> the taxes ultimately get passed on to consumers through higher product prices, regardless of their income levels.
It increases producer prices which shifts the supply curve to the right, but its pretty self-evident that the effect on actual prices is dependent on price elasticity of demand in the markets for particular products, and that price elasticity of demand is not independent of the income of the people in the market for the product.
> Taxing corporations doesn't produce magic money -- it's still taxing people in the end, but it's the consumers.
No more than taxing labor income (which the US does disproportionately, as much capital income faces lower income tax rates and labor income is subject to additional, non-income taxes) is really taxing corporate stockholders, because it shifts the supply curve for labor increasing market clearing prices of labor and eating into corporate profit margins.
> We should be taxing the people who own the corporations, or are paid huge salaries by them -- that is, if you believe in progressive taxation.
But taxing high salaries is "regressive", just as much as taxing corporations, taxing consumers -- after all, if you shift the supply curve for management work and increase the market clearing price of that good, you are increasing producer costs and, therefore, shifting the supply curve for the good produced in a way which increases the market clearing cost, resulting in price increases to the consumer to pay the taxes. If you are going to make this argument for corporate taxes, you have to apply it to whatever you present as the alternative to corporate taxes, as well.
> but its pretty self-evident that the effect on actual prices is dependent on price elasticity of demand in the markets for particular products
Of course, but there's still the "minimum profitability" that a business seeks to have. Suppose three firms compete to sell widget X, and consumers are willing to pay up to $10 for it, but the companies sell it at $5 due to competition (it costs $4 to make and distribute). Then the price is determined by supply cost + reasonable profit, determined by competition. If the government removes part of that profit, they'll raise prices accordingly, and sell for $6 instead, since that's still within the demand price elasticity -- otherwise the firms would decide there wasn't enough profit and get out of the business entirely.
> No more than taxing labor income... is really taxing corporate stockholders
The difference is that taxing labor income can be intentionally progressive, which is widely believed to be a good thing.
> But taxing high salaries is "regressive"
That just doesn't make any sense -- words can't be redefined like that. The very definition of progressive taxation is taxing high salaries (EDIT: incomes) of individuals at a higher rate than lower ones.
I understand your overall argument -- it's certainly debatable to what extent you believe corporate taxes to affect prices, vs to what extent you believe personal income tax to affect market salaries. But that doesn't affect the point I was making, which is that corporate taxes are ultimately passed onto people, and that this is not done in a progressive way. But by taxing people directly instead, this can be done progressively.
>"corporate taxes are ultimately passed onto people"
I don't really get this argument. It's always made as if the taxes are applied in a vacuum where market forces no longer exist.
If corporations are operating in a competitive market, they will seek cost advantages and continue to compete for market share. Raised taxes represent an additional expense (for the purposes of this discussion), much like raised energy prices. It is not always the case that these costs are passed on to consumers. Rather, smart companies seek to become more efficient, reduce costs elsewhere, or even realize a slightly lower profit margin per unit in order to maintain or increase market share vs. other competitors.
There's also the option to reduce executive compensation, decrease shareholder dividends, and a host of other options available in the interest of remaining competitive. A smart company could actually outmaneuver other competitors, wind up with more volume, realize the same net profit after taxes, and pass lower prices on to consumers.
I mean, there are just a ton of other variables here. And, those who advocate low or no corporate taxes are frequently free marketers. So, it's very interesting to me that they all but completely ignore very relevant free market mechanisms that can countervail the effects of raised corporate taxes.
IMO, it's just an oft-repeated meme that "higher corporate taxes are automatically regressive because they automatically create higher prices for consumers".
Isn't it an easy solution though? Based on what you've said, companies have likely already done what they can to reduce expenses to what they consider an optimal place.
I'll try an example, although that might not be totally valid (I'm not really up on current tax laws). These are all made-up numbers and rates:
Say you sell a widget for $100, and it costs you $70 to make. Your profit on that is $30, of which let's say you pay $5 in taxes, so let's say you walk away with $25 per widget.
If the government bumps up the taxes by a percentage that makes the tax be $6. As a corporate policy, the easiest way to keep the same returns to investors is to tack on another dollar to the price and sell it for $101. Profit is $31, pay $6 in taxes, still walk away with $25/widget.
Your competitors are in the same boat as you are, regardless of what the tax rate was/is. Theoretically, if they weren't stealing your business at the lower tax rate, they won't steal it any more or less at the higher tax rate.
Sure maybe you consider some other areas to cut costs, but haven't you done that already? I know it's a silly over-simplified example, but if I own a company and I don't want to give back my profit, I raise my prices to compensate, and so do all competitors. The people that lose are the customers.
I see the rationale in that argument, but I think one of the things you're missing is that companies won't just automatically raise their prices in unison.
Smart companies may hold their prices constant and take a per unit profit hit to capture more share, allowing them to maintain or even increase overall profit. They may introduce higher margin products and/or develop entirely new strategies or lines of business.
And that is the free market mechanism that I mentioned: each company must adjust to the new reality and try to use it to gain an edge over its competitors. They do this all the time.
And, given this new incentive to maintain profits, they may be more aggresive in finding cost reduction elsewhere. One might argue that companies are doing all they can now, but you might be surprised at how new realities create new incentives.
The other important thing with returning shareholder value is how Wall Street works. It is very much a time-relative game. For example, how did the company do vs. last quarter or same quarter last fiscal year? Viewed this way, you can see why some companies pump the brakes on all out profit-maximization over a given timeframe, instead opting to ensure that the line keeps moving up and to the right over a longer period. So, it's more complicated than all companies are always maximizing profit at all times.
Finally, your example that the easiest thing to do is to raise the price by, say, $1 doesn't really hold, irrespective of what direct competitors do with their pricing. They must still keep prices in line with what the market will bear. If not, consumers may begin looking for substitutes or go without (depending on the product). So, while it might be the simplest thing for a company to try, it might not be accepted by the market.
This is all part of the free market at work. So, your simplification is tempting, but I think it goes back to creating that vacuum I mentioned, ignoring all of the many market variables that countervail the assumption that $1 in increased "cost" equals $1 in increased price.
If the market has reached the pre-tax equilibrium, would an added evenly-applied tax change competitiveness at all? I guess I don't see how that would change anything at all. If you and I are competitors, and we both pay the same tax rate, that's already factored into our businesses in some way. Sliding it up or down an equal amount on both of us won't change the me vs. you competitiveness right?
I get what you're saying regarding only pricing what the market will bear, but on the flip side of all this, consumers suddenly have more money, so I could make the argument that the consumers are willing to pay more because they suddenly have more in their pockets, and around the mulberry bush we go...
>would an added evenly-applied tax change competitiveness at all?
Any variable can change competitiveness, as companies may differ in their responses to it.
For example, look at fuel prices for airlines. When they increase across the board, some airlines may raise prices, others may cut back on services offered, still others may add baggage fees, some may focus on increasing volume on more profitable routes, some may lower prices and heavily promote their lower fares to gain market share, while others may risk prepaying for fuel at current prices or hedging with shorts, etc.
Point being, of course, that the same change that hits every competitor will produce different responses and effects. This can completely alter the competitive landscape. And, it's virtually a guarantee that you won't simply get some uniform, across the board price increase.
If we don't acknowledge this, then we are looking at the change in a vacuum, completely insulated from the realities of free market behavior.
>I could make the argument that the consumers are willing to pay more because they suddenly have more in their pockets
Yeah, I think I actually mentioned that in another post (too much risk/work to view another post mid-reply on this tablet). Anyway, it could definitely be the case that consumers can bear more, however, it is not neccesarily 1:1. That is, there are a lot of variables that might impact whether they'd be willing to spend that extra money on that product. Also, there is still some price that the market simply won't bear for a given product, irrespective of the extra money in consumer pockets. In any case, there is certainly no guarantee that companies can simply pass on the additional cost.
And, it can also be the case that some companies can, but others cannot, given their prior prices.
Possibly. Unless the tax code gave them incentive to cut costs elsewhere instead. I would guess such incentive to be logical, given the problem they're trying to solve.
In any case, one of the big premises of the article is that hiring less is happening anyway and contributing to the need for a basic livable income. So, that's a bit circular.
And, of course, that's just one of many potential cost-cutting measures.
> Raised taxes represent an additional expense (for the purposes of this discussion)
Raised income taxes aren't really an additional expense, because they are taken out of after-tax net income, not gross income. That complicates the analysis substantially.
This is precisely the reason I don't understand it when people say the cost of the tax will be passed onto consumers. What cost? The tax is on profits...
You may see it that way, but most businesses do indeed see tax liabilities as a cost of doing business. Just because the profits are taxed doesn't mean it's not a cost of some sort. For instance, you could say today's taxes are the cost of doing business next year or even quarter.
Depends on how the company applies the math. If a company wishes to treat tax liability as a cost of doing business, I fail to see how that couldn't be done.
But 'reasonable profit' isn't a constant. Just look at the airline industry - no single airline has had a consistent profit margin (most have not even been consistently profitable!). Thin margins aren't incentive to leave an industry - if they were then grocery stores would not exist (as they all have razor thin margins) and WalMart, Target, Kmart would all have switched industries.
In your example, if taxes of $0.50 are added, the firm may still sell widgets at the post-tax price of $5 and accept the reduction in margin from $1 to $0.50.
> That just doesn't make any sense -- words can't be redefined like that.
I used the quotes and the "just as much as..." reference because I was applying your logic about corporate taxes to the alternative you proposed. I don't agree that either is regressive, obviously, and I laid out exactly why that logic was wrong earlier in the post, before showing how if you ignored the fact that the logic was wrong and applied it consistently, it would say the same thing about your alternative as it said about the thing you proposed the alternative to.
> The very definition of progressive taxation is taxing high salaries of individuals at a higher rate than lower ones.
Actually, the usual definition is about taxing higher incomes at a higher rate. Confusing income with wages or salaries , so that one ignores non-labor (and, particularly, capital) income in considering the progressivity of taxes, is a pretty serious error.
>But taxing high salaries is "regressive", just as much as taxing corporations, taxing consumers
I disagree here. For this to hold, executives would have to strive to keep their pay where it is. But this simply isn't realistic. Executive pay has exploded beyond belief in the last half century, it's completely unprecedented.
There is no reason to allow individuals to siphon off so much capital, and no benefit to it. Standard of living with $1B is no different than $10B (which is why after Steve Jobs hit $6B he stopped bothering with making any more money).
It increases producer prices which shifts the supply curve to the right, but its pretty self-evident...
If you're taxing corporate income, it's pretty clear that Apple's and Google's supply curve will shift to the right. Not so much Samsung's or Nokia's. Taxing corporate income harms exports. Trying to tax only the corporate income from products and services sold in the US is in essence a VAT and then we're not talking about corporate income tax.
No more than taxing labor income (which the US does disproportionately)
If you have a point to make, please try doing it without blatantly lying. It's common knowledge that the US has substantially higher corporate tax rates than almost anywhere else:
The headline U.S. corporate tax is higher than that of many other countries, but it also has many more loopholes than the corporate tax of many other countries. As a result, the effective corporate tax rate in the U.S. is relatively low, around 13%: http://en.wikipedia.org/wiki/File:Effective_Corporate_Tax_Ra...
However I believe the parent's point was just that taxes on personal earned income represent a much larger share of total U.S. tax receipts than taxes on corporate income do, i.e. the U.S. mainly taxes labor income. And that is true; the corporate income tax accounts for only 10% of federal tax receipts: http://www.cbpp.org/cms/?fa=view&id=3822
> If you have a point to make, please try doing it without blatantly lying.
I'm not blatantly lying. US taxes on labor income are disproportionate to taxes on other income sources, both because of the favorable rates applied in the income tax system to capital income, and because labor income is subject to additional taxes.
> It's common knowledge that the US has substantially higher corporate tax rates than almost anywhere else
Whether that's true or not, its entirely irrelevant the claim I was making.
Seriously? What tax rate do you pay on your regular 40h a weke job? What tax rate do you pay on investments? Most people are taxed roughly 36% (28% income tax, 2% medicare, 6% social security) on their labor, however investments are only taxed at a flat 15%. Hence, the US disproportionately taxes labor over investments.
Do you have other evidence that shows that investment income is in-fact taxed higher than labor income in the US?
> (28% income tax, 2% medicare, 6% social security)
This year, the 28% tax bracket for a single individual stars at $87,850 taxable income. The Social Security cap is $113,700, and the Social Security tax is levied on all income below this. The individual standard deduction is $6100 and the personal exemption is $3900.
That means that for an individual, a 28% income tax rate means income is above $97,850 while paying Social security taxes means income is below $113,700. I sort of doubt this covers "most people".
For a couple, the 28% bracket starts at $146,400 taxable, the standard deduction is $12,200, and personal exemptions are $7,800. So in this case the rate you quote applies to income over $166,400 and below $227,400 if both members of the couple have equal salaries. Again, hardly "most people".
Of course the 15% bracket definitely has a marginal rate of 23% or so, again ignoring EITC and various other tax credits you can claim at those income levels that phase out with income, since they're certainly paying FICA at that point.
> investments are only taxed at a flat 15%
It really depends. Dividends are sometimes taxed at this rate and sometimes at your normal income rate, depending on whether they're qualified or not. Capital gains are, if you hold long enough. And capital gains can, of course, still affect your AMT exemption, meaning that if you're in the the AMT phaseout range your marginal rate on even long-term capital gains is about 22% (15% + 25%*28%, since the phaseout applies to normal income).
Of course once you make so much money that the AMT becomes irrelevant your marginal rate on capital gains drops back down to 15%.
Sure, but I assumed oijaf888 was talking about marginal rates on income, which affect whether you want your marginal dollar to be salary or investment income. If we start talking about overall rates, there is no plausible way at all to claim that "most people" pay an overall Federal rate higher than 15%.
Really the FICA portion (medicare + social security) is nearly twice that, because your employer has to match it. You explicitly see the 2X if you're self-employed, but even otherwise that's money they're spending to employ you that could be going to you and is instead being taken as tax revenue.
Except capital gains taxes don't include inflation in the calculations.
So let's say your stocks in aggregate rose 4% that year, and the inflation was 3%. You made 1% profit (in purchasing power). You pay 4% * 0.15 = 0.6% which is 60% of your profits and only 38% of your income.
Paying employees is a business expense, so the money is not taxed as corporate profit. Paying dividends (outside of the context of a co-operative where you've pre-committed to paying certain dividends) is not considered a business expense and so the money is taxed as corporate profit before being distributed.
I don't think it's the same thing, because your salary is an expense to the company, so they don't pay taxes on that amount. (Some states/cities do tax corporate revenue as well as corporate profit, but not federal taxes.)
I'm not saying they are taxed on the amount of money they pay you. Well, there is Social Security (US) taxes that they pay but you could argue that's money that should go to the employee anyway if there was no such tax. I'm saying the company makes money that is taxed and then they pay you out of that money in which you are taxed for receiving.
Ok, granted, not all the money that the company has on hand that is paid into your salary is taxed as corporate income, but the idea is valid. I agree not at the same level as taxing profits and then taxing dividends which is essentially the same money.
I'm just going with the notion that it is not uncommon for money to be taxed as it is exchanged from one entity to another.
"Most people are taxed roughly 36% (28% income tax, 2% medicare, 6% social security) on their labor, however investments are only taxed at a flat 15%."
"Double taxation" may not be an entirely accurate label (more like "an additional pass of taxation"), but the fact that dividends (in particular) are taxed as corporate profit before being taxed as individual profit makes that 15% figure misleading for dividends, which is what the child comment brought up: "Arguably, you get double-taxed if you own stocks."
Really, the number of times the money is taxed is irrelevant (except wrt paperwork) and we should be looking at the total tax level, but the point is that it's more than the nominal tax rate on qualified dividends if we're going to be comparing tax rate on labor income to tax rate on non-labor income, apples to apples.
Of course, that's specifically for dividends; bond premium payments and capital gains are a different discussion.
Various countries have dividend imputation for that:
> it reduces or eliminates the tax disadvantages of distributing dividends to shareholders by only requiring them to pay the difference between the corporate rate and their marginal rate.
No, its not.
> the taxes ultimately get passed on to consumers through higher product prices, regardless of their income levels.
It increases producer prices which shifts the supply curve to the right, but its pretty self-evident that the effect on actual prices is dependent on price elasticity of demand in the markets for particular products, and that price elasticity of demand is not independent of the income of the people in the market for the product.
> Taxing corporations doesn't produce magic money -- it's still taxing people in the end, but it's the consumers.
No more than taxing labor income (which the US does disproportionately, as much capital income faces lower income tax rates and labor income is subject to additional, non-income taxes) is really taxing corporate stockholders, because it shifts the supply curve for labor increasing market clearing prices of labor and eating into corporate profit margins.
> We should be taxing the people who own the corporations, or are paid huge salaries by them -- that is, if you believe in progressive taxation.
But taxing high salaries is "regressive", just as much as taxing corporations, taxing consumers -- after all, if you shift the supply curve for management work and increase the market clearing price of that good, you are increasing producer costs and, therefore, shifting the supply curve for the good produced in a way which increases the market clearing cost, resulting in price increases to the consumer to pay the taxes. If you are going to make this argument for corporate taxes, you have to apply it to whatever you present as the alternative to corporate taxes, as well.