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Old 08-08-2011, 12:30 PM   #61
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Originally Posted by jdw_fire View Post
at the moment companies are having good revenue reports and, as i said in my 1st post on this thread, the highest profits/GDP in 60 years. why have they been realizing these profits instead of investing in their companies? maybe it is because the tax rates are so low that it makes more sense to book the profit.
Small U.S. businesses are not seeing those profits. If they were, tons of the unemployed would start their own business.

But since you brought it up, the only ones I know making those profits are the large cap multi-national global companies. Most of them, if they can do so are leaving their profits outside the U.S. specifically due to the high corporate tax rate we currently have. They either have or are in the process of moving their headquarters abroad. This speaks directly against what you are proposing. I believe what you are proposing will drive more of them out of the U.S. Why headquarter your company in a country with high corporate tax rates.
Just look at the retirees seeking out states to live without an income tax. Same principle.
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Old 08-08-2011, 12:36 PM   #62
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I just don't get your first point.... charging higher taxes does not make an employee cheaper to hire or not fire... you have to have income to offset that expense.... if there is not income it does not matter what tax rate you have....

...

And you have not addressed the theme that a lot of people have pointed out that without demand there is nothing to invest in... demand needs to go up and higher taxes will not increase demand... heck, there is plenty of evidence that lower taxes will... have you seen what happens when they have a sales tax holiday Lots of people go to the stores to save a whopping 7 to 10%.... even when the store was giving a 30% reduction a few weeks earlier and not getting those same people...
in essence i addressed what you say here in my 1st post on this thread. since business profits are at a 60 year high there HAS to be business income and demand. otherwise, how would you get a profit, let alone RECORD profits?

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Originally Posted by Texas Proud View Post
...

Since I was a tax accountant back when taxes were high (and I bet you were not)... I can tell you that they did a LOT of stupid things to try and reduce their taxes.... cattle feeding comes to mind quickly... investing in real estate at highly inflated prices was another... oil wells were popular in Texas...

But I also saw the opposite.... there were many times I did estimated taxes on business decision and the taxes were too high for the business to do what it wanted... many investments were not made because of high taxes... one very rich guy had many opportunities to sell some banks that he owned... and it would have helped out the communities they were in if they were sold.... the cap gain tax back then was high and he decided it was not worth selling since his after tax return was so poor... so I am not talking from ignorance here... I did the work 30 plus years ago for many taxpayers.... and I still have not heard any businessman say he would invest if there were higher tax brackets...

Now, the 179 writeoff is a different animal... you are going to invest in some equipment either this year or next (or even next).... but if you invest this year you get a 100% deduction on your investment (note, not 100% of the cost, but 100% deduction)... you make it because you need that equipment... but do you invest in equipment that you do not need to reduce your taxes I have not heard of anybody doing that...
i dont understand how you cant see the tax payer psychology i am pointing out when you actually give examples of that very psychology in your post. i highlighted in red where you give an example of a business owner making a decision about his businesses based overwelmingly on the tax implications. you also mentioned lot of schemes that were used to reduce taxes, which you called "stupid". so therefore you are acknowledging that tax payers will do "stupid" things to avoid paying taxes. that is exactly the tax payer psychology i based my premise on.
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Old 08-08-2011, 01:10 PM   #63
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A tip:

Whenever I'm working on a longer post (too often!), I hit select-All-copy once in a while. At least the latest work is in your copy buffer (and I use a clip board manager that gives be a history of clippings).
thanks for the tip

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Originally Posted by ERD50 View Post

In response to my actual $$$ examples:



I have a hard time seeing how this would change anything. Higher marginal rates would just translate to X% effective rates, it all seems like a wash to me that would just complicate the math for no benefit. What's wrong with my 50% versus 25% and 15% cap gains rates for illustration?

I'm going to have to ask you to make your case with numbers as I did. I'm not following you.




But I don't see where it made the case, even for real estate. See my above comments.



I think clifp said it well.


The following is why I'd like to see numbers laid out:



This is pretty 'squishy'. How would we get real data on 'how many' tax reduction seminars there are then versus now, and who is to say anyone's observation of the number is correct. And it really isn't relevant to the OP. Trying to optimize taxes when rates are high does not mean those methods involve economic growth opportunities. As a simple example, for higher t ax brackets, municipal versus corp bonds may make sense. Has nothing to do with 'growth'.




I'm not even sure this was a valid strategy at any time.




Maybe. Depends a lot on the specific situation, and whether it really moves the income to a lower tax bracket. As some of us have posted, it isn't so easy for an on-going business to turn income into cap gains. I don't think we can assume it can be done in the general case, unless you can show us how.


I'm not pointing out that last group to be critical - all I'm saying is that I'd like to see you put these thoughts into numbers that we can all evaluate. I think that is the best way for you to get your point across.

-ERD50
as i try to respond to your points i find it difficult to do so because the statements of mine that you are addressing are now gone once i quoted you. so i will try to address what i think you are thinking by first suggesting you look at my last 2 posts, in which i try to get my point across that i am talking about a tax payer psychology. i have said this to you over and over again and since it is a psychology the proof may not be in the dollar and cents numbers.

that being said i did come up with a dollars and cents example that does support my premise. let me set the stage: i will use your 2 tax rates and nomenclature (i.e. case L and case H), the business in question is expecting to make a profit in this year and determines how much that profit will be earlier enough in the busines year to make a decision as to whether to invest it in the business (thereby converting the profit to business expense) or taking the profit and paying the taxes on it. the amount of the profit is $1M. the expected return from that profit is $88k/yr in additional profit. i will continue to use a 10% cap rate. so, should this business owner make the investment?

case L:

if the investment is not made the owner reaps $1M - $250k (income taxes) = $750K net to business owner.

if the investment is made the business increases in value by $880K. $880K - $132K (capital gains taxes) = $748K net to business owner.

case L bottom line, it doesnt pay the business owner to make the investment.

case H:

if the investment is not made the owner reaps $1M - $500k (income taxes) = $500K net to business owner.

if the investment is made the business increases in value by $880K. $880K - $132K (capital gains taxes) = $748K net to business owner.

case H bottom line, it does pay the business owner to make the investment.
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Old 08-08-2011, 01:16 PM   #64
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So ..let's say husband owns a small business and the profit line is $250,000. Lets agree that 45% is paid out to husband as the tax portion he will send directly to the federal government...because wife works and their combined income is bumped to a higher tax bracket due to this sub s income. So he needs to allocate $112,000 of profit to tax. He now has available $137,500. If he retains that profit....the entry is to the Accumulated Adjustments Account. And there it sits.

If he hires an employee, the expense of that employee comes out of next years cash flow. It does not reduce the accumulated adjustment account.
So ...$137,500 remains in that account.

If he buys equipment..he can either pay cash or take out a loan. Regardless, the undistributed profit remains in the Accumlated Adjustment account.

If he buys land...same thing. The POINT is ....that the ONLY way to get it out of the Accumulated Adjustment account is to distribute it to himself. That's it. Nada. No other way. The Accumlated Adjustment accounts specific purpose is to "hold" undistributed profits.

So...let's say business owner ..does buy the land, hires the employee, buys equipment...etc.. Years down the road....he decides to distribute to himself the money that is in the Accumulated Adjustment Account but by this time it's one million dollars. He does it. BUT...because he had to buy that land, that equipment and hire that employee....he now needs to borrow...from the bank the money to pay himself the profits that he originally left in the company....and he bankrupts the company doing so. (or not - it depends)

I think you may not quite understand what happens...to profit money left inside a company. It doesn't go ...where you think it goes. Most everything else comes out of "cash flow". Period. Profit is Profit. Cash Flow is cash flow and they are 2 different animals.

Second point.
Same scenario as above. Husband business owner....decides that instead of leaving profit money in the company he distributes it to himself. Why not, he had to pay the tax on it already.? He does so for many years. Down the road, the company gets in trouble....and guess what...because said owner...distributed the profits to himself..he is now in a personal position to loan the company money so it can be saved. (without going to a bank who may or may not lend him money)
Had he not distributed the profits to himself..he would not have this option.

End of points.

Except to say that instead of the 1 million he had... due to gross taxation by the government he now only has $600,00 to save the company( or some other lower figure). Oh i know...i know....but he has $600,000 which is far more than others have. So instead of saving his company he keeps his $600,000 since it is not enough to save the company anyway, closes the doors and lays off all his employees, reduces income for all his suppliers and vendors ...etc. Stewardship falls off the cliff.
So who gets hurt in this scenario. Business owner? With any luck - no. Employees, Suppliers, Vendors and the community...that's who.

Third point...is the fine line between the "profits" a company makes and what they can spend out of cash flow. They have to be very careful....to succeed.
what this post seems to miss is that the case i am making is that the profit for any given year is converted to expenses in that same year thus eliminating the profit and therefore eliminating the need to pay the taxes on it in the 1st place.
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Old 08-08-2011, 01:16 PM   #65
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i dont understand how you cant see the tax payer psychology i am pointing out when you actually give examples of that very psychology in your post. i highlighted in red where you give an example of a business owner making a decision about his businesses based overwelmingly on the tax implications. you also mentioned lot of schemes that were used to reduce taxes, which you called "stupid". so therefore you are acknowledging that tax payers will do "stupid" things to avoid paying taxes. that is exactly the tax payer psychology i based my premise on.
Huh? JDW...his example spoke directly to capital gain taxes..not income taxes based on profit.
Perhaps...you are using individual tax payer psychology rather than the acumen and business philosophy of business owners who use measures other than taxation to make their decisions. You have not convinced me that your argument holds up ...any way I look at it. Sounds to me like....you want to use a punitive approach...sort of like..."o.k business man....if you don't invest your money back into your company we are going to tax you such that you have little choice". JDW....I know a lot of people who will shut their doors on that....and the result will be decreasing tax revenues for the government ...not more.
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Old 08-08-2011, 01:22 PM   #66
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what this post seems to miss is that the case i am making is that the profit for any given year is converted to expenses in that same year thus eliminating the profit and therefore eliminating the need to pay the taxes on it in the 1st place.
And what I am telling you is that.....a small company is NOT going to convert all of their profit or even a good percentage of it to expenses for operations....when they do not know if they will make it the following year.

Let's say they do that and next years sales are 20% lower and their profit is negative. Then what JDW? They lay off the employee they hired the year before and maybe a couple of more.

A business should not eat up all it's cash flow just to support operations. I certainly wouldn't want to live that close to the edge. You are not factoring in business risks ....at ALL !

There have been many arguments and logical reasons presented to argue against what you are saying.
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Old 08-08-2011, 01:42 PM   #67
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Huh? JDW...his example spoke directly to capital gain taxes..not income taxes based on profit.
Perhaps...you are using individual tax payer psychology rather than the acumen and business philosophy of business owners who use measures other than taxation to make their decisions. You have not convinced me that your argument holds up ...any way I look at it. Sounds to me like....you want to use a punitive approach...sort of like..."o.k business man....if you don't invest your money back into your company we are going to tax you such that you have little choice". JDW....I know a lot of people who will shut their doors on that....and the result will be decreasing tax revenues for the government ...not more.
it is clear you dont agree with, nor like my idea, and unfortunately you also seem to not be seeing the tax payer psychology i have been talking about. granted the example that i highlighted in red was a CG example but so what? i pointed it out because it shows the psychology i am trying to get you all to see. just because it is a CG example doesnt invalidate it in showing that psychology. the other "stupid" schemes to lowering taxes that were also in the post i highlighted, also show that psychology. i have to believe he used the word "stupid" when mentioning those schemes because, to him, they didnt make financial sense. so if people are willing to follow "stupid" schemes to avoid paying personal income taxes, how can you all claim that they wont do something like just plowing those expected profits back into their company (making them expenses instead) in order to reduce their personal income taxes when it carries the added benefit of growing their business?
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Old 08-08-2011, 01:49 PM   #68
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And what I am telling you is that.....a small company is NOT going to convert all of their profit or even a good percentage of it to expenses for operations....when they do not know if they will make it the following year.

Let's say they do that and next years sales are 20% lower and their profit is negative. Then what JDW? They lay off the employee they hired the year before and maybe a couple of more.

A business should not eat up all it's cash flow just to support operations. I certainly wouldn't want to live that close to the edge. You are not factoring in business risks ....at ALL !

There have been many arguments and logical reasons presented to argue against what you are saying.

sheeeeezzzzz, i never said that in practice the company would "convert all of their profit or even a good percentage of it to expenses for operations" (i am not sure what you mean by "a good percentage of it"). that example was used for illistrative purposes. and i dont think your point refutes my premise. the small companies dont have to convert all of it, just some of it, to produce economic/job growth!
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Old 08-08-2011, 01:53 PM   #69
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as i try to respond to your points i find it difficult to do so because the statements of mine that you are addressing are now gone once i quoted you.
Yes, the forum software (unlike some others) strips out embedded quotes. The only alternative I know, is to go back, copy and paste them into a "QUOTE" tag. Not a lot of fun.

Quote:
will try to address what i think you are thinking by first suggesting you look at my last 2 posts, in which i try to get my point across that i am talking about a tax payer psychology. i have said this to you over and over again and since it is a psychology the proof may not be in the dollar and cents numbers.
Yes, but I feel that any view of tax payer psychology is too subjective to be used to convince anyone. So I keep saying (over and over), show me the kinds of numbers a business person would review with an accountant to say "Yes, let's make this investment!"

Quote:
that being said i did come up with a dollars and cents example that does support my premise. ... the amount of the profit is $1M. the expected return from that profit is $88k/yr in additional profit. i will continue to use a 10% cap rate. so, should this business owner make the investment?

case L:

if the investment is not made the owner reaps $1M - $250k (income taxes) = $750K net to business owner.

if the investment is made the business increases in value by $880K. $880K - $132K (capital gains taxes) = $748K net to business owner.

case L bottom line, it doesnt pay the business owner to make the investment.

case H:

if the investment is not made the owner reaps $1M - $500k (income taxes) = $500K net to business owner.

if the investment is made the business increases in value by $880K. $880K - $132K (capital gains taxes) = $748K net to business owner.

case H bottom line, it does pay the business owner to make the investment.
OK, thanks for providing numbers. I do feel that they fail to meet the criteria though. The scenario would need to be something that would apply to a large % of businesses to have any significant effect on economic growth. You have provided a very narrow example (selling the business the next year) – let's look at a ten year period as I did.

Further, you did not use the after-tax value of the investment return in your calculations. That is what would drive the value of the business. It is why high tax rate people will buy a 4% muni over a 5% corporate bond – after tax returns are all that matter.

So, in the CASE L, the after-tax added profit from investment is $88K*.75= $66,000 and the business value would increase by 10x (our assumption) = $660,000.

So, in the CASE H, the after-tax added profit from investment is $88K*.50= $44,000 and the business value would increase by 10x (our assumption) = $440,000.

Even that assumes the business owner can realize that cap gain. How does he do that? How does a small business ( a baker or butcher or car repair shop) invest in their business ( an added oven, counter space, another car bay and tools), and mange to realize a cap gain from that the following year? I don't think they can, generally. But regardless, your numbers fall apart as they are based on pre-tax profits, not after-tax profits.


(edit:add) I should have multiplied the $660K and $440K numbers by .85 to show the 15% cap gains tax rate, but it applies equally to each, so isn't that important - the case L investment still provides more money to the business owners pocket)

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Old 08-08-2011, 01:58 PM   #70
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Old 08-08-2011, 02:30 PM   #71
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Yes, but I feel that any view of tax payer psychology is too subjective to be used to convince anyone. So I keep saying (over and over), show me the kinds of numbers a business person would review with an accountant to say "Yes, let's make this investment!"
just because you cant put numbers to it doesnt mean it doesnt exist and there have been posters, besides me, that inadvertantly supported its existance.

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OK, thanks for providing numbers. I do feel that they fail to meet the criteria though. The scenario would need to be something that would apply to a large % of businesses to have any significant effect on economic growth. You have provided a very narrow example (selling the business the next year) let's look at a ten year period as I did.

i never said the business was sold the next year, it doesnt have to be. when it comes to the increased business value you can think of it as an increase in net worth of the business owner. i just applied CG taxes to it to make a fair comparison. s/he can sell the business whenever s/he wants to. as for using a 10 year period, either repeat this year over and over again (using a $1M investment) or not, it doesnt make a difference to the invest/dont invest decision analysis. [as an aside, it is interesting that you couldnt see what i just typed in this paragraph with out me pointing it out to you (e.g. the business doesnt have to be sold but a value needed to be established and i used the method you used to do so, or it is simple math, if you want a 10 year period, multiple by 10). you seem to be making negative comments on nuances, how open minded are you being?]

Further, you did not use the after-tax value of the investment return in your calculations. That is what would drive the value of the business. It is why high tax rate people will buy a 4% muni over a 5% corporate bond after tax returns are all that matter.


So, in the CASE L, the after-tax added profit from investment is $88K*.75= $66,000 and the business value would increase by 10x (our assumption) = $660,000.

So, in the CASE H, the after-tax added profit from investment is $88K*.50= $44,000 and the business value would increase by 10x (our assumption) = $440,000.

this isnt correct. the taxes due on the business' profit by the potential buyer of the business may influence whether that buyer does in fact buy it but when the business owner is do an analysis of his/her business to determine its value for sale a business owner doesnt include the personal income taxes s/he would be paying on the profit if s/he still owned it.

Even that assumes the business owner can realize that cap gain. How does he do that? How does a small business ( a baker or butcher or car repair shop) invest in their business ( an added oven, counter space, another car bay and tools), and mange to realize a cap gain from that the following year? I don't think they can, generally. But regardless, your numbers fall apart as they are based on pre-tax profits, not after-tax profits.

i disagree, see above comments

(edit:add) I should have multiplied the $660K and $440K numbers by .85 to show the 15% cap gains tax rate, but it applies equally to each, so isn't that important - the case L investment still provides more money to the business owners pocket)

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Old 08-08-2011, 02:31 PM   #72
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Old 08-08-2011, 02:37 PM   #73
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Old 08-08-2011, 02:48 PM   #74
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i never said the business was sold the next year, it doesnt have to be. when it comes to the increased business value you can think of it as an increase in net worth of the business owner. i just applied CG taxes to it to make a fair comparison. s/he can sell the business whenever s/he wants to.
OK, but we do need to show the realized capital gain at some point.

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Originally Posted by ERD50 (edited to show 15% cap gains rate)
So, in the CASE L, the after-tax added profit from investment is $88K*.75= $66,000 and the business value would increase by 10x (our assumption) = $660,000 x .85.

So, in the CASE H, the after-tax added profit from investment is $88K*.50= $44,000 and the business value would increase by 10x (our assumption) = $440,000 x .85.
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this isnt correct. the taxes due on the business' profit by the potential buyer of the business may influence whether that buyer does in fact buy it but when the business owner is do an analysis of his/her business to determine its value for sale a business owner doesnt include the personal income taxes s/he would be paying on the profit if s/he still owned it.
OK, you can look at it that way - but it is irrelevant. The only value that 'counts' is what someone will pay you for it. The new owner certainly will value the business on the ongoing after-tax profit that can be realized from the investment. Just like my muni example. And for as apples-to-apples comparison as we can make, it makes sense to say the 25% and 50% tax rates would apply to the new owner as well.

What are you saying? That we have to assume the new owner pays no taxes on income? That doesn't seem to favor your position. (edit/add: in fact, you just made the opposite point. Lower taxes favor investment, as there is a higher reward for that investment)

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Old 08-08-2011, 02:50 PM   #75
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Old 08-08-2011, 02:51 PM   #76
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Old 08-08-2011, 02:54 PM   #77
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in essence i addressed what you say here in my 1st post on this thread. since business profits are at a 60 year high there HAS to be business income and demand. otherwise, how would you get a profit, let alone RECORD profits?



i dont understand how you cant see the tax payer psychology i am pointing out when you actually give examples of that very psychology in your post. i highlighted in red where you give an example of a business owner making a decision about his businesses based overwelmingly on the tax implications. you also mentioned lot of schemes that were used to reduce taxes, which you called "stupid". so therefore you are acknowledging that tax payers will do "stupid" things to avoid paying taxes. that is exactly the tax payer psychology i based my premise on.

Nobody has said that businesses are making decisions without considering taxes.... it is that with high taxes, businesses and people make stupid decisions to try and minimize taxes...

Are you suggesting that we should increase taxes so people can make a lot of stupid decisions and that this will help the economy That is just so wrong on the face of it... Also, almost all of the tax schemes that were back then have been outlawed...

And I can say that no smart businessman will invest a dollar to save 50 cents in taxes unless he is able to get NET profits above that dollar...

But, I am finished with this since to me the basic premiss is so plainly wrong it is not worth my time...


Read a few more posts... and decided to add something since it has gone to the cap gain for some reason.... but a higher tax make all assets worth less.... period..

And for some reason the OP still thinks that a business can grow just because.... the examples given mean nothing IMO... a business owner makes a decision on an investment... he wants the highest after tax profits with the risks he is willing to take... if the investment was a good investment with low taxes he will do it.... with high taxes he might not... because the investment itself has become more risky...

To the OP... have you even studied business What is your background?
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Old 08-08-2011, 03:05 PM   #78
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Originally Posted by jdw_fire View Post
at the moment companies are having good revenue reports and, as i said in my 1st post on this thread, the highest profits/GDP in 60 years. why have they been realizing these profits instead of investing in their companies? maybe it is because the tax rates are so low that it makes more sense to book the profit.
There's one word that explains it all: UNCERTAINTY

Business owners are taking their profits and keeping them in cash. There is so much uncertainty they don't want to take a risk and have the govt tax them into oblivion.
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Old 08-08-2011, 03:11 PM   #79
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Originally Posted by Texas Proud View Post
Nobody has said that businesses are making decisions without considering taxes.... it is that with high taxes, businesses and people make stupid decisions to try and minimize taxes...


But, I am finished with this since to me the basic premiss is so plainly wrong it is not worth my time...

+1

I think one of the problem JDW, is I get the distinct impression that your not familiar with the mechanics of how accounting/taxes work for businesses.

Have you had college accounting classes? Do you do your own taxes? Have you run a small business?. Now if you answered yes to all 3 than maybe I'm the one that is confused. Otherwise may I suggest you sign up for an accounting class, I think you'd understand the practical problems of what you are suggesting.
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Old 08-08-2011, 03:32 PM   #80
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sheeeeezzzzz, i never said that in practice the company would "convert all of their profit or even a good percentage of it to expenses for operations" (i am not sure what you mean by "a good percentage of it"). that example was used for illistrative purposes. and i dont think your point refutes my premise. the small companies dont have to convert all of it, just some of it, to produce economic/job growth!

That "assumes" they are not already doing so. Small businesses are going to invest back into their companies in a prudent manner. But some things that cost money are not an investment as there is no ROI. It is a cost of doing business and those cost go up every year reducing next years profit line (assuming no increase in sales).
Higher taxation will make it even more difficult for the small businesses to function successfully year after year. I think it is the sort of thing that you have to "experience it" to know it as a fact.
I know on the surface it seems to you your concept will work...but there are so many factors it doesn't take into account...that...well..I don't know what else to say.
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