Chapter i- i6

Implicit-Taxes, iClienteles iand iArbitrage

Implicit iTaxes i- iAn iimplicit itax iis isimply ithe ieffect iof itaxes ion ithe iprice iof ian iasset. iFor iexample, iif
ian iasset iis itax-preferred, ithe iprice iwill ibe ibid iup ito ireflect ithe itax ipreference. iUnlike iexplicit itax

ipayments iimplicit itaxes ineed inot iincrease igovernment irevenue. iWhile ithe iowner iof ia itax-

exempt ibond ireceives iless iincome ibecause iof ithe iimplicit itax, ithe igovernment iis inot ithe
ibeneficiary iof ithis ireduced iincome.

Tax-Favored iStatus iallow itaxpayers ito ikeep iincome iup ito ia iparticular ilimit ior iincome ifrom ia
iparticular iassets/investment iwithout ihaving ito ipay itax ion ithem.

Tax i- iFavored iStatus iand iImplicit iTaxes i- iTax ifavored istatus iof ian iinvestment ior iincome iwill ilead
ito ihigher iimplicit itax iand ivice iversa. iThat iis ibenefit iof itax ifavored istatus iwill ibe icompensated iby

iimplicit itax. iExample: iif ia itaxable igovernment isecurity icost iTk. i90 itaxpayer ihave ito ipay itax itk. i10

ion ipresent ivalue iearnings ifrom ithe isecurity ion ithe iother ihand ia itax ifree igovernment isecurity iwill

icost iTk. i100.

Explicit itax iis ia itax ilevied iand icollected iby ia igovernment. iExamples: iincome itax, ivalue iadded itax,
isales itax, icustom iduty, isupplementary iduty iand iso iforth.

Implicit, iExplicit iand iTotal iTax iRates i- iDifferences iin iexplicit itax irates iwill, idue ito imarket
icompetition, ilead ito iimplicit itaxes, iwhich iare ithe idifferences ibetween ipre-tax ireturns ion ifully

itaxed iinvestments iand ithe ipre-tax ireturns ion ipartially ior itax-exempt iinvestments. iIn ifact, ilower

iexplicit itaxes iwill ithus ilead ito ihigher iimplicit itaxes iand ivice iversa. iTherefore, iequitable itaxation

iwould ifocus ion iequal itotal itaxes iacross icompanies, iincluding iexplicit iand iimplicit itaxes.

Importance iof iAdjusting ifor iRisk iDifference i- iCorporates’ imust ihave ito iconsider ithe irisk
idifference iat ithe itime iof iconsidering iinvestment icost ialong iwith iimplicit itax. iRisk iassociated iwith

ian iinvestment iwill iforce ito iincrease ior idecrease iof icost iof iinvestment. iRisk idifference ito ibe

iadjusted ito iensure, ihigh iimplicit itax ihas inot ibeen icharged, icost iof iinvestment iis inot ihigher ithan

iregular itaxed iinvestment ietc. iwhich iwill iprovide iequitable imarket icompetition.

Tax iClientele i- iCategories iof iinvestors iwho ihave ispecific ipreferences ifor idebt ior iequity ibecause
iof idifferences iin itheir ipersonal itax irates.

Clienteles i- iImplicit iTaxes iand iCorporate iTax iBurdens i- iIf ia ipreferential iclass iof itaxpayer ipay
ireduced icorporate itax ias iper itax ifavored irate, ihave ito ibear iimplicit itax iburden iafter iadjusting irisk

idifference. iWhich iwill ilead ithe itotal iimplicit itax iand icorporate itax iburden iequivalent ito ithe

iclasses iof ihigh icorporate itaxpayer. iThat iis itotal iburden iof itax iwill ibe iequilibrium ifor iall iclasses.