I saw the concept of ‘profit per employee’ mentioned as a criterion for evaluating a company. And I wonder if that might be applied at the tax level. Obviously you’d have to account for [del]wrinkles[/del] edge cases like the boss being paid squillions while everyone else made minimum wage (so you’d likely want to exclude the top 1%-5% of salaried employees) on one hand and holding companies on the other, and I’m sure there are more, but prima facie this seems to me the equivalent of the current progressive taxation of citizens.
On the societal - and thus political - side it has the benefit of encouraging profitable companies to employ people, thus reducing unemployment and giving people opportunities for progression. And a company that finds itself struggling due to a downturn would benefit from reduced taxation.
Can you elaborate on your ‘needlessly convoluted’ comment? I agree that you have to account for trying to game it - I gave two examples myself - but there’s an army of civil servants who can surely solve that.
Some companies, especially retail, are using part-time employees instead of full-time ones as they don’t need to offer benefits to the part-timers because they don’t work enough hours to qualify.
By hiring lots of part-timers & giving them fewer hours their profit stays the same but the # of employees goes up thereby lowering their profit per employee. Unless you put in some ruling that it’s per FTE (Full Time Equivalent) where 4 x 10-hour part-timers = 1 FTE your idea won’t work very well & will actually decrease stable employment.
Define “employee”. Hire a lot of people for 1 hour per year for minimum wage. (There’d be company’s to set this up for you.)
Instant tax break.
Define “profit”. A lot of the biggest American companies make no taxable profit in the US. Income is credited to a Irish subsidiary with money routed thru banks in Luxembourg or a Channel Island or …
Plus virtually no Congressperson is going to pass a law increasing the taxes on the companies that finance their campaigns.
Fairness/simplicity has nothing to do with the US tax system. A lot of folk love it being complicated.
It seems to me that your proposed solution is a direct incentive toward lower productivity, toward replacing automation with manual labor. At face value, these seem to be incentives to move in the diametric opposite direction to the economic expansion of that last century that gave us our current standard of living. Also, of course, U.S. unemployment is 4.1%, so at present there isn’t really a problem that needs solving.
But in the very long term… if the endpoint of the next hundred years or so it a post-scarcity economy in which none of us need to do much work, it’s very interesting to think about how we get there from here. It’s really hard to envision how we might transition from a competitive capitalist economy to post-scarcity where the economic incentives that drive so much of what we do simply don’t exist any more.
On the way from here to there, I suspect that something like Universal Basic Income is a first step.
Yeah, not really clear to me what the proposal is exactly, though seems you assume it’s a progressively higher rate on higher profit per employee which I’d also assume for lack of any other explanation. If so the fatal flaw is as you say.
Taxing the income of individuals at a higher and higher rate has a cost in terms of negative incentive* to make more money, but that’s offset to at least some degree by the person still receiving what’s left after tax. In this case that offset wouldn’t exist. The incentive would be to find the least (labor) productive way to make a given profit. That would include btw a new incentive to ‘offshore’ additional work to low wage countries.
Also keep in mind in any debate about corporate taxation that the corp income tax in the US before the recent reform was only around 9% of federal revenue.
*highly politicized issue, but it has to be true at some %, nobody thinks there’s zero negative incentive at a personal tax rate of 90%, it’s just a question how big the disincentive is v whatever total amount of money ‘we’ decide we have to raise which somebody then has to pay.
Company gross income must be included as part of company owner’s gross income. Own 10% of a company? 10% of its balance sheet goes on your personal income tax. No need for other fooling around.
Yes, it is, but there is a balancing point: the business owner still wants to - needs to - make money. Plus there are the social and political benefits of encouraging employment.
In addition to the substantial issues already mentioned, different industries will have very different profit per employee figures. Some activities are simply far more labour-intensive than others. Why should the latter effectively get tax breaks? I think all sorts of perverse incentives will be created.
I’m not even sure how this would work. Say Example Company (ExCo) has an annual profit of $100,000 and 10 employees, all full time (10 FTE).
Under the rules today ExCo would (ostensibly) pay $21,000 in taxes - 21% corporate tax rate.
Under your plan, profit per employee (PPE) is $10,000. How much tax would the company pay? Would there be a tax table that says for PPE range 0-1,000 you pay 10% tax, for $1,000-5,000 15%, $5,000+ 21%? Depending on the table structure it still won’t make sense for me to hire another FTE unless it moves me to a lower tax percentage. Even then it still may be more expensive to hire vs. just paying the taxes, depending on how many FTE would be needed to get me to the next lower level.
In the case of ExCo, assuming at $10/hr pay rate, their current $21k tax bill could only pay for one additional FTE. Unless hiring that FTE completely wipes out the tax bill, it doesn’t make financial sense to hire. I’m having trouble envisioning a system where it would.
I don’t understand this point. Why exclude top salaried employees? Today the optimal solution for a company is to produce everything with no employees but the top, so they won’t have to reduce their profits by paying salaries. Your proposal will be an incentive in the other direction.
Today Wall Street likes layoffs - this will be a force in the other direction, since layoffs will increase their taxes. Assuming there is a profit.
The problem would be gaming the system, the way Hollywood studios do to people who are supposed to get a percentage of movie profits - which vanish even for wildly successful movies. Limiting executive pay in the calculation will help if your point was that the execs eat up all the profits in pay - but some of them do this already.
Because it gets round the problem of the owner paying herself squillions while paying everyone else minimum wage.
I’m sure there are many problems, but there are a lot of clever people who can solve them all. So the question is, “Is this a kernel of a good idea or is it fatally flawed?”
Fatally flawed as I understand you. Although, you haven’t even really described what your system is. I and others have guessed you mean taxing corporate profit at a progressive schedule of rates depending on the profit per employee. That would be fatally flawed, not because of minor bugs but two major features:
a) disincentivizing productivity improvements. If productivity growth led to a permanently lower employment level practically nobody would be employed now after productivity has increased around 100 fold or so since the pre-industrial era. So the basic idea that productivity permanently lowers employment is just wrong, no matter how much a forward looking version of that fear intrigues journalists or even how many people who are successful in the tech business (doesn’t mean they understand economics, and vice versa for economists trying to succeed in the tech business) warn about it. There can be painful transitions. Public policies might be needed to smooth them. But creating an incentive toward less labor productivity is simply a bad idea, and again would exacerbate another populist bugaboo at the same time: jobs being moved to lower wage countries (where you usually use more people to get a job done, albeit hope to come out ahead on more than proportionally lower wages)
b) it arbitrarily taxes inherently less labor intensive industries more heavily for no good reason.
If the idea had more merit to begin with, this would be more worthwhile to explore but FWIW, exclude executives from what? Exclude them from the denominator of number of employees? (that would make almost no difference). And profit is calculated after paying employees so maybe your not talking about taxing profit. Again not really clear what you’re talking about, and I guess it’s possible I or others are basically misunderstanding it as we try to fill in the gaps.