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All business costs must be passed onto consumers, otherwise the company will not stay in business very long.
A more useful question is "if we cut corporate taxes, would the savings be passed onto consumers (or to workers)?"
As Beardsley Ruml's famous paper pointed out, IT DEPENDS.
Beardsley: Suppose the corporation income tax were removed, where would the money go that is now paid in taxes? That depends. If the industry is highly competitive, as is the case with retailing, a large share would go to lower prices, and a smaller share would go to higher wages and in higher yield on savings invested in the industry. If labor in the industry is strongly organized, as in the railroad, steel, and automotive industries, the share going to higher wages would tend to increase. If the industry is neither competitive, nor organized or regulated --- of which industries there are very few --- a large share would go to the stockholders.
At the time Ruml wrote that paper, businesses were highly regulated, anti-trust laws were enforced, and labor was strong. Today, we have the opposite situation, so most likely a reduction in corporate taxes would result in a windfall for shareholders. The rich would get richer.
A related question is "would a land value tax come out of landlord's profits, or be passed onto renters?"
That's more complicated because urban real estate is monopolistic and, in a hot market, landlords are able to charge whatever the market will bear, usually a % of income.
But I think it is naive to assume, as George-ists do, that the LVT would always come out of the landlord's profit.
It's also important to note that corporate taxes are a source of profits.
IF you cut corporate taxes, and there is no slack, then any extra consumption has to be accommodated somewhere.
At that point it is simply a question of the distribution profile.
I always find the 'cut corporate taxes' argument to be a bit silly. If you have high corporate taxes and immediate capital offsets, then companies can simply avoid paying tax by investing - which is sort of what you want.
Corporate income / loss taxes can be both an outlay of cash and an inflow of cash and neither are passed onto the consumer.
Think of the trillions being held off-shore ....... are those tax savings being passed on to the consumer?
Taxes are not a cost in the sense that; All business costs must be passed onto consumers, otherwise the company will not stay in business very long.
Bear in mind that the tax is applied only on taxable income / loss, which is not the same as accounting income.
If you are unprofitable for tax purposes there is no liability for tax, unless a jurisdiction has instituted a minimum tax or perhaps a capital tax (neither being a tax on taxable income.
Taxes are not factored in as costs when projects are evaluated for RFQ/RFP purposes or pricing purposes, since once again, all that matters is clearing the required internal rate of return or any other imposed hurtle. Nor are estimated taxes allocated to the valuation of inventory.
As a practical matter any attempt to assign tax costs to a product's overall cost would be nothing more than an arbitrary allocation. Consider that most corporations in the US are allowed to file consolidated tax returns, consisting of perhaps hundreds or more of companies, with all kinds of income / loss profiles.
Income taxes do not make one corporation uncompetitive versus others offering the same goods or services or vice versa. Obviously they are all subject to the same rules, ergo no difference.
A simple example is the sales tax collected by retailers. The sales tax does not come out of the retailer's pocket. The retailer simply adds the tax onto the customer's bill. You understand that because it is printed on your bill.
Income taxes are not nearly so predictable, and they are not printed on the customer's invoice, but nonetheless an established business knows from experience about what percentage of income tax it will have to pay, and adjusts its markup accordingly.
Ditto property taxes, license fees, regulatory costs, etc.. Those costs are passed onto the consumer.
@Seve141 said "they are all subject to the same rules, ergo no difference."
To the extent that that is true, I agree that taxes do not alter competitiveness. But the 50 states have different taxes and different regulatory costs, and different countries have different taxes and different regulatory costs.
Think of the trillions being held off-shore ....... are those tax savings being passed on to the consumer
I can't speak to that issue because my business is not holding trillions of dollars off-shore or anywhere else ! :-)
As I asked previously, a better question is "if we cut business taxes, will the savings be passed onto consumers?" And it depends -- it depends on whether there is enough competition to drive the price down. Lacking competitive pressure, prices are apt to be sticky, and markup is likely to be whatever management thinks it can get away with at a given level of output.
The original topic is tied to the question of "how are prices set, anyway?" Post-Keynesians hold that prices are cost plus markup. Markup will vary depending on the industry and on the business climate.
@Neil said If you have high corporate taxes and immediate capital offsets, then companies can simply avoid paying tax by investing - which is sort of what you want.
Yes. But in an "open" economy, companies may also avoid pay tax by relocating to a different jurisdiction.
The article, if I read it correctly was related to income taxes not salt and such taxes.
Sales taxes, local or State taxes or vat and capital taxes are not a cost for the purposes that I previously described.
Perhaps I don't understand what the term cost is as defined by you or the economic community?
I have no argument that yes, they are indeed an outlay to the business, however, they don't matter with respect to competitive pricing or sales related concerns. They are in the same class as lease expense or perhaps utilities. Obviously, when a retail operation is acting as an agent of the State collecting and remitting sales tax, it isn't a cost and in fact they are remunerated for doing so.
The only thing that truly matters in profitability is the variable contribution that a firm's product line generates. That has nothing to do with any level of taxation, rather, it has to do with how much variable contribution is generated to cover the firms' fixed expenses.
Once fixed expenses are covered, every sale and the variable contribution after that goes 100% to the bottom line.
How are prices set is a great question. To that question, there is no one or easy answer. For e.g. in the automotive world, cost plus has nothing to do with it. Fixed costs of suppliers have nothing to do with it. It is simply OEM target pricing recognizing the cost of variable inputs only. BTW Tax issues are not contemplated.:-)
The same for the large computer related manufacturers and almost any other large corporate entity you can imagine. Retailers are no different.
Businesses are in business to make as much money as possible. Given the opportunity to raise prices, extract rents etc. they will do so. I think the history is pretty clear on this matter.
Levels of corporate income tax had nothing to do with it, as far as I am aware.
For present purposes, it is probably sufficient to equate expenses and cost, so that taxes would count as an expense against revenue that affects the bottom line of the income statement that adds to equity on the balance sheet. Significant financial ratios are calculated on this, and they would influence management decision making.
Generally speaking, taxes are looked at as cost of doing business in a particular tax jurisdiction, and firms and investors pay attention to this since this affects net profit as the amount by which equity increased on the balance sheet during the period. Taxes that apply to all firms do not affect competitiveness but taxes that don't, do. Clearly firms have to consider this, since they can't pass taxes along if this means becoming less competitive, unless this can be offset otherwise in a non-generic or commodity market where no firm has an advantage regarding the product.
Generally speaking, net profit is allocated to distribution and retained earnings. Retained earning can be allocated to investment, equity buybacks, or saved for future use.
Quite obviously, firms must pass along all costs however incurred if they are to be profitable concerns.
So in that sense, taxes have to be passed on to customers, and clients and firms will attempt to this to the degree that the market permits in order to maximize return on investment and profit margin.
I would say that in general taxes get passed along as a cost to the degree that firms can do this, but actually determining this in specific cases may be difficult.
I think it is much more difficult to argue that lowering taxes would necessarily imply that customers would pay less based on the so-called law of supply and demand in competitive markets, especially in the case of administered prices.
However, it should be obvious from the above that the issue is really with retained earnings that are saved or are used to buy back equity to increase the share price rather than being invested. Distributions are taxed at the household level, and best management practice is to prefer funding investment with retained earnings instead of financing it with debt.
The issue arises with long term saving and equity buy back to increase share value and therefore capital gains as a way of avoiding household ordinary income taxes on distribution of earnings. This is where either regulation or tax pressure should be applied. Tax credits can also be extended for investment. Or better yet, either make all household revenue taxable equally, or tax revenue that doesn't come from work at higher rates as economic rent
Very well stated, Tom. I would only raise questions about your last sentence, tax revenue that doesn't come from work at higher rates. The question is, who is to say what is work or not work? If Warren Mosler receives revenue from trading currencies, is that work, or is that rent? Well, Warren does spend time and effort to "earn" those revenues.
If a landlord receives revenue from rental property, is that work, or rent? Well, the landlord may have worked to earn money to buy the property in the first place. He probably does spend time and money on maintenance, improvements, advertising, dealing with tenant problems, etc., or else pays a management company to do those things for him. Who is to say the landlord does not "earn" his profit?
Whether or not money is "earned" through "work" is basically a moral question. A communist might argue that no worker is morally entitled to "earn" more than anyone else. At the other extreme, the Koch brothers probably feel that they "worked" to grow the business that they inherited from their father.
@Seve141, agree that how prices are set is a "great" question. Obviously in the real world it's more complicated than simple ivory tower models. Nonetheless, models are useful as rules of thumb.
One of the differences between post-Keynesian vs. neoclassical economics is that post-Keynesians assume, as a very general rule of thumb, that prices are set based on cost plus markup. This is the implicit assumption in Beardsley Ruml's argument that corporate taxes are passed onto consumers.
Here is a link to Ruml's paper if anyone needs it.
It's easy to think of particular markets where the cost-plus-markup rule may not apply. For example, most MMT'ers believe that the Sauds, as a monopolistic swing producer, set the price of oil to whatever they want it to be. If that is true, then taxing or not taxing American oil companies may not have much impact on the price of oil!
The point is to tax economic rent at least as much as productive contribution, if not more.
Work produces a good or service that is socially necessary or at least socially contributive.
If someone is receiving compensation without making a social contribution, they are not working, or if they are being compensated disproportionally relative to contribution, then that is economic rent, too.
Of course there are grey areas. Law and regulation is full of them. There are ways of dealing with such and the line doesn't have to be drawn all that finely anyway, as long as the principle is followed.
Let us compare two states of affairs, one with a corporate income tax, and one without. In general, surely the tax is only partially passed on to consumers in the former case. Otherwise the consumers would purchase just as much from the corporations in both cases. Does anybody think that that is true in general? To pass on the tax to consumers means raising prices. Do we think that sales will not drop?
"companies may also avoid pay tax by relocating to a different jurisdiction."
Nope. Not in a floating rate system. All they do is move it around the circuit elsewhere in the chain, or they end up saving it - which is just 'voluntary taxation'.
Floating rate currency adjust to take that into account. Now it may be that there is currency manipulation in which case you get a free lunch - other countries giving you real stuff in return for electronic bits.
The 'moving offshore' line is a canard based upon faulty analysis of the accounting - primarily mistaking the reporting currency for the operational *currencies*.
The companies may go offshore, but the people don't. So you just engage them doing something else. The result is a higher standard of living for the general population.
Of course that requires a government that actually understands that extracting as much real value from the rest of the world as possible is the correct policy position.
"It's easy to think of particular markets where the cost-plus-markup rule may not apply."
It applies in every business market I've ever been in.
Firms set prices based upon what they think will generate the greatest turnover, generally mostly from their existing customer base - almost regardless of costs. In other words what the market will stand.
So it is never a judgement of price alone. It is price and any possible effect that has on quantity.
What you then do is make your costs fit what you can get.
There are other phases where you are loss leading, or capital building, but the stable business bit tends to target turnover and contribution.
Individual businesses tend not to worry about corporate income taxes, but do worry about sales taxes if they are targeting the consumer that has to absorb them (which depends what type of sales tax it is).
However the individual business is not the aggregation. In aggregate if you can't make enough money after tax you go bust and disappear. So the amount of tax in aggregate that leaks from your circulation path (tax paid vs taxer spend received as income - possibly transitively) is what gets added to the cost cycle.
So overall it is the usual thing - net saving in the operational currency.
@Neil, price determination has been debated by economists for eonss and we are not going to end the debate anytime soon. :-)
But the fact is that post-Keynesians favor some variation of the cost plus markup school of price determination -- though there is a lot of wiggle room in the word "markup."
Not sure if I can link directly to JSTOR, but Malcolm Sawyer offers a nuanced explanation of "markup" here.
companies may go offshore, but the people don't. So you just engage them doing something else. The result is a higher standard of living for the general population.
Of course that requires a government that actually understands.
That's ivory tower theory. Reality is that government is by the 1%, of the 1%, for the 1%, and always has been. Firms do go offshore, and people do become unemployed or underemployed. The skilled manufacturing worker who is forced to find a new career in a service sector sees his standard of living decline.
Foreign countries do not give individuals free stuff. I can't print money, so I have to work to earn money to pay for foreign stuff, and I can't buy it if I am unemployed or underemployed because my industry moved offshore to take advantage of lower jurisdictional costs.
Free trade is an ivory tower theory that has been a disaster in practice. Academics support free trade because it sounds good in theory and their teaching jobs and think tank jobs haven't been moved offshore (yet).
The JG is not a satisfactory response for the workers who have been impacted by free trade. JG advocates have no intention of picking up litter for minimum wage. When they advocate the JG, they advocate it for OTHER PEOPLE, not for themselves or for their "class." Is Warren Mosler going to pick up litter? Stephanie Kelton? Neil Wilson?
I share your sentiment, however one could argue that a heckuva lot of jobs don't produce anything useful for society. It often boils down to values.
Some societies are based on cultures that reverse the priority of important and trivial. In the consumer-based liberal society of the US, this is the principal task of public relations, marketing and advertising and the related support mechanisms it creates including creating think tanks and trade associations, and renting institutions including political and academic. Much of what is produced for US consumers could be eliminated without significant effect other than economic effect on certain beneficiaries and also with great improvement to the quality of the society.
Neil "companies may also avoid pay tax by relocating to a different jurisdiction."
Nope. Not in a floating rate system. All they do is move it around the circuit elsewhere in the chain, or they end up saving it - which is just 'voluntary taxation'.
Not in US states and municipalities where firms do negotiate hard for tax break, public subsidies and other drains on the taxpayer dollar to the extent that the feds don't offset, which now is about never. They do this not only in choosing new locations, starting a bidding war over the "job creation" they will bring to the state or community, or actually relocating current operations.
This is a huge deal in the US right now. It's extremely competitive and taxpayers in states and munis affect take a hit in being forces to "buy jobs" with tax breaks and subsidies.
Walmart is notorious for this, for example. They negotiate very hard for the few jobs they bring and the temporary construction work that building stores involves. They demand tax breaks and subsidies and other than the few jobs they bring, which is usually offset by the small businesses they wipe out, they leave almost no money in the community that they take out in sales. They don't purchase locally and their saving, management salaries, and stock dividends go elsewhere.
Tom, when I questioned "useful" jobs, I was thinking about the military-nuclear-spy complex. But that's just my values. Apparently I am in a minority.
My state economy has devolved in my lifetime. We are now the minimum wage capital of the US -- a higher % of minimum wage jobs than any other state.
Lately we have also been attracting businesses that pollute. For example, a few years ago Californian passed more stringent regulations on dairies. So the California dairies relocated to Idaho, where our politicians love pollution.
when I questioned "useful" jobs, I was thinking about the military-nuclear-spy complex.
I am a pacifist who is also a realist. While I oppose all military activity in principle, I acknowledge that most people are not in agreement, so then I counsel limiting it as far as possible.
The US in beyond overboard in this regard, and the intent can only be perceived as hostile.
Bucky Fuller argued that if military use of resources was converted to non-military, the world could build out a utopia of distributed prosperity in short order since everything needed is already available.
Right, which is why state and local taxes on firms are significant. In the US, we are in a race to the bottom led by states that provide as close to zero worker benefits and protections as possible, and municipalities in the same locale vie to outdo each other in attracting firms using tax breaks and subsidies. In some instances it's gotten to the level of ridiculous when subsidies are added on top of tax breaks. The cost of each added job in lost revenue and subsidies can be humongous.
That money is better spent improving education, infrastructure and social amenities to attract firms to an environment works for everyone instead of being "business-friendly" and oriented to "job creation" regardless of the costs. IN the US, the states and munis are being made increasingly "responsible" financially which means less federal largesse (other than for military-related expenditure) and more dependence on tax payer funding either through taxes or borrowing that has to be repaid chiefly from taxes in the future.
All the BS that the deficit hawks and those preaching financial responsibility at the federal level is correct at the state and muni level.
21 comments:
All business costs must be passed onto consumers, otherwise the company will not stay in business very long.
A more useful question is "if we cut corporate taxes, would the savings be passed onto consumers (or to workers)?"
As Beardsley Ruml's famous paper pointed out, IT DEPENDS.
Beardsley: Suppose the corporation income tax were removed, where would the money go that is now paid in taxes? That depends. If the industry is highly competitive, as is the case with retailing, a large share would go to lower prices, and a smaller share would go to higher wages and in higher yield on savings invested in the industry. If labor in the industry is strongly organized, as in the railroad, steel, and automotive industries, the share going to higher wages would tend to increase. If the industry is neither competitive, nor organized or regulated --- of which industries there are very few --- a large share would go to the stockholders.
At the time Ruml wrote that paper, businesses were highly regulated, anti-trust laws were enforced, and labor was strong. Today, we have the opposite situation, so most likely a reduction in corporate taxes would result in a windfall for shareholders. The rich would get richer.
A related question is "would a land value tax come out of landlord's profits, or be passed onto renters?"
That's more complicated because urban real estate is monopolistic and, in a hot market, landlords are able to charge whatever the market will bear, usually a % of income.
But I think it is naive to assume, as George-ists do, that the LVT would always come out of the landlord's profit.
It's also important to note that corporate taxes are a source of profits.
IF you cut corporate taxes, and there is no slack, then any extra consumption has to be accommodated somewhere.
At that point it is simply a question of the distribution profile.
I always find the 'cut corporate taxes' argument to be a bit silly. If you have high corporate taxes and immediate capital offsets, then companies can simply avoid paying tax by investing - which is sort of what you want.
Are Corporate Income Taxes Passed onto Consumers?
Corporate income / loss taxes can be both an outlay of cash and an inflow of cash and neither are passed onto the consumer.
Think of the trillions being held off-shore ....... are those tax savings being passed on to the consumer?
Taxes are not a cost in the sense that; All business costs must be passed onto consumers, otherwise the company will not stay in business very long.
Bear in mind that the tax is applied only on taxable income / loss, which is not the same as accounting income.
If you are unprofitable for tax purposes there is no liability for tax, unless a jurisdiction has instituted a minimum tax or perhaps a capital tax (neither being a tax on taxable income.
Taxes are not factored in as costs when projects are evaluated for RFQ/RFP purposes or pricing purposes, since once again, all that matters is clearing the required internal rate of return or any other imposed hurtle. Nor are estimated taxes allocated to the valuation of inventory.
As a practical matter any attempt to assign tax costs to a product's overall cost would be nothing more than an arbitrary allocation. Consider that most corporations in the US are allowed to file consolidated tax returns, consisting of perhaps hundreds or more of companies, with all kinds of income / loss profiles.
Income taxes do not make one corporation uncompetitive versus others offering the same goods or services or vice versa. Obviously they are all subject to the same rules, ergo no difference.
Are taxes a cost? Of course they are.
A simple example is the sales tax collected by retailers. The sales tax does not come out of the retailer's pocket. The retailer simply adds the tax onto the customer's bill. You understand that because it is printed on your bill.
Income taxes are not nearly so predictable, and they are not printed on the customer's invoice, but nonetheless an established business knows from experience about what percentage of income tax it will have to pay, and adjusts its markup accordingly.
Ditto property taxes, license fees, regulatory costs, etc.. Those costs are passed onto the consumer.
@Seve141 said "they are all subject to the same rules, ergo no difference."
To the extent that that is true, I agree that taxes do not alter competitiveness. But the 50 states have different taxes and different regulatory costs, and different countries have different taxes and different regulatory costs.
Think of the trillions being held off-shore ....... are those tax savings being passed on to the consumer
I can't speak to that issue because my business is not holding trillions of dollars off-shore or anywhere else ! :-)
As I asked previously, a better question is "if we cut business taxes, will the savings be passed onto consumers?" And it depends -- it depends on whether there is enough competition to drive the price down. Lacking competitive pressure, prices are apt to be sticky, and markup is likely to be whatever management thinks it can get away with at a given level of output.
The original topic is tied to the question of "how are prices set, anyway?" Post-Keynesians hold that prices are cost plus markup. Markup will vary depending on the industry and on the business climate.
@Neil said If you have high corporate taxes and immediate capital offsets, then companies can simply avoid paying tax by investing - which is sort of what you want.
Yes. But in an "open" economy, companies may also avoid pay tax by relocating to a different jurisdiction.
Dan
The article, if I read it correctly was related to income taxes not salt and such taxes.
Sales taxes, local or State taxes or vat and capital taxes are not a cost for the purposes that I previously described.
Perhaps I don't understand what the term cost is as defined by you or the economic community?
I have no argument that yes, they are indeed an outlay to the business, however, they don't matter with respect to competitive pricing or sales related concerns. They are in the same class as lease expense or perhaps utilities. Obviously, when a retail operation is acting as an agent of the State collecting and remitting sales tax, it isn't a cost and in fact they are remunerated for doing so.
The only thing that truly matters in profitability is the variable contribution that a firm's product line generates. That has nothing to do with any level of taxation, rather, it has to do with how much variable contribution is generated to cover the firms' fixed expenses.
Once fixed expenses are covered, every sale and the variable contribution after that goes 100% to the bottom line.
How are prices set is a great question. To that question, there is no one or easy answer. For e.g. in the automotive world, cost plus has nothing to do with it. Fixed costs of suppliers have nothing to do with it. It is simply OEM target pricing recognizing the cost of variable inputs only. BTW Tax issues are not contemplated.:-)
The same for the large computer related manufacturers and almost any other large corporate entity you can imagine. Retailers are no different.
Businesses are in business to make as much money as possible. Given the opportunity to raise prices, extract rents etc. they will do so. I think the history is pretty clear on this matter.
Levels of corporate income tax had nothing to do with it, as far as I am aware.
Revenue – Expenses (not including taxes) = Gross Income
Gross Income – Income Tax = Net Income
Net Income – Other Taxes = Net Profit After Taxes
Generally speaking, "expense" and "cost" are used interchangeably, but there is also a difference between expenses and costs.
What is the difference between a cost and an expense?
For present purposes, it is probably sufficient to equate expenses and cost, so that taxes would count as an expense against revenue that affects the bottom line of the income statement that adds to equity on the balance sheet. Significant financial ratios are calculated on this, and they would influence management decision making.
Generally speaking, taxes are looked at as cost of doing business in a particular tax jurisdiction, and firms and investors pay attention to this since this affects net profit as the amount by which equity increased on the balance sheet during the period. Taxes that apply to all firms do not affect competitiveness but taxes that don't, do. Clearly firms have to consider this, since they can't pass taxes along if this means becoming less competitive, unless this can be offset otherwise in a non-generic or commodity market where no firm has an advantage regarding the product.
Generally speaking, net profit is allocated to distribution and retained earnings. Retained earning can be allocated to investment, equity buybacks, or saved for future use.
Quite obviously, firms must pass along all costs however incurred if they are to be profitable concerns.
So in that sense, taxes have to be passed on to customers, and clients and firms will attempt to this to the degree that the market permits in order to maximize return on investment and profit margin.
I would say that in general taxes get passed along as a cost to the degree that firms can do this, but actually determining this in specific cases may be difficult.
I think it is much more difficult to argue that lowering taxes would necessarily imply that customers would pay less based on the so-called law of supply and demand in competitive markets, especially in the case of administered prices.
However, it should be obvious from the above that the issue is really with retained earnings that are saved or are used to buy back equity to increase the share price rather than being invested. Distributions are taxed at the household level, and best management practice is to prefer funding investment with retained earnings instead of financing it with debt.
The issue arises with long term saving and equity buy back to increase share value and therefore capital gains as a way of avoiding household ordinary income taxes on distribution of earnings. This is where either regulation or tax pressure should be applied. Tax credits can also be extended for investment. Or better yet, either make all household revenue taxable equally, or tax revenue that doesn't come from work at higher rates as economic rent
Very well stated, Tom. I would only raise questions about your last sentence, tax revenue that doesn't come from work at higher rates. The question is, who is to say what is work or not work? If Warren Mosler receives revenue from trading currencies, is that work, or is that rent? Well, Warren does spend time and effort to "earn" those revenues.
If a landlord receives revenue from rental property, is that work, or rent? Well, the landlord may have worked to earn money to buy the property in the first place. He probably does spend time and money on maintenance, improvements, advertising, dealing with tenant problems, etc., or else pays a management company to do those things for him. Who is to say the landlord does not "earn" his profit?
Whether or not money is "earned" through "work" is basically a moral question. A communist might argue that no worker is morally entitled to "earn" more than anyone else. At the other extreme, the Koch brothers probably feel that they "worked" to grow the business that they inherited from their father.
@Seve141, agree that how prices are set is a "great" question. Obviously in the real world it's more complicated than simple ivory tower models. Nonetheless, models are useful as rules of thumb.
One of the differences between post-Keynesian vs. neoclassical economics is that post-Keynesians assume, as a very general rule of thumb, that prices are set based on cost plus markup. This is the implicit assumption in Beardsley Ruml's argument that corporate taxes are passed onto consumers.
Here is a link to Ruml's paper if anyone needs it.
It's easy to think of particular markets where the cost-plus-markup rule may not apply. For example, most MMT'ers believe that the Sauds, as a monopolistic swing producer, set the price of oil to whatever they want it to be. If that is true, then taxing or not taxing American oil companies may not have much impact on the price of oil!
The point is to tax economic rent at least as much as productive contribution, if not more.
Work produces a good or service that is socially necessary or at least socially contributive.
If someone is receiving compensation without making a social contribution, they are not working, or if they are being compensated disproportionally relative to contribution, then that is economic rent, too.
Of course there are grey areas. Law and regulation is full of them. There are ways of dealing with such and the line doesn't have to be drawn all that finely anyway, as long as the principle is followed.
@Tom said Work produces a good or service that is socially necessary or at least socially contributive.
I share your sentiment, however one could argue that a heckuva lot of jobs don't produce anything useful for society. It often boils down to values.
Let us compare two states of affairs, one with a corporate income tax, and one without. In general, surely the tax is only partially passed on to consumers in the former case. Otherwise the consumers would purchase just as much from the corporations in both cases. Does anybody think that that is true in general? To pass on the tax to consumers means raising prices. Do we think that sales will not drop?
"companies may also avoid pay tax by relocating to a different jurisdiction."
Nope. Not in a floating rate system. All they do is move it around the circuit elsewhere in the chain, or they end up saving it - which is just 'voluntary taxation'.
Floating rate currency adjust to take that into account. Now it may be that there is currency manipulation in which case you get a free lunch - other countries giving you real stuff in return for electronic bits.
The 'moving offshore' line is a canard based upon faulty analysis of the accounting - primarily mistaking the reporting currency for the operational *currencies*.
The companies may go offshore, but the people don't. So you just engage them doing something else. The result is a higher standard of living for the general population.
Of course that requires a government that actually understands that extracting as much real value from the rest of the world as possible is the correct policy position.
"It's easy to think of particular markets where the cost-plus-markup rule may not apply."
It applies in every business market I've ever been in.
Firms set prices based upon what they think will generate the greatest turnover, generally mostly from their existing customer base - almost regardless of costs. In other words what the market will stand.
So it is never a judgement of price alone. It is price and any possible effect that has on quantity.
What you then do is make your costs fit what you can get.
There are other phases where you are loss leading, or capital building, but the stable business bit tends to target turnover and contribution.
Individual businesses tend not to worry about corporate income taxes, but do worry about sales taxes if they are targeting the consumer that has to absorb them (which depends what type of sales tax it is).
However the individual business is not the aggregation. In aggregate if you can't make enough money after tax you go bust and disappear. So the amount of tax in aggregate that leaks from your circulation path (tax paid vs taxer spend received as income - possibly transitively) is what gets added to the cost cycle.
So overall it is the usual thing - net saving in the operational currency.
@Neil, price determination has been debated by economists for eonss and we are not going to end the debate anytime soon. :-)
But the fact is that post-Keynesians favor some variation of the cost plus markup school of price determination -- though there is a lot of wiggle room in the word "markup."
Not sure if I can link directly to JSTOR, but Malcolm Sawyer offers a nuanced explanation of "markup" here.
companies may go offshore, but the people don't. So you just engage them doing something else. The result is a higher standard of living for the general population.
Of course that requires a government that actually understands.
That's ivory tower theory. Reality is that government is by the 1%, of the 1%, for the 1%, and always has been. Firms do go offshore, and people do become unemployed or underemployed. The skilled manufacturing worker who is forced to find a new career in a service sector sees his standard of living decline.
Foreign countries do not give individuals free stuff. I can't print money, so I have to work to earn money to pay for foreign stuff, and I can't buy it if I am unemployed or underemployed because my industry moved offshore to take advantage of lower jurisdictional costs.
Free trade is an ivory tower theory that has been a disaster in practice. Academics support free trade because it sounds good in theory and their teaching jobs and think tank jobs haven't been moved offshore (yet).
The JG is not a satisfactory response for the workers who have been impacted by free trade. JG advocates have no intention of picking up litter for minimum wage. When they advocate the JG, they advocate it for OTHER PEOPLE, not for themselves or for their "class." Is Warren Mosler going to pick up litter? Stephanie Kelton? Neil Wilson?
I share your sentiment, however one could argue that a heckuva lot of jobs don't produce anything useful for society. It often boils down to values.
Some societies are based on cultures that reverse the priority of important and trivial. In the consumer-based liberal society of the US, this is the principal task of public relations, marketing and advertising and the related support mechanisms it creates including creating think tanks and trade associations, and renting institutions including political and academic. Much of what is produced for US consumers could be eliminated without significant effect other than economic effect on certain beneficiaries and also with great improvement to the quality of the society.
Then there is finance.
Neil "companies may also avoid pay tax by relocating to a different jurisdiction."
Nope. Not in a floating rate system. All they do is move it around the circuit elsewhere in the chain, or they end up saving it - which is just 'voluntary taxation'.
Not in US states and municipalities where firms do negotiate hard for tax break, public subsidies and other drains on the taxpayer dollar to the extent that the feds don't offset, which now is about never. They do this not only in choosing new locations, starting a bidding war over the "job creation" they will bring to the state or community, or actually relocating current operations.
This is a huge deal in the US right now. It's extremely competitive and taxpayers in states and munis affect take a hit in being forces to "buy jobs" with tax breaks and subsidies.
Walmart is notorious for this, for example. They negotiate very hard for the few jobs they bring and the temporary construction work that building stores involves. They demand tax breaks and subsidies and other than the few jobs they bring, which is usually offset by the small businesses they wipe out, they leave almost no money in the community that they take out in sales. They don't purchase locally and their saving, management salaries, and stock dividends go elsewhere.
Tom, when I questioned "useful" jobs, I was thinking about the military-nuclear-spy complex. But that's just my values. Apparently I am in a minority.
My state economy has devolved in my lifetime. We are now the minimum wage capital of the US -- a higher % of minimum wage jobs than any other state.
Lately we have also been attracting businesses that pollute. For example, a few years ago Californian passed more stringent regulations on dairies. So the California dairies relocated to Idaho, where our politicians love pollution.
Free trade sets up a "race to the bottom."
when I questioned "useful" jobs, I was thinking about the military-nuclear-spy complex.
I am a pacifist who is also a realist. While I oppose all military activity in principle, I acknowledge that most people are not in agreement, so then I counsel limiting it as far as possible.
The US in beyond overboard in this regard, and the intent can only be perceived as hostile.
Bucky Fuller argued that if military use of resources was converted to non-military, the world could build out a utopia of distributed prosperity in short order since everything needed is already available.
"JG advocates have no intention of picking up litter for minimum wage."
That's because it has nothing to do with that. That's just your hobby horse and you won't get off it.
As it happens I'd be quite happy on the JG writing Open source software for everybody to use. So once again you are flat wrong.
And if government is of the 1% then they will be quite happy with businesses going offshore and there is nothing you can do about it.
If you're going to debate, try and stay on point and away from Strawmen. Otherwise it gets boring.
Tom,
States aren't in a floating rate system. They are in a fixed rate system - just like the Eurozone states.
Right, which is why state and local taxes on firms are significant. In the US, we are in a race to the bottom led by states that provide as close to zero worker benefits and protections as possible, and municipalities in the same locale vie to outdo each other in attracting firms using tax breaks and subsidies. In some instances it's gotten to the level of ridiculous when subsidies are added on top of tax breaks. The cost of each added job in lost revenue and subsidies can be humongous.
That money is better spent improving education, infrastructure and social amenities to attract firms to an environment works for everyone instead of being "business-friendly" and oriented to "job creation" regardless of the costs. IN the US, the states and munis are being made increasingly "responsible" financially which means less federal largesse (other than for military-related expenditure) and more dependence on tax payer funding either through taxes or borrowing that has to be repaid chiefly from taxes in the future.
All the BS that the deficit hawks and those preaching financial responsibility at the federal level is correct at the state and muni level.
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