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News Speaking as a business owner about taxes

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  1. Feb 6, 2010 #1

    Ivan Seeking

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    I wanted to address what I see as a fallacy in the argument against taxes on companies and corporations. As the the saying goes, if you tax companies, they will just pass along those costs to consumers. While that may be true in some cases, it is not always true. The fact is that I have to compete with other companies. In fact, my price is determined almost entirely by market expectations; not by my taxes or even my general operating costs. If my taxes go up, I may have to live with less money. I am not at liberty to raise prices willy-nilly. What's more, if I see another company raise their price, I gain a competitive edge if I can live with a bit less and move in on their action. This can easily lead to more long-term business that more than justifies the short-term reductions in earnings.

    When I hear people talking about this imaginary, automatic mechanism of action to recover increased expenses, I have to laugh a bit. It just isn't that simple. There are many forces that drive operating costs and pricing; taxes are just a part of the picture. For example, rather than increasing prices, a company may opt to reduce benefits for their employees. They may freeze hiring or wages. They may dump less profitable components of the company. They might also find ways to reduce waste within the company.

    I easily worry as much about the cost of professional and general liability insurance, as I do taxes. I worry a lot more about getting sued than I do my tax rate.
     
    Last edited: Feb 6, 2010
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  3. Feb 6, 2010 #2
    Which in the end incurs cost to the same category, the end user. Less pay for the work, and less jobs available overall. Multiplied at national scale doesn't look appealing. You also usually hire only when you grow and diversify the business. If you have to freeze planned hiring, this means you cant afford your planned expansion. Less cash flow, in the end it can even mean less tax money.

    Out of proportion taxation would also increase fiscal evasion, and would encourage a flux of money to other areas with more acceptable taxation.

    Of course, but we should not assume that taxation acts like a mechanism of innovation. It's better to assume that the companies are (already) optimized to the best ability of the owners / executives.

    It may, than again, it may not. First of all, it's on a case by case basis to be determined if you will have the luxury to maintain the prices. Size or your company. Specific legislation on taxes. Popularity of your products, and your relation with retailers. All those will have a say in whatever you can maintain the price, or you will be forced to go up as your competitors do.

    Taxation is a factor in the dynamic of prices. It is not the only factor, though, so yeah, is incorrect IMO to day end user will support all taxation.

    It would be interested if a good economist would explain to us in this thread how government determines the leves of taxation, and how it correlates it to the market, it;s needs and so on.
     
  4. Feb 6, 2010 #3

    Hurkyl

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    If everything in the world remains fixed except the taxes paid by your one company, then this argument works.

    However, that's somewhat unrealistic.

    If you can afford to eat the cost if taxes were raised and profit by stealing the customers of a competitor who raised their prices... then you can afford to lower your prices right now and steal their customers. Why haven't you? Taxes seem completely unrelated to this statement.
     
  5. Feb 6, 2010 #4

    Ivan Seeking

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    Perhaps, but it all has to be considered in proportion. How many jobs? Are the workers already paid well. When you multiply to the national level, you have to know precisely what you are multiplying first.

    Well, on that point I do agree, but I also think we have made ourselves sitting ducks for unfair competition from abroad. When we start taxing suppliers like China and India to offset laws related to product safety, environmental emissions, worker safety, and the many other reasonable mandates imposed on companies here, that give foreign suppliers a huge advantage, we can talk.

    Nor should we assume that all companies are optimized.

    Why? That is not what I see in the real world. In fact, I often blow away the competition by keeping operating expenses exceedingly low. Long ago I realized that the trick is to be small and lean. While other companies have long meetings and fat cat on fancy lunches, I make good to great money from my home office. If they can't compete, that is their problem, not mine. So the question is this: I can survive a tax hike. Can they? It never hurts my feelings to see a competitor drop off the map.

    Yes, it does have to be considered on a case by case basis. That was my point. It is not so simple as, A, therefore B. It is a fallacy to suggest that anything in the real world is that simple; esp in the world of economics.
     
    Last edited: Feb 6, 2010
  6. Feb 6, 2010 #5
    Well, I said "to the best of abilities". Enforcing more pressure wont be good. Some would optimize, others would fail.

    I can understand that you want a competitor out of the picture, this is what I would love too. But the real issue IMO with companies going out the drain is the drag on society. Probably less in USA than in EU due to your laws and social system, but even so. Close a business and you have unemployed ppl. No business going on, you loose the tax money that company would contribute to the state budget.

    So the real question is not if you or me can survive a tax hike. It's basically "Can we (the government) afford a tax increase at moment X in time ? If yes, what in what quantum "?
     
  7. Feb 6, 2010 #6

    CRGreathouse

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    Of course if the other companies are subject to the same tax, their prices will rise, allowing you to raise your price in turn.

    In general, though, your point is quite correct. It is rare that businesses are able to pass along all of a tax increase to their customers.* When not all of the tax can be passed along, there is deadweight loss: utility lost by consumers (and businesses) but not recouped by the government.

    * In an efficient market, this happens precisely when demand is perfectly inelastic.

    Agreed [subject to DanP's caveat].

    Out of curiosity, do your favor some form of tort reform, and if so what kind?
     
  8. Feb 6, 2010 #7
    Here , in liability lawsuits, the plaintiff has to pay lawsuit costs and if he losses, he has to pay all expenses made by the defendant. How does this work in USA ?
     
  9. Feb 6, 2010 #8

    CRGreathouse

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    In the US, the plantiff pays lawsuit costs. There are essentially four possible outcomes: the plaintiff prevails, the parties settle, the defendant prevails, and the defendant 'wins big'. Only in the last case must the plaintiff reimburse the defendant for reasonable legal expenses. That is, it is possible for a defendant to prevail but not recoup legal expenses.

    But the cost of legal action is high enough that most parties settle.
     
  10. Feb 6, 2010 #9
    I agree Ivan - tax increases will result in job losses and reduced benefits for employees in a competitive economy. Hopefully Obama will figure this out before it's too late.
     
  11. Feb 7, 2010 #10

    Hurkyl

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    How can you tell that the current tax rate is too high? (Or exactly right)
     
  12. Feb 7, 2010 #11
    There's an old saying "you can't borrow yourself out of debt".

    Someone has to pay for all of the legislation that has passed (stimulus) and pending (cap and trade, card check, health care reform/entitlement expansion, etc.).

    There's also another old saying "he who has the gold makes the rules". Borrowing from China is a really bad idea.
     
  13. Feb 7, 2010 #12

    russ_watters

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    You guys missed something obvious:
    Fine, with the caveat that if costs go up for everyone, everyone may raise prices. But sure, maybe they are capable of absorbing a tax increase....
    ...but what if you can't? What if you are already close enough to the edge that a tax increase pushes you over? Then you go out of business if you can't raise prices.

    And as others pointed out...
    Yes, you are correct that all of those are negative effects of raising taxes, but you're missing the point that those things don't just hurt your workers, they hurt your company's profitibility/viability. "Dump less profitable components of the company" is another way to say part of your company is out of business. Hiring or wage freezes may be ok in a down economy, but in a growing economy they will hurt your ability to thrive and keep good workers. Odd that you would say such things when you are trying to argue against taxes damaging business...
    Sure, but that may not be true if your taxes go up a lot.

    Something else:
    That's why they call it macroeconomics. The common liberal fallacy of using isolated anecdotal information is just plain wrong. If it is true in "some" cases but not true in others, then the average cost to consumers has gone up and economic theory is validated. That sentence is correct and it is exactly why your thesis is wrong: you just stated that taxes force prices up!

    Oops!
     
    Last edited: Feb 7, 2010
  14. Feb 7, 2010 #13
    Attorney Fees

    Attorney fees are not included in court costs. In the United States, the losing party is not required to pay the winning party's attorney fees unless a law provides for an award of attorney fees in the lawsuit. For example, many consumer protection and environmental laws provide that a winning plaintiff can recover his or her attorney fees.


    http://research.lawyers.com/Court-Costs-in-Civil-Lawsuits.html" [Broken]

    The court system here (Canada) is "loser pays" including attorney fees. Sometimes they're only recoverable as according to a table of attorney costs as set out by the courts (which generally don't cover the actually cost of an attorney incurred) or the court can award costs on a "solicitor and his client basis" meaning that attorney costs have to be reimbursed by the losing party in full.
     
    Last edited by a moderator: May 4, 2017
  15. Feb 7, 2010 #14
    There ought to be a caveat on that because the question is not one of borrowing itself but what you are doing with the borrowed money. If you are using it to generate income, or simply bridge until receivables arrive, then it makes all the sense in the world to borrow. If you borrow to pay off existing debt (Peter/Paul) or for consumer spending, then no, you can't borrow yourself out of debt, you only create new debt.


    Yes.
     
  16. Feb 7, 2010 #15
    To address Ivan's ideas, as someone who has both been a self-employed contractor and a business owner (one company in the States, actually) I agree that taxes are a very small component of the cost of operating picture. As a contractor for services, my biggest costs entailed continuously upgrading to remain competitive in the field. As the owner of a business that created a product, cost of production/cost of materials was forever the balancing act. Taxes were way, way down the line in terms of something we concerned ourselves with.
     
  17. Feb 9, 2010 #16

    mheslep

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    As it should be for most businesses, especially if your operational decisions can not impact the tax picture. But when calculating a go/no-go expansion based on ROI - new employee, new shop, etc, all of it counts. In the macro sense given, say, ten percent better ROI we should see ten percent more new investments. Take five percent away to taxes, .... and so on. In a progressive tax system, where the tax increases on the marginal return, the effect is worse yet.
     
  18. Feb 9, 2010 #17

    mheslep

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    BTW, the US administration's chief economic advisor, Christine Romer, wrote a widely cited paper about the impact of taxes on economic activity (GDP). This is about taxes in general, not just business taxes. Romer found a 3:1 multiplier for GDP created vs taxes cut, or vice versa.

    http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf [Broken]
     
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  19. Feb 9, 2010 #18

    russ_watters

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    Let me give a more specific example of what happens on the margin to illustrate the point:

    Say you run a business with a 5% profit margin. For every $1 of income you have, $.95 goes to expenses of all kinds and $.05 is profit. If your expenses increase by 1%, that's now about $.96 in expenses and $.04 in profit. If your profit drops from $.05 to $.04, that's a drop of 20%. That's why businesses (particularly small businesses where the profit is the personal income of the owner) are so highly sensitive to small changes in operating costs.
     
  20. Feb 9, 2010 #19

    Gokul43201

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    How did you arrive at the connection between liberalism and this particular type of fallacy? If you have a reference, I am most interested.
     
  21. Feb 9, 2010 #20

    Gokul43201

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    While it may be fallacious to assert that the entire additional cost from the tax increase goes into a price increase it is also fallacious to say that tax increases (or any other marketwide increase in operating costs) cause no increase in prices.
     
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