Small changes in the tax code may have no impact on pricing but at the extremes it works its way in by either fostering or limiting competition. It also impacts the need for businesses to borrow and provides for more capital to create efficiencies through modernization which may works its way into cheaper and cheaper costs of production
How does a Shiny CEO âspendâ $30M per year? I canât conceive of a way I could spend $1M, without soon being up to my ears in stuff. I submit that the extra profits created by a reduced tax rate go into doing what has the highest return, with the least effort: financial manipulation/speculation. Apple/Boeing buybacks are financial manipulation, that create no âjobsâ. As we have seen, Boeingâs financial manipulation has so consumed the company that they are losing market share, which will eventually, negatively impact âjobsâ.
Here are the annual âjobsâ totals at Boeing, starting in 2009, while the company spent Billions buying back stock.
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Itâs far more likely that cutting corporate taxes would increase excessive Executive Compensation rather than reduce prices for consumers.
intercst
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Of course, but thatâs not the fault of the tax policy (or the math).
The facts show that cutting taxes has no impact on âjobsâ or âpricesâ, the two excuses always offered for giving the âJCsâ a free ride.
Steve
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Well thatâs true, âat the extremesâ. For instance at 100% tax rate (or close) nothing happens. At 0% tax rate (or close) you have Somalia.
But lowering the corporate tax rate has done nothing but encourage corporations to shower the executives with salaries, bonuses, and precious little has trickled down to the middle class - where most of the spending that supports the economy takes place.
And when I look for modernization (after all, we have lowered the corporate tax rate multiple times in recent years) I see rusting factories, a diesel electric railroad system creaking along the tracks, public infrastructure being starved, airports that look like theyâre from the 1930âs, and more.
Even the âcheaper costs of productionâ seem to be just a container boat ride away - in China, not in Kansas. Where is all this great âefficiencyâ, except in the multimillion dollar estates of the Captains of Industry?
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Yes. They already know how much they can charge for it so if taxes go to zero there is no incentive to lower prices. Theyâre not going to charge any less than they know they can get.
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Sometimes it is based on that. Other times it is based on what the market will bear. LVMHâs margins are on the order of 15-20% as opposed to most retail businesses which are more like 5-10%. They could lower their prices a bunch and still be profitable. But they donât because they make more money selling their stuff at markups so absurd they would be a sailor blush. Charging what the market will bear has made CEO of LVMH Bernard Arnaut somewhere between the third and the richest man on planet Earth. He goes to sleep each night on a Scrooge McDuck-style mountain of gold because he keeps LVMHâs prices nice and high and keeps the difference for himself.
Visaâs margins are on the order of 40%. The company prints money. In theory, they could lower their prices (merchants hate exchange fees with the heat of a thousand burning suns). But they donât care. Visa isnât cutting prices. Why should they? There is a firehose of cash that flows into their bank accounts every day.
And sure, there is another version of this story where companies like Wal-Mart and Costco relentlessly trim costs so they can keep prices very low and make money on volume. That works too.
But in the real world, there is no universal principle that cutting corporate taxes means a savings for consumers. Some companies might pass the savings along. Many are delighted to keep the windfall for themselves.
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How quaint. You still believe in the fairy tales taught in business schools. There are precious few products that actually have the competition that microeconomics teaches. Those products are known as commodities, and have pretty low margins. Most everything you can think of that is stuff people buy has a pretty low elasticity of demand. People are going to buy with little regard to price. Apple can charge whatever they want for their phones and computers. GM and Ford and Toyota and Mercedes and BMW can charge what they want. Ditto for clothing designers and theme parks and restaurants and a whole host of other goods and services. Yes, there are alternate products available for many of these things, but they arenât direct replacements. A Samsung phone competes a little bit with Apple phones, but they are far from direct swaps.
So the idea that any reduction in corporate tax rates will be reflected in the price of products is one of those theoretical constructs that doesnât survive the transition to practice.
âPeter
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Thatâs not the argument that I made, its the changes in the corporate tax rate depending on the amounts have a more complex impact on capital spend and other decisions that can work their way back into pricing. It is not a direct correlation and prices do not tend to move up or down with small fluctuations in the corporate tax rates. Long term, innovation and entrepreneurial cultures will tend to locate in areas where capital is retained in the private sector and regulatory structures are more limited.
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That is not necessarily true. It is a generality. Currently government spending is helping corporations build out factories.
Supply-side economics made it wiser to offshore factory output. That left this country much poorer and now over $34 tr in debt.
That is true but if the factories are offshored, then we get poorer as a nation. The money leaves this country. The competition coming in is from overseas which hastens the countryâs indebtedness.
You mentioned extremes versus minor tweaks. The middle ground is working. It would work a bit better with slightly higher taxes. I am against extremes like in the 1950s. That was poorly done back then.
That is not true. Somewhat higher taxes lower consumer prices. Factories are built to compete with each other since expensing factories lowers the tax bill.
Better than offshoring because there is less to expense.
If I understand it correctly, you are arguing that there is some level of tax cut that will find its way to reduced prices for the products or services that a business sells.
I am saying that there is no such level. You could reduce corporate taxes to zero and, except for pure commodities, there would be no change in corporate prices. Why should prices change? The business already knows that its customers will pay the previous âwith taxâ price. There is no incentive to cut prices, because there is no effective competition.
All that would happen is that corporate profits will increase, with that increase spilt in some way between the owners and top corporate management.
âPeter
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That is very annoying isnât it? Do not put words in my mouth. I find it equally annoying. You assume far too many things about left-leaning politics. Parrot talk stuff.
On a nicer note, if you study demand-side economics you find you were fed lies about it for decades. Demand-side economics is when this nation gets fabulously wealthy.
China and Germany were enjoying demand-side economics until recently. That was why those nations were getting incredibly wealthy.
I have heard the biggest BULL crappers on earth in this country say that demand-side economics is a bad thing. What a joke. It takes a lobotomy to think that.
German tax law would never go over in the USA. German tax law encourages reinvestment in the company as opposed to rewarding the insiders. Thatâs why German companies like SAP, Volkswagen, Deutsche Telekom (T-mobile in the US), Siemens, etc are juggernauts. German tax code essentially forces them to invest and expand.
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Iâm saying that small changes probably matter very little. However, if the tax rate change is substantial, it starts to create meaningful decisions as where businesses locate and also additional capital to spur greater business activity. It fosters new competitors that will cause businesses to have to compete on price, among other things. Businesses with moats may be less affected as you pointed out. However, the price of the inputs may go down as more competitors compete as suppliers. Certainly, products and services that are highly commoditized would likely see downward pressure.
Additionally, if corporations pay lower rates, it reduces the need to borrow, lowering the cost of capital, which may translate into overall lower costs of production and lower prices to the consumer.
Iâm not making an argument for a specific rate. It seems to me that lower is better in the end but probably the more important factor is the rate relative to similar nations where businesses may decide to relocate if it gets too out of whack.
Wealthier upper management and more Mercedes Benz for their teenagers.
Fixed that for you.
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I wonder how many workers and suppliers then benefit from that increased production?
It seems like your view is mostly one of envy. I tend to respect those that have worked hard and become successful rather than vilify them.
I care little how they spend their money.
Boeingâs issues are multi-faceted and the reasons for the loss of market share go well beyond any attention focused on buybacks.
I would disagree that Apple is in the same category. Regardless, the goal of a business is not the creation of jobs it is the following.
- Develop and Provide solutions that are valuable to others through services and products
- Grow and continue to differentiate itself from competitors where possible and if it makes economic sense
- Ultimately, it is to then create long term financial value for the shareholders.
Job creation is not the endgame but a positive byproduct. The increased shareholder wealth can then be reinvested in other new ventures. Steve Jobs left/dismissed from Apple. He then created NEXT computers and took $10mil to buy PIXAR and develop that business which later went public and then sold to Disney. Jobs returned to Apple and made a $150 million dollar investment of his own money and an agreement to be interim CEO for $1 a year. The rest as they say is history.
In the 1990âs, it cost $5-$6k to buy an IBM ThinkPad, the premier laptop of its day. Today, with an iPhone, the average person can walk around with more computing power and capabilities at a price of $600 to $1,000.
If a company doesnât factor in the tax rate when running their business, why do states, counties and municipalities offer companies tax abatements when recruiting new companies? I believe most abatements are for 10 years. A relatively short time. If taxes donât influence company decisions, why do they consider the abatements?
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