I’m a big fan of Andy Haldane. He is a ranking member of the Bank Of England, and a key member of the BOE financial stability committee. Over the weekend he gave a speech in London, which many regard as the first official “salute” to the Occupy Movement. Haldane has a unique writing style, he is very lucid, clear and very plainspoken for a central banker. His speeches are a delight to read! I strongly recommend reading the whole thing here. This speech has caused a firestorm in financial circles, see all the reactions here. A few choice quotes from the speech which inspired me.
If you ever talk to MBA’s (especially those into finance) you will hear them wax eloquent about a company’s capital structure. Capital structure is nothing but how a firm finances itself. Firms need money to operate. How do they get that money? They have a couple of choices – just rely on the profit they generate, issue shares to investors (issue equity) or borrow money from investors (issue debt). The choices that a firm makes and the mix of self financing vs equity vs debt is what is termed as the capital structure of the firm. Having a structure formalizes things, makes company profitability easy to analyze, brings predictability.
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Myth 1: Interest and taxes are deductible. You are getting paid by the government to own a house
Lets walk through an example. You make $100K a year. Pay $6K in real estate taxes and $10K in mortgage interest. There are two types of deductions available when you file your tax returns, a standard deduction and itemized deduction. For 2011 the standard deduction is $11,900. Assuming you did not buy a house your taxable income = $100K – $11.9K = $88.1K. At a marginal tax rate of 35% you will owe $30.8K in taxes. So effectively you paid $30.8K out of your pocket. Now assume you took the itemized deduction and deducted the entire taxes+interest. So taxable income = $100K-$16K=$84K. At 35% tax rate, tax = $29.4K. So great right, you paid less tax, so less out of pocket?