Cut capital gains tax?

[pb4uski]

It is really hard to assess because we don't know what prices would have done if there was no tax cut... my suspicion is that the tax cut makes it easier for companies to absorb increased costs so ultimately consumers will benefit indirectly.

 

[samclem]

Coverage so far by the press has concentrated on the easy story--stock buybacks (and some bonuses to employees, including those at all levels). These are easy stories to write because the companies issue press releases or mandatory financial disclosures with hard figures. The stories practically write themselves.

It is much harder to determine how these decreased taxes have affected prices--there will be no hard numbers, it will take large studies with many assumptions that will be subject to dispute. But anyone claiming that taxes (and other costs) are not linked to product prices needs to explain why companies didn't raise prices to the moon before the tax cuts. Are they not subject to competitive pressures, and doesn't a reduction in costs across the competitive players eventually result in reduced prices? Capital will go to where it can produce the best return.

 

[Independent]

Under the current rules corporate income is taxed twice... once when earned by the corporation and then again when paid as dividends to an investor... it is the same income.

Corp earns $100 and pays $20 in tax for net of $80... if the $80 is distributed to an individual as dividends and then taxed at 15% so the total tax on that income is 32%. That should be enough!

If the $80 of dividends was ordinary income at 22% then the total would be 37.6%... too much!

IMO, we should keep the corporate income tax (to avoid unlimited tax shelters) but give corporations a deduction of 100% of dividends paid to US taxpayers. If the corporation pays out all of its earnings, it pays no taxes. No double taxation on corporate earnings.

Then, tax the dividends and capital gains at the same rates we use for wage income.
And, "who pays the C-corp income tax?" be much easier to answer.

If the corporation wants capital, it can sell new stock. Many would use automatic dividend reinvestment plans.

(Alternatively, 1099 all C-corp earnings to shareholders. Let them include those earnings on their personal income taxes. ... I believe this requires an adjustment to cost basis.)

 

[Independent]

Here, here!

This is the response I get from some people when discussing corporate taxes. Let me try my explanation on this crowd:

So you say if a Corp sees a tax savings, the savings will not be passed onto the consumer? You probably would say, no, because the Corp is 'greedy'.

Well, I say they will pass the savings on to the consumer, because they are 'greedy'.

Here's an economist who disagrees with you https://economix.blogs.nytimes.com/2013/02/19/who-pays-the-corporate-income-tax/

Probably most people assume that the corporate income tax is largely paid by consumers of its products or services. That is, they assume that although the tax is nominally levied on the corporation as a whole, in fact the burden of the tax is shifted onto customers in the form of higher prices.

All economists reject that idea.

If the tax were a sales tax, and all sellers paid the same rate for a given product, that would be passed on to consumers. Your reasoning would work in that case.

One more thing that Bartlett doesn't mention is that even between corporations, the income tax is not a uniform percent of sales. Some companies have higher profits as a percent of sales than others. I think your example assumes they are all identical.

 

[Independent]

You do not have the accept lower tax rates on dividends and capital gains. You can vote with your wallet and pay the difference as a donation to the US Treasury.

This comment could be made regarding anyone who supports any tax. But, we all agree that we want a government and governments get money from taxes. Somehow, taxes are supposed to appear without anyone supporting them.

 

[pb4uski]

Probably most people assume that the corporate income tax is largely paid by consumers of its products or services. That is, they assume that although the tax is nominally levied on the corporation as a whole, in fact the burden of the tax is shifted onto customers in the form of higher prices.

All economists reject that idea.

Having worked tangentially to pricing for many years, I can assure you that taxes were considered in pricing. Our pricing was designed to provide a target after-tax return on capital utilized... obviously also with a view of having a reasonably competitive price compared to other offerings by other providers. However, if there was a market segment where we couldn't earn our target then we would put little effort into that market segment. We had certain segments that we ultimately withdrew from because we couldn't earn our target return.

If our tax burden increased then the increase would eventually be reflected in prices... and if taxes decreased then the reduction would eventually be reflected in prices unless we were able to milk the higher prices for a while but that would be unlikely in a competitive environment... one or more competitors would likely reduce prices to gain share and we would be forced to reduce prices as well.

 

[MichaelB]

Having worked tangentially to pricing for many years, I can assure you that taxes were considered in pricing. Our pricing was designed to provide a target after-tax return on capital utilized... obviously also with a view of having a reasonably competitive price compared to other offerings by other providers. However, if there was a market segment where we couldn't earn our target then we would put little effort into that market segment. We had certain segments that we ultimately withdrews from because we couldn't earn our target return.

If our tax burden increased then the increase would eventually be reflected in prices... and if taxes decreased then the reduction would eventually be reflected in prices unless we were able to milk the higher prices for a while but that would be unlikely in a competitive environment... one or more competitors would likely reduce prices to gain share and we would be forced to reduce prices as well.

I also worked in pricing - brand / product and corporate. It’s fair to say that taxes affect pricing, but product and brand pricing always seeks to maximize profit. Taxes are not a driving force, competition and demand are.

 

[Independent]

Having worked tangentially to pricing for many years, I can assure you that taxes were considered in pricing. Our pricing was designed to provide a target after-tax return on capital utilized... obviously also with a view of having a reasonably competitive price compared to other offerings by other providers. However, if there was a market segment where we couldn't earn our target then we would put little effort into that market segment. We had certain segments that we ultimately withdrews from because we couldn't earn our target return.

If our tax burden increased then the increase would eventually be reflected in prices... and if taxes decreased then the reduction would eventually be reflected in prices unless we were able to milk the higher prices for a while but that would be unlikely in a competitive environment... one or more competitors would likely reduce prices to gain share and we would be forced to reduce prices as well.

Did you happen to work for a mutual insurance company? I did at one time, and that's how I would have responded. We essentially did cost plus pricing. But, our "income" tax didn't really tax economic income. (There is some of that for all companies.)

You say " also with a view of having a reasonably competitive price ". That sounds like most of the pricing is done before you check competition. Other companies start with the competitive price, then work backwards to see whether they can make a profit.

If the different lines generate different ROI, the company will emphasize those with the higher ROI. That's true before and after tax.

 

[ERD50]

Here's an economist who disagrees with you https://economix.blogs.nytimes.com/2013/02/19/who-pays-the-corporate-income-tax/

Probably most people assume that the corporate income tax is largely paid by consumers of its products or services. That is, they assume that although the tax is nominally levied on the corporation as a whole, in fact the burden of the tax is shifted onto customers in the form of higher prices.

All economists reject that idea.

If the tax were a sales tax, and all sellers paid the same rate for a given product, that would be passed on to consumers. Your reasoning would work in that case.

One more thing that Bartlett doesn't mention is that even between corporations, the income tax is not a uniform percent of sales. Some companies have higher profits as a percent of sales than others. I think your example assumes they are all identical.

I was very tempted to stop after reading "All economists reject that idea.". I don't think ALL economists agree on anything beyond the most basic ideas.

I was going to find the one exception I need to disprove that (after all, he said all), but then I'm not sure what qualifies as an 'economist'. Here's what wiki had about the author of that article:

He originally studied American diplomatic history under Lloyd Gardner at Rutgers and Jules Davids at Georgetown. He did a master's thesis on the origins of the Pearl Harbor attack at Georgetown, ...

I can find plenty of 'economists' of that level (and probably much higher) that would disagree.

At any rate, it's a twisted, tortured premise.

Therefore, corporations cannot raise prices to compensate for the corporate income tax because they will be undercut by businesses to which the tax does not apply.

Hmmm, so I'm taxed but my competitor isn't? Then I guess he's not making a profit? How long can that go on before he goes out of business, or raises his prices so he can make a profit?

Or if other reasons exist to allow my competitor to not pay taxes while I must, well, then if I can't be competitive, I'll shift my business to another product. From there, the lack of competition will allow my competitor to raise prices, and he will.

I also worked in pricing - brand / product and corporate. It’s fair to say that taxes affect pricing, but product and brand pricing always seeks to maximize profit. Taxes are not a driving force, competition and demand are.

Sure, but the cost of doing business (which includes a corp tax) fits into that. Demand is affected by price. Competition drives prices down, but a business isn't going to accept a low or negative profit margin for long. They will either raise prices or shift their business. The cost of paying taxes, the cost of compliance (and legal avoidance) all help to set a floor on the price of that product.

Sure, taxes aren't everything, but they are as much a part of pricing as components, labor, overhead, etc. A $ is a $, once they are summed up, their origin doesn't matter.

And to be clear, I'm not viewing this as a big-business versus the little guy. I believe that everyone (especially the little guy) benefits from eliminating corp income tax. Not only is the tax, but the cost of compliance and legal avoidance, which are non value added processes, passed on as well. And every $ avoided is just another $ the little guy will eventually pay - better he pay it w/o adding the lawyers and accountants in what amounts to a shell game.

-ERD50

 

[MichaelB]

ERD, just two comments. First, you dismiss Bruce Bartlett’s analysis quite handily, but don’t really address his points. He has significant economic and tax policy expertise working for the Reagan and Bush #1 administrations and his analysis is quite good, despite the fact that his university studies were in another field.

Second, your points on pricing are not clear, but you seem to have a basic misunderstanding.

Until we find a way to do that, I'll go with the logic and examples we see in the open market, where companies do cut prices when their costs are reduced (my gasoline example) for one

This is not the way corporations act. They are always looking to maximize profit and won’t give a nickel back unless there is a profit advantage.

 

[pb4uski]

Did you happen to work for a mutual insurance company? I did at one time, and that's how I would have responded. We essentially did cost plus pricing. But, our "income" tax didn't really tax economic income. (There is some of that for all companies.)

You say " also with a view of having a reasonably competitive price ". That sounds like most of the pricing is done before you check competition. Other companies start with the competitive price, then work backwards to see whether they can make a profit.

If the different lines generate different ROI, the company will emphasize those with the higher ROI. That's true before and after tax.

I worked for a mutual and later also consulted with both stock and mutuals. We would price based on costs plus overhead, taxes and profit (cost of capital) and then see how we compared to the competition simultaneously. The whole point is that if our taxes declined then it woudl ultimately be reflected in pricing and vice versa.

I'm not sure what you mean by taxes not taxing economic income, but taxes were a real cost in our case, especially in the long run although there might be timing differences in the short run.

 

[pb4uski]

... This is not the way corporations act. They are always looking to maximize profit and won’t give a nickel back unless there is a profit advantage.

That's not totally true... they may be willing to give a nickel back (ie; accepa lower profit) if they have a long term objective to grow market share... and then try to make it up in volume.

 

[ERD50]

ERD, just two comments. First, you dismiss Bruce Bartlett’s analysis quite handily, but don’t really address his points. He has significant economic and tax policy expertise working for the Reagan and Bush #1 administrations and his analysis is quite good, despite the fact that his university studies were in another field.
...

I understood he held positions as an economic advisor to Regan and Bush, but I would balk at anyone, regardless of pedigree stating that "All economists agree .... ". That tends to make me dismissive of the writings, but I did carry on and read further.

...

Second, your points on pricing are not clear, but you seem to have a basic misunderstanding.

Quote:
Until we find a way to do that, I'll go with the logic and examples we see in the open market, where companies do cut prices when their costs are reduced (my gasoline example) for one

This is not the way corporations act. They are always looking to maximize profit and won’t give a nickel back unless there is a profit advantage.

I understand. And we are in agreement.

I'm not saying that corporations lower the price of a gallon of gas just because their cost went back down. I'm saying that competitive pressures and greed will have them lowering their price in an attempt to maintain their market share and overall profits. If they don't drop their price, their competitors will (to gain market share and overall profits), and round and round we go. Just as you said, they do it to maximize profits.

If they agree to holding their prices up, they are breaking the law and I hope the get long jail terms in an unpleasant place.

-ERD50

 

[MichaelB]

This is a complex subject that just doesn’t fit cleanly into the rhetoric used to justify legislation, and I think it is pointless to try to make it fit.

The tax reduction allows business keep more of the cash it earns. There was no shortage of cash or investment capital before the tax cut, so it wasn’t needed by business to fund anything. There’s no reason to expect this money to be used any differently than the cash business was generating before the tax cuts.

To test that we need to look at aggregate capital flows and see where the cash is. For that, we probably need more time. The US is a data rich environment, but this type of data collection and analysis is still labor intensive.

Pricing also suffers from some rhetorical oversimplification. A business will always try to charge the highest possible price, based on its business plan. Even competitive pressure isn’t enough to drive prices down, which is why, for our retirement calculations, we assume prices will increase over time.

 

[CardsFan]

Related only to the tax reduction for corporations:
I may be wrong, but I thought there was a lot of speculation that the lower rates would encourage business to repatriate more profit.
Additionally:
Any business, and most people on this forum, look out for themselves and do what is in their best interest.

If profits go up, investors benefit, if prices go down, consumers benefit. Since I am both an investor and a consumer, I will somehow benefit.

 

[MichaelB]

Related only to the tax reduction for corporations:
I may be wrong, but I thought there was a lot of speculation that the lower rates would encourage business to repatriate more profit.

Brad Setzer, economist for the Council for Foreign Relations, and one of the best economic analysts, just did a first cut at that. You can see it here https://www.cfr.org/blog/trump-tax-reform-seen-us-balance-payments-data

Additionally:
Any business, and most people on this forum, look out for themselves and do what is in their best interest.

If profits go up, investors benefit, if prices go down, consumers benefit. Since I am both an investor and a consumer, I will somehow benefit.

+1

 

[CardsFan]

Brad Setzer, economist for the Council for Foreign Relations, and one of the best economic analysts, just did a first cut at that. You can see it here https://www.cfr.org/blog/trump-tax-reform-seen-us-balance-payments-data


+1

Thanks for the link. I am only part way through it. Looks like the repatriation is not as much as hoped, but still, there is some.

 

[pb4uski]

As much as I "like" this feature of the tax code, I'll admit that I find it hard to argue for.

https://thehill.com/opinion/finance/452446-stop-giving-away-capital-gains-taxes

There is a rule that has been part of the tax code for nearly a century that safeguards the wealth of the rich, but violates nearly every principle of sound tax policy. Yet it persists, costing our national coffers $40 billion or so each year. Even by federal government standards, this is a significant dollar figure today.

 

[joeea]

Interesting question, but I think it would be hard to parse out from the noise and all the other global effects.

There are a lot of things a company could do with the savings, increase wages/compensation, add to the workforce, reduce prices, invest in their business (which might help their suppliers add more jobs, etc).

Until we find a way to do that, I'll go with the logic and examples we see in the open market, where companies do cut prices when their costs are reduced (my gasoline example) for one.

So when you wrote "Well, I say they will pass the savings on to the consumer, because they are 'greedy'." that was just speculation without real evidence.

Okay. I guess we can always hope that it might still work out that way.

 

[Independent]

I was very tempted to stop after reading "All economists reject that idea.". I don't think ALL economists agree on anything beyond the most basic ideas.

I was going to find the one exception I need to disprove that (after all, he said all), but then I'm not sure what qualifies as an 'economist'. Here's what wiki had about the author of that article:

I can find plenty of 'economists' of that level (and probably much higher) that would disagree.

At any rate, it's a twisted, tortured premise.

Did you read the whole article? He quotes plenty of other people. For example

The just-published March 2013 issue of The National Tax Journal, the principal academic journal devoted to tax analysis, contains four articles by top scholars ...

The arguments among economists are whether the tax is borne entirely by capital, or split between labor and capital.

Hmmm, so I'm taxed but my competitor isn't? Then I guess he's not making a profit? How long can that go on before he goes out of business, or raises his prices so he can make a profit?

Or if other reasons exist to allow my competitor to not pay taxes while I must, well, then if I can't be competitive, I'll shift my business to another product. From there, the lack of competition will allow my competitor to raise prices, and he will.

You and your competitor are both trying to maximize before tax profit. If you have different profits as a percent of sales, which one controls the price?

Note that a sales tax can turn an profitable business into an unprofitable business. I expect gasoline taxes far exceed the profit margin of the oil companies. An income tax can't do that, it can only reduce the profit on a profitable line.

Note that if we used either of my suggestions - allowing C-corps to reduce income by dividends paid to US taxpayers, or doing a 1099 passthru, we wouldn't be having this discussion.

 

[Independent]

I worked for a mutual and later also consulted with both stock and mutuals. We would price based on costs plus overhead, taxes and profit (cost of capital) and then see how we compared to the competition simultaneously. The whole point is that if our taxes declined then it woudl ultimately be reflected in pricing and vice versa.

I'm not sure what you mean by taxes not taxing economic income, but taxes were a real cost in our case, especially in the long run although there might be timing differences in the short run.

Regarding "economic income", at one time mutual life insurance companies had an "income" tax that effectively taxed gross investment income, not profits. But, I was thinking about reserves. Calculating current income requires an adjustment for reserves. If the tax reserves are different from the reserves the company holds for other purposes, the difference results in a timing shift on taxes, and deferring/advancing taxes has an actual cost. At one time, life insurance companies had three sets (at least) of reserves - Stat, GAAP, and Tax.

If you're old enough and you worked life insurance, you may recall "818c" elections. That reserve adjustment was big enough to move prices.

If a firm evaluates investments on ROI, and the investment it makes in anticipation of earning a profit is taxed (ie produces a tax credit) at the same rate as the profit, and at the time the same cost is incurred, than the before tax ROI and the after tax ROI are the same.

 

[Independent]

As much as I "like" this feature of the tax code, I'll admit that I find it hard to argue for.

https://thehill.com/opinion/finance/452446-stop-giving-away-capital-gains-taxes

Yep. Somewhere, I found a study that looked at estates over $100 million and found that on average 55% of the value was in unrealized gains.

 

[ERD50]

So when you wrote "Well, I say they will pass the savings on to the consumer, because they are 'greedy'." that was just speculation without real evidence.

Okay. I guess we can always hope that it might still work out that way.

No, it is based on logic and some knowledge of how free markets work.

There are plenty of cases where the "noise" in a system makes it hard to parse out an effect, but logic can still tell you that a certain thing has a certain effect. See my earlier example of insulation in a home. If your utility bills don't go down, that does not "prove" that insulation doesn't work. We know it does.

-ERD50

 

[Montecfo]

The last tax reform was close to revenue-neutral on the personal side but hugely in the red on the corporate side.

Comparing the Latest House and Senate Tax Bills by Provision | Committee for a Responsible Federal Budget

Had the corporate rate been reduced not as much, and in a way to be totally offset by broadening the corporate base, I'd be fine with that. But it was not, instead a needlessly debt-financed giveaway to the corporations.

But you miss the point. Jobs were moving overseas, costing 100% of the tax base. Apparently you desire this result.

You can't just "tax the big corporations" into prosperity. They are run by smart people, and they leave the jurisdiction.

 

[Montecfo]

I would be happy to, as long as everyone else does, too.

You seem to lack conviction on this in that case.