Businesses, taxes, and job creation

[her209]

As I understand it, only a business' profit is considered taxable (not their gross income).

In other words,

• gross income - expenses/investments = profit

Before going on, lets look at how interest rates effect on the economy. The interest rate is increased to slow down a fast growing economy by "encouraging" saving (higher returns) and less spending (things costing more). The interest rate is decreased to on a slow economy to stimulate spending.

Can tax rates used similarly to interest rates, in that, by having higher tax rates, it "encourages" a company to invest thereby creating more jobs?

 

[1EZduzit]

Absolutely

 

[Stunt]

A company's obligation is to its stock holder and profits determine dividends. Investors would pull out of these companies if profits were taxed heavily. Also with investment in jobs comes investment in infrastructure and equipment. These cannot be made without huge capital investments (loaned with interest). The goal of adding employees and equipment is to generate higher profits and revenues.

Raising interest rates is done to reduce inflation. More people on salary and more capital investment will stimulate even more inflation. This is counter productive to actually reducing inflation (also bad for the economy, one could argue moreso than interest rates).

 

[Stunt]

All i see that plan accomplishing is massive cash flows out of the country. Companies who are able to give attractive dividends and opportunites.

 

[gallivanter]

Originally posted by: 1EZduzit
Absolutely

No.

Firstly, I believe that an erroneous micro concept was mixed with a macro one. How individuals are affected by, and react to, an economic policy is not necessarily how a corporation would or should.

I state erroneous because it was incorrectly stated what the purpose of interest rate increases are, and the effects brought about by them. It is true that higher interest rates encourage more saving, but primarily encourage less borrowing, they hinder the money flow. Further, increasing the rates are used to slow the economy, by slowing the money flow, to lower inflation. Relatively speaking, prices go down, not up. (Using down in the twisted sense here).

Rates are decreased to encourage more borrowing, which creates more investment and more money in the chain. The economy grows, and inflation is hopefully kept in line.

How is raising taxes on a corporations profits similar to this?


Use a real number example. Tell me how raising the tax rate on a company's profits are going to force them to purposefully decrease their profits, which is what was originally suggested.


(Granted, the above may be overly simplistic, and fails to address many pertinent issues, but the bulk of argument stands.)

 

[her209]

Originally posted by: Stunt
A company's obligation is to its stock holder and profits determine dividends. Investors would pull out of these companies if profits were taxed heavily.

But how would the tax rate affect the investors if the money has already been invested? In terms of the stock holders, its true that they would get less dividend if the company turns a smaller profit, but how would the value of the stock be affected?

Also with investment in jobs comes investment in infrastructure and equipment. These cannot be made without huge capital investments (loaned with interest). The goal of adding employees and equipment is to generate higher profits and revenues.

Yes, that would be the goal. I'm trying to find the reason why a company would rather pay the money as a tax to the federal government rather rather than invest that money back into the company.

Raising interest rates is done to reduce inflation. More people on salary and more capital investment will stimulate even more inflation. This is counter productive to actually reducing inflation (also bad for the economy, one could argue moreso than interest rates).

Can you elaborate on this part?

 

[her209]

Originally posted by: Stunt
All i see that plan accomplishing is massive cash flows out of the country. Companies who are able to give attractive dividends and opportunites.

If the consumers aren't being paid, then they can't buy the product being produced.

 

[Genx87]

Originally posted by: 1EZduzit
Absolutely

Not quite, interest rates are used to slow borrowing in a hot economy and stimulate borrowing in a cold economy.

Raising a tax on income will have little effect on the above scenario. All you will get is increased govt spending right along with increased inflation with no controls to stop it.

 

[gallivanter]

Originally posted by: her209

Originally posted by: Stunt
A company's obligation is to its stock holder and profits determine dividends. Investors would pull out of these companies if profits were taxed heavily.

But how would the tax rate affect the investors if the money has already been invested? In terms of the stock holders, its true that they would get less dividend if the company turns a smaller profit, but how would the value of the stock be affected?

Also with investment in jobs comes investment in infrastructure and equipment. These cannot be made without huge capital investments (loaned with interest). The goal of adding employees and equipment is to generate higher profits and revenues.

Yes, that would be the goal. I'm trying to find the reason why a company would rather pay the money as a tax to the federal government rather rather than invest that money back into the company.

Raising interest rates is done to reduce inflation. More people on salary and more capital investment will stimulate even more inflation. This is counter productive to actually reducing inflation (also bad for the economy, one could argue moreso than interest rates).

Can you elaborate on this part?

What do you feel happens to the money gained as a dividend?

Do potential upsides not affect stock prices? What about a decline in profitability in past investments?

 

[her209]

Originally posted by: gallivanter
How is raising taxes on a corporations profits similar to this?

That's what I'm trying to get it. By raising the tax rate, would a corporation invest more rather than paying that money to the government.

Use a real number example. Tell me how raising the tax rate on a company's profits are going to force them to purposefully decrease their profits, which is what was originally suggested.

For example, lets say a company makes $1 million in profit for the current year. The current tax rate is 25%, therefore the amount of tax to be paid is

$1M * 25% = $250K

For the next year, the company forecasts that the company will make $1.1 million, but the tax rate is now increased to 30%. So the company will be paying

$1.1M * 30% = $330K

Had the interest rate not change, they would have only paid

$1.1M * 25% = $275K

Therefore, the company is paying an extra

$330K - $275K = $55K in taxes due to the tax increase.

In order for the company to only pay $275K in taxes (ie, avoid paying the extra $55K), they would have to end up with a profit of only

$275K = x * 30%
x = $916K

Therefore, the company must invest back into the business

$1.1M - $916K = $184K

As you can see, the remaining profit to be distributed to the stockholders is smaller next year if the investment is made.

Current year: $1M - $250K = $750K
Next year (w/o extra investment): $1.1M - $330K = $770K
Next year (with extra investment): $916K - $275K = $641K

 

[gallivanter]

Originally posted by: her209

Originally posted by: gallivanter
How is raising taxes on a corporations profits similar to this?

That's what I'm trying to get it. By raising the tax rate, would a corporation invest more rather than paying that money to the government.

Use a real number example. Tell me how raising the tax rate on a company's profits are going to force them to purposefully decrease their profits, which is what was originally suggested.

For example, lets say a company makes $1 million in profit for the current year. The current tax rate is 25%, therefore the amount of tax to be paid is

$1M * 25% = $250K

For the next year, the company forecasts that the company will make $1.1 million, but the tax rate is now increased to 30%. So the company will be paying

$1.1M * 30% = $330K

Had the interest rate not change, they would have only paid

$1.1M * 25% = $275K

Therefore, the company is paying an extra

$330K - $275K = $55K in taxes due to the tax increase.

In order for the company to only pay $275K in taxes (ie, avoid paying the extra $55K), they would have to end up with a profit of only

$275K = x * 30%
x = $916K

Therefore, the company must invest back into the business

$1.1M - $916K = $184K

As you can see, the remaining profit to be distributed to the stockholders is smaller next year if the investment is made.

Current year: $1M - $250K = $750K
Next year (w/o extra investment): $1.1M - $330K = $770K
Next year (with extra investment): $916K - $275K = $641K

Exactly. As profits become more and more important to corporations, as they have over the last 6 to 8 years, this would be an unacceptable situation.

Of course this does not even take into account such things as productivity, debt capital, and undistributed profits, all of which are factors in this discussion, as is the utility of the re-investments proposed.



By the way, you do know what your proposal is eerily similar to, don't you?

 

[her209]

Originally posted by: gallivanter
What do you feel happens to the money gained as a dividend?

[*]saved into bank account
[*]buy more stock
[*]buy a company's product

Similarly, let me ask you this, what happens when that money is spent by the company instead of being paid as dividend? What about when that money is spent by the government?

 

[Stunt]

But how would the tax rate affect the investors if the money has already been invested? In terms of the stock holders, its true that they would get less dividend if the company turns a smaller profit, but how would the value of the stock be affected?

Using profits to buy additional personel or equipment creates more demand for goods either though corporate investment, or people getting jobs and buying more consumer goods. This increased demand for items to buy with increase inflation rather than reduce it as increased interest rates do (reduces ability to access more capital).

Yes, that would be the goal. I'm trying to find the reason why a company would rather pay the money as a tax to the federal government rather rather than invest that money back into the company.

A company's goal is profits. No matter what the taxation rate is, investors and company leadership will demand the highest return for their money.
Under your logic, people would never work to go above a certain tax bracket as they will be taxed more and their hourly pay will be worth less than the hours before it.

You see, business is motivated by profits, not reducing the tax they spend.
Using your numbers example, you assume spending 275k is better than spending 330k on taxes; well if you continue this, you 'best' result is 0k in taxes (no profit). This is what struggling companies look like. They tend to be over-staffed, inefficiently managed, and spend too much. You are basically crippling well run companies.

 

[Stunt]

PS. I'm not an economist by trade, i've taken a few courses...but feel free to correct anything i say econ nuts 🙂