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What does a company do if taxes are raised?

  1. Aug 10, 2011 #1
    If taxes are raised on a specific sector, what does a company on that sector does? For example, the company is getting a liquid profit of $1.000.000 a year, and the tax on profits is 30%. $300.000 goes to taxes.
    Now the tax is raised to 50%, and the company has just lost $200.000 per year. How do shareholders react and what are the usual responses to those reactions?
     
  2. jcsd
  3. Aug 10, 2011 #2
    If it's a private company, they pay the tax and look for a way to shield income the next year. If the private company has passive investors - they may try to sell their shares back if possible (it will depend on the terms of their specific agreement - price may be based on total return).

    If it's a public company, they'll weigh their return on investment and make a decision to sell the shares or not.
     
  4. Aug 10, 2011 #3
    And what other things does the company do? What about reducing wages and increasing products' prices? Would this reduction in the company's profit change the aggregate supply curves for the products of that sector?
     
  5. Aug 11, 2011 #4

    BWV

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    This addresses the important question of who bears the cost of corporate income taxes and the answer in most cases is consumers and workers
     
  6. Aug 11, 2011 #5
    What evidence do we have of that?
     
  7. Aug 11, 2011 #6
    Are we focused on the choices and actions of shareholders or the management?
     
  8. Aug 11, 2011 #7

    D H

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    Staff Emeritus
    Science Advisor

    Most companies have very small profit margins. A company that has a negative profit margin (i.e., it is losing money) won't be in business for long. To stay in business for any length of time, the company has to react to every little thing that impacts the profit margin. When a supplier increases the costs of some resource, the company can either raise their prices in return or can try to switch vendors.

    When the cost increase is a tax hike, the company can either pass that tax increase on to their customers or can move the operation in question to a different venue. There aren't many other choices. Cut payroll? Employees will walk. Cut costs elsewhere? If the company is in a competitive industry, they oftentimes can't. Companies in a competitive industry are already quite streamlined (those that aren't have already gone bankrupt).
     
  9. Aug 11, 2011 #8
    It should also be noted they would all be faced with the same tax increase.
     
  10. Aug 11, 2011 #9
    The shareholders might provide a few of these directives to management:
    1.) don't increase debt
    2.) try to find a way to improve sales and margins - not because they haven't maximized in the past - but because the tax increase may have eliminated a few competitors.
    3.) don't hire any new employees and find a way to trim payroll and benefits.
    4.) renegotiate all purchasing costs
    5.) tighten the credit cycle (accounts receivable management)
    6.) hire a better tax accountant
     
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