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Posts Tagged ‘Corporate America’

High Corporate Taxes Do Not Stymie Corporate Spending

Posted by politicalpartypooper on August 29, 2010

Consider this our second lesson in economics; Economics 102.

Lets talk about high corporate (or business) taxes versus low taxes.  I argued with a die-hard Conservative for about an hour this weekend, and he refused to see the sense of what I am about to tell you.  Let’s see if it makes sense to you, or if I am wet behind the ears.  I’ll use the same examples I gave him.

Let’s say I have two tax scenarios; one is with corporate/business taxes at 25% and one is at 75%.  Please keep in mind that no one is suggesting even close to a 75% tax rate, but let’s use it for an example.

My Conservative friend  said that trickle down economics works because if he had lower corporate taxes (he doesn’t own a business) he would use that extra money saved with the lower taxes to buy equipment, which would trickle down to the factory that made the equipment and the people employed there.  Well enough.

Except that’s not the way it works in business.  It sounds good, it almost sounds right, but it isn’t.  It’s an anecdote that has no basis in reality.  I answered that any business person waiting until after he had paid his taxes to see what he had left for capital equipment purchases is a moron and deserves to get gouged by taxation.  That wasn’t met with a great deal of understanding or approval, so I explained why I said it.

As a business owner, I don’t wait until I pay my taxes in the new year to buy equipment I need.  That would be stupid.  I buy the equipment before I pay my taxes for one purpose. I call it Profit Reduction.  Call it whatever you want; tax-deductible equipment purchase, capital equipment purchase… whatever.  The point is I use that purchase to reduce the profit that I have to report to the IRS.  Remember that all profit is taxable, but not all income is.  Income is the money my business earns.  But it’s not all taxable.  I can deduct expenses just like an individual can.  I can deduct labor, travel, materials, office space rent, utilities, equipment purchases, etc.  All of those expenses are deducted from gross business revenue (income).  What’s left after that is profit.  Let’s go to the example.

Let’s say my business has a gross revenue of $200,000.  Labor costs are $120,000, equipment costs were $20,000, and rent and utilities and all other expenses were $20,000.  Those business expenses add up to $160,000.  Since my gross revenue was $200,000, my actual net profit would be $40,000.  If my business was taxed at 25%, my tax bill would be $10,000.  If it was taxed at a 75% rate, my tax bill would be $30,000.  If I waited until after I paid my taxes to buy equipment, I would have left my net profit at the full $40,000, all of it taxable.

Here’s why high taxes can actually be an incentive for a business owner to buy equipment at the end of the year…or give out employee bonuses at the end of the year.  Yes, if you receive a bonus around Christmas time, that bonus is fully deductible as a business expense.  Now you know why it comes around the end of the year.  And here you thought your boss was actually giving you a Christmas bonus.  Nope, he’s reducing the net profit of his business and your bonus helps him avoid paying more taxes.  As a business owner, the thought process sounds something like this:

“Hmmm, if my net profit is $40,000, I’ll owe $10,000 in taxes this year.   Why should I pay that much?  Why should the Federal government get my business’ hard earned money?  I’d rather give it away than pay them that much!”

And so evolves the “Christmas” bonus in the mind of the business owner.  Better that my employees get a bonus than the Fed gets one dime more than they deserve, which is almost nothing.  Besides, maybe that bonus will encourage my employees to work more efficiently; at least they won’t waste that money like the Federal government would.  And, I can pay myself a nice bonus, too…fully deductible.

So let’s say the bonuses add up to $20,000.  My net profit is now reduced to $20,000, and if I paid at a 25% rate, I would still owe $5,000 in taxes.  Hmm, how can I cut that amount even lower?  I know!  I’ll buy equipment that I was putting off until next year!  Anything to reduce my net profit as close to zero as possible so that my tax bill is as close to zero as possible, too.

Trickle Down Economics puts the cart before the horse.  In other words, it paints a portrait of a business owner being a moron and paying taxes before he pays bonuses or buys capital equipment.  Not smart, especially when it leaves you paying taxes on a much higher net profit.  I don’t personally know of a single business owner or executive who runs his business that way.  Not one.

Remember when I said that higher tax rates would create an even greater incentive for a business to reinvest in itself rather than throw their net profit down the toilet by paying extra taxes to the Fed?  Well, think about it.  If my tax rate was 75%, that would mean a $40,000 profit would see $30,000 of my company’s money being paid to the IRS.  If you think I’m stingy at 25%, wait until you see how stingy I am toward the IRS if taxes are at 75%.

Where does all that money go?  If I give it to my employees as bonuses, conveniently around Christmas so I look like a big softy; where does that money end up?  Does some of it maybe end up at the mall?  And maybe some of it is saved, and some of it is invested.  If I didn’t give those “Christmas” bonuses, and instead paid the actual taxes on my gross profit, where would that money end up?  I think we all know that it would end up in the toilet.

Where does the money I spend on Capital equipment right before the end of the year go? The same place my Conservative friend said it would end up if only the Feds would cut his business taxes so he had more money to buy equipment.  The cart before the horse.

If you are a business owner who waits to buy equipment or give out bonuses until after you’ve paid taxes, you are flushing money down the toilet.  Executives and business owners do not operate that way, unless they are morons.

In the end, the Federal Government does not dictate to me how much of that gross profit they are going to get.  I control that, because I control how much net profit I actually have.  I control it through wages, expenses, and equipment purchases.  If I have to buy a new computer every year just to make sure that the $2000 I spend on it does not end up in the hands of the IRS, then that’s what I do.  And I do do that.

Higher taxes are an even greater incentive for me to reinvest in my business than low taxes.  Like I said before, I do not know of a single business owner or executive who doesn’t feel the same way.  Conservative politics and Trickle Down anecdotes aside, the numbers prove that high taxes are a greater incentive for businesses to reinvest in themselves than low taxes. And when we reinvest in our  own businesses, we are helping to create the demand that Conservatives say comes from Trickle Down economics.  Cut corporate taxes, they say.  But it doesn’t work.  Low taxes create very little incentive for reinvestment.  Rather, they create incentive for a business to hoard cash.  Cash doesn’t do anyone any good unless it is spent.

This is not rocket science, but proponents of Trickle Down economics prefer anecdotes to facts.  They prefer to tell you all about how businesses would reinvest money into their own business if only we cut their taxes, and they’d do it because they’d have more money to spend.  But reality shows that it just doesn’t work that way.  I spend my money before the Fed gets it, not after.  I know exactly how much money I have to spend, and I plan that with my accountant.  I reduce the actual taxes I pay by being proactive; by reinvesting in my business RATHER THAN PAYING THAT MONEY TO THE IRS.

It’s the cart before the horse.  My tax bill does not decide for me how much equipment I can buy, or what kind of a bonus I can give to my employees.  I decide how much gross profit is going to be exposed to taxes.  That’s not an anecdote; that’s just reality.     Ω

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Breaking Down Trickle Down: Business Plan 101

Posted by politicalpartypooper on August 18, 2010

The thirty year old Conservative plan for the economy is known by many names; Supply Side, Reaganomics, but my favorite name for it is Trickle-Down economics. In case you don’t follow economic theories, Trickle-Down is the practice of giving advantage to the supply side of our economics system, the corporations, wealthy, and small businesses who create jobs, through tax breaks and incentives. The idea is that wealthy people flush with cash save that cash, and those savings are invested, through some means, back into the economy, which then through various ways, trickles down even to the poorest of Americans, either through innovations and efficiencies that make consumer goods less expensive to own, or through job creation due to increased demand.

Historically, this has been accomplished through tax breaks, especially for corporate America. In fact, about the only solution available to Supply-Siders is reducing taxes.

Thankfully, that’s as complicated as Republicans have made it, which makes my job much simpler.  The idea of cutting taxes for corporate America and small businesses is that they will then use that money to create jobs in their own businesses.  Only we’ve been using Bush’ Trickle-Down tax cuts for nine years, and we’re bleeding jobs.  The best that can be said about Bush’ job creation record was that it was a positive record during his two terms.  He averaged 49,000 jobs created per month.  Economists say we need at least 150,000 to keep up with population growth.  So Bush only fell about 101,000 jobs short per month with his Trickle-Down plan.

So much for tax cuts creating jobs.

Now let’s get to the good stuff, and don’t worry, this is easy.  Business Plan 101.  How to make money running a business.

Business A receives a tax cut and finds itself flush with cash.  Wanting to do their part, they immediately hire several staff.  However, after a few months, they realize that there is no work for these new staffers to do; even though they were flush with cash before they hired the new staff, in the end, there was no demand for those new hires to fulfill.  After a few more months, those hires were laid off, and Business A had less cash than they did before they received the tax cut.

Business B received the same tax cut as Business A.  Instead of hiring new staff, though, Business B researched whether there was actually anything for them to do; in other words, they monitored demand, always at the ready to meet it with new employees if it came to that.  But in this case, the demand for their product was no different from before they received the tax cut, so they didn’t hire anyone.  The tax cut ended up not achieving its goal.

Which business is the smarter business?

Tax cuts mean nothing for job creation without demand.  Absolutely nothing, and that it can be described like this, without using any fancy formulas, completely destroys the myth of Trickle-Down economics.  The effect that tax cuts for the wealthy, or for Corporate America have on our economy are long delayed, at best, and meaningless at worst.

Business planning 101 dictates that you don’t hire unless there is work for them to do.  In other words, if demand is not present, neither should any new hires be.  And this is exactly what ails our economy today.  No good, smart business should ever hire someone just because they received a tax break, and the investments that the wealthy make and the subsequent trickling effect are too delayed and minimal to do any good.

Capitalism starts from the ground up.  No product is sold without a consumer to buy it.  This is simple stuff.  I explain it to my conservative friends all of the time, and then they go watch Fox News or some moronic Republican Senator who repeats all of the old anecdotal “facts” about Supply-Side, and I have to start all over again.

I can make the greatest gadget ever, but if there is no buyer for this gadget, I’ve just lost money.  Capitalism’s history is gorged with start-ups that failed because no one wanted their product or service.  President Obama just visited one that teeters on the brink yesterday, ZBB in Menomonee Falls, Wisconsin.

No matter how you roll the economy, it has a starting place, and that starting place is demand, at the bottom.  Tax cuts have no  significant impact on job creation.     Ω

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Accused Of Being Ignorant Of The Economy, I Make My Case Against Charlie Sykes and Supply-Side

Posted by politicalpartypooper on August 14, 2010

Finally some good economic news!  Sales on Porsches are up!  In July alone, Porsche sales climbed 75% from July of 2009.  However, sales on Ford, Dodge, and GM averaged about a 5% increase, and Honda and Toyota sales are down, meaning the Middle Class isn’t buying as many new cars this year as last year, and last year, they didn’t buy much at all.

Okay, so my good news was a bit tongue-in-cheek.  Yes, the economy rocks for the rich and for Wall Street, but for the Middle Class, according to Newsweek columnist Dan Gross real unemployment remains around16.5%:

That’s the Bureau of Labor’s U6 number, which takes into consideration so-called “discouraged workers” who have given up looking for work, as well as people who are working part-time but would like to be working full-time. Overall, according to Gross, the number means that there is “one out of six adults in this country whose talents and time and skills are not being utilized anywhere near to the extent of their abilities.”

Tax rates on some of those buying Porsches are half of what they were pre-1982, and lower by four to seven percent than in the 1990’s, a period of time marked by low unemployment.  Clearly the top tax rates have diddly squat to do with creating jobs.  It’s been that way all throughout our history in the 20th century and into the first decade of this one.  Anyone who says otherwise is either ignorant, lying, or relies on faith-based economics.  Sadly for them, economics aren’t faith-based.  Just because you believe the economy starts at the top and trickles down doesn’t make it so.  Neither do the actual numbers or consumers, the stuff a real economy is made of.

And what does this current economy tell us?

There aren’t enough consumers spending enough money, despite the glossy Porsche sales reports.  That fact is so blatant, so in-your-face that it’s hard to believe some people can’t see it.  Let me explain.  No matter how many tax breaks you give the top ten percent of earners in the US, there simply aren’t enough of them to make any difference in consumer demand, which drives our economy and job creation.

I was told by Charlie Sykes, talk radio host at WTMJ, Milwaukee, Wisconsin, that I was ignorant of economics.  Yes, he actually replied, briefly and insultingly, to my email of the other day, but he was allowed to be insulting since he took my blog post about him as an insult.  I’m a big boy…I took it with a thumb in my mouth and only a little bit of whining.  Tangent completed.

The reason I bring it up is because Charlie is amongst a large group of people called Conservatives who still believe the economy is driven from the top and trickles down to the Middle Class.  But as I stated earlier, there simply aren’t enough of them to create any real demand.  What’s my proof?

1. If consumer demand were up, jobs would be created.  We’re still losing more jobs than we’re creating.  Demand is down.  From the US Consumer Demand Index:

After a surprisingly strong upswing in May, the CDI for June fell by more than 20 index points and now stands at -27, down from -5 in May as lower demand for clothing and food drags the aggregated index down. However, this is still 10 points up on the all-time low of February 2009. The three-month moving average is also down but less dramatically so, from -13 in May to -18 in June.
Reminding you that the index was set at 100 as an average for the year of 2000, it’s obvious that we are not yet out of the woods. But on the other hand the new data do not convincingly indicate that there is much further to go to reach the bottom, if we have not already reached it.

2. Despite eight years of lowering taxes on corporations and the top ten percent of earners, from 2001 thru 2008, an average of only 49,000 jobs were created per month.  A benchmark of 150,000 jobs is needed each month to accommodate incoming/outgoing workers, to say nothing of actual positive job growth beyond that.  Needless to say, when compared to the benchmark, 49,000 jobs created each month is pathetic.  It also explains why the first Bush Recession was a jobless recovery.

3.  The economy has lost a cumulative total of 3.1 million manufacturing jobs since 2001 according to the U.S. Bureau of Labor Statistics.  That’s 28,703 jobs lost per month.  I think we know where they went, and where they are going…overseas.  But Conservatives like Charlie Sykes and his brethren “believe” that Free Trade is good for American jobs.  Just another case where faith-based economics is completely opposite of reality.  I know you guys really, really want supply-side economics to be true, but the numbers say, undisguisedly, that supply-side economics is a fairy tale, unless the only goal of trickle-down is to enrich a very few people in the United States while everyone else steadily but rapidly sees their standard of living decline, which, mind you, mimics our current reality.

4.  If you still needed evidence that taxes do not affect job creation, this graph says it all.  It breaks down job creation, change in GDP, and change in household net worth by decade.  Remember, corporate tax rates and tax rates on the highest earners were 70% or above until 1982.

Boy, the current decade really sucks, doesn’t it?  Negative job growth, negative household net worth gain, and the lowest GDP since the Great Depression.  President Bush and President Obama must be so proud.  I really do believe they are going to set unbreakable records for economic futility.  Even the 1970’s beats this decade, and we all remember how sucky that decade was. The 70’s didn’t just beat this decade, they kicked its ass; which means Nixon, Viet Nam, the oil embargo, an impeachment, Ford, and Carter did better economically speaking than Bush and Obama.  How’s that for a pathetic record?  A record, I might add, that includes tax rates that are half of what they were during the seventies, when, you know, high  corporate tax rates stagnated job growth…umm, except, from the graph, it looks like taxes didn’t have any effect whatsoever on job growth in the 70’s.  Or in the 60’s, or in the 50’s, or in the 40’s…or ever.

Will Charlie, or people like him finally admit the error of their ways?  Will they, at the very least, admit that the numbers don’t look so hot?  If not, why not?  Facts are facts.  You can’t hide from these numbers, they are what they are, and sadly, I used to be a Supply-sider.  Not any more.  Not once I started studying the actual statistics.  And if I can change, I have to believe that Charlie and others can, too.  I was a staunch supporter of trickle down and everything Reagan.  To some extent, I’m still an apologist for Reagan; I just love the guy.  But when you run into the actual numbers, you have to make a choice; will you accept that what you’ve believed for three decades has been false, or will you continue to “believe” in a lie?

And if you continue to believe in that lie, why?  What are you trying to protect?  The numbers of this economy don’t protect the Middle Class; they destroy it.  The last time I checked, most of the people I know are Middle Class, including Charlie and most Conservatives.  So what have you to gain by protecting a faith-based economic system that has never loved you back?

16.5% real unemployment.  9.5% by the government’s count, and over 9% unemployment for eighteen consecutive months.  3.1 Million manufacturing jobs lost.  With a benchmark of 150,000 jobs needed to be created per month to keep pace with population growth, the Bush average of 49,000 fell over 100,000 short per month, amidst the largest corporate tax cut in two decades.  Even the “good” times in the Bush presidency were shockingly bad by every historical standard since the Great Depression, with regards to the Middle Class.

If the Middle Class can’t buy because they don’t earn enough or don’t have a job, demand suffers.  If that condition persists long enough, it becomes chronic, and the hole gets deeper and harder to climb out of with each passing month.  That unemployment persistently remains so high is an indicator of a huge lack of consumer demand, and nothing else.  Some writers report that corporations are hoarding their cash and not hiring even though they have the reserves to do so.  I don’t doubt that, and I won’t blame them.  If there’s no demand, why bother hiring?   Even corporations are showing by their unwillingness to hire that it is demand that drives this economy, and not corporations and wealthy people flush with cash who just want to fling a few chips down to the peasants.  Trickle down is a lie, a fable, nothing more.  American corporations flush with cash but not hiring are proving that fact beyond the shadow of a doubt.

My rule number three of economics applies here.  That corporations are flush with cash and aren’t hiring isn’t a sign that they are leery of the deficit, or of higher taxes.  Rather, it’s the strongest indicator that demand is non-existent.  Because remember, in Capitalism, where there is demand, someone will always meet it.  If you are a corporation that refuses to meet that demand, don’t worry, someone else will.  If there were any actual demand present, these corporations would be hiring, to meet it, or they would be amongst the dumbest of business models ever invented.

If you and Charlie are still inclined to “believe” that supply-side (trickle down, voodoo, call it whatever you want) economics is the only way to make the American economy work for everyone, then might I suggest that you click your heels together three times in rapid succession, and maybe you’ll find yourself in the dream-land where trickle-down really works.

Do you need more statistics?  Do you want more?  I could go on all year if you need me to, if it would make any difference.  But somehow, I think it won’t.  I think Charlie, and those who “believe” in supply-side economics do so because they don’t want to see the truth…they just want to be right, even if being “right” means being ignorant of the facts.

Faith-based economics will not save you, or America.  If you love America, do the one thing for yourself that you still can.  Vote according to your own interests, like corporations do with their lobbyist minions.  But before you vote, you better make damned sure of what’s best for your interests.  For three decades, Republicans have been tooting the supply-side horn.  They’re tooting it louder than ever this year.  But we’ve USED supply-side economics for the last three decades, and look where it’s gotten us?  Even with Obama’s tax increase, corporations and the top earners are paying half of what they did before supply-side hit America.  Half.

And maybe you, or someone you know has been out of work for a long time, or has lost the pension he contributed to for decades, or did everything right…saved twenty percent of his income and invested the way Money Magazine told him to, and all he has left, if he is lucky, is his original investment.  Or maybe you or someone you know lost his job to someone overseas, and the next job he got saw him earning twenty percent less than before.  Maybe your parents paid for your college education, and try as you might, you can see no way of paying for your children’s education.  Perhaps you are nearing retirement, and are worried about what the most recent bear markets did to your chances of financially surviving retirement.

Your interests are the only thing you should be focused on right now.  Any economic plan that focuses on corporations and the wealthy few is, by definition, not focused on you.

Think about that.     Ω

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