Tax Season 2012: Work No Longer Pays

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

Well, that may be your point....I thought the rest of us were discussing who really bears the burden of the tax (i.e., who actually "pays for" the tax that the corporation "pays").

It means that everyone pays for it. Customers due to increased prices, laborers due to relaxed benefits, and the company itself for total revenue loss due to a shrink in quantity of the product demanded.

[FreshFish]

Re: Tax Season 2012: Work No Longer Pays

I certainly understand the point that income tax is merely an expense on the company's balance sheet.

Well, that may be your point....I thought the rest of us were discussing who really bears the burden of the tax (i.e., who actually "pays for" the tax that the corporation "pays").

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

You are either missing the point or over-simplifying. The burden of corporate income taxes is always shifted, by necessity, until eventually it is borne by real people. There are at least five major classes of stakeholders, perhaps more, and it is hard to determine how the burden is shifted among them, yet it is a mathematical requirement that the total burden is spread across all of them: the sum of the effects across all parts will equal the total paid.

Corporations are merely a form of organization. It is like saying "houses use water." No, people who live in houses use water, or guests in the house use water, or water is used by people to help their lawns grow, or whatever. Money flows through corporations like water flows through houses. The corporate income tax is like tapping into a house's water supply.

I certainly understand the point that income tax is merely an expense on the company's balance sheet, and either revenue must be increased, or a discretionary expense (such as a dividend, or labour in the form of layoffs, or anything like that) must be reduced to meet balance. One thing to realise is that increasing revenue is not always the best answer. Sometimes it's cutting the expense, but most of the time a combination of the two. So, in effect, they're never not paying the tax, because it still exists on the balance sheet. It just doesn't seem like they do because they adjust their balance sheets accordingly. At this point, we're trying to argue six vs. half-dozen.

We can also say, because profits would reduce due to a decrease in quantity demanded from the raised price, they are paying for a portion of the tax increase, albeit in the form of lost potential revenue.

[FreshFish]

Re: Tax Season 2012: Work No Longer Pays

I never really understood the "don't pay" idea, because they do pay; it just so happens that they have the easy ability to change the revenues received, so there's a misconception that they effectively don't pay the tax because it is passed onto the customer, but that isn't always the case for expenses. It's just like any other organization (whether for profit or not), as well as any (responsible) individual. They all have a budget, and have to adjust both revenues and expenses in order to balance it (although some organizations do better at this than others, if you know what I mean).

You are either missing the point or over-simplifying. The burden of corporate income taxes is always shifted, by necessity, until eventually it is borne by real people. There are at least five major classes of stakeholders, perhaps more, and it is hard to determine how the burden is shifted among them, yet it is a mathematical requirement that the total burden is spread across all of them: the sum of the effects across all parts will equal the total paid.

Corporations are merely a form of organization. It is like saying "houses use water." No, people who live in houses use water, or guests in the house use water, or water is used by people to help their lawns grow, or whatever. Money flows through corporations like water flows through houses. The corporate income tax is like tapping into a house's water supply.

[Almington]

Re: Tax Season 2012: Work No Longer Pays

You can't have it both ways, though. You can't argue that "corporations don't pay taxes," and then turn around and argue that it affects the company to the point that they have to lower dividends. If they make up the revenue to pay the tax, then there would be no reason to change the dividends.

At the end of the day, taxes approximate a zero sum game (assuming that any changes are revenue neutral). It is just a question of, from an individual person's view, if they are paid directly or indirectly. Regardless of if the corporation pays taxes on the money or the individual pays taxes on the increased dividend, the end result is that the taxes still get paid.

That doesn't change the fact that with the current byzantine corporate tax code with it various credits, deductions, and adjustment, not to mention any direct government subsidies that any claims about having the highest corporate tax rate is silly when companies have huge accounting departments that manage to substantally reduce if not outright eliminate any actual tax burden on the corporation.

[FreshFish]

Re: Tax Season 2012: Work No Longer Pays

You can't have it both ways, though. You can't argue that "corporations don't pay taxes," and then turn around and argue that it affects the company to the point that they have to lower dividends. If they make up the revenue to pay the tax, then there would be no reason to change the dividends.

It appears that we are snagged by a semantic technicality. I am not "having it both ways" I am using a word in one technical sense which also can be used in a different generic sense.

You will probably concur (though we'll see, eh?) once I clarify.

While corporations may write a check to the government that represents the corporate income tax, the actual burden of the corporate income tax is shifted to all of the corporation's stakeholders, in one form or another. For example, since dividends are a distribution from after-tax profits, the higher the corporate income tax, the smaller the pool of after-tax profits available from which to make dividend distributions.

Similarly, because until 2003 there was a different income tax rate for dividends relative to long-term capital gains, prior to 2003 there was a bias for corporations to use share repurchase programs instead of dividend distributions as another way of moving after-tax profits from corporate coffers to shareholders. To the extent that the corporate income tax is higher, there is less cash left over for share repurchase plans.

So in one sense corporations do "pay" corporate income tax by writing the check; however because all corporations are pass-through entities of one kind or another, corporations themselves do not "pay for" corporate income taxes, the burden of corporate income taxes always and necessarily must be borne by someone else.

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

You can't have it both ways, though. You can't argue that "corporations don't pay taxes," and then turn around and argue that it affects the company to the point that they have to lower dividends. If they make up the revenue to pay the tax, then there would be no reason to change the dividends.

I never really understood the "don't pay" idea, because they do pay; it just so happens that they have the easy ability to change the revenues received, so there's a misconception that they effectively don't pay the tax because it is passed onto the customer, but that isn't always the case for expenses. It's just like any other organization (whether for profit or not), as well as any (responsible) individual. They all have a budget, and have to adjust both revenues and expenses in order to balance it (although some organizations do better at this than others, if you know what I mean).

[LynahFan]

Re: Tax Season 2012: Work No Longer Pays

What do you invest your 401k funds in? are any of them stock funds?

If yes, then high corporate income taxes mean less dividends are paid into your stock funds, and stocks in your funds grow more slowly than they would otherwise. You suffer the opportunity loss of less growth than you otherwise might have received had corporate taxes not been so high.

That is the nefarious part of corporate income taxes, the burden is never borne by the corporation itself, the burden is always shifted to others. Because it is unseen, it erodes national wealth, yet its proponents can still claim to be virtuous anyway, because the consequences are so hard to quantify, and "corporations are inherently 'evil' anyway" in their eyes (though the reason is never given, I guess it is supposed to be so "obvious" that no explanation is necessary??).

Imagine that everyone in a community draws water from the same aquifer, and one person draws a huge amount out of it. Everyone's water levels decline.

You can't have it both ways, though. You can't argue that "corporations don't pay taxes," and then turn around and argue that it affects the company to the point that they have to lower dividends. If they make up the revenue to pay the tax, then there would be no reason to change the dividends.

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

That is the nefarious part of corporate income taxes, the burden is never borne by the corporation itself, the burden is always shifted to others. Because it is unseen, it erodes national wealth, yet its proponents can still claim to be virtuous anyway, because the consequences are so hard to quantify, and "corporations are inherently 'evil' anyway" in their eyes (though the reason is never given, I guess it is supposed to be so "obvious" that no explanation is necessary??).

I'm not even one of those "evil corporations" guys, and I think I could explain this one. The issue seems to be with the notion of "profit". With a profit-making organization, even if you do make a profit, you have to use the money somehow. Some organizations choose cash reserves, some pay dividends, some decide to reduce revenue per head in an attempt to attract more business, but because it's the whole idea that the organization is making money, they're supposedly greedy, and therefore inherently evil.

However, this group never calls out the government. Why? It's a Non-Profit Organization. These organizations also get out of sales taxes and similar expenses because their budget does not look to create higher discretionary funding, but if they happen to get it, they'll use it somewhere. Because they don't use the word "profit", though, supposedly they're OK.

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

So what does that have to do with higher income taxes? I am not trying to be dense. I am simply not seeing the connection.

You've heard of opportunity cost, right? With an added mandatory expense, and assuming the same revenues (obviously this isn't always the case, as you could try to increase revenues at the expense of potentially losing some customers), you need to dump a discretionary expense. One of those could be an employee incentive, such as a company match on common stock.

[FreshFish]

Re: Tax Season 2012: Work No Longer Pays

So what does that have to do with a 401k?

What do you invest your 401k funds in? are any of them stock funds?

If yes, then high corporate income taxes mean less dividends are paid into your stock funds, and stocks in your funds grow more slowly than they would otherwise. You suffer the opportunity loss of less growth than you otherwise might have received had corporate taxes not been so high.

That is the nefarious part of corporate income taxes, the burden is never borne by the corporation itself, the burden is always shifted to others. Because it is unseen, it erodes national wealth, yet its proponents can still claim to be virtuous anyway, because the consequences are so hard to quantify, and "corporations are inherently 'evil' anyway" in their eyes (though the reason is never given, I guess it is supposed to be so "obvious" that no explanation is necessary??).

Imagine that everyone in a community draws water from the same aquifer, and one person draws a huge amount out of it. Everyone's water levels decline.

[dxmnkd316]

Re: Tax Season 2012: Work No Longer Pays

Remember that with some 401k plans, there is a company match involved. Typically one of the 401k plans is common stock in that particular company as well (some companies will force the company match to the company's common stock).

So what does that have to do with higher income taxes? I am not trying to be dense. I am simply not seeing the connection.

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

So what does that have to do with a 401k?

Remember that with some 401k plans, there is a company match involved. Typically one of the 401k plans is common stock in that particular company as well (some companies will force the company match to the company's common stock).

[dxmnkd316]

Re: Tax Season 2012: Work No Longer Pays

"This" being how high federal corporate income tax rates (US corporate income tax rates are now the highest in the "developed" nations, as Japan just lowered theirs) by necessity must lead to lower after-tax corporate profits, necessarily leading either to lower dividend payouts, fewer stock buybacks, or a reduced rate of share price appreciation.

Corporations do not "pay" income taxes, they merely collect them, so that the burden of the tax is borne in aggregate by customers (higher prices), suppliers (lower prices), employees (reduced wages and benefits), executives (lower bonuses), and shareholders (as just noted).

Plenty of empirical studies by academic and government economists have all validated this statement; I'm not going to track down and post links. Once upon a time, people stored findings in "articles" and "books" of which I have paper copies (or scanned copies in PDF). If there were a handy way to upload articles from my archives that would be different.

So what does that have to do with a 401k?

[FreshFish]

Re: Tax Season 2012: Work No Longer Pays

Can you elaborate on this?

"This" being how high federal corporate income tax rates (US corporate income tax rates are now the highest in the "developed" nations, as Japan just lowered theirs) by necessity must lead to lower after-tax corporate profits, necessarily leading either to lower dividend payouts, fewer stock buybacks, or a reduced rate of share price appreciation.

Corporations do not "pay" income taxes, they merely collect them, so that the burden of the tax is borne in aggregate by customers (higher prices), suppliers (lower prices), employees (reduced wages and benefits), executives (lower bonuses), and shareholders (as just noted).

Plenty of empirical studies by academic and government economists have all validated this statement; I'm not going to track down and post links. Once upon a time, people stored findings in "articles" and "books" of which I have paper copies (or scanned copies in PDF). If there were a handy way to upload articles from my archives that would be different.