Taxes (Political)

[R. Richard]

I just came across some interesting information about taxes.

[Dollar figures in billions]
-----------------------------2006----------2005------------%
---------------Through-----May------------May--------Change
Indivual income---------$687-----------$605--------+13.6
Corporate income------$184-----------$141--------+30.5
Social Insurance--------$563-----------$525--------+ 7.2
Other---------------------$111-----------$ 98---------+13.3
Total taxes-------------$1545----------$1369-------+12.9

Total spending---------$1772----------$1642-------+ 7.9
Deficit---------------------$227-----------$273---------(16.8)

BUSH DID NOT CUT TAXES! Bush did cut the tax rate. A lower tax rate has, historically caused more tax dollars to be collected. The reason behind the lower rate/higher taxe collections is that the people who actually pay taxes work harder when less of their money is taken from them.

Another interesting item is "Corporate income taxes." It is not really possible to tax a profitable corporation. A profitable corporation simply treats taxes as another expense item. Prices are raised to cover the expense item and the consumer actually pays the "Corporate income taxes." However the increased level of corporate taxes paid indicates an expanding economy, a normal case when tax rates are cut.

You will note that we are still running a deficit. That is because Congress is spending money faster than the increase in tax receipts.

 

[R. Richard]

No comments at all?

 

[Guest]

Not from me, sorry (mainly cos I'm English, but also because the two words in the thread title sent shivers down my spine).

*shudders*

 

[Zeb_Carter]

Hey R.R. what's to comment...they are what they are. The govenment is the only business that can run at a deficeit year after year and stay in business.

So what's to be said that hasn't already been beat to death?

 

[Liar]

Ok, since you insist, here's one:

BUSH DID NOT CUT TAXES! Bush did cut the tax rate. A lower tax rate has, historically caused more tax dollars to be collected. The reason behind the lower rate/higher taxe collections is that the people who actually pay taxes work harder when less of their money is taken from them.

So people did not work hard before? From what I can see, the majority of taxpayers work their asses of just to stay afloat, regardless of taxation level. The difference between high tax and low tax in a society is simple. High tax means that some society services are cheaper or free. Low tax menas that there is more money in your pocket, but some nesccities in life costs more.

Increased choice. But decreased cost effectiveness per unit, due to loss of standardization. on the other hand, possible decrease in real costs due to freer competition.

What you do get though, is an increased consumption (of stuff that would otherwise be tax funded). And comsumption is taxed already. So all we do with a tax cut is shifting numbers to new posts.

There might be synergic effects somewhere in there, actually increasing the government's revenue, but I seriously doubt it has to do with some kind of Working Class psychology.

 

[Roxanne Appleby]

Tax incidence

"Tax incidence" is the analysis of who the ultimate payer of a tax is. With sales tax, it's pretty clear that it's the buyer. Property taxes clearly fall on property owners. Individual income taxes on individuals with income. So who pays corporate income taxes?

Human beings. Corporations are just "flow through entities." They don't buy tasty food to eat, fancy cars to stroke their vanity with, comfy houses to live in, etc. They are just legal fictions. They are pipelines: Money flows in from human customers, and it all flows out eventually to some human being.

In another thread I wrote that customers and workers may pay a share of the corporate income tax in the form of higher prices or lower wages, but I realized later that is not correct. Enterprises already pay workers as little as they need to, and price their products as high as they can, given the supply and demand reality of the labor market and the market for their product. (The calculations may not be quite that simple, but essentially that's what it boils down to.) Imposing an income tax on the labor buyer and product seller (the corporation) does not directly change the underlying supply-and-demand realities of those respective markets.

Given all that, who pays corporate income taxes? The owners of the corporation, the shareholders. The tax is actually levied on corporate earnings, aka profits, which belong to shareholders, and are either paid out as dividends or retained inside the firm for the time being, before being paid out at some future date. It would be more economically efficient to eliminate corporate income taxes, and replace them with higher taxes on individuals. Corporate income taxes skew business decisions by making managers arrange their business in a manner designed to avoid taxes, rather than running the company as efficiently as possible, creating the best value for customers and investors.

Taxes on corporations are just a way for politicians to hide the real tax burden paid by individuals. At the end of the day all taxes are paid by some individual. Regardless of whether you think they should be higher or lower, more progressive or less, there's no reason we can't agree that taxes should be transparent rather than hidden, and generate as little wealth-destroying economic inefficiencies as possible.

 

[Roxanne Appleby]

Not from me, sorry (mainly cos I'm English, but also because the two words in the thread title sent shivers down my spine).

*shudders*

Yeah, look what happened the last time Brittannia got into a contentious tax disagreement with the North American colonies - she got her nipple bit.

 

[R. Richard]

I disagree that the shareholders pay corporate income taxes. Normally, a well run corporation sets certain profit percentage goals. If they sell more product, profits are higher and that is good. If they sell less product, profits are power and that is bad. However, if the corporation makes too much PERCENTAGE profit, that is always bad. If the percentage of profit is too high, competition will come in and undercut prices, reducing margins well below reasonable levels. A well run corporation will find ways to keep prices below the level of too much percentage profit. The object is not to aid the customer, but to prevent lots of competition from entering the market. Corporate taxes are a cost, reducing the percentage of profit. The customer usually pays corporate taxes.

I totally agree that corporate taxes are just a way for politicians to hide the true level of taxation from the individuals who actually pay the taxes.

One other item. Politicians will always fight a flat tax. If there is a flat tax, then increases in spending will eventually result in a higher rate of taxation for the flat tax. Politicians do not like taxpayers to know that they are paying more.

 

[R. Richard]

So people did not work hard before? From what I can see, the majority of taxpayers work their asses of just to stay afloat, regardless of taxation level. The difference between high tax and low tax in a society is simple. High tax means that some society services are cheaper or free. Low tax menas that there is more money in your pocket, but some nesccities in life costs more.

People work hard. If they are heavily taxed, they spend a lot of effort avoiding taxes, instead of producing goods and services. If they are lightly taxed, they spend a lot of effort producing goods and services.

You say that high tax means that some society services are cheaper or free. Your underlying assumption is that the taxpayer wants the cheaper or free society services. In a lower tax environment, the taxpayer, not the government, decides what services the taxpayer wants to buy. I don't know about you, but I know better than the government what I want and need.

Increased choice. But decreased cost effectiveness per unit, due to loss of standardization. on the other hand, possible decrease in real costs due to freer competition.

What you do get though, is an increased consumption (of stuff that would otherwise be tax funded). And comsumption is taxed already. So all we do with a tax cut is shifting numbers to new posts.

I would be happy to reply if I could figure out what you are talking about.

There might be synergic effects somewhere in there, actually increasing the government's revenue, but I seriously doubt it has to do with some kind of Working Class psychology.

There are provable effects. Every significant tax rate cut has produced more revenue for the government. The tax cuts were done by both Democrats and Republicans and the effect was always the same. Every significant tax rate increase has produced less revenue for the government. The tax increases were done by both Democrats and Republicans and the effect was always the same.

Taxes are a method whereby the government, not the taxpayer decides how money is spent. To an extent it is good that the government makes certain spending decisions. As I have pointed out before, the interstate highway and railway systems were built because the government decided to spend money in that fashion. The benefits of the interstate highway and railway systems are too many to list and too plain to deny.

The City of New Orleans decided to spend money on a "police force" and not on levees. The result is that the City of New Orleans now has the National Guard maintaining order and the town is not completely dried out from the collapse of the levees. If the decisions of the City of New Orleans with regard to the spending of tax revenues make sense to you, please explain why. TIA.

 

[Roxanne Appleby]

Sorry, Rich, but there are a bunch of non-sequitors in your post No. 8. You have mixed up the dynamics of competitive markets, including the tendency of a profitable enterprise to attract competitors, which has the effect of lowering profitabilty by eroding "pricing power," with the discussion of the incidence of corporate income taxes, which is a completely separate issue. My post is accurate.

There are some other problems in your post. "Normally corporations set profit percentage goals." Normally home sellers do also, but if they price their home at twice the going rate, it ain't gonna sell, regardless of their "goals." Supply and demand set prices, not any one player's "goals."

You are correct that a well run company keeps its pencil sharp regarding costs. Also, if it has pricing power it may be wise to restrain it so as to delay the entry of new competitors. But if there are profits to be made by entering the market, someone will, and as they do prices will fall until they are just high enough to pay the expenses of a well run operation, and give the owners a modest return on investment, comparable to the return on a "safe" investment like treasury bonds, plus a slight risk premium. This is all Econ 101 and correct as far as it goes, but again it has nothing to do with the incidence of corporate income taxes.

 

[Roxanne Appleby]

There are provable effects. Every significant tax rate cut has produced more revenue for the government.

It's true that tax cuts which encourage workers and investors to put themselves and their capital to work more so as to generate more income and thus grow the economy ("supply side tax cuts") tend to increase government revenues. Permanent reductions in marginal income tax rates, taxes on dividends and capital gains taxes fit this description (the much hated, so called "tax cuts for the rich"). Tax cuts that are temporary, especially ones that just hand out candy on a one-time basis ("rebates") don't do squat to grow the economy, and don't increase government revenues.

(If it is not ignored this post will almost certainly generate a fusillade from the left, but I don't really understand why, except for some wierd aesthetic preference for punishing the affluent even when logic and evidence shows that doing so is totally divorced from the real goals of helping the little guy. BTW, the above does not preclude supply-side tax cuts weighted toward the little guy, primarilly reductions in payroll taxes [social security, unemployment insurances, etc.])

 

[Joe Wordsworth]

I am somewhat intimately involved in the revenue execution for a corporation... we do indeed pay the taxes, we do not--in fact--just pass it along as an expense onto the customer. It's just not as simple as "its all shunted and passed along and political and blah, blah, blah".

Just not. I don't really know how else to put it. We've had several tax alterations in the last few years, and our product and service rates have been market conscious (as they always are). It's not increased taxes that are raising prices, per se--it's increased costs, more often than anything. Increased taxes just end up as the cost of doing business.

 

[S-Des]

I am somewhat intimately involved in the revenue execution for a corporation... we do indeed pay the taxes, we do not--in fact--just pass it along as an expense onto the customer. It's just not as simple as "its all shunted and passed along and political and blah, blah, blah".

Just not. I don't really know how else to put it. We've had several tax alterations in the last few years, and our product and service rates have been market conscious (as they always are). It's not increased taxes that are raising prices, per se--it's increased costs, more often than anything. Increased taxes just end up as the cost of doing business.

Not my area of expertise, but don't some companies avoid paying taxes by using tax dodges (in the recent past many were accused of setting up phony shelter companies off shore to take advantage of tax loopholes established to assist developing countries)? It's good that you work for an honest company (I used to as well), but there still are a lot of people out there that believe you succeed at all cost (including bending a few laws and behaving reprehensibly).

Lego just announced they're closing their offices, laying off 300 people and moving the company to Mexico to take advantage of the cheap labor and tax incentives. Here in Illinois, our new Governor raised licensing fees and taxes to generate revenue and a number of trucking companies moved out of state, costing the taxpayers millions and losing thousands of jobs.

This is such a messed up thing to debate because it's complicated beyond all measure. Even economists don't agree on the effects of raising or lowering taxes and the overall impact on the economy. Then you pile on people's political biases on top of it and it becomes a nightmare. I try to keep an even keel and listen to all sides to decide what to believe, but it just seems impossible to navigate. I guess that's how the politicians can keep fucking us over (on both sides of the aisle).

 

[Joe Wordsworth]

Not my area of expertise, but don't some companies avoid paying taxes by using tax dodges (in the recent past many were accused of setting up phony shelter companies off shore to take advantage of tax loopholes established to assist developing countries)? It's good that you work for an honest company (I used to as well), but there still are a lot of people out there that believe you succeed at all cost (including bending a few laws and behaving reprehensibly).

Some companies probably do (and some definitely) use tax shelters and whatnot... so do some rich people... so do some middle class people... so do some freelance "cash only" lawn mower or pool cleaner people working out of a pickup truck.

Lego just announced they're closing their offices, laying off 300 people and moving the company to Mexico to take advantage of the cheap labor and tax incentives. Here in Illinois, our new Governor raised licensing fees and taxes to generate revenue and a number of trucking companies moved out of state, costing the taxpayers millions and losing thousands of jobs.

That definitely happens. There's an old saying (well, I've heard it most of my life anyway) that goes "I used to be a Democrat, then I owned my own business". It's sorta funny and being a saying or cliche' is hardly wisdom in any way... but it's got some truth to it. I didn't used to care, one way or the other, about increasing social welfare or development programs (programs that, basically, hand out to the have-nots from the pockets of the all), and then I got involved in executive revenue managment and involved in where the money comes from and goes. Now, whenever I hear "increased spending for X, Y, or Z", it makes me cringe. It makes me want to recommend moving a product or service, or contacting a new vendor, or decreasing production on expensive channels in favor of cheaper ones to the higher ups--because it's not "Oh, make a wee less profit and benifit the world", its more often "lose thousands a year on an already strained budget". The word "corporation" is not synonymous with "lavish excess of money", from my positions behind the curtains its more "battling to NOT have to downsize budgets".

This is such a messed up thing to debate because it's complicated beyond all measure. Even economists don't agree on the effects of raising or lowering taxes and the overall impact on the economy. Then you pile on people's political biases on top of it and it becomes a nightmare. I try to keep an even keel and listen to all sides to decide what to believe, but it just seems impossible to navigate. I guess that's how the politicians can keep fucking us over (on both sides of the aisle).

That's part of my point... it is horribly complex. An economist, or executive, or CEO of a seriously developing corporation... that's a real job. It's a more serious, taxing, and demanding job that most people realize--it's never simple. Never as simple as "Oh, just this" or "Oh, just do that". I get hackled everytime someone proposes that their arm-chair genius could keep a multi-million dollar company in the black and growing while satisfying the most random social or personal expectations concieved in lay-luxury.

 

[JamesSD]

You will note that we are still running a deficit. That is because Congress is spending money faster than the increase in tax receipts.

How Conservative of them... Seriously, if I was a fiscal conservative, I'd be pissed how this administration is running the country.

My understanding is that lower tax rates mean people tend to pay a higher percentage of what they owe. Obviously the actual amount of tax collected is a complex matter affected by things like how the economy is doing and the size of the workforce. The economy is marginally stronger in '06 than it was in '05.

The theory that people work harder when their tax rates are lower is pretty weak. I just don't see many people saying "I could make another $1,000 sale, but since I only get to keep 62% and not 70% of the profits, why bother? $700 would be totally worth it, but $620 isn't."

Economic choices are always complex. Tax rates have a moral component as well as a fiscal one, and not everyone has the same morals. So yeah, those were some interesting stats. How much has the estate tax decrease hurt tax revenues?

 

[Roxanne Appleby]

I am somewhat intimately involved in the revenue execution for a corporation... we do indeed pay the taxes, we do not--in fact--just pass it along as an expense onto the customer.

Yes, darling, you write the check, but whose "account" are you writing it on? Answer: The owners of the company. If the taxes were not paid by the corp, sooner or later that extra money would go to the shareholders. (Who would then pay more personal income tax as a result – those on the left can relax and put down your torches and pitchforks.)

Point of clarification: The corporate income that is subject to tax is called "earnings" in financial markets, and "profits" in plain English. Corporate income taxes come out of profits. And who do the profits belong to? The owners of the company. The shareholders.

S-Des: Not my area of expertise, but don't some companies avoid paying taxes by using tax dodges. Here in Illinois, our new Governor raised taxes to generate revenue and a number of trucking companies moved out of state, costing the taxpayers millions and losing thousands of jobs.

Precisely what I was referring to when I wrote, "Corporate income taxes skew business decisions by making managers arrange their business in a manner designed to avoid taxes, rather than running the company as efficiently as possible, creating the best value for customers and investors. It would be more economically efficient to eliminate corporate income taxes, and replace them with higher taxes on individuals."

Moving a trucking company out of Illinois (away from Chicago) to avoid taxes is a good example of the perverse outcomes and loss of economic efficiency that are the price of politicians trying to hide the true tax burden on individuals.

(At the state level it's a bit more complicated, because they're also trying to export the tax burden to residents of other states, but the effect on economic efficiency is the same, and in the end that's a zero-sum gain anyway if everyone else does the same – which they do.)

 

[Roxanne Appleby]

How Conservative of them... Seriously, if I was a fiscal conservative, I'd be pissed how this administration is running the country.

The theory that people work harder when their tax rates are lower is pretty weak. I just don't see many people saying "I could make another $1,000 sale, but since I only get to keep 62% and not 70% of the profits, why bother? $700 would be totally worth it, but $620 isn't."

Ah, your argument has tripped over the theory of marginal utility. As all schoolchildren can recite , Austrian economist Eugen von Böhm-Bawerk famously observed, "And it is on the margin, and not with a view to the big picture, that we make economic decisions."

You take a $15 trillion economy and 300 million people who are (almost) all striving to get ahead, and those individual $80 additions in income here and there under a lower tax rate add up, plus they are cumulative from year to year. It makes a very signifigant difference in the rate of economic growth. The logic you use is always trotted out to denounce tax cuts, but it is erroneous. (I am not characterizing your motives here, jut pointing out what actually happens in the public policy arena.) Although they may not realize it, those who deny the importance of marginal changes with regard to tax increases accept the principle implicitly in other policy areas, or in real life, because it is an important factor in all human action.


PS. As a fiscal conservative, I am indeed hugely pissed at how this President and this Congress are "running" the economy, at least on the spending side. In the final analysis, the only thing that stops economic growth is bad public policy. Left to themselves, people will bust their butts to improve their condition, and the inevitable result is economic growth and a wealthier society (which is better able to afford lending a helping hand to those at the lower end, among other things, such as champers and chocolate.)

 

[R. Richard]

There are some other problems in your post. "Normally corporations set profit percentage goals." Normally home sellers do also, but if they price their home at twice the going rate, it ain't gonna sell, regardless of their "goals." Supply and demand set prices, not any one player's "goals."

Supply and demand set prices for the total market. Supply and demand WOULD also set prices for a specific product. Let us take the case where my company is going to make A, B, C and D. I find that B, C and D can all be made and sold in the current supply and demand environment at a before tax profit of 30%, which after a corporate tax of 40% yields me a final profit of 18%. I also find that A,in the current supply and demand environment, will yield me a net loss of 5%. In a resonable world, I simply do not make A and defeat the law of supply and demand. If, for some reason, I have to make A, I will outsource, add installation and maintenance contracts, finance contracts and/or whatever, to jack my margin up to the extent practical. again defeating supply and demand. In addition, I develop BRANDED products, which also, to an extent defeat the law of supply and demand. You can buy "the same thing" cheaper, but it doesn't have my brand on it.

You are correct that a well run company keeps its pencil sharp regarding costs. Also, if it has pricing power it may be wise to restrain it so as to delay the entry of new competitors. But if there are profits to be made by entering the market, someone will, and as they do prices will fall until they are just high enough to pay the expenses of a well run operation, and give the owners a modest return on investment, comparable to the return on a "safe" investment like treasury bonds, plus a slight risk premium. This is all Econ 101 and correct as far as it goes, but again it has nothing to do with the incidence of corporate income taxes.

If I find myself in a high corporate income tax environment, I move to a place where there is a lower corporate income tax. I continue to sell my products at prices that will yield me a modest return on investment, but that modest return is aided by the lower corporate income tax in my new location. In the way I have just described, I can undercut my competition on price and still maintain my margins by using the corporate income tax to my advantage. The corporate income tax rate has a great deal to do with the actual profits realized.

 

[Roxanne Appleby]

Richard, almost everything you say in your last post comes under what I called, "a well run company keeps its pencil sharp regarding costs." "Sharp pencils" may include outsourcing, subcontracting, getting the lowest interest rate on borrowing, and the other things you cite. You're not "jacking up your margin," per se, you're just figuring out ways to make the product at a cost low enough to allow you to sell it at a profit. (You can call it "jacking up margin" if you want - it's not wrong, technically, but is kind of misleading. "Jacking up" implies some kind of choice. Your only choice is to run the company as efficiently as possible and make a buck, or not, and go out of business. Same "choice" as every other business in a competitive environment.)

There is no "defeating" the laws of economics, including the way supply and demand interact.

The one additional thing you say is this: "In addition, I develop BRANDED products, which also, to an extent defeat the law of supply and demand."

Nope, you still haven't "defeated supply and demand;" you've just created a new demand. Clever you. Good for you. For a while your cost-controlling "pencils" can be a little less sharp. Guess what? Enjoy it while it lasts, because competitors will come in eventually and erode most (if not all) of your "name brand" premium. Expect to see Wal-Mart house brand before long, and you better sharpen your pencils then! Your loss, the consumers' gain. Ain't capitalism grand!

I've been tossing this term "pricing power" around, and you define one important element of it with your "name brand" reference. Reading a thread on another forum I thought of a great example of "pricing power" arising from branding: Astroglide. How much do you want to bet that the contents of that three ounce, $12.95 bottle cost the company about 40-cents to produce?! OK, I'm making up the 40-cent figure - maybe it's as much as a buck or two.

Of course that doesn't include all the marketing and distribution costs, and the amount spent an R&D to develop the product. (I'll bet the Lit crowd could have saved them money there by providing volunteers! )



Edited to add: BTW, I commend your essentially sound grasp of the irrevocable laws of economics, micro and macro. In my (sometimes unfortunate) smartie-pants, smart-alecky way, I'm just presenting some better tools for describing those laws.