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%)
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!
- What Role Does Tax Policy Play in Corporate Capital Management? (thinkup.waldenu.edu)