Posts Tagged ‘economics’

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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Twitterpated And A Double Dip All In The Same post?

Posted by politicalpartypooper on August 16, 2010

I succumbed to Twitter, but already I’m thinking about un-succumbing.  I wanted to see what all the fuss is about and now I see that it is about nothing.  My first follower wanted to show me her naked pictures, but not on her Twitter site…

I ask you.

Do I really need this?

In other news,  They’re just predicting this now?  A double dip recession?  Oh noes!  Whoever could have predicted that?

Listen, when your top “economists” are making apologies to the 40% of the unemployed who will remain unemployed because their skills are “unwanted” in America, continual recession into depression is what you end up with.  But the Mainstream Media is going to act like this is new…BREAKING NEWS! ECONOMY ISN’T RECOVERING!  I’ve been warning you for a year now.  This is just the tip of the iceberg.  But when it’s done, hopefully we’ll have learned our lesson about Free Trade and Trickle Down.

I’ll be following that thought up with a new post about the new permanently “unemployables” soon.     Ω


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Basic Rules For Job Creation

Posted by politicalpartypooper on August 2, 2010

Despite Conservatisms’ undying devotion to trickle-down economics, there are really only a few basic rules when it comes to job creation.  Concentrating wealth at the top isn’t one of them.

1.  Consumers create demand.

2. Demand creates jobs.

Simple, right?  Taxes have little to do with job creation, as can be seen by following charts:

From the Tax Policy Center,

From USPolitics.about.com

See all of those years where the top rates were 70% and above?  From 1936 until 1980, top marginal tax rates never fell below 70% in the US.  We didn’t see any higher unemployment figures from 1949 until 1980 than we do today, where tax rates aren’t even half what they used to be.  So what’s all this talk about raising taxes being a job killer?

It’s hog wash!  Taxes don’t create jobs, and tax cuts don’t either, unless the tax cuts go to the people who spend the money, like the poor and the middle class.  Again, it all goes back to the basic rules of economics:  consumers create demand and demand creates the need for more jobs.  Supply Side economics is a fable. Demand is color-blind, class-blind, and tax-blind.  If a person wants and has the money for it, he’ll buy it.  That’s how it works.  The more people who buy it, the more there is demand for that product.  That only and always starts with the lowly consumer.  So, in essence, consumers create jobs.

Got it?  If not, look at those two charts again.  During periods where the Trickle-downers were taxed the most, at or above 70%, unemployment remained unaffected by the actual tax rate.  Consumers create jobs, and if those consumers are jobless, they can’t very well spend money to create more jobs, can they?  Where are the jobs?  Overseas, where the Free Traders wanted them.  And who wanted Free Trade?  The wealthiest Americans and corporate greed.

People, if after seeing these facts, you still believe in Trickle Down economics, then I suggest that your economic theory is based on faith and not on actual fact.  Economics aren’t anecdotal.  The numbers are what they are.  Taxes on the wealthy and even taxes on small businesses do not stifle job creation.  But consumers without money to spend does.  That’s what goes on in America today, like it or not.

The reason there are no jobs in America is because there is no demand.  It feeds on itself, and will only get worse so long as we continue to allow large corporations to ship American jobs overseas.  Don’t applaud the Supply-siders; they are lying to you.  The only thing that matters in a free market economy is demand.  That’s it.  It’s simple.     Ω


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House – Senate Compromise Equals Continued Bailouts

Posted by politicalpartypooper on June 25, 2010

The House-Senate compromise bill on overhauling regulations on banks and other financial institutions was passed today at 5:40 AM.  Two years after the American economy began to collapse, lawmakers began their negotiations in front of C-Span cameras on Thursday morning, but ended them behind closed doors on Friday.  So much for transparency.

During the collapse, the Dow Jones Industrial Average fell from a high of just over 14,066 to 6,626, a nearly 53% drop in less than a year.  Unemployment skyrocketed to nearly eleven percent.  The Housing Bubble, coupled with Credit Default swaps and other risky derivatives betting left America’s banks unable to meet Federal requirements for Capital on hand, creating the need for a massive Wall Street bailout to “prevent the American economy from collapsing”.

With all of that in mind, Congress and the Senate negotiated the strongest parts of the reform bill away.  Credit Default swaps are here to stay.  Banks can still play in the derivatives market, and still have Federal cash available to bail them out from a series of bad bets.  In layman’s terms, the banks money (investor money) is backed by the Fed.  The bank is still allowed to use that Fed backed investor money to trade in derivatives related to interest rates, foreign exchanges, gold and silver, the largest and most profitable portion of their derivatives trading already.  If the bank’s bet on those derivatives is bad, they have the Fed to fall back on to make their bets good.  That’s called a bailout, but because of the oversight and transparency rules in the bill, the bailouts will be smaller and happen more frequently.

There are some strong changes in the bill, but regulation on the major items most taxpayers were concerned about, like bailouts and Credit Default swaps, were either watered down or left alone completely.  That Credit Default swaps are still in existence at all is a point that amazes me, as an investor.  That one instrument created a domino effect that collapsed our economy.  Nearly two years after AIG and our biggest banks went hat in hand to the Fed, unemployment rates are still near ten percent, and the Dow Jones, which never regained what it had lost to begin with, is on the way back down again.  Consumer confidence is low, banks are not lending to small businesses, and businesses are not hiring.

Yet our senators and congresspeople found nothing inherently wrong with a derivative that toppled our economic system. And, our senators and congresspeople want you to believe that all of the money Wall Street and our largest banks give to them do not create a conflict of interest or influence the way they write legislation.     Ω

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