Econ geeks: Can someone help me respond to this?

[Lone_Wolf_Moderate]

"Democrats believe in taxing big business; but we all know that "big business" doesn't "pay" taxes, they are just the conduit for collecting taxes from us, their customers. Businesses include the cost of taxes in their prices ... and it is we who pay those prices. We all know it. The Democrats are, thus, for hiding the true cost of government."

The comment came from a righty blogger arguing that Dems are out of touch with Americans, because they want to tax the wealthy.

[Extend a Hand]

1. this site has a lot of info on the (un)fairness of our economic system

http://www.jmooneyham.com/enormous-costs-to-society-of-right-wing-governance-reference.html#section26
http://www.jmooneyham.com/brightref.html
How badly are the 'poorest' rich hurt by income taxes?
http://www.jmooneyham.com/rich-reference.html#section10

[Selatius]

2. It's an argument that falls flat on its face.

A progressive tax scheme taxes those who are best able to pay taxes for one reason only:

It serves as the ultimate regulator on the entire economy. A progressive tax code serves almost as a heart for the human body. It pumps blood to the extremities where it is needed. Such a tax scheme does the same thing with dollars. The old school economists will tell you the best way to stimulate aggregate demand for goods and services is to put money in their pockets.

Tax cuts for the poor coupled with increases in the taxes of the people at the top is not a bad thing because the tax revenue generated can then be reinvested back in the economy in the form of health care, education, and infrastructure maintenance/upgrades. The internet itself benefited precisely because ARPAnet, the predecessor to the internet inside the US, was a government funded network built for communications in case of nuclear war. Later on, it was turned over to public universities for use, and from there, the world wide web was born.

Without a tax code, we would still be living like it's 1906 instead of 2006. In 1906 there was no such thing as an income tax. Rates of illiteracy were high because the public education system did not exist, and the average lifespan of people was barely in the 40s because there was no real public spending on health care priorities. There were very few paved roads because there was no money to build them, and only a minority of households had electricity because there was no tax revenue to build power stations, nevermind money for a power grid that could transport electricity into peoples homes.

The money that could've gone to all of that didn't go there because such things are not the priority of the wealthy. They used their money to pursue more profit instead of investing in their workers or in the nation's infrastructure. There were a few such as Henry Ford who argued that better treatment of workers is good for business, but few bought the argument, and he lost in the SCOTUS in Dodge v. Ford. The shareholders were simply interested in making money, not enriching the lives of ordinary people. If Ford wanted to help workers, he should do it on his own dime, not the dime of the board of directors of the corporation.

BTW, our tax code IS NOT PROGRESSIVE ANYMORE. I would argue with anybody who says otherwise. If anything, the poorest are taxed most heavily, while the rich get to exploit loopholes and credits and shelters written into the law by their servants in Congress whom they bought out and lobbied.

[TreasonousBastard]

3. OY! That's bullshit, but...

it's pretty damn difficult to argue against. To make it worse, some rightwing economists have proposed that corporations shouldn't pay any taxes at all, since they create economic activity. Some look at corporate taxes as double taxation, proving that they don't know the first thing about finance or economics.

There are lots of taxes businesses of all sorts pay, but this guy is probably talking about what's essentially a corporate income tax. Probably the simplest argument against this is that a business pays taxes on its profits, and there's no way to build that into the selling price. They try to set their prices to make a profit, but profitability is far more complicated than simply pricing. So, why shouldn't a company pay some taxes on its profits? We pay taxes on our net incomes-- why shouldn't they?

Pricing itself is a complex thing, and while many may try to get a good markup on goods, or rate on services, competition, order size, customer demnds, etc. cause discounts. Expenses can be unusually high or low during the period, too, affecting profitability.

It's almost 5 in the morning here, and I don't want to get into double taxation now. Best thing to do with anyone who brings it up is just to shoot them to put them out of their misery.

[Lone_Wolf_Moderate]

4. Your argument works for me.

I knew the righty argument was bogus, put I couldn't quite put my finger on why. You've helped a bunch.

[Jim Lane]

5. Double taxation

The main flaw in the "double taxation" argument is that most of the corporate profit isn't otherwise taxed at all. If we were setting up a system from scratch, there'd be a lot to be said for having no corporate income tax -- provided that all corporations were treated as Subchapter S corporations are now. That means they'd report their profits to their shareholders, each of whom would have to declare his or her proportionate share as income (whether the corporation chose to pay a dividend or not). To try to move to that system now, though, would entail huge difficulties of transition. Still, a conservative who objects to the corporate tax as double taxation should have no principled objection to making sure that all the profit is taxed once.

[Dogmudgeon]

6. How 'bout a little EVIDENCE, there, Buckaroo ...

Rightists are good at making up cockamamie stories.

That's about ALL they're good at.

--p!

[unblock]

7. ah, yes, corporations are just pass-throughs. you wonder why they bother?

if the cost of corporate taxes were 100% passed through to consumers, why would corporations object so strongly to them? do you really think they're so valiently defending their consumers when there's zero impact to their own bottom line? of course not.

the truth, as any sane economist can tell you, is that any tax or regulation can impose a "wedge" on the buyer-seller transaction, which effectively lowers the value of the transaction to BOTH parties. i.e., the cost is SHARED between buyer and seller. how much is paid by the buyer and how much is paid by the seller depends on many factors.

for instance, if the tax is specifically SALES-based, such as a -- wait for it -- SALES TAX, then the corporation can lower its exposure to the tax only by increasing the effective price to consumers by 100% of the tax. this effective price hike keeps the corporate profit per transaction constant, but also reduces demand at the higher price. thus total sales drop, as do corporate profits.

so normally, corporations will lower to underlying, pre-tax price to an "optimal" level. the price is slightly lower (perhaps by half of the sales tax, maybe more, maybe less) this way, the effective cost to the consumer is higher by about half the sales tax, and the effective net income from the sale to the seller is also reduced by about half of the sales tax. maybe the optimal split is 80-20, maybe it's 20-80, it depends. either way, sales are still reduced as way, though not as much as if the consumer was made to bear 100% of the sales tax.


now let's consider what happens if you place a tax on sellers on something OTHER than profit. for instance, cost of production or profit. now, corporations are free to consider leaving the cost of the transaction completely unaffected. this way, the effetive price to consumers and the effective income per transaction is completely unaffected, and sales are not reduced. not interference with their market share strategy, no damaged customer relations, etc. they are free to minimize their cost of the tax through several other means, including by reducing their dividends, cutting costs, reducing staff, freezing wages, or just saying "no" to gold commodes in the executive washroom. perhaps the "optimal" strategy will include passing through SOME of the cost to consumers, but a non-SALES-based tax permits the optimal solution to pass portions of the cost onto many other constituencies.



so you would think that corporations would prefer their taxes to come in the form that gives them the most flexibility, i.e., income taxes. yes, they scream up and down that they would PREFER sale-based taxes or value-added taxes (which are very close to sales taxes).

why is that? perhaps it is because they do NOT have the interests of the consumers at heart, and prefer to push as much as possible of the tax on to consumers and blame the government. a tax on PROFITS makes it difficult for them to do this. they would have to simply raise their nominal prices and EXPLAIN that it's higher than it otherwise would be due to taxes on profit. with SALES taxes, they can set keep their nominal prices unchanged, and tack on an explicit SALES tax and completely blame the government.

which is exactly what they do.

[izzie]

8. I think Dem want to tax the income they make, like you pay

If I sell cars and pay tax on my income why not the man who buys stock in the company that made the car pay tax on the money he gets from that stock? Please do not say he gives people jobs. If I did not sell the car he would not have a job either. It is a two way street. It seems to be unfair to me to tax income in different slots of value. It was like them taxing new oil and old oil at different rates. Do they still do that?

[TomClash]

9. Bushit. Here are two counterpoints

They get limited liability from the Federal and state governments. Their shareholders, who usually include top managers, are only liable to debtors to the extent of their equity investment. If Enron goes under its debtors can't take the homes, bank accounts and personal property of the shareholders. I'd be willing to eliminate all corporate taxes if they give their limited liability up. Fat chance.

Business cannot pass through taxes as higher prices because some business will try to take a lower profit margin to get greater market share. If they could pass through tax expenses to consumers, they would never worry about taxes. Yet they piss and moan about taxes all the time and hire an army of lobbyists in DC and every state capitol to avoid or reduce their tax exposure. If they could simply pass taxes on to consumers, why would they do that?

[dcfirefighter]

10. Taxes on economic rent cannot be passed on

If they could, the producer / seller would raise his price, regardless of the tax.

For example, if a company owns a patent on Swidgets, and currently sells them at $10, with a $5 profit, a tax of $3 a Swidget would not allow them to raise the price to $13. If they could raise the price to $13, they would have already. Because of the patent, there wouldn't be any other competitors to force them to keep their price at $10 - that price was set by what the market would bear.

Conversely, is a company sold unpatented widgets, and currently sells them at $10, with a $0.10 profit, a $3 tax on widgets would cause them to raise their price and sell fewer widgets. If all of the competing widget producers were also faced with a $3 tax, the price would be determined by the relative elasticity of demand. If some of the comepeting widget producers were not faced with the tax - perhaps because they were located in another country, and even sold in another country - the market share of the foreign producers would increase at the expense of the taxed domestic producers.

Taxes on productivity and trade are passed on, at least partially, mostly depending on the elasticities of supply and demand - the more elastic side pays a higher proportion of the tax.

Taxes DO influence the proportional mix of the factors of production used to produce Capital and Wealth:
Taxes on Labor reduce the use of Labor, depressing wages and causing unemployment. These taxes include wage, payroll, and most income taxes.
Taxes on Capital reduce the demand for all factors of production, depressing wages, causing unemployment, and reducing investment.
Taxes on Land reduce the speculative value of land and encourage it's efficient use - causing more labor and capital to be used, increasing wages, employment, and returns to productive investment.
Taxes on Wealth reduce the demand for all factors of production, with a similar effect as taxes on Capital.
Taxes on sales reduce the demand for all factors of production, as well as increasing the cost of living, effectively further reducing wages.
Note that Capital and Wealth only refer to human-made things, natural things with value are 'Land'.


In short, Land should be taxed, so 1) more labor and capital are used, acheiving full employment and high wages 2) Land is used efficiently, such that GHG's, sprawl, transport costs, and pollution are reduced and 3) the speculative value of land is reduced, reducing inflation.

[Warpy]

11. Actually, taxes are on the net, not the gross

meaning that a business is taxed on what it makes over and above the cost of doing business. If the business gets all pissy about paying income tax on its net by raising its prices the next year to increase its net, its taxes just go up. The loss in business it faces from jacking its prices up generally isn't worth the tiny increase in net profit.

This is something that anyone who has actually run a business knows, although they'll never teach it in college economics classes.

Your right wing ranter friend needs to read a few of the latest surveys about who is in step with Americans. Most Americans know the rich don't pay their fair share of taxes. Most Americans (87% in the last poll I read) think that cutting taxes does no good, and want WAGES to rise.

It's hard not to feel a little sorry for right wingers, their ideology has run its course and people are turning against them because it doesn't work. If we're lucky, we may be able to avert a full blown depression. Then again, they're in control of the government for another three long years.

[lagged_variable]

12. Principles

Just to stress one thing dcfirefighter said (though all of his discussion on the distortionary effects of various taxes is quite true):

Businesses pass on taxes to the customer only to the extent that they can pass on taxes. When we levy a tax on a price-inelastic good (essentially, something that people buy regardless of price changes), consumers shoulder the majority of the tax burden, regardless of who is explicitly taxed. When we tax things that are price-elastic (goods for which people are responsive to price changes), the company will pay the majority of the tax, even if the firm thinks they are "passing on" the burden - the loss in customers is greater than the gain to "passing the tax on".

It's somewhat ironic that you're asking this in the Economics forum, when your RW "friend" clearly has not taken a bit of Econ. This concept is something that is (or should be) taught in the first month of an Econ 101 class. The policy choice is, of course, which goods to tax so that we can choose the optimal incidence and distortion of taxation (given whatever revenue requirements the government has).

[ticktockman]

13. Taxes can only be passed through to those who benefit

"Democrats believe in taxing big business; but we all know that "big business" doesn't "pay" taxes, they are just the conduit for collecting taxes from us, their customers. Businesses include the cost of taxes in their prices ... and it is we who pay those prices. We all know it. The Democrats are, thus, for hiding the true cost of government."

The comment came from a righty blogger arguing that Dems are out of touch with Americans, because they want to tax the wealthy.

The argument that businesses don't really pay taxes because they are all passed through to their customers is an old argument. It's also deeply flawed. To see why, look at a business with a relatively small customer base, say a company that sells yachts. Like all companies, that company receives and benefits from various government services. That is the rationale for why they, like individuals, should pay a share of the taxes that pay for those services. Now, if the company chooses to pass all of those taxes through to their customers, only people who benefit from the selling of the yachts will pay for the services that made those sales possible. That would seem only fair. In any case, the cost is not spread among all taxpayers as the fallacious argument suggests. It is spread only among customers who benefit from the services.

[Sammy Pepys]

14. The only way you could really argue against it is...

...if you made the case that excessive taxation caused a reduction in wages or hiring or benefits or expansion OR that businesses made up for previous tax bills by raising prices after the fact. I think it would be pretty hard to prove that though.

But I think it's probably worthwhile to remember that tax law is not terribly cut and dry. There are all sorts of ways businesses can probably reduce their tax bills down to nothing.