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MIS 4500 (31)
Lecture 15

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University of Manitoba
Management Info. Systems
MIS 4500
Pourang Irani

Lecture 15: Taxes and Private Wealth Management in a Global Context: Global tax structures:  taxes on income: progressive or flat  wealth-based taxes (property and on wealth transfers)  consumption taxes (sales taxes; value added taxes)  Future value interest factor (if taxed annually): FVIF = [1 + r(1 – t)] n i i Tax drag may exceed the tax rate: compounds over time. Tax drag increases as the investment return increases. For deferred taxation: FVIF = (1+r) – [(1+r) – 1]t = (1+r) (1-t ) + t n cg cg cg cg If cost basis differs: FVIF cgb= (1+r) (1-t )cg t –cg1 – B)t = (1cg) (1 – t ) + t BcgB is cge percentage basis to market value Annual wealth-based taxes: FVIF = [(1+r)(1 – t )] n w w Annual return after realized taxes: r = r(1 – pt – p i i p d d; thcg cg are the percentages of return and don’t need to add to 1 b/c unrealized capital gains are not included in the equation; does not capture tax effects of deferred CGs. * Effective CGs tax rate: T = t (1 –cg – p –ip )/d(1 –cgt – p t – i i ) d d cg cg F* nre afte*-tax a*cumulation for each unit of currency in a taxable portfolio: FVIF taxable (1 + r ) (1 – T ) + T - (1 – B) t cg n Accrual equivalent return: the IRR of the after-tax return: starting amount (1 + R ) = after-AEx return Accrual equivalent tax rate: the hypothetical tax rate that produces an after-tax return equivalent to the accrual equivalent return: r(1 – T ) =AE AE Future af
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