Years prior to the American Revolution, Ben Franklin attempted to explain to Crown officials why taxing the sugar trade to produce more revenue wouldn't work. He told them that if they raised the duty on a barrel of molasses, say, by two pennies, all that the merchants in New England would do was pass along the price increase to their English customers. Thus, the Crown would really be raising taxes on people in England, not the colonials in America....
The British never got it. But that's the essence of the argument that corporations don't pay taxes, they only collect them, acting pretty much as 21st Century tax farmers for the government. The cost of paying taxes is figured into the final cost of the goods or services they sell you, not paid out of profits.
Here's an explanation from a small business owner in Delaware:
First, think about the parts I have emphasized in bold. Taxes are a cost to be recovered before making a profit, and are therefore actually paid by the customers. Pure Ben Franklin, right?
The second part doesn't work quite so well:
This emphasized section might strike you as strange coming from a small business owner, because it suggests that the person has no intention of utilizing additional funds to expand the business, invest in new equipment in order to upgrade services or reduce costs, or hire new employees to meet the additional demand caused by the expansion.
Nor does this small business owner appear to operate in a competitive environment, wherein a reduction in costs might be expected to lead to a reduction in price to attract more business, acquire more market share, and ultimately make far, far more profit later by the exercise of delayed gratification and disciplined risk of capital. No, this particular owner is just going to take any extra profit from a tax cut, put it in the bank, and screw over the customers by continuing to charge them the same price.
Given the first point our business owner made about taxes actually being paid by the customer, the second point might make you scratch your head.
Until you consider the source.
The British never got it. But that's the essence of the argument that corporations don't pay taxes, they only collect them, acting pretty much as 21st Century tax farmers for the government. The cost of paying taxes is figured into the final cost of the goods or services they sell you, not paid out of profits.
Here's an explanation from a small business owner in Delaware:
I employ people.
I hire new people when I need their services and I think I can keep them working and I think I can cover their costs.
I’m not hiring people because I have extra cash.
In my business, extra cash is called Profit.
Taxes I have to pay are part of the cost of doing business and built into the overhead charged to clients.
Interestingly, I also build in profits too, so I get both of them covered. So at the end of the day — taxes get paid because we recover those costs in full AND I get my profit numbers.
NOW — the way tax cuts work in this scenario (Why is it unusual to have your taxes covered in overhead?) — is that you pay less taxes, but you don’t really change your overhead. You’ve just enhanced your profit. You aren’t really going to buy anything new with that or hire anybody.
Because you’ll get those costs covered with your overhead and the new work you’ll have that person doing.
First, think about the parts I have emphasized in bold. Taxes are a cost to be recovered before making a profit, and are therefore actually paid by the customers. Pure Ben Franklin, right?
The second part doesn't work quite so well:
NOW — the way tax cuts work in this scenario (Why is it unusual to have your taxes covered in overhead?) — is that you pay less taxes, but you don’t really change your overhead. You’ve just enhanced your profit. You aren’t really going to buy anything new with that or hire anybody.
This emphasized section might strike you as strange coming from a small business owner, because it suggests that the person has no intention of utilizing additional funds to expand the business, invest in new equipment in order to upgrade services or reduce costs, or hire new employees to meet the additional demand caused by the expansion.
Nor does this small business owner appear to operate in a competitive environment, wherein a reduction in costs might be expected to lead to a reduction in price to attract more business, acquire more market share, and ultimately make far, far more profit later by the exercise of delayed gratification and disciplined risk of capital. No, this particular owner is just going to take any extra profit from a tax cut, put it in the bank, and screw over the customers by continuing to charge them the same price.
Given the first point our business owner made about taxes actually being paid by the customer, the second point might make you scratch your head.
Until you consider the source.
Comments
However, capitalism tends to be a bit slow to act. Suppose it's possible to lower prices by x dollars and still make a profit. If you act before your competitors, you can temporarily get the same benefit in extra sales from a (20% of x) reduction in price as you could from reducing by x. Thus, competition will eventually lower prices by x, but we should expect it to take a fair amount of time. Now, if we had an equilibrium solution to start with, this wouldn't really be an issue. However, if we start from the existing situation of excessive interference from government and were to suddenly remove it by ending corporate income taxes, we shouldn't expect prices to drop to their natural level overnight. A conundrum to which I don't really have a solution.
The trickle down theory is once again exposed as a hoax. The term you use here..."ultimately make far, far more profit later by the exercise of delayed gratification"... is too funny considering whose comments are being targeted.
"I believe, in many ways, the future of our economy is largely dependent on growing small business,” Markell said. “The big job growth is likely to come from smaller companies.”
The article further states that small businesses account for 48% of Delaware's private sector employment.
Steve, you usually have more credible sources ! (snark).
You make my point for me: too often our reaction to a piece of writing has more to do with who wrote it than what it actually said.
Beyond that, the criticism IU expressed stands, no matter the source. Your point is moot in that regard.
I read the dialogue late last night. My reaction clearly does NOT correlate to some sentiment about perceived authorship (outside of enjoying the sheer irony of the source which I, obviously, was aware of while reading it and forming my opinion). Nice try though.
I'll try again. I had read post threads on a few Delaware blogs the other night, including the comments from Cassandra that Steve quotes here.
I mistakenly attributed the quotes to Dom., gee, I assumed it was her being quoted. I didn't click the link. So kill me.
because anyone among your customer base who knows about the tax break will realize that your overhead is now lower and will either delay their purchases or negotiate w/ you and your competitors for a better price, thereby restarting the competitive process that lowers prices.