Stripped to its bones the idea is that there is a natural rate of return to capital.
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Its rate of return on capital may be a lot less than America's a fact that has attracted attention lately but it is no worse than in many European economies.
In a Deloitte study of 20, 000 US firms, the rate of return on assets and invested capital declined by 75 percent during the period 1965-2011.
If a firm can deploy the incremental dollar of cash flow at a rate of return greater than its cost of capital, it should pursue acquisitions or internal capital projects, as these methods will be the fastest way to build shareholder value.
In theory, the resulting efficiencies should mean that Germany could raise its poor average rate of return on invested capital.
Indeed, the IMF's analysis suggests that the internal rate of return on invested capital in publicly traded firms in emerging markets has been very poor over the past decade, even before currency risk is taken into account.
This can create the very odd situation for some wealthy filers whose income composed primarily of capital gains and qualified dividends are taxed at a rate of only 15% on their Federal return and 9.55% (or more) on their state.
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Fiduciary duty requires that institutions invest capital with the expectation of earning a competitive rate of financial return commensurate with risk.
This way capital gains and dividends will be taxed at a top rate of 15%, whereas the investment return on deferred pay is all eventually taxed as ordinary income at a top rate of 35%.
The notion behind the yardsticks is simple: a company creates value only if the return on its capital is greater than the opportunity cost of it, or the rate that investors could earn by investing in other securities with the same risk.
One thing Resendes says is for sure: If Barack Obama wins in November and follows through on his vow to raise the capital gains rate from 15% to 20%, it will drive up the required rate of return investors demand from stocks and drive down their prices.
The second result from a rise in capital gains taxes is that it would change the return on investment which would lower the overall rate of saving and investing and as a consequence lower the overall capital investment which in turn would lower GDP growth and expansion.
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