Comment on the Modigliani-Miller Propositions

[This is a comment on “The Modigliani-Miller Propositions after Thirty Years” by Merton H. Miller in this same issue.] What a treat it is to have the opportunity to read Merton Miller's ruminations on the MM Propositions. A comment on Miller and Modigliani's work can easily become a discussion of any facet of modern finance. I will focus on the two areas of arbitrage and taxation. Since the original MM analysis, economists have learned an enormous amount about the role played by no arbitrage conditions in financial markets. Taxation is where the real world meets the theory. At first blush, the corporate deduction for interest seemed to doom the MM analysis to an academic curiosity, since it appeared to give debt an obvious cost advantage over equity. It was the genius of Miller to see that the arbitrage analysis went much too deeply into the workings of the financial markets and the economy as a whole to be easily unseated by even something as powerful as the tax code.