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Good one REWahoo...!
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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.
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.
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...
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!
I think one of the problem JDW, is I get the distinct impression that you're not familiar with the mechanics of how accounting/taxes work for businesses.
the tax rates also play a role and a higher top tax rate will get small business owners to look for more ways to shelter that income
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!
thanks for the tip
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.
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.
+1, an important point that many may not think of. Not being able to borrow even with good business/revenues-profits/collateral was a sea change...My suspicion is that the meme that you can always borrow when you need to has been proven wrong by 2008. So as a result companies want to be in a position not to be forced to borrow and it may become a long term shift as debt becomes less desirable. (In particular if the taxation of interest looks like the taxation of dividends one way or the other the cheapness of debt begins to change)
JDW...I'd like to point out that some of the investments back into the business you talk about will not necessarily increase the value of the business.
.... Unless "cash flow" is increased by some means whether it is thru increased sales or reduced cost....it does not increase the value of the business.
Exactly (sounds like part of a BUS101 course I took eons ago ).The three buyers will not automatically raise their bids by $1M. They will be asking 'how much added (after-tax) profit will this provide the business?', and then they will re-value the business based on the additional after-tax profit.
As long as this doesn't translate to more hiring and wage increases, the average person on the street doesn't feel particularly giddy about this and it isn't likely to keep them opening their wallets. My Megacorp has been posting record profits quarter after quarter since 2008, and I've had one 2% raise in the last 5 years.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.
It is not worth shifting cash flow to capital expenditures, unless that capital returns even more cash flow. And then that cash flow is taxed at those higher rates. If just shifting money to hard assets accomplished anything, I guess businesses would just buy piles of gravel or something, and hope to recoup the cost of that pile of gravel when they sell the business. Makes no sense, and businesses don't do that, do they? Cap gains rates are lower than corp income rates now - so why don't we see this now?
-ERD50
Thanks for putting some numbers to it ERD50....
Let's say I am negotiating to sell a business. I have three buyers talking with me about a number right around $10M. Now I go to all three, and tell them I am considering buying/installing a $1M machine (hard asset) at the business.
The three buyers will not automatically raise their bids by $1M. They will be asking 'how much added (after-tax) profit will this provide the business?', and then they will re-value the business based on the additional after-tax profit.
Yes, I got wordy... again
The numbers were in the section above, which you didn't quote:
-ERD50
JDW...I'd like to point out that some of the investments back into the business you talk about will not necessarily increase the value of the business. Business value is what someone will pay. More importantly, a strategic buyer will buy only "hard assets". They also calculate "cash flow" ratios when they are purchasing.
So unless that investment back into the business is for equipment and hard assets, the value of the business does not necessarily go up. Unless "cash flow" is increased by some means whether it is thru increased sales or reduced cost....it does not increase the value of the business.
Meaning..adding jobs or employees...does not necessarily equate to increased business value unless those two things happen. One can not assume it will. EX: The government requires new labeling laws, new environment restrictions on waste water and you have to spend money to hire an employee to implement, track..or there are new OSHA laws and you have to improve working conditions for your employees...etc. This all becomes an added cost of doing business, cost money but does not increase your business value.
The value of the business is "some" multiple of EBITA...and that multiple changes. Even with that it is what someone is willing to pay.
I think your thought...that any money left in the business increases business value...throws your entire concept off.
Good points. To supplement that, let me provide a numeric example.
Let's say I am negotiating to sell a business. I have three buyers talking with me about a number right around $10M. Now I go to all three, and tell them I am considering buying/installing a $1M machine (hard asset) at the business.
The three buyers will not automatically raise their bids by $1M. They will be asking 'how much added (after-tax) profit will this provide the business?', and then they will re-value the business based on the additional after-tax profit.
If the answer is 'No, no added profit, but it's a really nice, modern, expensive, shiny machine', the potential buyers will not be impressed. They will be calculating ' gee, if he installs this machine, and it does not add to profits, I'm going to rip it out ($ cost) and sell it on the used market for 60 cents on the dollar'. These potential buyers would tell the owner to NOT install that equipment.
It is not worth shifting cash flow to capital expenditures, unless that capital returns even more cash flow. And then that cash flow is taxed at those higher rates. If just shifting money to hard assets accomplished anything, I guess businesses would just buy piles of gravel or something, and hope to recoup the cost of that pile of gravel when they sell the business. Makes no sense, and businesses don't do that, do they? Cap gains rates are lower than corp income rates now - so why don't we see this now?
-ERD50
Others, including you.... had or have said the same thing I did ...perhaps in a different way... but the points had been made. When one talks about increased business value, it needs to include "increased cash flow", "an increase in hard assets", increased sales, increased profit, EBITA...etc. all of which i know you and others on this thread...more than understand.
Raising taxes...puts more of a road block up ..towards all of those things.
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.
...
If so, then let's base it on the cases I used from the previous thread, and label them "Case L" for relatively lower income tax rates, and "Case H" for relatively higher income tax rates. Let's spread it over 10 years.
Let's put numbers to it - Say a person has a $1M taxable gain each year. Let's look at 10 year results with 50% effective tax rates versus 25% effective tax rates:
Case H: @ 50% rates, $10M gain, $5.0M Tax, $5.0M Take Home
Case L: @ 25% rates, $10M gain, $2.5M Tax, $7.5M Take Home
So consider if they invest the first year profits at the beginning of the year, and assume they get 25% higher profits each year based on their investment for the next 10 years. That is $12.5M over the ten years minus the $1M reinvested = $11.5M
Case H: @ 50% rates, $11.5M gain, $5.750M Tax, $5.750M Take Home
Case L: @ 25% rates, $11.5M gain, $2.875M Tax, $8.625M Take Home
In the other thread, you wanted to factor in the increased value of the business if it was sold, at 10x the increased annual profits...
Case H: annual after-tax profit increase due to investment = $0.750M; x10 = $ 7.50M more sale value
Case L: annual after-tax profit increase due to investment = $1.125M; x10 = $11.25M more sale value
...
-ERD50
As long as this doesn't translate to more hiring and wage increases, the average person on the street doesn't feel particularly giddy about this and it isn't likely to keep them opening their wallets. My Megacorp has been posting record profits quarter after quarter since 2008, and I've had one 2% raise in the last 5 years.
and if you all had read the the post i was responding to and the discussion leading up to it, it should have been obvious that the argument i was making was that the investment of the scheduled profit back into the company would produce an increased expected profit the following year.
i am especially surprised at ERD50 doing it since i was responding to his example (see below) and in that response i followed his premise that the investment back into the company would produce an increase in profit the next and following years.
it is obvious that i am the only one arguing this side of my premise so the fact that there are multiple of you taking the other side is making responding to each of your posts alot of work and is very tiring. however, when you overlook points in my argument and then make your points based on that overlooking it really makes me feel like "what is the point of responding to them when they dont even read my posts".
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.
No, it doesn't. A position is weak because of its merits, not it popularity.Kind of shows how weak an argument it is, does it not
Of course, the same could be said of all the others who continue to make the same points over and over again.I do not overlook your responses... but it is like a guy a few offices down who said 'I can say the sky is pink all day long but it does not make it pink'....