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Old 07-24-2019, 03:45 PM
Happy Fun Ball is offline
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Should higher taxes spur investment?


This is a quick question and I feel like I am being dumb or missing something. Shouldn't higher taxes increase investments and not the converse as it is currently argued?

Say a company or a shareholder made $10 in profit last year and we want to compare the evaluate the effects of a 50% tax rate on said investor.

For a 50% tax rate, only $5 of the profits are going to benefit the shareholders as the rest is going to tax. It seems to me there is an incentive proportional to the tax rate to put some of the profits into tax deductible investments in order to minimize the tax. So instead of paying $5 in taxes, it would be better if the company or investor increased the value of their stake; i.e. give talent raises to motivate and retain them, or buy a higher speed robot to improve efficiency/productivity, or buy out a competitor or supplier to reduce costs, or just buy more shares of the investment. If the company/investor spends $5 of the profit on these tax deductible investments, more benefits go the the benefit of the company/shareholders because while they are only able to take home $2.50 (compared to $5 without the investment), but the value of their investment increased by $5 and they only paid $2.50 in taxes.

For smaller tax rates, it seems to me that this incentive is proportionally less.

Right?

I was thinking about this after learning how charitable deductions is down after the Trump tax law change. Trump doubled the standard deduction, so now there is less of a reason to give to charities. But this effect should also apply to tax rates in general, right?
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Old 07-24-2019, 04:37 PM
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It is usually assumed that the cost of new taxes are for the most part passed down rather than allowed to cut into profits, and that corporations are already doing what they can to maximize shareholder value.

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Last edited by Max S.; 07-24-2019 at 04:41 PM.
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Old 07-24-2019, 07:32 PM
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OK, but I don't think that invalidates my thinking. If the capital gains rate increased to 50%, I would re-invest rather than cash out. Wouldn't you?
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Old 07-24-2019, 07:35 PM
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Most big corporations already pay little or nothing in taxes, so that part of your argument really doesn't apply.

Cite.

Last edited by Tim@T-Bonham.net; 07-24-2019 at 07:37 PM.
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Old 07-24-2019, 07:46 PM
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Generally, capital investment is written down over a number of years, not all at once. In any case, a lot of the tax cuts were used by the companies to buy back their shares, thus increasing the value of the remaining shares.
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Old 07-24-2019, 08:44 PM
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This is GQ, so I'll just state that this is based on the underlying assumption that companies are always profitable, always able to expand, and that there is no risk in these investments.

The idea of spending money on a business is so you can make it. If you will make less money at the end of the day, because of an increased tax rate, that goes into the risk calculus making some business ventures not worth the risk, even though they would have otherwise been successful. That means no employees to work at all at the company, let alone get raises, no innovation to be done, and no shares to be bought back.

Econ 101 says that all taxes are always deadweight losses. Sure, they are a necessary function of living in a society, but they always distort the market.
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Old 07-24-2019, 10:06 PM
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Econ 101 says that all taxes are always deadweight losses.
That's very poor economics. More realistic to view taxes as the price you pay for services provided by the society.

For example, taxes pay for the roads your employees use to get to work, and customers to arrive, and for delivery of your raw materials, and distribution of your finished products. Without roads paid for by taxes, could your business operate?
[And transportation is a public good needed by society, paid for by society, even though it costs more than the direct taxes provide. It must be subsidized, and has been, going back to the days when slaves built stone roads (all leading to Rome).]

Businesses do have a legitimate complaint, if the taxes they pay are out of proportion to the benefits they get from society. (But it's hard to claim that, if your company is making enough money to pay executives millions. But this may be straying out of GQ territory.)
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Old 07-24-2019, 10:11 PM
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That's very poor economics. More realistic to view taxes as the price you pay for services provided by the society.

For example, taxes pay for the roads your employees use to get to work, and customers to arrive, and for delivery of your raw materials, and distribution of your finished products. Without roads paid for by taxes, could your business operate?
[And transportation is a public good needed by society, paid for by society, even though it costs more than the direct taxes provide. It must be subsidized, and has been, going back to the days when slaves built stone roads (all leading to Rome).]

Businesses do have a legitimate complaint, if the taxes they pay are out of proportion to the benefits they get from society. (But it's hard to claim that, if your company is making enough money to pay executives millions. But this may be straying out of GQ territory.)
It is textbook economics. Note how I said that taxes are necessary, and they are necessary for the reasons you stated. However, that does not change the fact that they introduce market inefficiencies.
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Old 07-24-2019, 11:06 PM
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Originally Posted by Tim@T-Bonham.net View Post
Most big corporations already pay little or nothing in taxes, so that part of your argument really doesn't apply.

Cite.
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Originally Posted by Hari Seldon View Post
Generally, capital investment is written down over a number of years, not all at once. In any case, a lot of the tax cuts were used by the companies to buy back their shares, thus increasing the value of the remaining shares.
I know how the world works (at least in simplistic terms). None of this is answering my question.

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Originally Posted by UltraVires View Post
It is textbook economics. Note how I said that taxes are necessary, and they are necessary for the reasons you stated. However, that does not change the fact that they introduce market inefficiencies.
This is also not answering my question. I agree with you that taxes distort the market and introduce inefficiencies, I am more asking a question from a theoretical perspective.

Given the fact that taxes are a "deadweight loss", doesn't it make more sense to invest profits than pay them in taxes. At least this way you are getting something for your money rather than helping poor people on the coasts (all that is tongue in cheek). I hear conservatives all the time justifying their tax cuts to millionaires claiming that cutting the investor class taxes will cause them to invest more of their profits. But I think the opposite is true; if you tax profits heavily won't this spur the people receiving those profits to invest in their businesses rather than losing the money to their "deadweight losses?" If I have this wrong, why and how?
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Old 07-24-2019, 11:12 PM
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Let's take it to a ridiculous extreme: let's say the tax rate is 99%, doesn't it then make sense the to try to write off every cent of your profits by buying anything that you can think of for your business rather than just given the government your money? After all, wouldn't it be better to have a forklift that you only use twice a year than to just give all your profits to the government, after all at least it is a tangible asset.

This ridiculous scenario (not much more ridiculous than the Laffer curve) shows that the Republican argument that tax cuts spur investment at the least only works over a narrow range, right?
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Old 07-24-2019, 11:24 PM
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When we tax “profit,” we encourage companies to pay more in wages, invest in buildings and R&D and so on in order to drive down the taxable figure.
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Old 07-24-2019, 11:32 PM
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Originally Posted by Happy Fun Ball View Post
This is also not answering my question. I agree with you that taxes distort the market and introduce inefficiencies, I am more asking a question from a theoretical perspective.

Given the fact that taxes are a "deadweight loss", doesn't it make more sense to invest profits than pay them in taxes. At least this way you are getting something for your money rather than helping poor people on the coasts (all that is tongue in cheek). I hear conservatives all the time justifying their tax cuts to millionaires claiming that cutting the investor class taxes will cause them to invest more of their profits. But I think the opposite is true; if you tax profits heavily won't this spur the people receiving those profits to invest in their businesses rather than losing the money to their "deadweight losses?" If I have this wrong, why and how?
Well, again, GQ and all, so I'm not arguing, but giving the typical counterpoint to your assertion.

Your goal in starting a business is to make money, not to continually grow your company, never taking any money out for yourself to do nice things. And, again, there is the risk. With a lower tax rate, you have the potential for higher profits, so you will start that business and reinvest if you think you can make higher profits by reinvesting.

If you raise taxes, the risk may outweigh the reward and you won't start the business at all. If you lower the tax rate, I have an incentive to reinvest because I have a chance of making even more money relative to the risk.

If I am still running the business and taxes are raised, I might want to shelter them against the taxes by reinvesting as you said, but as soon as I think about it, I won't because:

1) Money in hand is always better than a deduction. If I have $10k that is taxed at 10%, I would rather have $9k instead of investing $5k and take home $4,500 (I think that math is right). If I thought reinvesting in the business was a good idea, I would still do it at a lower tax rate because I (hope) I would get repaid in spades. If it is a bad idea, then I would be throwing good money away.

2) Either way, I am looking at the end result: what I take home. Sure, this year I can reinvest (if I think it will be a good thing) but at some point, I want to take a profit relative to my risk. And if you have jacked up my taxes, why would I risk more by reinvesting in a business when I may not realize any profit, and if I do, it will be taxed higher? I've basically doubled down on my risk and will get less of a reward---even if things go well.
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Old 07-24-2019, 11:39 PM
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Let's take it to a ridiculous extreme: let's say the tax rate is 99%, doesn't it then make sense the to try to write off every cent of your profits by buying anything that you can think of for your business rather than just given the government your money? After all, wouldn't it be better to have a forklift that you only use twice a year than to just give all your profits to the government, after all at least it is a tangible asset.

This ridiculous scenario (not much more ridiculous than the Laffer curve) shows that the Republican argument that tax cuts spur investment at the least only works over a narrow range, right?
Would you start or continue a business if you were taxed at 99% on your profits? There would be no business, no wages, no forklifts.

And no, it doesn't only work over a narrow range. If taxes are 1%, look at all that extra money making potential you have. If a new forklift would help you make more money, taxed only at 1%, you would buy it.

Or is it better for the economy as a whole to buy an unneeded forklift?
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Old 07-24-2019, 11:46 PM
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When we tax “profit,” we encourage companies to pay more in wages, invest in buildings and R&D and so on in order to drive down the taxable figure.
How so? If a 10% tax hike goes into effect, which would you rather do, give the employees a cumulative $50k/yr raise or keep the money? Money is better than a deduction.

1)A Raise--My tax bill would go down $5k/yr, but I still paid $50k. A net loss of $45k

2)Keep the Money--$45k in my pocket.

So tell me again how me losing $45k would spur me to give the employees a raise?
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Old 07-24-2019, 11:51 PM
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When we tax “profit,” we encourage companies to pay more in wages, invest in buildings and R&D and so on in order to drive down the taxable figure.
This is what I am arguing.

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Originally Posted by UltraVires View Post
Well, again, GQ and all, so I'm not arguing, but giving the typical counterpoint to your assertion.

Your goal in starting a business is to make money, not to continually grow your company, never taking any money out for yourself to do nice things. And, again, there is the risk. With a lower tax rate, you have the potential for higher profits, so you will start that business and reinvest if you think you can make higher profits by reinvesting.

If you raise taxes, the risk may outweigh the reward and you won't start the business at all. If you lower the tax rate, I have an incentive to reinvest because I have a chance of making even more money relative to the risk.

If I am still running the business and taxes are raised, I might want to shelter them against the taxes by reinvesting as you said, but as soon as I think about it, I won't because:

1) Money in hand is always better than a deduction. If I have $10k that is taxed at 10%, I would rather have $9k instead of investing $5k and take home $4,500 (I think that math is right). If I thought reinvesting in the business was a good idea, I would still do it at a lower tax rate because I (hope) I would get repaid in spades. If it is a bad idea, then I would be throwing good money away.

2) Either way, I am looking at the end result: what I take home. Sure, this year I can reinvest (if I think it will be a good thing) but at some point, I want to take a profit relative to my risk. And if you have jacked up my taxes, why would I risk more by reinvesting in a business when I may not realize any profit, and if I do, it will be taxed higher? I've basically doubled down on my risk and will get less of a reward---even if things go well.
Hmmm. I get your logic. But I am now thinking of several of my acquaintances that have started businesses not for the purpose of making money, but for the purpose of dodging taxes. They write off every purchase they can think of: gas, cleaning supplies, utilities, home improvements, vacations, etc... trying to reduce their taxable income. In starting their businesses they were not looking at what they take home, they were looking at how they can reduce the amount the government takes from them. Or maybe they were looking at how they can maximize their quality of life without paying taxes. Surely you know people who do this also. Stories of small business owners writing off everything under the sun whether applicable to their business or not are ubiquitous.
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Old 07-24-2019, 11:58 PM
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How so? If a 10% tax hike goes into effect, which would you rather do, give the employees a cumulative $50k/yr raise or keep the money? Money is better than a deduction.

1)A Raise--My tax bill would go down $5k/yr, but I still paid $50k. A net loss of $45k

2)Keep the Money--$45k in my pocket.

So tell me again how me losing $45k would spur me to give the employees a raise?
When you give your employees a raise you are getting improved morale and employee retention; surely this better than nothing. Take it to an extreme, let's say a 99% tax hike goes into effect; if you give your employees a raise or buy a new robot, at least you are getting something for your money rather than just losing it as a "deadweight" loss, right? If this logic is sound, where is the point where it makes more sense to keep the money and eat the loss than invest the money (i.e. buy back stock) and avoid the taxes altogether?
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Old 07-25-2019, 12:00 AM
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Answering my own question: you would say it makes no sense to buy the robot or give the raise even with 99% taxes because you are getting something that has no chance of making you profit in the future so it is better to get 1 cent on the dollar than to throw good money after bad.

I see what you are saying, I need to think about this...
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Old 07-25-2019, 12:01 AM
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Hmmm. I get your logic. But I am now thinking of several of my acquaintances that have started businesses not for the purpose of making money, but for the purpose of dodging taxes. They write off every purchase they can think of: gas, cleaning supplies, utilities, home improvements, vacations, etc... trying to reduce their taxable income. In starting their businesses they were not looking at what they take home, they were looking at how they can reduce the amount the government takes from them. Or maybe they were looking at how they can maximize their quality of life without paying taxes. Surely you know people who do this also. Stories of small business owners writing off everything under the sun whether applicable to their business or not are ubiquitous.
Your friends might not want to tell that to too many people as doing that is very frowned upon by the IRS.

I'm not a tax guy, but I think after about three years, even if the IRS cannot prove anything nefarious, they will deny those business deductions and claim that what you are doing is a hobby and not a business.
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Old 07-25-2019, 12:10 AM
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Your friends might not want to tell that to too many people as doing that is very frowned upon by the IRS.

I'm not a tax guy, but I think after about three years, even if the IRS cannot prove anything nefarious, they will deny those business deductions and claim that what you are doing is a hobby and not a business.
Yeah, I think those acquaintances of mine are pretty sketchy; personally, I think it is patriotic to pay your taxes and I do it proudly. I am sincere in this belief, I think these people are immoral and their protestations of being a proud American to me sound pretty hollow.

Regarding the IRS and the businesses, I have no idea what goes on but they seem to be starting new businesses and closing old businesses all the time. I can't even keep up.
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Old 07-25-2019, 12:13 AM
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Here is Wikipedia on a deadweight loss: https://en.wikipedia.org/wiki/Deadweight_loss as I do not believe that you are using it or understanding it correctly.

The short, sloppy and dirty example would be if I had a widget that you would buy for $1, but not a penny more. I would sell you a widget for $1, but not a penny less. Without a sales tax, we would both be happy as you would get your widget and I would get my $1.

Oh, but our state just enacted a 5% sales tax. That means for the widget, you would have to pay $1.05 which you are unwilling to do. Alternatively, I could reduce the price to 95 and some odd cents (and pay the tax out of pocket) which I am unwilling to do.

So, here is a market transaction, beneficial to both of us that now will not happen because of the new sales tax. That means that no new information is imparted to the market and the good use you could have put towards the widget and me to that $1 will not now happen.

That is a "deadweight loss."
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Old 07-25-2019, 12:59 AM
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Talking about a 99% tax rate is an extreme and isn't interesting or relevant when talking about the tradeoff between investing or not. A 99% rate would cause most businesses to quickly close up shop and either enter the black market or leave the country. It would also cause mass civil disobedience and cheating and likely destroy the economy of any country that tried it, similar to what has been happening in Venezuela.

If we are talking about the difference between 20% and 38% that's a more interesting conversation to have. Taxes are definitely a big deal and most companies try to not get bit as much as they can. Whether you invest in something depends on the risk vs the reward. Higher taxes mean less reward which can result in a previous investment not penciling out.

In most cases a minor tax increase might actually lead many companies to try and make their operations more efficient (e.g. less costly) so they can net the same amount after taxes. In the short term this looks like the opposite of investment because they may be cutting employees, putting off equipment upgrades or maintenance etc. to try and maintain profits. BTW this is exactly the same thing a typical household does when their taxes go up. You don't see people thinking "oh, I better buy a bigger house to get that juicy deduction because tax rates went up" as that doesn't make sense.
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Old 07-25-2019, 05:18 AM
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Talking about a 99% tax rate is an extreme and isn't interesting or relevant when talking about the tradeoff between investing or not. A 99% rate would cause most businesses to quickly close up shop and either enter the black market or leave the country. It would also cause mass civil disobedience and cheating and likely destroy the economy of any country that tried it, similar to what has been happening in Venezuela.

If we are talking about the difference between 20% and 38% that's a more interesting conversation to have. Taxes are definitely a big deal and most companies try to not get bit as much as they can. Whether you invest in something depends on the risk vs the reward. Higher taxes mean less reward which can result in a previous investment not penciling out.

In most cases a minor tax increase might actually lead many companies to try and make their operations more efficient (e.g. less costly) so they can net the same amount after taxes. In the short term this looks like the opposite of investment because they may be cutting employees, putting off equipment upgrades or maintenance etc. to try and maintain profits. BTW this is exactly the same thing a typical household does when their taxes go up. You don't see people thinking "oh, I better buy a bigger house to get that juicy deduction because tax rates went up" as that doesn't make sense.
A 99% rate is relevant when you talk about a deadweight loss. A 0% rate has the market running at optimum efficiency. A 100% rate, or anything near it, kills the market.

Now, yes, and again yes, some taxes are required to have a government with roads, fire, and police protection. Without basic government, no market is possible.

However, and again, any tax linearly from 1% to 100% causes more and more inefficiencies in the market. So a bump from 20% to 38% wouldn't cause rioting in the streets, but the OP was about how a higher tax rate could be beneficial to the market because it possibly spurs investments.

It never happens. Higher taxes are never good for markets. Now, one could argue that higher social spending and higher taxes are more beneficial than the market inefficiencies introduced, but that is never argued. The implication is always that the rich have these big piles of money that if we could just tap into we would have a utopia with no effect on the market. It can't happen.
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Old 07-25-2019, 07:13 AM
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This is a quick question and I feel like I am being dumb or missing something. Shouldn't higher taxes increase investments and not the converse as it is currently argued?

Say a company or a shareholder made $10 in profit last year and we want to compare the evaluate the effects of a 50% tax rate on said investor.

For a 50% tax rate, only $5 of the profits are going to benefit the shareholders as the rest is going to tax. It seems to me there is an incentive proportional to the tax rate to put some of the profits into tax deductible investments in order to minimize the tax. So instead of paying $5 in taxes, it would be better if the company or investor increased the value of their stake; i.e. give talent raises to motivate and retain them, or buy a higher speed robot to improve efficiency/productivity, or buy out a competitor or supplier to reduce costs, or just buy more shares of the investment. If the company/investor spends $5 of the profit on these tax deductible investments, more benefits go the the benefit of the company/shareholders because while they are only able to take home $2.50 (compared to $5 without the investment), but the value of their investment increased by $5 and they only paid $2.50 in taxes.

For smaller tax rates, it seems to me that this incentive is proportionally less.

Right?

I was thinking about this after learning how charitable deductions is down after the Trump tax law change. Trump doubled the standard deduction, so now there is less of a reason to give to charities. But this effect should also apply to tax rates in general, right?
Suppose that a company’s executive leadership and board are preparing the company’s 2020 budget. They have a pretty good idea what they expect the operating profit for 2020 to be and are discussing how to use it.

In very general terms, there are four ways they can use that profit:
• Additional payments to non-owning stakeholders, such as employee bonuses or charitable donations
• Investment such as research and development or capital assets (I’m excluding fixed asset accounting and depreciation from this discussion. Stock buybacks also fall in this category, but are beyond simple discussion.)
• Payments to owners - dividends
• Increasing the company’s cash reserves (which includes reducing debt)

The first two items reduce a company’s taxable profit and third and fourth items do not. Your premise is that increasing the corporate tax rate would disincentivise the last two items and therefore encourage the first two items. What really happens is that the tax increase makes the last two items more expensive, and therefore reduces the funds available for the first two.

For non-public companies, dividends are often essential for investors who after all are the owners of the company. Investors definitely have a goal of eventually selling the company or taking it public, but that can take years and requires the company to have a fairly high value. Someone who invests $1 million into a company that’s worth $5 million and is making a profit isn’t going to want to wait until the company is worth $1 billion 10 years down the road and goes public before he receives any return on that investment. Dividends are the way he receives income from that investment now and maintains his stake in the original investment. That investor will probably accept trade-offs, but he’s going to be hugely interested in maintaining that dividend. Reduce a company’s profits through taxation and he’s going to try to get some of that profit back from cuts in expenses – and there go your employee bonuses.

With public companies, not all public companies issue dividends. Many mature ones do in order to provide income to stockholders, and also as a sign of stability which attracts long-term investors. Once a company starts issuing regular dividends, they are extremely reluctant to cut it. Many companies will have a loss-making year and continue to issue dividends because they don’t want to be seen as in trouble. Reduce the amount of profit available for that dividend and the company leadership will take steps to pay it anyway, even if those steps are detrimental in the long-term.

Regarding cash reserves, managing a company’s cash position is a huge focus of management. Want to know a good way to go out of business? Have your short-term debts exceed your cash reserves. If a company is growing, it is increasing its supply chain which usually means more short-term debt to suppliers. Therefore it will be directing some of its profits into cash reserves. Reduce that profit and you're acting as a brake on growth

TLDR: Corporate tax increases do not encourage internal business investment.

Last edited by Wrenching Spanners; 07-25-2019 at 07:17 AM.
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Old 07-25-2019, 08:01 AM
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It is textbook economics. Note how I said that taxes are necessary, and they are necessary for the reasons you stated. However, that does not change the fact that they introduce market inefficiencies.

How do they ? If roads were built by private actors and paid for by tolls (or some other scheme), would that be more efficient because "s'not a tax, innit" ?
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Old 07-25-2019, 08:16 AM
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Higher taxes mean less money. Wouldn't that mean that you have LESS money to invest?
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Old 07-25-2019, 08:34 AM
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No, because expenses are deducted before taxes are applied.
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Old 07-25-2019, 08:39 AM
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I can think of few topics more GD than "what effect do tax rates have on economic activity". Moving.
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Old 07-25-2019, 10:39 AM
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[Moderating]
I can think of few topics more GD than "what effect do tax rates have on economic activity". Moving.
Hell, I feel like this is "asked and answered." I am OK with locking it.
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Old 07-25-2019, 12:30 PM
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My first inclination in answering this question is to say that if a company felt it had a good opportunity to expand its business, it would do so by taking on debt or courting new equity investors. Very rarely are operations expanded by reinvesting profits, because that's in general way too slow. If you have a great business idea and want to grow from 1 store to 10 to 100 to 1000, doing so with the profits of the stores itself will take you a long time compared to bringing in other investors. You present your plan to investors, and if they like it, it will get funded, and you'll expand way faster at the cost of being under a lot of debt or losing some of the equity ownership. If you finance using debt, interest payments are tax deductible.

So I think the idea that there are ways to invest your profits to increase the value of your business is a bad assumption. You can almost always use other people's money to do it if you really wanted to. The main reason that you wouldn't invest in a potential new line of business or in R&D or whatever is that you think the risk/reward balance is not good enough. Unless the taxes are temporary or you're the sole shareholder that plans on passing the appreciated business on death so that the new owners have a step-up in basis on inheritance from which they can sell the business for a much smaller gain than you could yourself, increasing taxes will decrease the reward and not decrease the risk. Both of those scenarios might be likely though, and would be the cases in which a business owner would be interested in making investments that increase the value of the business by increasing its future profitability.

The idea is not entirely without merit. Because of the time value of money, there are gains to be made by deferring taxable income as much as possible. With the ability to effectively fully expense all investments in machinery and equipment right now instead of having to depreciate them for tax purposes over a number of years, you can get some great Time Value of Money where new investments are more profitable just because of paying less taxes now and reinvesting that money. However, I don't think that the rate of taxes has any impact on the calculation, because the same percentage is taken out at the end as would be in the beginning unless one of the two scenarios mentioned above is the case. I would be willing to entertain a fully fleshed-out argument that says that the tax deferral is more beneficial the higher the rate of taxes, but the argument presented so far does not address why postponing taxes now to pay more taxes later is more beneficial the higher the tax rate.

That said, I would guess that if taxes are raised, then business owners are likely to believe that taxes will come back down in the future and may make these investments on that basis. It may also spur more people to plan to use the inheritance step-up in basis to save their family taxes. But those are the only reasons I see why raising taxes would encourage businesses to reinvest their profits.

Last edited by glowacks; 07-25-2019 at 12:32 PM.
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Old 07-25-2019, 01:26 PM
Scylla is offline
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Most big corporations already pay little or nothing in taxes, so that part of your argument really doesn't apply.

Cite.
That says 60 out of 500. That’s not most.
  #31  
Old 07-25-2019, 02:24 PM
Lance Turbo is offline
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Econ 101 says that all taxes are always deadweight losses.
You just failed Econ 101.

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It is textbook economics.
Show me this textbook.
  #32  
Old 07-25-2019, 02:55 PM
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If the company/investor spends $5 of the profit on these tax deductible investments, more benefits go the the benefit of the company/shareholders because while they are only able to take home $2.50 (compared to $5 without the investment), but the value of their investment increased by $5 and they only paid $2.50 in taxes.
Investing $5 in equipment or paying people more, doesnt' make the company's value go up.

Increasing the profits of the company, makes the company's value go up. Typically company valuations are based upon the stream of expected forecasted future cash flows. You only invest in new equipment or in higher wages for people, if you think that this will increase your future cash flows.

Increased taxes means lower cash flows, now and into the future.
  #33  
Old 07-25-2019, 03:20 PM
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You just failed Econ 101.
No, he's correct, and you aren't.
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Show me this textbook.
Cite (pdf) and cite. Technically not 101 level, but do your best.
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How do they ? If roads were built by private actors and paid for by tolls (or some other scheme), would that be more efficient because "s'not a tax, innit" ?
It would be more efficient, but not because of what it is called.

It would be more efficient because those incurring the cost - the tolls - are only the ones using the road, and the risk incurred by building the road is borne by the private actors. We don't do it that way, for the most part, for reasons of convenience, plus hiding and shifting costs.

We do have some toll roads and toll bridges, and at least in my state, roads and highways are covered by a gasoline tax, which has many of the same efficiencies as a toll road. As well as some of the disadvantages - the gasoline tax isn't progressive, because everyone pays the same rate at the pump.

But the discussion about incentivising re-investment by taxing profits kind of misses the point, IMO. Re-investing is done either out of altruism, because you are a nice person and want your employees to be happy, or out of a desire to profit more.

But re-investing is a risk, just like investing is a risk. If I have $1000 in profits, and the tax rate goes from 5% to 10%, I can either put the $900 in my pocket or distributed it to my nine employees as a bonus. (Presumably they will pay tax on the bonus at 10% rather than 5%, so it is marginally worth less to them, too.)

Now maybe that boosts morale so that next year, I have $2000 in profit. So I would end up with $1800 after tax. Or maybe my business burns down next Wednesday and I wind up with nothing after tax.

Profit is the payment for successfully taking risk. The higher the profit, the higher the risk people will accept, the lower the profit, the lower the risk. As ever, economics operates mostly on the margins. Maybe the difference between an average ROI of 3% and 2.8% is not huge, but there is a difference.

Regards,
Shodan
  #34  
Old 07-25-2019, 03:28 PM
Lance Turbo is offline
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No, he's correct, and you aren't.
Cite (pdf) and cite. Technically not 101 level, but do your best. It would be more efficient, but not because of what it is called.
Neither of those cites support his claim or are Econ 101 textbooks.

His claim is, "Econ 101 says that all taxes are always deadweight losses." That is simply untrue.

Something like, "There is some deadweight loss associated with almost all taxes," is a true Econ 101 level statement on the matter.

Last edited by Lance Turbo; 07-25-2019 at 03:32 PM.
  #35  
Old 07-25-2019, 04:06 PM
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How do they ? If roads were built by private actors and paid for by tolls (or some other scheme), would that be more efficient because "s'not a tax, innit" ?
You are conflating two different things. Taxation on the sale of widgets introduces a deadweight loss in the widget market.

If you taxed private road building it would introduce a market inefficiency in road building.

Whether road building is better left to government and requires widget taxation but has benefits above the deadweight loss in the widget market is a different debate.

In these debates "but what about roads, police protection, and fire departments!" are strawmen. Very few people when talking about lower taxation and limited government are talking about government spending so low that these functions are privatized.
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Old 07-25-2019, 06:50 PM
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Neither of those cites support his claim or are Econ 101 textbooks.

His claim is, "Econ 101 says that all taxes are always deadweight losses." That is simply untrue.

Something like, "There is some deadweight loss associated with almost all taxes," is a true Econ 101 level statement on the matter.
I think this is nitpickery of the highest order. (The highest order, sir! )

All taxes as it pertains to a market are deadweight losses to that market.

Your second paragraph equivocates and seems to imply that some taxes will give a better benefit to society to offset or provide a greater benefit to society. I don't object to that statement. However, the OP was about spurring investment in the market, which is objectively untrue.
  #37  
Old 07-25-2019, 08:01 PM
Lance Turbo is offline
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All taxes as it pertains to a market are deadweight losses to that market.
This is false. You keep saying taxes are deadweight losses. They are not. Most, not all, taxes cause deadweight losses. Causing something is not the same as being something.
  #38  
Old 07-25-2019, 11:54 PM
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That's very poor economics. More realistic to view taxes as the price you pay for services provided by the society.

For example, taxes pay for the roads your employees use to get to work, and customers to arrive, and for delivery of your raw materials, and distribution of your finished products. Without roads paid for by taxes, could your business operate?
[And transportation is a public good needed by society, paid for by society, even though it costs more than the direct taxes provide. It must be subsidized, and has been, going back to the days when slaves built stone roads (all leading to Rome).]

Businesses do have a legitimate complaint, if the taxes they pay are out of proportion to the benefits they get from society. (But it's hard to claim that, if your company is making enough money to pay executives millions. But this may be straying out of GQ territory.)
As Herbert Hoover taught us, taxes alone aren't necessarily a good thing; what matters is how those taxes are spent...or not.
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Old 07-26-2019, 03:23 AM
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This is false. You keep saying taxes are deadweight losses. They are not. Most, not all, taxes cause deadweight losses. Causing something is not the same as being something.
There might be glove slaps if you keep nitpicking like this.
  #40  
Old 07-26-2019, 04:49 AM
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Neither of those cites support his claim or are Econ 101 textbooks.

His claim is, "Econ 101 says that all taxes are always deadweight losses." That is simply untrue.

Something like, "There is some deadweight loss associated with almost all taxes," is a true Econ 101 level statement on the matter.
If Econ 101 equates to simple microeconomics, then a sales tax is a leftwards movement of the supply curve. Suppose no sales tax exists and the supply demand equilibrium, the point where the supply and demand curves meet is $100/widget for 1000 widgets. That means that among all the suppliers in the market, there’s a set of them with the ability and willingness to make 1000 widgets and sell them for $100. Suppose a 5% sales tax on widgets is introduced. In order to sell the widgets at an after-tax price of $100, they’ll have to be willing to sell them at a pre-tax price of $95.24. Fewer suppliers will be willing to sell widgets at that price, so there will be a new supply demand equilibrium where fewer widgets will be sold and the price will go up. You can speculate about the price and quantity of the new equilibrium point, but unless you have a vertical demand curve, it will be at a pre-tax price lower than $100. Keep in mind that nothing in this model is affecting the cost of producing widgets, and since we’re doing simple microeconomics, we’ll presume it’s flat. That means that the profit per widget is going to go down. From the viewpoint of the supplier market, the decrease in profit times the reduction in quantity sold is the deadweight loss. That will always exist from an external intervention that moves the supply curve left.

Where things get more complicated is that you can have a steep demand curve such that the new gross amount of sales (quantity times after-tax prices) is greater than the previous gross amount of sales. That means that the tax collected is greater than the profit lost, which is arguably a benefit to society. However, to consider that argument, you need to look at the effect of increased prices on the buyers, and you’ve just move out of simple microeconomics.

Last edited by Wrenching Spanners; 07-26-2019 at 04:51 AM.
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