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!
Related articles
- What Role Does Tax Policy Play in Corporate Capital Management? (thinkup.waldenu.edu)
Even if you want to play the BS tax rate game guess who has the second highest nominal tax rates in the world.
CHINA
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.
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
If you look deeper our corporate taxes are lower than the countries we are losing our jobs to but you can see it has nothing to do with taxes:
Japan
South Korea
Mexico
Canada
OH that is good. Even color coded! No excuse NOT to understand it!
I love numbers but pictures really tell the story the best in my opinion.
There is one very good thing about the American tax system. We have no national VAT which is the most regressive tax you can have.
Of course a VAT is the ultimate goal of the right wing. They call it “fair” or “flat” tax. Unfortunately at least the left in Europe has bought into the idea of VAT as well.
Good stuff. Does not fit on a bumper sticker, more’s the pity.
Maybe you could print your own bumper sticker – “Honk if you want to know more about nominal tax rates.”
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.
But… Jobs! And class warfare and such!
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 . ..
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…
grrr.. I Knew it was a lie, but I had no idea what a big Lie it really was..
Thanks, PW!
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.