel logit approach to control for individual specific fixed effects, which may also influence IRA participation behavior. This paper examines participation during the years of open eligibility for IRAs, as well as examining the impact of the 1986 tax reform on participation. A key finding of this paper is that taxpayers' IRA participation decisions are more sensitive to changes in tax rates due to changes in taxable income than to direct changes in the tax tables. Top

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