Surely, in the real world, this is what people do with real estate? It only works when property values rise faster than the cost of money, but in London, the scheme made many millionaires (or many millionaires into billionaires). There is a tower block in The City called Centre Point, which was kept deliberately empty because the owners made more profit by watching the value go up than they would by letting it. Of course, the trick is to not be left holding the baby when the market crashes.
I don’t get that. Adding tenant rental income to the existing business must be a net plus. Where’s the benefit in leaving it empty? (Unless like Toronto, renting it out turns it into a commercial property tax rate, double the residential rate…)?
Remember that in this scenario, the robot supply company is making sales and paying taxes that it would not be if your company hired human workers instead of buying robots.
If you’re talking about the employees’ income taxes, the company is going to say “So what?” Why should the company care about what taxes its employees are paying?
Same thing with sales tax; why should the company care how much taxes its customers are paying? (Other than how it affects their purchasing decisions.)
The company is going to make its decision by comparing the cost of purchasing and maintaining the robots to the cost of paying wages to human workers. Taxation for the company (sales tax for the robots vs social security for the employees) is probably not going to be enough to tip the balance.
Think of taxes as obstructions in a pipe. Whether you are at the outlet end or the pumping side, the obstruction is impeding whatever you are trying to do.
Try this mental experiment. What if the taxes were 90%? 99%? 99.9%? How would it affect the employer?
If you’re willing to lose money just to avoid paying taxes, you can surely do that. The reason businesses pay taxes is that the point of businesses is to make money, and when you make money you have to pay taxes on that money.
Only a few companies operate on a “no profits” model, the most famous example is Amazon. You put every dollar you make back into the company to grow the business and expand into other businesses, and the shareholders get no dividends, the only thing they get is the chance to watch their stock price go up.
Which works fine, as long as the all the foregone profits are equivalent to the increase in the value of the company. Where it fails is when a company spends a billion dollars on some new project, and that doesn’t increase the company value by a billion dollars. It’s easily possible to spend a billion dollars and have the value of the company go down rather than up.
This is why shareholders like dividends.
Except taxes aren’t 90%. Yes, high taxes on products makes those products uncompetitive. If a particular form of compensation is highly taxed, then companies will try to figure out ways to compensate their employees that aren’t subject to the same high taxes. So for instance, if wages are taxed at 30%, but health insurance is taxed at 0%, it makes a lot of sense to offer your employees health insurance plans rather than cash wages. When taxes on wages get really high you start offering free employee cafeterias, company cars, company housing, subsidized company stores, stock options, and eventually in-kind payments where you’re handing out cabbages instead of money.
And of course when taxes get really high, people just flat-out cheat on their taxes and don’t pay anything. So take the famous example of the Sugar Act, where parliament figured they’d raise more money if they cut the tax from 6 pence to 3 pence.
Yes, the Laffer curve surely applies in situations where you’re edging into really really high tax rates. But expecting a huge boom in productivity when changing a tax rate from 31% to 29% is really naive.
Okay. Now think of taxes as healthy food. And try this mental experiment. Is your company paying enough taxes? Maybe you should be paying more to improve your company’s health.
Now think of taxes as lego bricks. In this metaphor, taxes are fun to play with but don’t leave them on the floor because they’ll hurt your feet when you step on one in the dark.
You aren’t taking my statement seriously. This is freshman year economics stuff. Taxes do negatively affect any business relationship and act on both sides, both supply and on demand. The reason I gave you that exercise you ignored is that for an employer to get people to perform labor on the employer’s behalf, the employer has to offer enough compensation to motivate people to show up. If you need a ditch dug, and you’re offering 50 cents an hour, not many people are willing to do it.
That ditch being dug has a certain amount of economic value. It is is not infinite. If you the employer effectively make $2 in revenue for every hour someone digs a ditch, you cannot pay the employees more than $2 an hour, or you go out of business.
If the employee is willing to dig ditches if, after taxes, they make $1 an hour, and the tax rate is 51%, nobody is digging any ditches.
Yes, if you taxed a worker’s wages at 99%, every worker in the country would stop working on the books.
And?
Is it your contention that this is what’s happening in America, and our poor benevolent capitalist overlords need to have their capital gains cut from 20% to zero, otherwise they’ll just go Galt’s Gulch? That we need to abolish the minimum wage, because of all the sweet sweet $3/hr jobs the American workers are missing out on?
What exactly are you getting at?
What I am getting at is that the taxes affect the efficiency of a transaction. It affects both the employee and the employer. Less educated individuals will claim that since 7.5% of payroll taxes are paid by the employer, it does not affect them. This is incorrect, it does have an effect. It’s right there in the math and basic, rock solid principles of economics that no credible economist disagrees with.
You’re inserting a metric ton of stuff I didn’t say. This is the straight dope, in the general section. Being exactly correct is something to be proud of, and is a goal in it’s own right. We’re not debating over optimal tax policy or at what percentage of tax the Laffer threshold is actually at, or how to implement taxes that are actually going to be paid. That’s all IMHO or Great Debates material.
The point of this thread is that there have been politicians in California and other places calling for additional taxes on robots that make money, since fully automated businesses appear to be feasible in the very near future. Machine learning actually works, billions is being thrown into making it better, and the computational hardware is rapidly becoming commonly available. (you need a GPU or custom ASIC to use these new algorithms at a reasonable speed and efficiency)
So I created an example of such a business, discussed commonly used methods of tax avoidance, and so far have concluded that this is a real problem, that governments couldn’t stay afloat if this type of business becomes common.
I took it as seriously as it deserved.
Here’s a lesson from sophomore year economics: the government doesn’t take tax money out to the back yard and burn it.
Taxation is the transfer of money from one part of the economy to another. The money is not destroyed. It’s just spent somewhere else. When taxes are collected and spent wisely on something like building a highway or paying to operate a school, those taxes do not act as an obstruction in a pipe. They add wealth to the economy.
Do you bootleg movies? If you don’t, is it because you feel that the people who create movies deserve to get paid for what they produce? And because you realize that if people didn’t pay for movies, then movies would stop getting made? So if you want to watch movies, you need to pay for movie tickets.
The government works on the same principle. We all like living in a society that has roads and schools and police officers and firefighters. And taxes are the price we pay to live in such a society.
Fully automated businesses are not feasible. Even if you have an automated factory where you shovel in iron ingots and coal on one side and get widgets out the other side, running the business requires human beings. Even if that human being is just a sold proprietor who answers the phones, keeps the books, writes the checks, makes all the sales, sweeps the floor, and keeps the assembly line running.
We have examples of such businesses with no employees today, they are the exact same sole proprietorships as above, the only difference is that you imagine the owner is producing a lot more widgets than a sole proprietor widget maker could do today.
A tax on “robots” is stupid. A tax on capital goods of all sorts might make sense, if we were trying to put our thumbs on the scales and tilt the balance a little bit back from capital to labor.
But imagine if you will your prediction comes true. One guy owns a factory that takes inputs X, Y and Z, and produces an arbitrary output of widgets in unlimited quantities.
Well, why can’t this magic widget factory produce the robots that make widgets?
A widget factory is only valuable if widget factories are scarce goods that cost a lot of money, and the widgets themselves are scarce goods that cost a lot of money. If you can produce widgets for free, the widgets are no longer valuable. And if you can produce widget factories for free, widget factories are no longer valuable.
Therefore, ownership of the industrial means of production will no longer be the key to wealth and power that it was in the industrial age. We are starting to see this today. Sure, factories in China make money. But factories are a commodity good, you can set up and tear down factories anywhere in the world. Apple makes a lot of money from Apple devices and services, but the guys who own the factories that assemble these Apple devices are only getting commodity prices for their services. And this is only going to intensify in the future.
You stated that it doesn’t make any difference to an employee if the employer has to pay payroll tax. This is untrue, per mainstream theories of mathematics. Do you dispute this or not?
I’m not sure if you intended to imply that sales tax are on consumers, but since you appear to contradicting someone saying that businesses are paying sales tax, I’ll assume that you at least mean that businesses don’t pay sales tax.
Well, they do in Michigan.
“205.52 Sales tax; rate; additional applicability; separate books required; penalty; tax as
personal obligation of taxpayer; exemption.
Sec. 2. (1) Except as provided in section 2a, there is levied upon and there shall be collected from all
persons engaged in the business of making sales at retail, by which ownership of tangible personal property is
transferred for consideration, an annual tax for the privilege of engaging in that business equal to 6% of the
gross proceeds of the business”
It’s fairly popular to collect it from the buyer, but there’s no reason one has to. Furniture stores love saying “And we’ll pay your sales tax” even though it was always their sales tax to begin with.
A good example of an automated business today is a website. Let’s pick on Hotels.com or Travelocity.com. There’s the capital work of setting one up. Then it just sits there. People login, enter orders, make purchases. the site forwards these orders to appropriate third parties whose job it is to provide you with an airline ticket, hotel reservation, or rental car. The site receives a confirmation and relays it back to the buyer. And… skims a percentage or fee for doing so.
of course, there’s a HUGE human input required for the pieces that a robot/web program can’t handle; plus there’s the sales side, getting hooked up to those airline seats and hotel rooms. But in a real world, that too could be automated; if the hotels really wanted you to sell their rooms, they would login and fill in the details themselves, eliminating that side of the labour equation. (Maybe EBay would be a good example - buyers and sellers just sign up and do their thing.)
There are several issues. Yes, if there are no employees then no payroll taxes like SS need to be paid. If there are, you pay. (and see the other current thread about trying to game the system - it’s not trivial to redefine employees as something else.) So you business uses 3 instead of 3,000 - so what?
If your business can churn out widgets at half the price using robots, then so can any other business. Everyone buys the same sort of robots, trains them, and now the commodity price of widgets is half what it was before you started and your revenue does not enjoy the cushion of being able to charge almost as much as a labour-intensive competitor. To be fair, this is what happened with autos; everyone uses robots, and so every car has “much drudgework done by robots for cheap” figured into the cost. As a bonus, robots are more precise and screw up much less often (if properly programmed). Good are cheaper, and there are less employees. And profits aren’t ludicrously high since everyone produces the same way with roughly the same labour and capital costs. very few businesses are like Apple, floating on a river of money where every deice seems to have a 30% to 50% profit margin. Creating such a business takes a lot of inspiration, planning, expertise - and especially luck.
What if much of the manufacturing economy did this automation trick? Well it is already. Manufacturing - if it hasn’t moved to China or Mexico - uses a lot less people. Like the farms that automated around 1900, the surplus workers became urban factory workers. used to be half of people worked on farms. Now it’s less than 3%. We don’t have 47% unemployment. Used to be half of people worked in manufacturing. Now it’s pretty low too - but we don’t have 50% unemployment. They are in the service industries. And today, unemployment is lower than it’s been in decades. Meanwhile, Amazon and its ilk on the internet are putting brick and mortar service industries (stores and their employees) out of business. Where will they go? Who knows. Somehow, there are jobs. Until we see unemployment climb it’s not something to worry about. Something will replace it. And meanwhile, people are working somewhere and paying taxes.
As I’ve already said, reinvesting the profits to build the business (and escape taxes for now) is not a strange new strategy. Every business does it to some extent, if only to replace existing capital equipment as it wears out. f you keep doing this, soon you reach the point of diminishing returns. The world can only absorb so many widgets - the rest are going straight to the garbage dump, and the price falls so dramatically that you no longer make money, and you factory is not worth what you intend to sell it for. Once you are a significant proportion of the total market, the usual rules no longer work. Amazon, for example, found something similar to this. Once anyone who chooses to buy books online comes to you, what do you do to keep growing? Expand into other stuff. But then you bump up against others who have also been selling hier specialty online. Now that buy online means Amazon or the actual manufacturer, what’s next? and so on.
So you factory’s profits, productivity, and hence value will eventually reach a ceiling. Then, if/when you sell (since you refuse to extract profits as dividends) the taxes still come due. But then, if you have cornered the world market on widgets, your factory is huge - who can afford to buy it? In the OP, who has a billion dollars for a widget factory in a saturated widget market. They would discount it by the fact that there is a glut of widgets and hence less revenue, with all this capacity online.
Except that in the US there is different tax rate on dividends versus capital gain of shares - unlike the rest of the word - causes a distortion where shareholders can prefer a rising share price over a dividend. This is something of a problem as for the most part the rest of the world doesn’t provide what is essentially an incentive not to pay dividends, and it skews the relative values of shares of US companies relative to those based in other countries, and skews the way markets work with those different shares. If a US company is operating to increase share value over dividends (famously Apple for one) many shareholders in the US are happy (especially institutional ones), but it makes the shares less attractive in other countries.
One would note that the idea of a tax on robots really has nothing to do with the governments feeling they might lose out on taxes from the operating company, but everything to do with loss of jobs in the economy. The tax would act as a disincentive to use robots to replace humans, keeping more jobs available for humans, who pay taxes as well. You could dress this up to simply say - “we want the taxes your workers would be paying. If you replace them with robots you have to make up our taxation shortfall.” More socially minded, it is a matter of avoiding mass unemployment, and the social ills that entails. Same deal, lots of people without jobs mean less tax income for a government and greater calls on the government’s coffers to address the problems that comes with unemployment. Outsourcing your manufacturing to Asian countries is little different in its impact.
Nemo, this whole argument is that the robot-only business would pay very little tax, which, if true, would mean that other “parts of the economy” would need to be taxed more. And it’s irrelevant whether the employer or the employee pays the payroll tax, except the psychological effects of making people think they are being taxed more or less, and the situation where an employee makes exactly the minimum wage and so the employer’s payroll tax doesn’t count against the minimum wage.
To the extent that taxes influence economic decisions, who pays the taxes on an economic transaction is not as important as you are implying. I, personally, don’t think that a 20% tax would change anyone’s decision, but if certain economic transactions were taxfree and others charged at 50% or more when you take into account sales, payroll, income, and marginal real estate taxes, and fees, then yes, I think it would drive down the magnitude of that activity compared to the taxfree one.
Canada, IIRC has a lower tax on dividends, especially Canadian dividends, because they are distributed from the corporation’s after-tax profits. If they were taxed as regular income for the person receiving the dividend, the effective tax on the total payout (personal plus corporate) would worse than if it were paid out as wages to that person.
the key to the OP’s scheme is not robots. It’s supposing a business pays no employees and plows all the profit back into the business as reinvestment. This could just as easily be accomplished (as I mentioned earlier) by a business with a real estate or stock fund asset set.
In the case of real estate or stock fund - yes, I sell the shares of the corporation for capital gains. But I could just as easily ell the underlying content - the stocks or apartment buildings or widget factories - and then pay myself dividends from the profits. “But,” you say, “the corporation has to pay capital gains tax; then a profit tax on the result. Then I get the dividend.” Well, this is true - but if I sell it to Fred, then he will eventually have to do the same thing to get his money out. Therefore the value of the corporation is diminished by the potential expense of any future taxes. it doesn’t matter whether you pay them, or Fred pays you less because he will eventually have to pay them. the money eventually coming out of the company will eventually be taxed be the same, so the current value of the company is devalued by the potential tax grab. they only guy motivated to buy your company for more is someone with a huge offsetting loss to cancel those taxes going forward, even if they won’t release their tax returns.
In the case of the widget factory, sooner or later the market is saturated, the reinvestment has to stop and the profits have to come out by dividend payments.
Dividend v capital gain rates differ in some other countries. And in the US since the early 2000’s the rate on ‘qualified’ dividends* and long term capital gains has been the same.
However even when the capital gain and dividend rate is the same, which it basically is now for taxed US investors holding US stocks, they may still prefer capital gains since the CG tax isn’t applied until the asset is sold. The investor controls the timing and can delay it. Further, in the US code unrealized capital gains are wiped out in inheritances, the ‘basis’ steps up to the value at death. OTOH a countervailing non-tax factor is that dividends are real** evidence of profits beyond just what companies and auditors say the profits are. And a very significant body of investors are not taxed on returns as they are received (pension funds, IRA/401k accounts etc).
The reasons for various dividend policies are a lot more complicated than some feature of the US tax code not duplicated anywhere else. And some significant stock markets have lower dividend yields than the US. European stocks have tended to have higher dividend yield than US, not ‘the whole world’.
*which includes almost all ‘conventional’ US stock dividends to US investors, also includes some foreign stock dividends, doesn’t include for example Real Estate Investment Trust dividends. ‘Non qualified’ dividends are ordinary income and are subject to a significantly higher rate.
**or more real. Co’s can borrow to pay them, but that tends to be more visible than the ‘quality’ of paper earnings.