Friday, July 31, 2015

Corporate Taxes

A few days ago I was commenting on the Chattanooga shootings of recruiters and supported arming them.   Another commenter raised the issue of Posse Comitatus and...

Frank Clarke: I hadn't considered Posse Comitatus (which, oddly, is also "PC").   I guess the government will just have to allow EVERYONE to go armed to act as a deterrent to a military takeover
· July 18 at 1:06pm

Wendy Anderson: I don't have a problem with that, Frank.   I would like to see tax rates on corporations go back to pre-Reagan so we can pay for more State Police...   we can assign them to guard those military offices without getting into the who (sic) "marital (sic) law" issue.
· 23 hours ago

Frank Clarke: Why?   Does it cost more to have law-abiding citizens armed?


I got to thinking about this (increasing corporate taxes) and had a revelation.   Allow me to share.

We say that corporations don't actually pay any taxes; they just collect them.   The basis for this is that by the workings of "generally accepted accounting principles", taxes are a cost of doing business.   As such, these costs work their way down through the cost-of-goods-sold into the wholesale price and the ultimate buyer pays it.   Either that or they reduce the firm's retained earnings and the shareholders pay it.

"Nothing wrong with that," I hear you say,   "Those capitalists can afford to make less."

So, the firm eats the tax increase and Retained Earnings falls off.   So does the Dividends per Share.

Preston and Diana Gotbux have 40,000 shares of ACME Tool in their investment portfolio, and they notice the drop in their dividend income.   Investigating, they realize that the corporate tax rate went from 38% to 44%.   The portion of dividend income they didn't get was taxed at 44% instead of the 53% they would have paid at their upper tax bracket.   They actually got a small discount on their taxes although it would be tough to calculate exactly how much.

Pete and Dede Sixpack have 40 shares of ACME Tool in their portfolio and they barely noticed a blip in their annual dividend check, so they didn't even bother to ask why.   Too bad.   It turns out that the few cents they didn't get from ACME because of the corporate tax bump was taxed at 44% instead of the 23% Pete and Dede would have paid if the dividends had been paid to them.   Pete and Dede didn't actually pay any more taxes -- less in fact, because their gross was less -- but ACME paid more on their behalf and at nearly double the rate they would have paid.

Preston and Diana are one of 30,000 couples in similar circumstances.   Pete and Dede are one of 36 million couples in similar circumstances.   Pete and Dede paid a penalty; Preston and Diana got the benefit.   Way to go, babe.   Stick it to the poor and pay it to the rich.   Ain't Unintended Consequences a bitch?

It gets worse.

ACME is big enough and has been in business long enough that they can absorb the higher taxes.   JONES Tool is a startup from last year and operates on a shoestring.   They don't have a spare 6% to cover the higher taxes.   They are now forced to make a cruel choice: either off-shore some of its employees as a cost-cutting measure or close their doors.   Either way, the twelve JONES Tool employees are goners.   If JONES shuts down, ACME has less competition and has more freedom to manipulate the market.   A bright ACME lobbyist would have asked his Senator to jack up the corporate tax rate.   Maybe he did.   And the Unintended Consequences keep on rollin' in.

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