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PocketWatch On March - 7 - 2011

Here is a little ammunition and something to think about the next time you hear that raising taxes on “business” will stop them from hiring or squash their ability or willingness to invest  or to upgrade their equipment or infrastructure…

Every time I hear that, my teeth hurt and my blood pressure rises.  Why?  because it’s total nonsense, that’s why.

I did a little math.

Here’s the model:

$10MM a year in sales
50% ($5MM) in Cost of Goods Sold (COGS)
40% ($4MM) in General & Administrative Expenses (G&A)
10% ($1MM) Earnings Before Income Tax (EBIT or Net Profit)
35% Tax on EBIT ($350K)

Now some math:
G&A including Taxes are $4,350,000 or 43.5% of sales.
Taxes increased G&A by a whopping 3.5%!
Let’s call this the baseline or ‘normal.’

Now let’s increase taxes to 50%

G&A including taxes are now $4,500,000 or 45% of sales.
Another 1.5% increase in G&A costs! (43.5% to 45%)

Conclusion:

Any business worth its salt already takes taxes into its cost/price matrix.

So, to incorporate an increase in taxes from 35% to 50%, (frankly no one is even contemplating such a large increase!) which amounts to a 1.5% increase in costs and therefore creates an increase of 0.75% sales price.

What are people that scream about this telling me?

Are they REALLY saying that an increase of 1.5% in G&A costs will sink a healthy company or that any company can’t put that into it’s pricing scheme, or that this HUGE amount will keep a company from hiring?

It’s time to put this nonsense to rest!

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A Little Truth About Business and Taxes, 10.0 out of 10 based on 4 ratings

Written by PocketWatch

I am a small town boy from northern Wisconsin, who grew up in the quintessential American family. Dad was a carpenter, mom stayed home, two brothers and a sister.Our politics, and we were political, was always Democrat. My dad always said all you had to do was to look at what each side was fighting for, and it was easy to see, even as a kid, that Republicans were all about big money and rich businessmen, whereas the Democrats were more about social solutions.I spent 6 years in the US Army in the VietNam era as an electronic instructor for NSA, worked as a Field Engineer for a computer firm based in Massachusetts, spent another few years building paper mills around the world for a firm from Washington state, drove long haul truck for a while, did 10 years of servitude in NYC for a large multinational market research company as the Business Manager, spent some more time on the road as a Business Consultant, and the last bit as the Business Manager for a manufacturing firm here north of Houston.I am trying to start up my own consulting firm using all my experience to help small and medium sized businesses stay out of trouble versus waiting until they get into trouble. No one teaches people how to properly run a business. Business schools and MBA programs really don't. There are very basic nuts and bolts that are either assumed or are ignored, and like the house built on sand, businessmen and entrepreneurs ignore these solid foundations at their peril.(Now retired and doing some substitute teaching at a couple of small K-12 schools here in northern Wisconsin. Living in a small hamlet of 340 people, quiet, peaceful, serene.)

13 Responses so far.

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  1. KQuark says:

    Even if you want to play the BS tax rate game guess who has the second highest nominal tax rates in the world.

    CHINA

    INSERT A NAME FOR THE IMAGE HERE

    The real reason we are losing manufacturing jobs to countries like China, Mexico and India is obviously wages which correlates to the incredible number of their working poor.

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  2. KQuark says:

    Great facts to fight back the lies. I always like to throw this back at anyone who complains about taxes because it measures the real tax burden not bogus tax rates that don’t even begin to tell the story. The best part is that the source is one of their own Forbes magazine.

    http://www.forbes.com/global/2008/0407/060_3.html

    INSERT A NAME FOR THE IMAGE HERE

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  3. KevenSeven says:

    Good stuff. Does not fit on a bumper sticker, more’s the pity.

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  4. PocketWatch says:

    As an addendum, notice that we are talking about just G&A increases (overhead). If we add both COGS and G&A together, cut the recited percentages in HALF (or nearly enough).

    That means an increase of a nominal 35% (and who pays the whole raft of that anyway!) to a ridiculous 50% nominal rate means a whole 0.75% increase in total costs and a corresponding 0.37% increase in price needed to compensate.

    Hmmmm… a third of 1% increase in cost to the consumer for a 15% increase in corporate tax rates… And we hear bitching about raising it 3%?!?!?!??!?!?!

    Bottom line, tax rates are barely noticeable to corporations, and increases in prices to consumers (inflation) is even MORE unnoticeable.

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  5. ADONAI says:

    But… Jobs! And class warfare and such!

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  6. For America and Roosevelt says:

    Something not-so-unrelated that is bugging me slightly is that the L.A. Times is running a whopping six-part exposé on the *tens of millions* of dollars wasted by those evil California community colleges . . . out of a $5.7 billion dollar bond . . . of which, say, $50 million ( that’s tens of millions, isn’t it? ) would be a whopping . . . *1 percent* . . . but this is such a good time for the major newspaper of a major liberal city to attack public spending, isn’t it? Something seems very strange about it . . .

    But I became suspicious of business rhetoric years and years ago, with the endless “ business creates jobs ” line – common sense says that the interest of business is to eliminate jobs, not create them – and, of course, the legal requirement that corporations maximise profits *requires* business to eliminate jobs.

    I’ve come to view business as just part of the same unholy trinity with social reactionism ( I like the word “ conservative ” less and less, it sounds like dignifying thuggery with the label of a philosophy ) and religious fundamentalism – things which have the same old completely false, self-righteous, self-justifying slogans
    mindlessly repeated year after year and decade after decade ( for example, I discovered recently that the “ socialism ” is literally over a century old – Al Smith tried to use it against Roosevelt, and Roosevelt called him out by digging a 1928 Al Smith quote where he complained about its having been used as a smear for “ over a quarter of a century ” ( in 1928 ) ).

    But yes, I have major issues with business degrees as such, I suspect them of being largely right-wing handout degrees, and having something to do with the right getting a foothold in academia. ( Plus the MBA, Public Relations, whatever-type people I’ve encountered were have been spectacularly incompetent as a rule. ) This is a topic I haven’t come across anything about. Remember the reports about teabaggers being supposedly of above-average education? I don’t think they were talking about degrees in philosophy, or French literature, for some reason . ..

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    • choicelady says:

      BAck in the 70s when the LA Times was independently owned they did a crash hack job against the regulatory ballot initiatives controlling nuclear power. Turns out their Board of Directors was smack full of people with those financial interests. From Rockwell that had a huge nuke subsidiary to Rio Tinto Zinc that mined uranium, the Times was so invested in nukes it was a wonder you couldn’t read the paper in the dark from the nuclear glow.

      LA Times is now owned by the Tribune Corporation. They are now under bankruptcy filing, so the real control is in the hands of creditors including JP Morgan, Wilmington Trust, and Deutsche Bank among others. While there is no smoking gun as there was in the 70s, the tenor of the paper would potentially reflect the vested interests of the creditors. So a lying discourse about rip off public interests to vent the spleens of the banks who have the Tribune corporation by the throat would seem “reasonable” to assume. Not reasonable to DO however. But you don’t say NO to your creditors. They want you to blame the public sector, you blame the public sector so you never, never, never look at these banks for THEIR rip offs of the public.

      Corporate power research is a wonderful eye opener. Always think to look up the boards of directors, the lenders of the corporate debt, and any outside interest such as bankruptcy trustees. All will be revealed…

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  7. jkkFL says:

    grrr.. I Knew it was a lie, but I had no idea what a big Lie it really was..
    Thanks, PW!

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  8. SequimBob2 says:

    PW — I retired from the private sector last year. I was responsible for pricing for all of our products. In the 20 some-odd years I was with my last company, competitive pricing was always a heated issue (translation: shouting matches with Marketing).

    Here was our price matrix format:

    labor + Labor Overhead
    Material and ODC
    G&A (applied to the above)
    Fee
    ____

    Total Price

    Never in my total 28 years of doing this type of work did taxes and their impact on our prices come up in the discussions. Supplier prices — big topic. Internal labor — big discussion. Taxes -- a small part of our indirect rates — not a discussion element.

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