Why do we tax businesses at all?

[Brainonska511]

Originally posted by: PaperclipGod

Originally posted by: eskimospy
That is simply incorrect and unsupported by reality

Then please, give me examples of where this is not the case. I'm really not arguing for the sake of it, I'd like to understand where my reasoning is faulty.

If an entire industry faces a tax hike, and all those companies had previously been selling in the "sweet spot", then ALL their costs go up, so all their prices go up.

If a company is in a competitive market, then prices are already as low as they can go. If a company could afford to sell the product for a cheaper price, then they would, because they'd capture a lot more market share.

In a non-competitive market, the company can increase prices without a second thought, as there's nowhere else to get their product.

If you tax profit, it won't move that sweet spot, as you're taxing profit, not increasing the cost of production. In fact, if there is profit, there was still technically room for more companies to enter that market.

 

[CADsortaGUY]

Originally posted by: BigDH01

Originally posted by: CADsortaGUY

Originally posted by: eskimospy

Originally posted by: CADsortaGUY

Originally posted by: Bowfinger
Not necessarily. The Econ 101 part is that a competent business always sets prices to maximize profit. Prices are set to that sweet spot on the supply vs. demand curve where increased prices results in lost sales and lower profits; decreased prices also reduce profits because increased sales are not enough to offset reduced profit margins. Maximizing profit means finding the "just right" price.

For a business, an "income" tax is a tax on profits. Profits go to business owners, whether they be proprietors or share holders. A business income tax reduces net profit, meaning it reduces the total money going to the business owners. Naturally the owners may want to increase prices to compensate for the profit taken by taxes. If the business is competently managed, however, they've already set prices to maximize profits. Increasing prices due to taxes would therefore have the opposite effect, actually reducing profits even more.

Real world economics are a bit more complex than that, of course, but the bottom line is most businesses have a limited ability to raise prices to offset income (profit) taxes.

Except that ignores the very real situational change created by increasing a tax. Not only will company A be affected but also Company A's competitors. So when the tax increase takes place they will all adjust thereby adjusting the market rates of their product/service. Basically that "sweet spot" will move due to the intervention of non-supply/demand forces - in this case gov't interference via taxation.

Except that since every company is not selling an identical product at identical price point and they don't all share the same current market objectives, all companies do not adjust together, and every $0.05 tax does not see a collective move north of $0.05 by every company in the taxed industry. Everyone knows this.

Nowhere does my statement need that to be the case to be true. If company A and B are in the same market with the same range of products(like Lowes and Home Depot) then there certainly will be identical moves on pricing to cover the new tax. Will they be EXACTLY the same in timing or in area? No, but you will see the increase from both - which is due to the outside force(gov't interference) moving the market's "sweet spot".

I'm not sure you're getting it. Even if two companies are selling perfectly substitutable products, the prices have been set based on aggregate supply and demand. There is a point on the demand curve that will yield the greatest revenue for the product. Increasing the "business tax" (which in and of itself is an ambiguous term) will only decrease the amount of profit available from that revenue. Increasing the tax shouldn't move the highest revenue yield on the demand curve. As bowfinger stated, the execs might feel the need to increase prices to reflect the reduced net profit, but this would actually lower revenues so would have no real effect. Increased taxes on profit should really only affect owners and shareholders through decreased dividends.

That's if you believe that markets behave rationally and also assumes somewhat symmetrical markets.

lol, again, it's an outside force causing the shift and it's a HUGE assumption that revenue would be lower if they increased prices to accommodate the gov't intrusion. It's is more than a bit naive to suggest that the supply/demand curve isn't affected by these outside intrusions by the gov't.

 

[PaperclipGod]

Originally posted by: BigDH01

I'm not sure you're getting it. Even if two companies are selling perfectly substitutable products, the prices have been set based on aggregate supply and demand. There is a point on the demand curve that will yield the greatest revenue for the product. Increasing the "business tax" (which in and of itself is an ambiguous term) will only decrease the amount of profit available from that revenue. Increasing the tax shouldn't move the highest revenue yield on the demand curve. As bowfinger stated, the execs might feel the need to increase prices to reflect the reduced net profit, but this would actually lower revenues so would have no real effect. Increased taxes on profit should really only affect owners and shareholders through decreased dividends.

That's if you believe that markets behave rationally and also assumes somewhat symmetrical markets.

So, the point of highest revenue yield on a demand curve is unaffected by the cost to produce the product?

If a product costs $10 to produce today, but $10.50 to produce tomorrow, why would a company settle for the reduced profit? It affects the company in a huge way, as selling a million items for 50 cents less profit each is $500K lost. For the consumer, though, the 50 cents is barely noticed... or at least, not seen as a huge impediment to purchasing whatever item it is.

Besides, if a company increases prices to offset costs, and sales slow, they can cut production and save money. They hire less people, buy less raw materials, and spend less on transportation, marketing, etc.

It just doesn't follow that an increased business tax would be born by the company and not the consumer. Even if a company did decide to try and absorb the tax increase itself, then it would be put in a financially worse situation than its competitors. The company might see increased sales, but assuming it's now selling items that are no longer making as much of a profit, then it has to cut expenses elsewhere -- build quality, marketing, salaries, jobs, etc.

 

[PaperclipGod]

Originally posted by: Brainonska511

If you tax profit, it won't move that sweet spot, as you're taxing profit, not increasing the cost of production. In fact, if there is profit, there was still technically room for more companies to enter that market.

What makes tax any different than any other operating costs a company must pay? Why do you think tax is some special cost that a business would only consider after the money has been made?

ONLY taxing profit isn't really possible if the company can know ahead of time how much it will have to pay. It won't go "oh darn, we have to cut salaries because we got taxed!", just like it won't go "oh darn, we have to produce the item for less, because we just realized we have to pay our employees!"

 

[fskimospy]

Originally posted by: PaperclipGod

So, the point of highest revenue yield on a demand curve is unaffected by the cost to produce the product?

If a product costs $10 to produce today, but $10.50 to produce tomorrow, why would a company settle for the reduced profit? It affects the company in a huge way, as selling a million items for 50 cents less profit each is $500K lost. For the consumer, though, the 50 cents is barely noticed... or at least, not seen as a huge impediment to purchasing whatever item it is.

Besides, if a company increases prices to offset costs, and sales slow, they can cut production and save money. They hire less people, buy less raw materials, and spend less on transportation, marketing, etc.

It just doesn't follow that an increased business tax would be born by the company and not the consumer. Even if a company did decide to try and absorb the tax increase itself, then it would be put in a financially worse situation than its competitors. The company might see increased sales, but assuming it's now selling items that are no longer making as much of a profit, then it has to cut expenses elsewhere -- build quality, marketing, salaries, jobs, etc.

That's not a rational assessment at all. Say it is something that consumers are price conscious about. They keep their price at $9.99, their competitor raises theirs to $10.50. Company A has reduced profit per unit sold, but since they are cheaper they sell more units. Revenue could increase and lead to static or even increased profits.

This is all just silly hypothetical scenario crap though. The point is that there are plenty of situations where businesses would find it advantageous not to raise prices even in the face of a new tax. I am unaware of any reputable economist that says all increased taxes on a business are passed onto the consumer. If you can provide such a link I would welcome it. I, on the other hand can provide you with large numbers of links that say taxes levied on businesses are shared between increased prices for consumers, lower wages for the company's employees, and shareholders.

 

[ElFenix]

Originally posted by: eskimospy

Huh? The question wasn't if some human being on the planet pays that tax, the question was if the tax was passed on to the customers of that business. This is sometimes the case, sometimes not. Therefore, 100% taxes are not passed on.

to the consumer, no. that doesn't mean it isn't useful to figure out just who is paying the rest of the tax. and i bet a lot of people on the left would be shocked to find out where the economic burden actually lies. i'm going to take a reasonable guess that the consumer bears less than half of the economic burden, and that labor lower on the food chain bears the plurality, if not the outright majority.

 

[ElFenix]

Originally posted by: Brainonska511 In fact, if there is profit, there was still technically room for more companies to enter that market.

except we tax accounting profit and not economic profit. they're different.

 

[PaperclipGod]

Originally posted by: eskimospy

That's not a rational assessment at all. Say it is something that consumers are price conscious about. They keep their price at $9.99, their competitor raises theirs to $10.50. Company A has reduced profit per unit sold, but since they are cheaper they sell more units. Revenue could increase and lead to static or even increased profits.

This is all just silly hypothetical scenario crap though. The point is that there are plenty of situations where businesses would find it advantageous not to raise prices even in the face of a new tax. I am unaware of any reputable economist that says all increased taxes on a business are passed onto the consumer. If you can provide such a link I would welcome it. I, on the other hand can provide you with large numbers of links that say taxes levied on businesses are shared between increased prices for consumers, lower wages for the company's employees, and shareholders.

To your example: Are consumers actually that price-conscious, though? What percentage of consumers actively cut coupons, so they can save 50 cents on a 10 dollar product? What percentage of consumers look through the sales papers each week, and buy their groceries at the place that has the product for 5% less? Comparatively, what percentage of consumers just go to the closest grocery store that has what they need as long as prices are relatively competitive?

Also, if you're selling something which consumers are price-conscious of, and there's a lot of competition, then your profit per item is probably already quite low. If you're only making 10% on each product, and now your costs go up by 5%, you have to sell twice as many of that item to make the same amount of money. Plus, the initial cost of buying that much stock (tying up your capital), shipping it, warehousing it, distributing it, and making more shelf-space for it increases costs again.

As for links to economists, I don't have any. Considering educated economists like Karl Marx and Milton Friedman can come to such disparate conclusions as socialism and capitalism, though, I don't think they'd be much help.

I agree that businesses pass costs along to employees as well as consumers, but labor laws have forced more of that cost onto the consumer than in the past.

 

[ElFenix]

Originally posted by: PaperclipGod


To your example: Are consumers actually that price-conscious, though? What percentage of consumers actively cut coupons, so they can save 50 cents on a 10 dollar product? What percentage of consumers look through the sales papers each week, and buy their groceries at the place that has the product for 5% less? Comparatively, what percentage of consumers just go to the closest grocery store that has what they need as long as prices are relatively competitive?

households aren't the only consumers. and it need not only be consumers doing the purchasing. if i need a million nails to build a neighborhood of houses with, i'm going to be conscious of a fraction of a penny saved per nail.

the grocery stores in your example are the same. those boxes aren't made by the cereal companies, they're made by a vendor. the cereal companies are conscious of fractions of a penny per box.

 

[BigDH01]

Originally posted by: CADsortaGUY

Originally posted by: BigDH01

Originally posted by: CADsortaGUY

Originally posted by: eskimospy

Originally posted by: CADsortaGUY

Originally posted by: Bowfinger
Not necessarily. The Econ 101 part is that a competent business always sets prices to maximize profit. Prices are set to that sweet spot on the supply vs. demand curve where increased prices results in lost sales and lower profits; decreased prices also reduce profits because increased sales are not enough to offset reduced profit margins. Maximizing profit means finding the "just right" price.

For a business, an "income" tax is a tax on profits. Profits go to business owners, whether they be proprietors or share holders. A business income tax reduces net profit, meaning it reduces the total money going to the business owners. Naturally the owners may want to increase prices to compensate for the profit taken by taxes. If the business is competently managed, however, they've already set prices to maximize profits. Increasing prices due to taxes would therefore have the opposite effect, actually reducing profits even more.

Real world economics are a bit more complex than that, of course, but the bottom line is most businesses have a limited ability to raise prices to offset income (profit) taxes.

Except that ignores the very real situational change created by increasing a tax. Not only will company A be affected but also Company A's competitors. So when the tax increase takes place they will all adjust thereby adjusting the market rates of their product/service. Basically that "sweet spot" will move due to the intervention of non-supply/demand forces - in this case gov't interference via taxation.

Except that since every company is not selling an identical product at identical price point and they don't all share the same current market objectives, all companies do not adjust together, and every $0.05 tax does not see a collective move north of $0.05 by every company in the taxed industry. Everyone knows this.

Nowhere does my statement need that to be the case to be true. If company A and B are in the same market with the same range of products(like Lowes and Home Depot) then there certainly will be identical moves on pricing to cover the new tax. Will they be EXACTLY the same in timing or in area? No, but you will see the increase from both - which is due to the outside force(gov't interference) moving the market's "sweet spot".

I'm not sure you're getting it. Even if two companies are selling perfectly substitutable products, the prices have been set based on aggregate supply and demand. There is a point on the demand curve that will yield the greatest revenue for the product. Increasing the "business tax" (which in and of itself is an ambiguous term) will only decrease the amount of profit available from that revenue. Increasing the tax shouldn't move the highest revenue yield on the demand curve. As bowfinger stated, the execs might feel the need to increase prices to reflect the reduced net profit, but this would actually lower revenues so would have no real effect. Increased taxes on profit should really only affect owners and shareholders through decreased dividends.

That's if you believe that markets behave rationally and also assumes somewhat symmetrical markets.

lol, again, it's an outside force causing the shift and it's a HUGE assumption that revenue would be lower if they increased prices to accommodate the gov't intrusion. It's is more than a bit naive to suggest that the supply/demand curve isn't affected by these outside intrusions by the gov't.

The idea is that the firm has already priced the product optimally. If the firm increased the price to try and maintain profit, it would actually have the opposite effect as revenues would decrease.

It's not naive, this is basic economic theory. How does changing tax on profit suddenly alter the optimal price for a product? Raising the price would only be counter-productive.

Now, if you want to call the curve itself naive, that's fine. I don't necessarily agree with it myself as it assumes perfect information.

 

[BigDH01]

Originally posted by: PaperclipGod

Originally posted by: BigDH01

I'm not sure you're getting it. Even if two companies are selling perfectly substitutable products, the prices have been set based on aggregate supply and demand. There is a point on the demand curve that will yield the greatest revenue for the product. Increasing the "business tax" (which in and of itself is an ambiguous term) will only decrease the amount of profit available from that revenue. Increasing the tax shouldn't move the highest revenue yield on the demand curve. As bowfinger stated, the execs might feel the need to increase prices to reflect the reduced net profit, but this would actually lower revenues so would have no real effect. Increased taxes on profit should really only affect owners and shareholders through decreased dividends.

That's if you believe that markets behave rationally and also assumes somewhat symmetrical markets.

So, the point of highest revenue yield on a demand curve is unaffected by the cost to produce the product?

If a product costs $10 to produce today, but $10.50 to produce tomorrow, why would a company settle for the reduced profit? It affects the company in a huge way, as selling a million items for 50 cents less profit each is $500K lost. For the consumer, though, the 50 cents is barely noticed... or at least, not seen as a huge impediment to purchasing whatever item it is.

Besides, if a company increases prices to offset costs, and sales slow, they can cut production and save money. They hire less people, buy less raw materials, and spend less on transportation, marketing, etc.

It just doesn't follow that an increased business tax would be born by the company and not the consumer. Even if a company did decide to try and absorb the tax increase itself, then it would be put in a financially worse situation than its competitors. The company might see increased sales, but assuming it's now selling items that are no longer making as much of a profit, then it has to cut expenses elsewhere -- build quality, marketing, salaries, jobs, etc.

I'm not following your logic. How does a tax on profit increase production costs? Firms are taxed when the product is sold, not produced.

Therefore, it is still in the company's best interest to earn as much revenue as possible. This point would be unaffected by taxes levied after selling. Raising the price to try and maintain profit margins would still reduce overall profit.

Really, it might be best just to break open an Econ book and brush up.

 

[justly]

PaperclipGod,
Simply put, you are not wrong.

With such diverse markets that exists in the world there are some nuances that might not appear to follow your conclusions at a rapid enough pace as to be seen, but your basic principle is sound.

I typically don't respond to every opinion that I disagree with simply because, I don't have that much time, and don't feel the need to participate in an exercise in futility (goes back to not having that much time). I am here to learn even if all I learn is how misguided some people can be.

The only reason I'm responding to you now is that I believe you are here to exchange ideas and use that exchange to come to your own conclutions, if I didn't think this was the case you wouldn't be reading this.

I believe you are correct that any and all tax has to considered part of a companies opperating expence.
In some cases where negotiating or competitive bidding determines the price there is already a sufficent profit margin built in that the added cost of a tax increase may not be visible.
There is also a case where a small business may only adjust pricing to maintain a specific standard of living for its owner and adequate wages to retain its employees. In this case the added tax will appear to be an inflationary adjustment, or even coincide with an actual inflationary adjustment. In this case the actual amout of time between a tax increase and having that tax passed on to the consumer could be substantial, but it will happen.
The only time a tax increase is not "eventually" passed on to consumers is in a failing business model. No employer or employee voluntarily takes a pay cut unless the only choice they are given is between lower pay, or no pay (lost of employment) and if this is the choice they have to make how can you argue against this being a failed business model?

 

[rchiu]

1. We tax business because government needs money (whether we need government is a discussion for another day)
2. Market is driven by supply and demand and company price their product accordingly so they can maximize total revenue, factoring price elasticity and competition. They cannot simplying "pass" the tax to customer by raising price to cover the tax they pay.

 

[PaperclipGod]

Originally posted by: BigDH01

I'm not following your logic. How does a tax on profit increase production costs? Firms are taxed when the product is sold, not produced.

Therefore, it is still in the company's best interest to earn as much revenue as possible. This point would be unaffected by taxes levied after selling. Raising the price to try and maintain profit margins would still reduce overall profit.

Really, it might be best just to break open an Econ book and brush up.

Right, but taxes take a predictable percentage of profits, thus they can be calculated into a businesses operating expenses. And if that business is selling something, the cost of that item must go up to fund the increased expense.

Imagine yourself selling watches on a street corner in NYC. You've got a suitcase full, and you know that you need to make $100 that day to survive - $75 to cover the cost of the watches, and $25 to feed yourself. However, there's a big guy with a baseball bat watching you, and he says that for "protection" you owe him 40% of the profit on every sale. Now, originally, you could have sold your suitcase of watches - let's say there's 10 in there - at $10 each and made your $100. That's the cheapest you can sell them for and still eat. Now, however, because you owe Guido $1 for every $2.50 you earn, you'll be $10 short for the day.

Knowing this, however, you proactively raise the price of your watches to $11.75. Instead of making $2.50 on each watch, you're now making $4.25. 40% of that goes to our Soprano-wannabe, leaving us with our initial $2.50 profit per watch. So now we can still feed ourselves and afford to give Guido his protection money. Who pays the extra, though? The people buying my watches.

If I were the only one on the street who Guido was offering to "protect", I'd go out of business. However, since Guido and his pals are pretty well organized, they've got someone out "protecting" every watch-seller in NYC, and they're each extracting the same amount of protection money -- so everyone's prices go up, but by an equal amount, so they'll all remain competitive.

So, the point here is that prices will rise as a response to the increased expense, no matter what word is used to describe the expense. Since taxes are not unique to each company (we tax by type of entity, not randomly), the burden is equal for each company - to cover expenses, prices must increase. Since the prices either go up, or the business goes under, everyone increases their prices.

Simply expanding production to cover the decreased profit per item isn't a viable alternative, since demand is finite.

 

[PaperclipGod]

Originally posted by: justly
PaperclipGod,
Simply put, you are not wrong.

With such diverse markets that exists in the world there are some nuances that might not appear to follow your conclusions at a rapid enough pace as to be seen, but your basic principle is sound.

I typically don't respond to every opinion that I disagree with simply because, I don't have that much time, and don't feel the need to participate in an exercise in futility (goes back to not having that much time). I am here to learn even if all I learn is how misguided some people can be.

The only reason I'm responding to you now is that I believe you are here to exchange ideas and use that exchange to come to your own conclutions, if I didn't think this was the case you wouldn't be reading this.

I believe you are correct that any and all tax has to considered part of a companies opperating expence.
In some cases where negotiating or competitive bidding determines the price there is already a sufficent profit margin built in that the added cost of a tax increase may not be visible.
There is also a case where a small business may only adjust pricing to maintain a specific standard of living for its owner and adequate wages to retain its employees. In this case the added tax will appear to be an inflationary adjustment, or even coincide with an actual inflationary adjustment. In this case the actual amout of time between a tax increase and having that tax passed on to the consumer could be substantial, but it will happen.
The only time a tax increase is not "eventually" passed on to consumers is in a failing business model. No employer or employee voluntarily takes a pay cut unless the only choice they are given is between lower pay, or no pay (lost of employment) and if this is the choice they have to make how can you argue against this being a failed business model?

Cheers, I appreciate the response!

I understand and agree with what you said about taxes eventually being passed on to consumers, and it also follows that any business which fails to pass its expenses on - no matter what form those expenses take - will fail.

As to your last point of lower pay vs. no pay -- don't labor laws often make "no pay" the only viable option? e.g., A US company might be financially viable if they can produce a laptop for $250 and sell it at a competitive price of $300. However, due to the cost of labor, even using minimum wage employees might raise the cost of production to $290. Cutting wages isn't even an option - you are mandated by the government to pay someone a minimum wage if you hire them. So, in essence, the government is forcing companies to fail, and forcing jobs overseas, as it will not tolerate a job which pays less than what it deems an acceptable wage. You might have unemployed people grateful for a job, even if it pays $4 an hour - better than nothing, right? But labor laws would prefer that person to remain unemployed than to earn even a small amount.

And since US labor laws don't mean much in the rest of the world (hello, China), business simply moves production to an area where labor can be bought at a cheap enough rate to make their product competitive.

 

[PaperclipGod]

Originally posted by: rchiu
1. We tax business because government needs money (whether we need government is a discussion for another day)
2. Market is driven by supply and demand and company price their product accordingly so they can maximize total revenue, factoring price elasticity and competition. They cannot simplying "pass" the tax to customer by raising price to cover the tax they pay.

If a company was making enough money to absorb that tax increase on its own, then how was it in business to begin with? Don't you think a competitor would have popped up, selling the same product for less, stealing that first companies market share?

 

[ElFenix]

Originally posted by: BigDH01

The idea is that the firm has already priced the product optimally. If the firm increased the price to try and maintain profit, it would actually have the opposite effect as revenues would decrease.

It's not naive, this is basic economic theory. How does changing tax on profit suddenly alter the optimal price for a product? Raising the price would only be counter-productive.

Now, if you want to call the curve itself naive, that's fine. I don't necessarily agree with it myself as it assumes perfect information.

it changes the factors in the risk-reward equation. for the risk taken the amount of capital outlaid and the return on it is probably no longer optimal. that is what changes.

Originally posted by: PaperclipGod

If a company was making enough money to absorb that tax increase on its own, then how was it in business to begin with? Don't you think a competitor would have popped up, selling the same product for less, stealing that first companies market share?

again, we tax accounting profit, not economic profit. only when there is economic profit to be made would a competitor come along even in perfect competition.

 

[dullard]

Didn't read the thread, so this may be a repeat.

1) We have to tax. We all wish we didn't need to tax, but we'd be much worse off without military, etc.

2) We want to end as many loopholes as possible in the tax code. Without a buisness tax, there would be a gaping loophole in the tax code.

Consider a sole-proprietor business. Suppose this business is making quite a good living, lets say $100k/year in profit. The loophole comes from the fact that the business owner can choose to give that $100k to himself or to keep that $100k in the business. Suppose there was no business tax, then there would be no required reporting of business expenses to the government. If he keeps it in the business, the business could pay his mortgage, buy his cars, provide his food and travel, etc. He is living the high life, all while technically earning $0 a year. He'd also be on food stamps and other welfare programs with $0 income (remember the business has the income, not the owner, in this scenario). That loophole is very easilly closed by taxing business income.

3) Even with this tax, most companies DON'T pay taxes. That was true even when business income was quite high. Link. I bring this up to show that the problem isn't as bad as some people think.

4) Businesses can pass on some taxes, but not all. Think of a truely competetive scenario. In true competition, the business has no control over price. If the business increased price, they'd have no customers and would go out of business. That is a crude but effective definition of true competition. So now, if the goverment slaps on a tax, the business CANNOT pass any of it on. Bingo, your whole "pass it on" argument is shot dead. Businesses can control expenses though. Thus, by being efficient, they can still have a profit in true competition and with that profit, they can pay the tax.

 

[Ldir]

Originally posted by: PaperclipGod

Originally posted by: BigDH01

I'm not following your logic. How does a tax on profit increase production costs? Firms are taxed when the product is sold, not produced.

Therefore, it is still in the company's best interest to earn as much revenue as possible. This point would be unaffected by taxes levied after selling. Raising the price to try and maintain profit margins would still reduce overall profit.

Really, it might be best just to break open an Econ book and brush up.

Right, but taxes take a predictable percentage of profits, thus they can be calculated into a businesses operating expenses. And if that business is selling something, the cost of that item must go up to fund the increased expense.

Imagine yourself selling watches on a street corner in NYC. You've got a suitcase full, and you know that you need to make $100 that day to survive - $75 to cover the cost of the watches, and $25 to feed yourself. However, there's a big guy with a baseball bat watching you, and he says that for "protection" you owe him 40% of the profit on every sale. Now, originally, you could have sold your suitcase of watches - let's say there's 10 in there - at $10 each and made your $100. That's the cheapest you can sell them for and still eat. Now, however, because you owe Guido $1 for every $2.50 you earn, you'll be $10 short for the day.

Knowing this, however, you proactively raise the price of your watches to $11.75. Instead of making $2.50 on each watch, you're now making $4.25. 40% of that goes to our Soprano-wannabe, leaving us with our initial $2.50 profit per watch. So now we can still feed ourselves and afford to give Guido his protection money. Who pays the extra, though? The people buying my watches.

If I were the only one on the street who Guido was offering to "protect", I'd go out of business. However, since Guido and his pals are pretty well organized, they've got someone out "protecting" every watch-seller in NYC, and they're each extracting the same amount of protection money -- so everyone's prices go up, but by an equal amount, so they'll all remain competitive.

So, the point here is that prices will rise as a response to the increased expense, no matter what word is used to describe the expense. Since taxes are not unique to each company (we tax by type of entity, not randomly), the burden is equal for each company - to cover expenses, prices must increase. Since the prices either go up, or the business goes under, everyone increases their prices.

Simply expanding production to cover the decreased profit per item isn't a viable alternative, since demand is finite.

You don't get it. If you are a good businessman you want to make the most profit possible. Why would you sell watches for $10 if you can sell them for $11.75? Your customers do not care about Guido. They just care how much the watches cost. You can either sell them for $11.75 or you can't.

 

[dullard]

Originally posted by: Ldir
You don't get it. If you are a good businessman you want to make the most profit possible. Why would you sell watches for $10 if you can sell them for $11.75? Your customers do not care about Guido. They just care how much the watches cost. You can either sell them for $11.75 or you can't.

Exactly. The price at which you can sell a good to maximize profit has NOTHING to do with the costs of producing that product (and those production costs include taxes).

 

[winnar111]

Originally posted by: BigDH01
I'm not following your logic. How does a tax on profit increase production costs? Firms are taxed when the product is sold, not produced.

Accounting gimmicks. You increase expenses to decrease taxable income.

 

[QuantumPion]

Originally posted by: BoomerD
Using the OP's theories,

Why do we tax individuals? Since businesses just pass taxes on to us in the form of increased prices, just tax businesses and not the individuals. :roll:

I am one of those people who think that taxes should be on profits, NOT on wages/salaries though. Doesn't matter the source of the profit...it all gets taxed at the same rate.

Of course, I know it'll never work like that...we peons don't have enough influence with the fine folks in the hallowed halls of Congress.

There is already a bill to implement this, HR-25, although it won't get through any time soon (in this administration). http://www.govtrack.us/congres...ltext.xpd?bill=h109-25

 

[Fern]

Originally posted by: PaperclipGod
Why do we tax businesses at all?

Won't businesses just end up passing along the increased cost to the consumer?

Yes, of course they do; every chance they get.

As usual there are always exceptions. However, if tax is increased for every producer of product 'A", there is a strong incentive for an across-the-board price increase because evrybody has to pay it. Even so, there wil be exceptions; it could be that one or more will not increase prices so as to have a 'price advantage' over other competitors who do. It just maybe that in their particular/unique micro-economic model they benefit more from not increasing prices (e.g., they have excess capacity and increased sales from lower prices is a bigger benefit.

When I was a finance/accounting major vback in the 'stone age' popular theory was that corporations should NOT be taxed.

Taxing them provides all kinds of poor incentives etc. Would there be such lavaish expenditures (fancy offices, resort junkets, expensive cars etc) if they were not deductible? because they are deductible Uncle Sam (and you & I) are helping pay for these things.

Big corporations may do it anyway, but there are a lot of smaller ones that I am confident who would not if they weren't deductible.

Taxing the company also is regressive. The little guy owning shares helps pay the wealthy guys tax. I can demonstrate this mathematically if need be.

The real reason coporations pay income tax is because would be too politically unpopular otherwise. Corporations (and dead people) don't vote either.

Originally posted by: nobodyknows
If we didn't tax businesses then we wouold have business owners not paying themselves a salary and keeping their profit tax free.

No. that wouldn't be how it works.

Firstly, we already sufficient rules about 'forcing' owners who in their business to declare a salary. (One ste of rules requires a certain level - forcing the salary upwards - to ensure SS is paid. The other set caps salary - forces it lower - to ensure that dividends are disguised as salary).

But the real point is that while corporations wouldn't pay taxes the owners/shareholders would (profit passed down to them similar to other pass -through entites such as S-corps or partnerships). So, the taxation occurs, just at a different level.

Fern

 

[Fern]

OK, you're either doing the 'straw man' thingy or don't understand the subject (math/economics/finance).

Originally posted by: Lothar
-snip-
If we were to eliminate the 35% corporate tax, do you truly believe that the price of goods will drop by 35%?

The equation is 'tax divided by revenue'; it's not a 'one-to-one' thing (35% of tax increase = 35% product price increase) unless revenue = net income and the tax rate is 100%.

I'll demonstrate:

I'll use a 10% net profit ratio (net profit after expenses etc is 10% of gross sales); this is a bit high but sufficient for this purpose.

BEFORE TAX INCREASE

Sales---------$100
Expenses-------90
Net Profit-------10

AFTER TAX INCREASE OF $30 (30%)

Sales----------$100
Expenses--------90
Net Profit--------10
Income Tax-----(3)

Net Profit--------$7
After Tax

So, after the tax increase of $3 (30%), you ony need to raise prices by $.03 (or 3%) per product to make up for the increased taxes. (Actually, because the increase is also taxed, it's a little higher). It is does NOT require a $3 (30%) price increase in product to make up for the tax.

Moreover, because of the various cost allocation methods/estimates used by the various corporations it's going to be damned difficult for the so-called experts to figure out what the heck is going on (in spite of what they claim). Because estimates of units produced/sold are just that - estimates; some company's price increases will be too high, others too low. I.e., any 'study' will give you a misleading picture as to the company's intent (pass along the increase tax or not).

Fern

 

[justly]

Originally posted by: PaperclipGod

Cheers, I appreciate the response!

I understand and agree with what you said about taxes eventually being passed on to consumers, and it also follows that any business which fails to pass its expenses on - no matter what form those expenses take - will fail.

As to your last point of lower pay vs. no pay -- don't labor laws often make "no pay" the only viable option? e.g., A US company might be financially viable if they can produce a laptop for $250 and sell it at a competitive price of $300. However, due to the cost of labor, even using minimum wage employees might raise the cost of production to $290. Cutting wages isn't even an option - you are mandated by the government to pay someone a minimum wage if you hire them. So, in essence, the government is forcing companies to fail, and forcing jobs overseas, as it will not tolerate a job which pays less than what it deems an acceptable wage. You might have unemployed people grateful for a job, even if it pays $4 an hour - better than nothing, right? But labor laws would prefer that person to remain unemployed than to earn even a small amount.

I think your making the assumption that labor is already at the lowest possible rate (minimum wage). In that case it would be a failing business, however if wages are above minimum wage there is the option to lower them. This will probably result in a high turnover of employees and often leave your business with less reliable employees to boot.

And since US labor laws don't mean much in the rest of the world (hello, China), business simply moves production to an area where labor can be bought at a cheap enough rate to make their product competitive.

I wish I had specific knowlage in this area, but since I don't maybe I can ask some questions that you can ponder over (maybe we will get lucky and someone with more knowlage than us will be able to provide an answer).

Lets look at the company (I believe it was one of the banks that recieved a bailout) that pre-ordered a french jet and was intimidated into canceling the order (I hope you know what I am refering to).
This was somthing like a 5 million dollar purchase, so how much do you think the profit was for a purchase of this magnitude? Since this was a french jet what amount of US taxes had to be paid? Now if an American jet company had recieved this order ask yourself the same questions.
Did our tax structure help America? or did we in effect impose a tariff on our own products to drive the market away from American products?

BTW I understand where you where trying to go with the analogy about the guy selling watches, but you way oversimplified it and that is why people could shoot holes in it. I really would have liked to revise it to make it more complete, however that requies more effort than I am willing to put into it at this time, maybe I will do it later if I get bored enough .