Corporatism / Socialism

[HFWR]

But usually it's based more on parental involvement and parental engagement in their children's education than any other single variable.

Which, I would guess, is the basis for success at all schools.

 

[ziggy29]

Which, I would guess, is the basis for success at all schools.

Agreed -- but my point is that merely throwing more money at the problem is likely to produce little or no return because it doesn't change anything about the single most determining success factor. But it feels good.

 

[ERD50]

Assume that a corporation makes only bread...

Corporation charges for bread what the market will bear. they maximize revenue no matter what their costs are.


... people will pay the same for bread no matter how the profit loaf is sliced.

and on oil, ('IT'=costs/taxes)...

IT DOESN'T CHANGE THE DEMAND CURVE

So here is a real world example. I started looking for bread versus wheat, but the cost of wheat is such a small % of the retail price of bread, their is too much room for other effects.

So I went with something much tighter - wheat and flour. Emeritus tells us that the market will only pay $X for flour, that the cost does not affect demand. I guess that is true if you isolate it in a vacuum, but the supply at that price has changed, so demand has to adapt to these new supply realities.

OK, so back to wheat and flour:

Wheat and flour price relationships, Kansas City - USDA/ERS

---------------- Cost of wheat -- Price of bakery flour
2009/10 Q1 Jun-Aug 14.48 15.00
2008/09 Q1 Jun-Aug 21.90 22.32
2007/08 Q1 Jun-Aug 15.14 16.32
2006/07 Q1 Jun-Aug 12.13 13.13

hmmm, so once they found they could charge $22.32 for flour, why lower the price back to $15? Idiots could have just kept all that profit for themselves, right! Or are you saying that we actually bought 33% less flour at the higher price? I know our household didn't change our buying/eating habits through those periods, and I bet we are pretty representative.

-ERD50

 

[FUEGO]

I spent the last 20 years of my working life as the head of product pricing for a $500M company. Maximizing profit, not revenue, was the prime directive of our department. Revenue growth was a factor, but a secondary one.

Pretty soon Emeritus will be rebutting your statement by asserting that he has worked the last 30 years maximizing revenue for a $1000M company, therefore his position is the correct position.

 

[Texas Proud]

Though there are some public schools doing a great job.

Because public schools are not nationally run... at least not yet...

 

[Texas Proud]

Unless basic economic theory has changed dramatically in the last 20 odd years since I looked at a Econ textbook, you are wrong you don't price a product to maximize revenue as you state. Instead, especially for the case of monopoly you price the product to maximize PROFIT not REVENUE. IIRC
that point is when marginally cost equal marginal revenue (although I vaguely remember a special case for monopolies). By changing marginal cost curve with the addition of tax, you are also changing the MR curve and the price.

In the real world the addition of tax gets partially passed on to the consumers and some gets absorb by the customers. The exact percentage depends on the elasticity of the demand for the product and competitiveness of the market place. However, I believe (but I could be wrong since I am to lazy to look it up) that even in a perfectly competitive market a tax increases the price.

In addition as SamClem suggests there is a value ((utility) to the widget that would have been purchased at $9 but aren't bought at $10 due to the
imposition of a tax. This utility is lost to society forever and is part of the hidden cost of a tax. It also explains why sin taxes are so popular, i.e. increasing the tax on cigarettes reduces demand. But since cigarette consumption has a negative impact on society the tax is a good thing.

Good to see someone else saw the mistake... and you said what I tried to say earlier in a much better way... thanks...


I still can not see how Emeritus is saying a VAT tax is not a transactional tax. And I think Sunsetsail agreed....

I disagree that it is an ad valorem tax. Sure, an ad valorem is based on the value... but the VAT is based on the increase in value, not 'the value'. I guess in the literal meaning you might be right....

BUT... it is not like an ad valorem tax where you pay it because you own it.. you only pay it when you sell something... you can add all the value you wish to a widget, but if you do not sell that widget you do not owe a VAT tax... hence, transactional.... no transaction, no tax...

DEF: ad valorem
adj. Latin for "based on value," which applies to property taxes based on a percentage of the county's assessment of the property's value. The assessed value is the standard basis for local real property taxes

 

[SunsetSail]

Good to see someone else saw the mistake... and you said what I tried to say earlier in a much better way... thanks...


I still can not see how Emeritus is saying a VAT tax is not a transactional tax. And I think Sunsetsail agreed....

I disagree that it is an ad valorem tax. Sure, an ad valorem is based on the value... but the VAT is based on the increase in value, not 'the value'. I guess in the literal meaning you might be right....

BUT... it is not like an ad valorem tax where you pay it because you own it.. you only pay it when you sell something... you can add all the value you wish to a widget, but if you do not sell that widget you do not owe a VAT tax... hence, transactional.... no transaction, no tax...

DEF: ad valorem
adj. Latin for "based on value," which applies to property taxes based on a percentage of the county's assessment of the property's value. The assessed value is the standard basis for local real property taxes

I was actually only agreeing with the narrow conclusion that VAT is an ad valorem tax by its definition, but after re-reading my post that wasn't clear at all. In practice the VAT works like a transaction tax because the incidence of taxation is triggered by disposition of the property - i.e., a transaction.

Maybe to avoid confusion and not get caught up in semantics as I did, we can go by more general terms and call a VAT, sales, etc. an indirect tax in contrast to income/franchise taxes which are direct taxes. I don't think anyone would disagree that a VAT is an indirect tax - which is a tax that generally can't be adjusted to individual taxpayer characteristics.

 

[Emeritus]

Unless basic economic theory has changed dramatically in the last 20 odd years since I looked at a Econ textbook, you are wrong you don't price a product to maximize revenue as you state. Instead, especially for the case of monopoly you price the product to maximize PROFIT not REVENUE. IIRC
that point is when marginally cost equal marginal revenue (although I vaguely remember a special case for monopolies). By changing marginal cost curve with the addition of tax, you are also changing the MR curve and the price.

In the real world the addition of tax gets partially passed on to the consumers and some gets absorb by the customers. The exact percentage depends on the elasticity of the demand for the product and competitiveness of the market place. However, I believe (but I could be wrong since I am to lazy to look it up) that even in a perfectly competitive market a tax increases the price.

In addition as SamClem suggests there is a value ((utility) to the widget that would have been purchased at $9 but aren't bought at $10 due to the
imposition of a tax. This utility is lost to society forever and is part of the hidden cost of a tax. It also explains why sin taxes are so popular, i.e. increasing the tax on cigarettes reduces demand. But since cigarette consumption has a negative impact on society the tax is a good thing.

I'll try again

i agree I should have said net revenue

What you are describng in your 9 and ten dollar widget is consumer surplus not utility

my point is simply that the shape of the demand curve does not change, whatever your costs.

 

[HFWR]

Agreed -- but my point is that merely throwing more money at the problem is likely to produce little or no return because it doesn't change anything about the single most determining success factor. But it feels good.

Once you have a safe, clean, relatively comfortable building, and well-qualified teachers, I agree completely.

No doubt that private-schooled or home-schooled children have the potential to get a much better education, but there are other reasons besides "government"...

 

[ERD50]

I'll try again
...

my point is simply that the shape of the demand curve does not change, whatever your costs.

And again, your point is too simple for the real world. You provide a static analysis, it is a dynamic (but not very complex) problem.

If the cost of production increases for all suppliers (tax, or any other reason), we can expect a cost increase to the consumer. Those business aren't just going to say "oh well, I guess we make less money now, sigh", they will try to recoup the cost.

And since the customer then has no source for $9 widgets (or whatever), the whole supply/demand curve now shifts around the demand for $10 widgets. It's a different market now - that is why your example is too simple.

When gas hit $4.00/G, consumption only went down a few percent. So why aren't they still charging $4.00 today? Nice profit margin there, certainly no greedy CEO would miss that?

-ERD50

 

[clifp]

I'll try again

i agree I should have said net revenue

What you are describng in your 9 and ten dollar widget is consumer surplus not utility

my point is simply that the shape of the demand curve does not change, whatever your costs.

Nope you should have said profit since it is a more precise term.

Yup you are right consumer surplus.

True but irrelevant, since the tax changes the shape of the supply curve and you need both to determine a market.

Here is a demand curve for oil.
1.3 million barrels @ $40
1 million @ $50
800,000 @ $60

What is the price, well we don't know until we see a supply curve. In the case of a monopoly with a low marginal cost of say $9. The price would be the one that maximize profit namely $50. What happens if they slap a $10/ barrel excess profit tax on the oil? The price raises to $60 which maximizes profit for the corporation now that the cost has risen to $19 so the consumer pays the whole cost.

 

[Texas Proud]

And again, your point is too simple for the real world. You provide a static analysis, it is a dynamic (but not very complex) problem.

If the cost of production increases for all suppliers (tax, or any other reason), we can expect a cost increase to the consumer. Those business aren't just going to say "oh well, I guess we make less money now, sigh", they will try to recoup the cost.

And since the customer then has no source for $9 widgets (or whatever), the whole supply/demand curve now shifts around the demand for $10 widgets. It's a different market now - that is why your example is too simple.

When gas hit $4.00/G, consumption only went down a few percent. So why aren't they still charging $4.00 today? Nice profit margin there, certainly no greedy CEO would miss that?

-ERD50

Will have to disagree with you on this.... changing the cost of the supply curve does not change the demand curve... the demand curve is how many of whatever would be bought for a specific price... if the price changes, the demand curve does not change... the actual number sold does, but not the curve...

Adding a tax will shift the supply curves since the cost to produce has changed... the new intersection of the shifted supply curve and the 'static' demand curve is the new volume of sales at the new price...

 

[ERD50]

Will have to disagree with you on this.... changing the cost of the supply curve does not change the demand curve... the demand curve is how many of whatever would be bought for a specific price... if the price changes, the demand curve does not change... the actual number sold does, but not the curve...

Adding a tax will shift the supply curves since the cost to produce has changed... the new intersection of the shifted supply curve and the 'static' demand curve is the new volume of sales at the new price...

OK, I agree - my wording was a bit off then. But I wonder if that static demand curve fully captures the scenario we are talking about. At any one point in time, you could do some testing to see how many fewer sales you would get at $10 versus $9 for a widget. But if some external event occurs that raises the overall price of all those widgets (and in the case of corporate taxes, all the alternatives too), it would seem that the demand curve would sort of reset (acclimate) closer to that new price? I guess it comes down to how those demand curves are determined.

For example, when gas was $2.50/G, I would guess the demand curve would drop off sharply at $4.00. But as the price creeps up, don't people become more accepting of the higher price? For all the groaning about $4.00 gas, I think it was single digit % reductions in consumption (still greater than any policy result). Elasticity of demand comes into play, as people don't have ready substitutes for gasoline.

At any rate (and now I really am curious how those demand curves are derived), Emeritus is still wrong that a company won't pass a tax increase onto the consumer. As others have said, they need to maximize profits, not sales. And if it is across the board, there is no change in the competitive advantage/disadvantage. If one company could take a lower profit margin to gain sales, they would have done it before the tax also.

-ERD50

 

[Texas Proud]

OK, I agree - my wording was a bit off then. But I wonder if that static demand curve fully captures the scenario we are talking about. At any one point in time, you could do some testing to see how many fewer sales you would get at $10 versus $9 for a widget. But if some external event occurs that raises the overall price of all those widgets (and in the case of corporate taxes, all the alternatives too), it would seem that the demand curve would sort of reset (acclimate) closer to that new price? I guess it comes down to how those demand curves are determined.

For example, when gas was $2.50/G, I would guess the demand curve would drop off sharply at $4.00. But as the price creeps up, don't people become more accepting of the higher price? For all the groaning about $4.00 gas, I think it was single digit % reductions in consumption (still greater than any policy result). Elasticity of demand comes into play, as people don't have ready substitutes for gasoline.

At any rate (and now I really am curious how those demand curves are derived), Emeritus is still wrong that a company won't pass a tax increase onto the consumer. As others have said, they need to maximize profits, not sales. And if it is across the board, there is no change in the competitive advantage/disadvantage. If one company could take a lower profit margin to gain sales, they would have done it before the tax also.

-ERD50

If a demand curve is calculated correctly, the change in tax does not affect it... the price goes up... demand usually goes down.. I do forget what changes the demand curve in a significant way.... college was way to long ago and I do not deal with this in real life...

Your last statement is correct... you price your item for max profits, not max sales... or max gross margin...

... unless of course you are a salesman who gets paid a commission.... you then price the product lower than cost and make it up with volume (a long time ago my boss at the time actually heard this from a dept head... not the below price comment... but when told he was pricing below cost he did say he would make it up with volume)....

 

[dex]

If a demand curve is calculated correctly, the change in tax does not affect it... the price goes up... demand usually goes down.. I do forget what changes the demand curve in a significant way.... college was way to long ago and I do not deal with this in real life...

Your last statement is correct... you price your item for max profits, not max sales... or max gross margin...

... unless of course you are a salesman who gets paid a commission.... you then price the product lower than cost and make it up with volume (a long time ago my boss at the time actually heard this from a dept head... not the below price comment... but when told he was pricing below cost he did say he would make it up with volume)....

I think you guys are talking about Price elasticity of demand
Price elasticity of demand - Wikipedia, the free encyclopedia

 

[ERD50]

I think you guys are talking about Price elasticity of demand
Price elasticity of demand - Wikipedia, the free encyclopedia

Yes, that's it. And they even talk about taxes:

In the opposite case, when demand is perfectly elastic, by definition consumers have an infinite ability to switch to alternatives if the price increases, so they would stop buying the good or service in question completely—quantity demanded would fall to zero. As a result, firms cannot pass on any part of the tax by raising prices, so they would be forced to pay all of it themselves.[34]

So just as one would expect, the claim Emeritus makes could only be true in very, very specialized rare cases. It's not a real world thing at all.

-ERD50

 

[Texas Proud]

Yes, that's it. And they even talk about taxes:



So just as one would expect, the claim Emeritus makes could only be true in very, very specialized rare cases. It's not a real world thing at all.

-ERD50

Yes... it is what we are talking about... but if you look at the example given... the demand curve did not move... the supply moved because of the taxes... and you were now at a different point on the demand curve... ie, the red demand line did not move... the blue supply line did...




When demand is more elastic than supply, producers will bear a greater proportion of the tax burden than consumers will.

 

[Emeritus]

When demand is more elastic than supply, producers will bear a greater proportion of the tax burden than consumers will.

my point was and is that costs don't change the shape of the demand curve
Therefore no statement can be made a priori as to the regressive nature of the tax

 

[ERD50]

When demand is more elastic than supply, producers will bear a greater proportion of the tax burden than consumers will.

OK, just so I follow you - you are taking back your previous statements (gentle way to say you are finally admitting to being wrong )? You previously said a profitable corporation eats the tax, and the consumer sees zero price increase:

if under this hypothetical the revenue maximizing price of oil is 100 dollars a barrel and the tax is 25 dollars it has no effect on the consumer.

So on to your other point:

my point is simply that you cant say a priori that corporate taxes are regressive

Sure I can. Except in those extremely rare cases where PED is near infinite (very small price changes result in very high quantity of sales changes), a portion of that tax is passed to the consumer and is paid by poor and rich alike.


And in the case of corporate taxes, we have a special case that I'll combine with this statement:

my point was and is that costs don't change the shape of the demand curve

But take a look at what drives that elasticity - a large part of it is the cost of the alternatives. Consumers don't usually have to by product A, product B may be a good (but more expensive) substitute. The price of product B puts a cap on what a consumer will pay for product A.

But... an across the board corporate tax raises the price of the alternative as well. So I'll stand by my statement that this becomes a dynamic, not static, situation. The demand curve will shift before/after an across the board corporate tax, since the price of the alternatives shifted also.

A rising tide lift all boats. A rising tax lifts all prices.

-ERD50

 

[ziggy29]

A rising tide lift all boats.

I'm not seeing much evidence of that these days. There are quite a few corporations posting record profits or close to it, and yet their employees haven't seen raises in years.

 

[chinaco]

...
For your electric bill, you can always use less, or make your own (wind/solar etc).

This is rapidly becoming a more cost effective and viable option!

 

[ERD50]

I'm not seeing much evidence of that these days. There are quite a few corporations posting record profits or close to it, and yet their employees haven't seen raises in years.

But that's a misapplication, isn't it? The employees will only see raises when the supply/demand curve for employees warrants it.

Or at least, you are taking my "all boats" comment too generally - I meant in the sense that a tax on all corporations is a rising cost (rising tide) that affects all company pricing (boats). Then we would expect to see prices rise, as there is no alternative for the consumer - all companies have higher costs. No place to run with your money.

Now, if all prices rise from a corporate tax, the consumer buys less 'stuff' overall (they only have X amount of money). So fewer jobs are required to make the stuff. It just seems bad all the way around. Yet, so many people who claim to be for the 'little guy' want to increase taxes on corporations. They should rethink their position.

-ERD50

 

[dex]

Yet, so many people who claim to be for the 'little guy' want to increase taxes on corporations. They should rethink their position.
-ERD50

That is the key point. However, I think the way it is perceived by the general public is a tax on the rich - i.e. taxing a corp. Even the news media does not (to my knowledge) present corp taxes as regressive. To me, that indicates they do not understand the issue.

The elimination or reduction of corp. taxes will not happen. But there will be pressure to increase them. And there has been discussion about a VAT system which is another regressive tax. In Europe VAT is in addition to the other taxes e.g. individual and corp.

 

[ERD50]

That is the key point. However, I think the way it is perceived by the general public is a tax on the rich - i.e. taxing a corp. Even the news media does not (to my knowledge) present corp taxes as regressive. To me, that indicates they do not understand the issue.

The elimination or reduction of corp. taxes will not happen. ...

I agree about the perception, but there was an exception to this (to my surprise/delight) a few years back here in IL. Our esteemed whistling Gov Blago tried to get a 'Gross Receipts Tax' passed:

Illinois House rejects business tax proposal

House Speaker Michael Madigan, D-Chicago, for the first time took a clear public position on the tax, which would be the largest in Illinois history.

"The gross receipts tax is a regressive tax," Madigan said. "There is a passthrough to the ultimate consumer. Many times those people are the least able in our society to take on additional costs."

The tax would apply to business transactions. Basically, every time a company takes in money, it would pay a small share to the state.

Comments like that were widely reported in print and TV/radio. They also mentioned that it would drive businesses over the border to other states, taking jobs with them.

The perplexing thing to me was - if they 'got it' this time, why don't they 'get it' in regards to all corporate taxation? And I still think a creative, well-spoken politician could get this point across - if they wanted to.

-ERD50

 

[clifp]

I have to admit that while I am no fan of raising corporate tax rates, I am not sure why the are any worse than other tax.

If we replaced all of the revenue generated by corporate taxes with say income taxes or even a sales tax, the economic impact would be similar I think. In particular an income tax would lower the demand curve as people have less money to pay for things. It is unclear to me (and I bet even professional economist would differ) that shifting the supply curve via a corporate tax is better or worse than lowering it with individual taxes. All taxes reduce economic activity to some extend.

Before you jump on the we need less taxes, it is worth remembering that a country like Somalia have a very low effective tax rate but even lower economic activity.