The Effect of Taxation on Securities

Abstract

retical effect of a tax upon the ordinary corporation bond. The two generally recognized taxes in the United States affecting such a bond are direct personal property taxes and income taxes. The personal property tax is generally imposed upon the principal of the bond. The income tax is imposed upon the interest the bond bears. To realize the effect of a personal property tax upon the principal of the bond, take the hypothetical case of a bond owned in a state having no personal property tax and no income tax. If such a state were to pass a law imposing a 1 per cent tax upon the principal of a $1,000 bond bearing 5 per cent the owner would be obliged to pay $10 in taxes each year. This would reduce the income on the bond from $50 to $40 a year. If the state, instead of enacting the personal property tax just stated, were to pass an income tax law taxing the bond owner 20 per cent upon the interest of the bond, the owner would be obliged to pay $10 in taxes each year. This would make exactly the same reduction in his income from the bond, which would then yield only $40 a year. It may be seen, therefore, because as a general proposition all taxes are paid out of income, that it is immaterial, in considering the effect of a tax on the bond, whether the tax is based upon its principal or income. If the owner of the bond