Corporatism / Socialism

[ERD50]

Sooo, gvmt raises taxes on widgets by $1... that does not mean the person who would buy at $9 will now buy at $10.... no, he will still only buy at $9... What does a company do They increase the price by a percent of the tax increase... it might be 1/2, 3/4 or even higher according to the demand line... so the company has to pay the gvmt the full $1, it is not able to collect the full amount from the consumer... so in reality the company is making less money due to the tax. Not a full $1 per widget, but less...

If there are alternatives to those $10 widgets, then yes (and there usually is).

The other side of that, if they sell fewer of them at $10, that means fewer jobs, which means more competition for jobs, which means lower wages, which means even fewer people can buy $10 widgets. Rinse-repeat.

Was there a bright side in there?

-ERD50

 

[ERD50]

The corporate tax issue is far far more complicated than this...

Corp taxes are a component of the price as wheat is to bread or oil to gasoline. When the price of oil goes down, the price of gasoline goes down.

....

There isn't anything complicated about it.

One thing I've learned - if the simple and correct answer doesn't give someone the answer they like, they may be motivated to complicate it, so they can come up with a different 'answer'.

-ERD50

 

[samclem]

Sooo, gvmt raises taxes on widgets by $1... that does not mean the person who would buy at $9 will now buy at $10.... no, he will still only buy at $9... What does a company do They increase the price by a percent of the tax increase... it might be 1/2, 3/4 or even higher according to the demand line... so the company has to pay the gvmt the full $1, it is not able to collect the full amount from the consumer... so in reality the company is making less money due to the tax. Not a full $1 per widget, but less...

Another loss to the economy comes in the case of all those folks who were going to buy the $9 widget but now won't buy the higher-priced one. The $9 widget offered some value to them (maybe increased ability to produce things in their company, maybe more enjoyment in their life, etc) and whatever "value added" the purchase would have represented (above the $9)--to themselves and to the economy as a whole, is forfeited. They'll maybe buy something else, but it won't add as much value as the $9 widget would have produced.
Taxes on corporations are regressive for the same reason sales taxes are regressive: People with lower incomes spend a higher percentage of their income on goods and services. Thus, corporate income taxes get passed along disproportionately to the poor.

 

[dex]

My bold.....

OK... there are economist here somewhere.... but I will try and explain the best I can...

They will try and add the extra tax to the item.... but they can not add all the tax... as Ziggy was saying, there is a curve of supply and demand.. I will also do some math, but all are made up numbers...

Say you sell widgets... there are a certain number of people willing to pay $12 per widget, some more at $11 per widget and even more if you drop it to $10, $9 etc.. You price the widgets to sell a certain volume at a certain price to try and maximize profits (but you also need to think long term here)...

Sooo, gvmt raises taxes on widgets by $1... that does not mean the person who would buy at $9 will now buy at $10.... no, he will still only buy at $9... What does a company do They increase the price by a percent of the tax increase... it might be 1/2, 3/4 or even higher according to the demand line... so the company has to pay the gvmt the full $1, it is not able to collect the full amount from the consumer... so in reality the company is making less money due to the tax. Not a full $1 per widget, but less...

I deleted that part while you were writing because I could see how it could get things off track. In specific cases there can be times where companies do not raise prices due to a component price increase. For example, cost component for wheat in bread might be small (and go up and down) (marketing, labor, baking higher) so companies do not change their prices with the fluctuation in the price of wheat.

I think Ziggy's example, is good for a new product being introduced and you are trying to establish the price. In a mature market, the marketplace establishes the price.

Eventually, a business has to look at its p/l and return on equity and decide if it wants to stay in that industry. If enough companies get out, the remaining companies can get pricing power - increase the prices to make staying in the industry worth it for them at the level of demand of the marketplace.

 

[Texas Proud]

If there are alternatives to those $10 widgets, then yes (and there usually is).

The other side of that, if they sell fewer of them at $10, that means fewer jobs, which means more competition for jobs, which means lower wages, which means even fewer people can buy $10 widgets. Rinse-repeat.

Was there a bright side in there?

-ERD50

Not always on the alternatives... because the alternative also can be NOT having a widget... (ie, cell phone for some)...

 

[BigNick]

It looks like classic government bungling through subsidies rather than socialism. Maybe there isn't a huge difference at some level?

All governments are pretty poor at getting things done, even the things that governments have to do, like defence and justice.

Socialism is just a more systematic attempt to improve a wider range of things (by "getting everyone to do the right thing", with "help" from the government). The only way in which it's worse than regular government not-being-very-good-at-stuff is that there is typically a better alternative. It's not evil or anything.

And in some cases, there isn't a better alternative, especially for things where a certain level X of provision for all is considered "better" than the likely free-market outcome of 10X for some and 0.1X for others. You can't get much more socialist than the US public school system; it just wasn't put in place by people using the S word. (I never understood why the US health care reforms were so vehemently opposed, not just by home schoolers and other minimal government types, but also by people who apparently had no trouble with their kids being educated by the state.)

 

[Emeritus]

I'm as cynical about corporations as the next guy, but I don't follow this -- at least not in a functional, competitive marketplace.

In terms of maximizing profit, there is a sweet spot always in terms of price -- set it too high and the loss of sales more than offsets the gain in per-unit profit. Set it too low and you're leaving money on the table because increasing the price won't lose sales faster than profits will grow.

(Warning -- math ahead)

Roughly speaking the "curve" is essentially a negative quadratic equation where the best price to charge is the maximum point of the curve where the value on the y-axis is at its peak; that is, where the derivative of that equation is zero. In a competitive marketplace, if the *cost* of making bread drops by 25 cents, there's no need for me to lower my price if no one else does. But as soon as someone lowers the price 15 cents, they gain market share, possibly enough to increase overall profits (since that reduced cost shifts the entire graph to the left). Another bread maker has to follow suit and cut their prices as well. By removing some of the cost from the equation, the "sweet spot" changes if the market is functional and competitive.

(Okay, no more math.)

Unlike payroll taxes for employees, which I don't think employers would pass on to employees in the form of higher pay, I think they *would* pass on much of a tax cut to *customers* in this environment. Businesses aren't competing much to attract and retain employees these days, but they are furiously competing to attract and retain customers.

Having said that, I'm not advocating for eliminating the corporate income tax. I just don't think businesses could withhold the benefit from customers in this economy like they could from employees.

I agree that assuming a business is profitable at all. all the firms in the market will price the product at essentially the same "revenue maximizing point." This is a function of the demand. But the overall demand curve for the product is not affected by the costs of production. Whether I produce oil at 10 dollars a barrel or 40 dollars a barrel the shape of the demand curve is the same. the question is where to set the price which depends on that shape. 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. It just means one company is more profitable than another. now if oil costs 90 dollars a barrel to produce and you put on 25 dollaras a barrel tax you will decrease consumption because of the price increase.

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

 

[Emeritus]

Another loss to the economy comes in the case of all those folks who were going to buy the $9 widget but now won't buy the higher-priced one. The $9 widget offered some value to them (maybe increased ability to produce things in their company, maybe more enjoyment in their life, etc) and whatever "value added" the purchase would have represented (above the $9)--to themselves and to the economy as a whole, is forfeited. They'll maybe buy something else, but it won't add as much value as the $9 widget would have produced.
Taxes on corporations are regressive for the same reason sales taxes are regressive: People with lower incomes spend a higher percentage of their income on goods and services. Thus, corporate income taxes get passed along disproportionately to the poor.

general Sales taxes are regressive, although sales takes on luxury goods may not be regressive

you cannot generalize that corporate taxes are regressive.

 

[SunsetSail]

general Sales taxes are regressive, although sales takes on luxury goods may not be regressive

you cannot generalize that corporate taxes are regressive.

It depends on whether you are applying the terms in their tradditional manner - i.e., the rate of tax in relation to income. Sometimes regressive, progressive and flat are used to describe a tax based on the overall tax burden and other times the tax burden as a percent of income as well.

In regard to a straight percent, sales taxes are flat - the same rate applies regardless of your income. Assuming that consumption doesn't go up proportionally to income increases, the actual tax burden relative to income is regressive.

Another apples to oranges problem is trying to apply these terms to customers when the tax itself is far removed from customers. Corporate taxes are progressive from all measures in regard to the corporate entity. But who knows in regard to the consumer because there are so many variables.

A VAT would reduce the economic distortions so long as all other forms of tax are eliminated.

 

[Emeritus]

It depends on whether you are applying the terms in their tradditional manner - i.e., the rate of tax in relation to income. Sometimes regressive, progressive and flat are used to describe a tax based on the overall tax burden and other times the tax burden as a percent of income as well.

In regard to a straight percent, sales taxes are flat - the same rate applies regardless of your income. Assuming that consumption doesn't go up proportionally to income increases, the actual tax burden relative to income is regressive.

Another apples to oranges problem is trying to apply these terms to customers when the tax itself is far removed from customers. Corporate taxes are progressive from all measures in regard to the corporate entity. But who knows in regard to the consumer because there are so many variables.

A VAT would reduce the economic distortions so long as all other forms of tax are eliminated.

A tax on the benefits of doing business in the corporate form is a perfectly reasonable excise or use tax. Corporations have perpetual existance and limited liability. Those are valuable legal benefits created by the state for which the state legitimately can charge a tax. Anyone can avoid the tax by doing business in a personal form.

 

[HFWR]

Corporations are people, too.

 

[SunsetSail]

A tax on the benefits of doing business in the corporate form is a perfectly reasonable excise or use tax. Corporations have perpetual existance and limited liability. Those are valuable legal benefits created by the state for which the state legitimately can charge a tax. Anyone can avoid the tax by doing business in a personal form.

I don't think I'm saying anything contradictory to your statement, but I'm not entirely sure what you mean. I agree that a corporate level tax is completely legitimate. I just would prefer a type of tax that provides more clarity from an economic standpoint.

A use tax definitely and typically an excise tax are transaction taxes, so they are more akin to a VAT than an income or franchise tax. I guess I am not really understanding your statement.

 

[samclem]

(I never understood why the US health care reforms were so vehemently opposed, not just by home schoolers and other minimal government types, but also by people who apparently had no trouble with their kids being educated by the state.)

There's a reason the proponents of US single-payer healthcare didn't use the US public schools as a positive example of a similar service provided by the government--because the opponents were already making full use of that example.

"We all think our schools are doing a great job, so let's have the government take over healthcare." It's an effective argument, all right . . .

 

[Independent]

I agree that assuming a business is profitable at all. all the firms in the market will price the product at essentially the same "revenue maximizing point." This is a function of the demand. But the overall demand curve for the product is not affected by the costs of production. Whether I produce oil at 10 dollars a barrel or 40 dollars a barrel the shape of the demand curve is the same. the question is where to set the price which depends on that shape. 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. It just means one company is more profitable than another. now if oil costs 90 dollars a barrel to produce and you put on 25 dollaras a barrel tax you will decrease consumption because of the price increase.

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

Are you sure that you meant the bold, or did you mean "all companies are less profitable than they were before the tax increase"? After all, the tax is the same for everyone.

The next step is that investors move capital to where it's most profitable. If it's a tax on gasoline, then investment flows out of gasoline refining until there are fewer competitors who can then charge enough to recoup their cost of the gasoline tax.

If one state has a high tax on manufacturing activies, and the surrounding states don't, manufacturers can move to the lower tax states. The same is true for nations. In the last few decades, it has become extremely easy to move capital across international borders. Americans who want to invest in corporations don't have to do it in the US. If US corp taxes are higher than other countries' taxes, that becomes one factor in a decision on where to invest.

But it's much harder for workers to move. Hence, when we put a tax on corporations, it's likely that the economic impact of the tax will fall on workers, who need to accept lower wages to keep owners here.

These guys estimate that 70% of the US corp income tax is borne by workers, and 30% by owners. http://www.cbo.gov/ftpdocs/75xx/doc7503/2006-09.pdf

If we really want to tax the owners of capital, it's much more direct to do it when they receive capital income. Then we get the tax regardless of where they invested and there is no tax incentive to invest abroad (there may be a tax incentive to physically move abroad, but now we're talking about relative individual taxes).

 

[Zathras]

There's a reason the proponents of US single-payer healthcare didn't use the US public schools as a positive example of a similar service provided by the government--because the opponents were already making full use of that example.

"We all think our schools are doing a great job, so let's have the government take over healthcare." It's an effective argument, all right . . .

I believe that comparison was not to argue that gov. health care will be effective. But to show another example of 'socialist programs'.
There are a number of people arguing that the health care program is socialism. Yet we have examples of other programs these same people don't seem to be up in arms against.

 

[HFWR]

There's a reason the proponents of US single-payer healthcare didn't use the US public schools as a positive example of a similar service provided by the government--because the opponents were already making full use of that example.

"We all think our schools are doing a great job, so let's have the government take over healthcare." It's an effective argument, all right . . .

Though there are some public schools doing a great job.

 

[Emeritus]

I don't think I'm saying anything contradictory to your statement, but I'm not entirely sure what you mean. I agree that a corporate level tax is completely legitimate. I just would prefer a type of tax that provides more clarity from an economic standpoint.

A use tax definitely and typically an excise tax are transaction taxes, so they are more akin to a VAT than an income or franchise tax. I guess I am not really understanding your statement.

Sorry if I was unclear.
A properly designed corporate franchise tax functions like a VAT. The value added is to the company in the ability to operate in the corporate form. Your statement does not differentiate between the method of setting the amount of a tax and the rationale for a tax. A VAT is specifically not a transaction tax, it is an ad valorem tax on the added value whcih is only calculated and collected at a transaction. A real estate transfer tax is normally a transaction tax. A gross receipts tax is an excise/transaction tax. A franchise tax can be set by transaction or my any other means.

I agree with your desire for transparency.

 

[ziggy29]

Though there are some public schools doing a great job.

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

 

[ERD50]

I agree that assuming a business is profitable at all. all the firms in the market will price the product at essentially the same "revenue maximizing point." This is a function of the demand. But the overall demand curve for the product is not affected by the costs of production. Whether I produce oil at 10 dollars a barrel or 40 dollars a barrel the shape of the demand curve is the same. the question is where to set the price which depends on that shape. 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. It just means one company is more profitable than another. now if oil costs 90 dollars a barrel to produce and you put on 25 dollaras a barrel tax you will decrease consumption because of the price increase.

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

But your examples don't support your 'simple' point (because they are too simple).

Your examples are static, and the whole market would change dynamically to an added $25 tax on a $100 bbl of oil. So maybe supply/demand is saying we consume X amount of oil at $100/bbl. The sellers are unlikely to absorb that added $25 cost/tax, esp if their profit is $20 on that $100. No point in doing business at a loss.

So they try to pass as much cost as possible onto the consumer. And the consumer will buy less, just like they did when gasoline was $4/gal. Those companies with a higher profit margin might squeeze out companies with lower profit margins. With less competition and tighter supplies, it's easier to raise prices - so they will. So once again, the customer pays the tax, as much as the market will bear. And we have fewer jobs supplying the lower amount of product.

Even if we don't go to the extreme of hitting loss levels, anytime you lower profit margins in an industry, money is going to flow to higher profit places.

-ERD50

 

[SunsetSail]

Sorry if I was unclear.
A properly designed corporate franchise tax functions like a VAT. The value added is to the company in the ability to operate in the corporate form. Your statement does not differentiate between the method of setting the amount of a tax and the rationale for a tax. A VAT is specifically not a transaction tax, it is an ad valorem tax on the added value whcih is only calculated and collected at a transaction. A real estate transfer tax is normally a transaction tax. A gross receipts tax is an excise/transaction tax. A franchise tax can be set by transaction or my any other means.

I agree with your desire for transparency.

Got it. I think we are in agreement. I wouldn't describe VAT as ad valorem for practical purposes (everyone thinks real/personal property), but you are absolutely correct that it is in terms of its definition.

It is telling about the complexity of the tax systems that two people that are at least fairly well informed about fed, state and local taxes (you are obviously from your statements and I hope I am because I run a megacorp indirect tax dept.) need several back and forths to understand each other. Or maybe I'm just slow.

 

[Emeritus]

But your examples don't support your 'simple' point (because they are too simple).

Your examples are static, and the whole market would change dynamically to an added $25 tax on a $100 bbl of oil. So maybe supply/demand is saying we consume X amount of oil at $100/bbl. The sellers are unlikely to absorb that added $25 cost/tax, esp if their profit is $20 on that $100. No point in doing business at a loss.

So they try to pass as much cost as possible onto the consumer. And the consumer will buy less, just like they did when gasoline was $4/gal. Those companies with a higher profit margin might squeeze out companies with lower profit margins. With less competition and tighter supplies, it's easier to raise prices - so they will. So once again, the customer pays the tax, as much as the market will bear. And we have fewer jobs supplying the lower amount of product.

Even if we don't go to the extreme of hitting loss levels, anytime you lower profit margins in an industry, money is going to flow to higher profit places.

-ERD50

No

you always price the product at the point that maximizes revenue . if you could make more money raising prices, you would whatever your cost structure. I did say "assuming the business is profitable. if its not it stops selling but none of these factors change the demand curve.

Lets assume you are a fixed cost manufacturer who has a monopoly and your oil cost you 30 dollars a barrel.

How do you price your oil ? You find the price where the barrels sold times the price is the maximum

Lets assume that is 50 dollars a barrel and you sell 1 million barrels.

now I put on a 10 dollar tax. What do you do ? Your demand curve is fixed. Raise the price and you lose sales.

now you bribe a few politicians and they take away the tax, IT DOESN'T CHANGE THE DEMAND CURVE. you still sell your oil at 50 dollars a barrel
only now you pocket the profit.

yes it gets more complicated in competitive environments but the fundamental principle stays the same.

 

[ERD50]

yes it gets more complicated in competitive environments but the fundamental principle stays the same.

It doesn't really get much more complicated in a competitive environment, it just gets much more 'real'. And in the 'real world', some/most/all of that tax will get passed along to the consumer.

I understand (and agree with) your monopoly example. But that's not what we were discussing, we were discussing your bread example (quoted below). As far as I know, the bread industry is still a mostly competitive one (despite the farm subsidies for wheat I guess).

Actually, wheat prices did go up a few years back, and I recall reading articles about how bread producers were needing to raise prices to compensate. Too tired to google it now, maybe later.

-ERD50

Eliminate corporate taxes and they raise dividends Or executives bonusesl. They don't cut the price of bread since the price is already at the revenue maximising point

 

[clifp]

No

you always price the product at the point that maximizes revenue . if you could make more money raising prices, you would whatever your cost structure. I did say "assuming the business is profitable. if its not it stops selling but none of these factors change the demand curve.

Lets assume you are a fixed cost manufacturer who has a monopoly and your oil cost you 30 dollars a barrel.

How do you price your oil ? You find the price where the barrels sold times the price is the maximum

Lets assume that is 50 dollars a barrel and you sell 1 million barrels.

now I put on a 10 dollar tax. What do you do ? Your demand curve is fixed. Raise the price and you lose sales.
.

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.

 

[ERD50]

No
...

Lets assume that is 50 dollars a barrel and you sell 1 million barrels.

now I put on a 10 dollar tax. What do you do ? Your demand curve is fixed. Raise the price and you lose sales.

now you ... take away the tax, IT DOESN'T CHANGE THE DEMAND CURVE. you still sell your oil at 50 dollars a barrel
only now you pocket the profit.

Unless basic economic theory has changed dramatically in the last 20 odd years since I looked at a Econ textbook, you are wrong

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.

Yes clifp, I was too generous in agreeing with the monopoly example. Emeritus is wrong, even in that monopoly case.

As you say, they maximize profits, not sales. The added tax is a higher % of profit $ than of sales $ (obviously, profit is a portion of the sales price). They will very likely be able to move the sales price up, accept lower demand, and improve profits over not raising prices. Unless the demand curve is almost a brick wall (such as gasoline going from $2.50 to $3.00 would cause us to use half as much gas?), that will be the case.

Maybe later, I'll post numbers to illustrate this with the $50 sales price, $30 cost of production and 1,000,000 unit demand and an added $10 tax.

Maybe it's time for Emeritus to go back to school?

-ERD50

 

[REWahoo]

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.

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.