Listening
Gold Member
- Aug 27, 2011
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Another statement with no foundation in reality. Insurance companies do and will continue to provide health insurance.
Your mistaken perception is based on false understanding of how business and economics works. Most companies do not earn a profit. They do provide imce for their employees and owners. Many are specifically designed as not for profit and non profit.
As long as people can earn a living providing insurance, companies will provide insurance.
Out of respect for what I think are rationale posts on your part, I'll try to pull some more out of these statements.
Most companies do not earn a profit ? Are you talking insurance companies or companies in general ?
Yes, companies in general. Small to large businesses. Businesses that are in truly competitive markets.
And, this shouldn't be all that surprising when we consider the details.
{I put some work into this....}
The whole concept breaks down into three parts, micro-economic theory, business accounting, and empirical data.
Micro Economic Theory
According to classical economic theory, most business shouldn't be earning a profit. Profit means that the market is not efficient or competitive. Where there are profits, then new businesses will enter the market, driving down prices to cost. At that point, no profit. Where profit exists in the medium and long term, there is market inefficiency which violates basic Adam Smith classical markets.
Business Accounting
It is, of course, important that we are working with the same definition of "profit". And, it is important that we are clear about the difference between how personal income taxes and business taxes are determined. Basically, there are no "expense deductions" in personal income taxes. I only point this out because that is what we are most familiar with and it's a bit difference for business taxes. Business taxes are calculated after costs, after expenses. Materials and labor costs are expenses. {Yeah, my comment in econ class what "You telling me that the CEO's $3 million salary is considered "not profit"? "Yes"} Interest payments on business loans are expensed. Depreciation of equipment is expensed.
It's simple enough to see if we do the accounting. By the time all is said and done,
Earnings = Revenues - costs.
EBIT {Earnings before interest and taxes}= (Price * Quantity_Sold) - (Wages * Labor Hours + Rent * Equipment_Hours)
..........{ That's the economics way of parcing it out. Facilities are lumped with equipment)
Profit is earnings after interest and taxes.
EBT {Earnings before taxes} = EBIT - interest
Taxes =t*EBT
Profit is {Earnings after taxes} = (1-t)*EBT
We can look up the terminology on investopedia and wiki. It get's a bit muddled, duplicated, overlapping, etc in real business accounting. So it is important that we have this basic set that we agree on. Business accounting concerns itself with EBIT. Economics generally doesn't care. Sometimes, accounting, finance, and economics overlap with differences. Never the less,
Wiki agrees with "In accounting and finance, earnings before interest and taxes (EBIT), is a measure of a firm's profit that excludes interest and income tax expenses."
So, the way wiki puts it, EBIT is profit before interest and taxes. That is actually a good way to put it because if we look about the definitions, there is this fuzziness in the use of "profit", "earnings", and "revenues".
For our purposes, what we are really interested in is "profit" AFTER everything. Otherwise, what are we talking about really? All companies have revenues, they must. In order to have to owe taxes, all companies must first have earnings after interest and other deductions. So, after tax "earnings", would be profit.
And, in fact, yes. Most companies do not earn a profit. Most companies just mange to make payroll. This isn't to say that the owner's don't make a nice income. They should. If they aren't, everyone else should be looking for work. Along "Main Street" where I live, most don't pay federal and state taxes. They simply don't have any earnings after expenses. They do pay sales tax, which they simply account for during the sale, and property taxes. Can't get past those because they are before expenses. But, after expenses taxes, typically they don't. That is, at least, what a new business owner has come to understand having talked with other business owners in the area. They obviously pay any income taxes on the salary they draw.
In classical theory, even high owner and CEO salary will attract competition, driving down earnings. So most companies better not be earning profits or we don't have free markets.
Yes, what you describe is a company in a completely free market.
And in that market, "no profit" does not mean the owner isn't paying himself something (he's and expense).
However, when the time comes that an owner can't make a living (on the long term), the company closes up.
In the context of our conversation, however, we are not talking free market. Another characteristic of the totally free market is "no barriers to entry". In the world of insurance, that is certainly not the case (as it would be in the case of starting an oil refinery). There are lots of barriers to entry and we call this situation (or most any other situation where a profit becomes possible) a market discontinuity.
Corporations, such as insurance companies, send that profit out in the form of stockholder dividends. If these dividends are not being sent out, the stock price drops (and when you are an overpaid, bloated CEO....you own a lot of stock or options and a dropping price could mean millions of dollars lost).
That is why I was surprized by your comment.
Now I better understand the POV of your post.
Thanks.
I will just add that when it comes to small companies, they tend to spend a lot of money above the bottom line to avoid taxes. The small company I worked for prior to being acquired used to generate 2 to 3 million a year for the owner. She usually paid taxes on nothing. She had a hell of an accountant.
Did she make a profit...technically no. Was there profit....you bet there was.
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