Why do we tax businesses at all?

[Craig234]

Originally posted by: Barack Obama
Its easier to tax businesses and theres less tax evasion I think but I might be wrong.

Oh, you might be.

For example, do you know that over half of all South America's wealth is in off-shore shells, which exist for tax evasion and other illicit activities?

It's not just South America, that's just a stat I have handy. It's globally *huge*.

Read David Cay Johnston sometime for one good writer on it.

 

[fskimospy]

Originally posted by: PaperclipGod

Originally posted by: eskimospy
As others have said, businesses don't always increase prices just because a tax went up just like they don't always reduce prices when a tax goes down. Some of the taxes levied on business are passed on, some aren't, it all depends on the situation. Because 100% of taxes aren't passed on, taxing business makes sense.

How is that possible? Where is the business going to get the money to pay the tax increase without raising its prices?

What do you mean where will they get the money? They will either reduce their profit or raise their prices, depending on how the market would best respond. Do you pass on 100% of the taxes levied on you by demanding higher wages? Of course not. If they raised the gas tax $0.01 tomorrow, would you go demand a raise?

 

[fskimospy]

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.

 

[3chordcharlie]

Businesses, or at least profit-maximizing ones, may change their prices due to taxes, depending on what type of tax it is; it's very hard to pass along an income tax.

A sales tax or unit tax can be passed along to the degree that consumers will still buy at the higher price (demand doesn't change much based on price). These tend to be commodity-type products (bread, plastic deck chairs, cotton T-shirts), where the price is set through relatively strong competition, would go up if all sellers faced a new tax.

A sales tax on something more unique, like oil paintings, sailboats, and high-quality furniture would not necessarily make customers willing to pay more for them - price is already more a function of demand than actual costs (there may be competition, but only a few sellers are capable of supplying the market, so profits tend to be higher).

In the first case, most of the tax is paid by the consumer in the form of a price increase. In the second case, most of it is paid by the seller, because the price can't really be increased (in fact, for a large tax, the seller may have to decrease their price to keep the same total cost, and number of customers).

An income tax *might* be passed along in the same way, but it would require most or all of the competitors to raise prices without colluding in order to do so; given the abstractness of 'ownership' in most companies, it's likely this wouldn't happen, qt least quickly.

 

[Bowfinger]

Originally posted by: winnar111

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.

Just look what happens when the cigarette tax goes up.

First, that's a tax on goods, not an income tax. I specifically focused on income (profit) taxes. A tax on goods is different because it is the government increasing the price of the product, regardless of how it affects sales, and therefore profits. Second, you're proving my point because the effect of increasing the cigarette tax is that demand drops, sales drop, and profit drops. That is also what happens if companies try to pass along increased profit taxes. Sales drop and profits drop.

 

[chess9]

We tax businesses to piss off Libertarians, Right Wingers, and Rush Limbaugh. Why else?

-Robert

 

[imported_Lothar]

Originally posted by: Barack Obama
Its easier to tax businesses and theres less tax evasion I think but I might be wrong.

AHAHAHAHAHAHAHAHAHAHAHA.

 

[imported_Lothar]

Originally posted by: PaperclipGod
I was thinking about this today, and I'd like to hear everyone's thoughts.

Is there ever a situation where a business would not pass a tax on to the consumer? How could it do so? How is a tax on business (businesses that sell staple goods, at least) not just an indirect tax on the consumer?

Wouldn't a tax system which only taxes luxury items and doesn't tax stuff like groceries, gas, and income make more sense? i.e., if you want things that a middle-class person cannot afford (or rarely afford), then you must pay a tax for that right.

Although, then there's the problem of who gets to decide what "luxury" is defined as.

If we were to eliminate the 35% corporate tax, do you truly believe that the price of goods will drop by 35%?

 

[PaperclipGod]

Originally posted by: eskimospy

What do you mean where will they get the money? They will either reduce their profit or raise their prices, depending on how the market would best respond. Do you pass on 100% of the taxes levied on you by demanding higher wages? Of course not. If they raised the gas tax $0.01 tomorrow, would you go demand a raise?

Right, and in the case of taxes, the answer is always to raise prices. It might be different if taxes varied from one company to another, but since business taxes are the same in every industry, there's no incentive to keep prices down. If every clothing store is suddely having to pay an extra 2% in taxes, then they all raise their prices 2%, and the customers are the ones footing the bill.

If a company is making a lot of money in an industry, and suddenly government decides to raise taxes on that industry, then the company continues to make a lot of money... the only difference is that it's now harder for competitors to enter that market because initial costs are now even higher.

With individuals, we don't have the luxury of adjusting our salary up a few dollars to counter every tax raise. Businesses do - they set the prices for their goods. If a business get's taxed an extra $0.01, they can pass that on to the customer without many people even noticing. Individuals, however, can't react as quickly, and are poorer for it.

 

[PaperclipGod]

Originally posted by: Lothar

Originally posted by: PaperclipGod
I was thinking about this today, and I'd like to hear everyone's thoughts.

Is there ever a situation where a business would not pass a tax on to the consumer? How could it do so? How is a tax on business (businesses that sell staple goods, at least) not just an indirect tax on the consumer?

Wouldn't a tax system which only taxes luxury items and doesn't tax stuff like groceries, gas, and income make more sense? i.e., if you want things that a middle-class person cannot afford (or rarely afford), then you must pay a tax for that right.

Although, then there's the problem of who gets to decide what "luxury" is defined as.

If we were to eliminate the 35% corporate tax, do you truly believe that the price of goods will drop by 35%?

If it didn't, then those companies producing those goods would be bankrupt in a year when the market is flooded with competitors producing the same product for 35% less.

Isn't that the whole idea of capitalism?

 

[Brainonska511]

Originally posted by: PaperclipGod

Originally posted by: Lothar

Originally posted by: PaperclipGod
I was thinking about this today, and I'd like to hear everyone's thoughts.

Is there ever a situation where a business would not pass a tax on to the consumer? How could it do so? How is a tax on business (businesses that sell staple goods, at least) not just an indirect tax on the consumer?

Wouldn't a tax system which only taxes luxury items and doesn't tax stuff like groceries, gas, and income make more sense? i.e., if you want things that a middle-class person cannot afford (or rarely afford), then you must pay a tax for that right.

Although, then there's the problem of who gets to decide what "luxury" is defined as.

If we were to eliminate the 35% corporate tax, do you truly believe that the price of goods will drop by 35%?

If it didn't, then those companies producing those goods would be bankrupt in a year when the market is flooded with competitors producing the same product for 35% less.

Isn't that the whole idea of capitalism?

Not necessarily. There are barriers to entry that can easily keep prices elevated and new competitors out.

 

[Bowfinger]

Originally posted by: PaperclipGod

Originally posted by: Farang
There are universities that will answer your questions in detail in Econ 101.

Oh, I'm sorry, you must be confused -- I figured that since I was asking a 5 line economics question in a forum dedicated to computers it'd be pretty obvious that I wasn't looking for a detailed answer.

I often forget that we share these forums with the mentally handicapped, I'll try to be more sensitive in the future.

Given that you've ignored every post attempting to provide that Econ 101 answer, it looks like Farang had the right idea. Why did you ask the question if your mind was either already closed or incapable of comprehension?

 

[fskimospy]

Originally posted by: PaperclipGod

Originally posted by: eskimospy

What do you mean where will they get the money? They will either reduce their profit or raise their prices, depending on how the market would best respond. Do you pass on 100% of the taxes levied on you by demanding higher wages? Of course not. If they raised the gas tax $0.01 tomorrow, would you go demand a raise?

Right, and in the case of taxes, the answer is always to raise prices. It might be different if taxes varied from one company to another, but since business taxes are the same in every industry, there's no incentive to keep prices down. If every clothing store is suddely having to pay an extra 2% in taxes, then they all raise their prices 2%, and the customers are the ones footing the bill.

If a company is making a lot of money in an industry, and suddenly government decides to raise taxes on that industry, then the company continues to make a lot of money... the only difference is that it's now harder for competitors to enter that market because initial costs are now even higher.

With individuals, we don't have the luxury of adjusting our salary up a few dollars to counter every tax raise. Businesses do - they set the prices for their goods. If a business get's taxed an extra $0.01, they can pass that on to the customer without many people even noticing. Individuals, however, can't react as quickly, and are poorer for it.

That is simply incorrect and unsupported by reality

 

[pstylesss]

Originally posted by: Modelworks
An even better question is why don't people that receive social security have a tax exempt card ?
If someone gets $1000 in benefits, $70 of that goes back to the government at a 7% sales tax rate. So they are taxing themselves.

Same reason states tax products purchased for road projects, because if they didn't the state wouldn't get their grubby hands on money that came down from the feds that was specifically earmarked for a road project. I don't know how many states do this, but I know WA does.

 

[pstylesss]

Originally posted by: her209
Businesses get taxed on their profits, i.e., expenses aren't taxed.

Businesses are created to make profits, and their shareholders or owners have a set percentage in mind. If their profits are taxed a certain amount they will raise prices enough to receive their desired profit margin.

edit: of course taking into account their increased prices on sales. But if an increase can be done it will be done.

 

[pstylesss]

Originally posted by: eskimospy
As others have said, businesses don't always increase prices just because a tax went up just like they don't always reduce prices when a tax goes down. Some of the taxes levied on business are passed on, some aren't, it all depends on the situation. Because 100% of taxes aren't passed on, taxing business makes sense.

Do you have a percentage of taxes that are passed on? Obviously not all taxes are passed on, but many are. In fact, approximately 23 - 29 per cent of the cost of all products are covering the cost of tax overhead (payroll tax employer portion, and income tax).

 

[First]

Marginal tax increases (key word being marginal as defined econometrically) have proven to have negligible impact on consumer prices as well as long term business growth. It's perfectly sensible to increase taxes as long as it isn't sudden, i.e. moderate. It's the same sort of logic (different math) used in analyzing supply shocks, OPEC exports in the 70's being a prime example.

 

[runzwithsizorz]

Originally posted by: ZeroIQ

Originally posted by: Modelworks
An even better question is why don't people that receive social security have a tax exempt card ?
If someone gets $1000 in benefits, $70 of that goes back to the government at a 7% sales tax rate. So they are taxing themselves.

Same reason states tax products purchased for road projects, because if they didn't the state wouldn't get their grubby hands on money that came down from the feds that was specifically earmarked for a road project. I don't know how many states do this, but I know WA does.

California, Has a state tax on 1-12 public school textbooks! No child left behind,--- or out.

 

[ElFenix]

actually a lot of it gets borne by the low end labor costs because it's easier to get the money out of employees than customers. customers will go elsewhere pretty readily, employees won't.

Originally posted by: eskimospy
As others have said, businesses don't always increase prices just because a tax went up just like they don't always reduce prices when a tax goes down. Some of the taxes levied on business are passed on, some aren't, it all depends on the situation. Because 100% of taxes aren't passed on, taxing business makes sense.

taxes are always 100% passed on because businesses aren't really people. somewhere along the line a real person bears that tax. it's just figuring out who actually bears it is the trick. the left is starting to figure out that corporate taxes get borne by the working class more than just about everyone else, but it'll be a while before the anti-corporation sorts come around.

 

[fskimospy]

Originally posted by: ElFenix
actually a lot of it gets borne by the low end labor costs because it's easier to get the money out of employees than customers. customers will go elsewhere pretty readily, employees won't.

Originally posted by: eskimospy
As others have said, businesses don't always increase prices just because a tax went up just like they don't always reduce prices when a tax goes down. Some of the taxes levied on business are passed on, some aren't, it all depends on the situation. Because 100% of taxes aren't passed on, taxing business makes sense.

taxes are always 100% passed on because businesses aren't really people. somewhere along the line a real person bears that tax. it's just figuring out who actually bears it is the trick. the left is starting to figure out that corporate taxes get borne by the working class more than just about everyone else, but it'll be a while before the anti-corporation sorts come around.

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.

 

[nobodyknows]

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

 

[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".

 

[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.

 

[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.

 

[PaperclipGod]

Originally posted by: Bowfinger

Given that you've ignored every post attempting to provide that Econ 101 answer, it looks like Farang had the right idea. Why did you ask the question if your mind was either already closed or incapable of comprehension?

What is it that you think I'm not comprehending...?