taxing business profits ?!

Discussion in 'Economy' started by Widdekind, Apr 20, 2012.

  1. Widdekind
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    Widdekind Member

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    Government Force "should" protect-and-serve markets, guarding economies against thievery (e.g. via en-Force-ing contracts). Ergo, every economic market-place transaction "should" be guarded by Government, and "should" be sales-Taxed to cover costs ("paying the security guards"). If Government were economically neutral, then Government would apply a single flat-rate sales-Tax (e.g. 10%), on every dollar spent, in the market-place, on every commodity bought-and-sold (e.g. income, the "sale" of Labor).

    However, business profits are "what's left over after the trading-day is done"; business profits do not reflect economic trans-activity, but the after-effects of the same. Ergo, Taxes on business profits are not "paying the guards in the market-place"; are "paying the guards back at home whilst counting money". Ipso facto, Taxes on profits economically resemble "muggings", of merchants, "on their ways back home", after-hours.

    if business pay Taxes on profits (Revenues - Expenses); then people should pay Taxes on their net-incomes ("how much you got in your account?"); if people recognize the latter as a Taxation-after-Taxes ("double jeopardy"), then they should recognize the former, as precisely the same ("Taxed for standing around with money in your wallet").
     
  2. DSGE
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    DSGE VIP Member

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    Not true. They'd be using a Ramsey rule for optimal commodity taxation. On on things which aren't commodities, like labour, a progressive tax is optimal. (By optimal here I mean minimising deadweight loss).

    Again though, this is assuming the taxes are on the trades. Taxing profits is more effecient than taxing the trades themselves.

    I don't recognise the latter as "taxation-after-taxes". I see it as two different kinds of taxes.
     
  3. itfitzme
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    Good stuff.

    Just to make a minor point to the convo,

    As I recall my business and accounting, taxes on businesses are on earnings, ergo EBIT, meaning earnings before interest and taxes, or EBT, earnings before taxes. Just to be picky about it, profits are after interest and taxes. Right?

    Earnings are revenues minus costs.

    Interst is a deduction, I presume to encourage capital investments. Then the tax is applied as a percentage, and viola, profits.
     
  4. asterism
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    asterism Congress != Progress

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    False premise.

    The Government sets the currency and the rules.

    Those the fund the Government set groups that make the Government. It's a game of inches, but sometimes the governed can score on a "Hail Mary."
     
  5. itfitzme
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    itfitzme VIP Member

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    BTW, thanks for the dead weight loss term. I'm going to have to study it a bit to get it down to the math.

    Do you think the term is applicable to inefficiencies caused by between market imbalances?

    Does the term apply to monopolies, if they were to be allowed to exist?

    Markets with industries with high market leverage, Carnot oligopoly dominated markets in particular?

    Does dead weight loss apply to price floors?

    I'm not seeing it, given the wiki diagram and description. Is it symmetric in reflecting about a vertical axis through the equilibrium point?

    Medical, petroleum, insurance, banking, and the auto mobile industries are a few that seem to run high profits and seem to have substantial market leverage.

    What is the overriding concern that leads to "inefficiency"?

    ------

    Seems like a lot of the issue tends to be underpinned by the standardized pricing that increases efficiency. It's all great, but in a true market with bidding, it would seem that the pricing would be on a sliding scale, with those having higher desire or need paying more, thus allowing the last units to actually be sold at a "loss", compared with the actual cost, while the average cost is at the equilibrium price.

    A lot of markets actually are close to this, with Raley's commanding a higher price and likely a higher margin while their sister store, Foodmax, in the next city sells at cut rate prices. The net effect is that they unload excess product at lower prices to those that have a lower willingness to pay. The remaining product gets picked up by the local food banks.

    In some areas, an extra ten minute drive and you can cut your food bill in half.

    I am not sure if all products manage to be so neatly marketed on a sliding scale.

    Hmmm....... I'm not sure if that eliminate the problem....
     
  6. Mr. H.
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    Mr. H. Diamond Member

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    And I thought that I was a hopeless drunk.
     
  7. DSGE
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    DSGE VIP Member

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    Deadweight loss is generally any allocation that deviates from the competitive equilibrium allocation. Basically when the marginal benefit to a consumer is not equal to the marginal cost of the good. This can happen because of price controls, market power (which lets firms set a price above marginal cost), probably some other stuff (that I can't think of right now).

    "I'm not seeing it, given the wiki diagram and description. Is it symmetric in reflecting about a vertical axis through the equilibrium point?"

    No, because no matter what the price is, production will always be to the left of the competitive equilibrium. If the market price is set too low, we end up at a point on the supply curve to the left, but off the demand curve. At a low price suppliers aren't willing to supply as much, but there's excess demand (shortage). If the market price is above equilibrium then we're on the demand curve to the left of equilibrium and off the supply curve. At high price consumers don't demand much but suppliers want to supply lots (surplus).
    This is looking at things in static equilibrium, so the case where demand changes and the supplier has to liquidate their stock by offering a price below cost isn't considered.


    That's called price discrimination, and it's super hard to do that. Remember that everybody wants to maximise their surplus (difference between the price paid in the market and the maximum price they're willing to pay). But you're right that that's efficient. Actually, in Micro 1 or 2 you normally do an example with that. With a regular monopoly that can't price discriminate there's deadweight loss from setting the market price above marginal cost. But a monopoly that can perfectly price discriminate actually ends up at the competitive equilibrium allocation, although since each consumer is charged the maximum they're willing to pay, all of the surplus is obtained by the monopoly.

    In theory, in absence of other frictions, I'd expect that the value of the difference in price between the two stores would be roughly equal to people's perception of how much a 10 minute drive is worth. A "premium for convenience".
     
  8. Widdekind
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    Widdekind Member

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    • Labor is a "commodity", i.e. "a convenient or useful product", de facto
    • Government "neutrality" implies complete non-consideration, of "what" is transacted, or "why" it is transacted, only "how much" the transaction was valued, by the market (presumed to fairly value goods & services, i.e. "to know what it's doing")
    • libertarian Governments do not seek "increasing revenues", as your Optimal Tax theory demands ("Government Guns looking for more OPM"), for Government "social planners"; libertarians leave "social structurings" to markets ("society optimized for making Money, not (submitting to) paying Taxes")
    For example, logically, "commodities" with highly elastic Demands, such that small increases in Price cause large decreases in Quantities, are, ipso facto, "luxuries" (not "necessities"); conversely, "commodities" with highly in-elastic Demands, such that increases in Price cause negligible decreases in Quantities, are, ipso facto, "necessities" (not "luxuries"). Ergo, "neutral" flat-rate Taxes "trim the fat" out of economies, without "trampling" upon "bread & water".




    • libertarian Governments guard markets, they do not inspect wallets
    • why is Taxing trades less efficient, than Taxing profits after trades ?
    Taxing trade requires consideration, of one amount of Money (on-the-spot Price); Taxing profits requires consideration, of two amounts of Money (Revenues - Expenses).

    i am arguing, that Government guards Money-flows, through markets (PQ, [$/time]), for which "Service" Taxes are taken ([$/time]); you are arguing, that Government concerns Money-stocks, outside of markets ([$]). Does Government Tax "fast moving" Money, or "slow stationary" Money ? You would agree, that flat-rate Taxes dis-incentivize "luxuries" (elastic Demand) compared to "necessities" (inelastic Demand) ? Taxes on profits directly target "added surplus values" (Revenues - Expenses) from profit-driven economic activity, the very "heart" of Capitalism.

    i want to ponder this point -- according to me, "slow stationary" Money avoids Government Taxation ("the T.Rex can't see you if you don't move"), promoting "frugality", demoting "profligacy" in spending. Yet, "idle" Money is directly targeted, by ideal "Demand-side" Government stimulus
    MV + dM x 0 = PQ
    --->
    (M+dM)V = PQ + d(PQ)​
    By demoting "luxuries", relative to "necessities"; and by demoting "spending", relative to "saving"; Money-blind flat-rate Taxes promote hoarding, which stashes can be raided, during "Demand-side" Government interventions, "on rainy days". Prima facie, flat-rate Taxes promote Money responsibility, which can be exploited, when necessary, during downturns.




    yes -- two different Taxes, applied in "series", to the same Money-flow:
    1. Tax on original transaction (Tax on sales)
    2. Tax on profits from transaction (Tax on profits)
    if currency must "surmount multiple hurdles", to remain in some merchant's wallet, then that currency has been "multiply Taxed".
     
  9. Widdekind
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    Widdekind Member

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    "haggling" attempts to capture Consumer / Producer ("the other guy's") surplus:
    [​IMG]
    you make an important point -- the "Demand curve" is actually the "top edge" of the "Demand region", lying below the DC ("yeah, they'd pay price P for quantity Q, but they'd sure pay less"); by implication, the "Supply curve" is actually the "bottom edge" of the "Supply region", lying above the SC ("yeah, they'd ship quantity Q for price P, but they'd sure take more"). Mutually-willing economic transactions will only occur, when both parties consent, symbolized by the "region of overlap", between the DR & SR. In the above figure, that overlapping region is colored (blue & red); any point (P,Q) residing in that region, represents a potentially possible, mutually-agreeable, (level of) economic transaction.

    Taxes increase costs, de facto shifting SCs upward:
    [​IMG]
    Note that the above figure depicts a constant "fee" Tax -- a flat-rate Tax would increase, with increasing Price, so that the SC would be "tilted" (not "uplifted"), still threading through the origin (P,Q = 0,0).




    seen the same in gasoline prices ("truck-stops on main highways charge more")
     
  10. DSGE
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    DSGE VIP Member

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    .

    Oh. That's using the term a bit broadly. In econ a commodity is specifically a good which is fungible.

    That's a strange way to define neutrality. I'd define it as acting in such a way as to minimise inefficiencies it causes in markets.

    That's not what my "optimal tax theory" demands at all. What the hell are you talking about?

    I assume you're misinterpreting this:

    "optimal taxation is the study and implementation of how best to design a tax to minimize distortion and inefficiency subject to increasing set revenues through distortionary taxation in the market."

    When it says "subject to increasing set revenues", it doesn't mean "such that revenues get maximised. It means if currently the government is raising revenue R, but needs to tax in order to raise revenue R+T, how should taxes be designed such that raising T in tax revenue minimises distortions and deadweight loss due to government presence.

    It means they have to create tons of inefficiency in those markets [with low elasticities of demand] to raise the same amount of revenue (since consumers just substitute away from the good being taxed).

    Be clear on what your goal is. We know that for the government to operate in needs to raise revenue R. Don't tell me the mechanism through which you think it should do it (flat tax), tell me the outcome you want from some mechanism. An example might be: "The government must raise revenue R. They should design taxes in such a way that minimises deadweight loss". And then we can figure out which system of taxation achieves that objective.



    So this tax system is motivated by a moral sentiment rather than economic theory?

    It's complicated (maybe check out a public economics textbook; I use Hindriks & Myles) but the idea is that when you tax trades it distorts the optimal quantity to produce, but when you tax profits it doesn't.

    But that's not extra work for the government. Companies have to release their balance sheets anyway.

    Stock, flow, who cares? Seriously, why does this matter? The government "guards" stocks as well as flows. You can't go and steal someone's profit. The government enforces property rights on stocks as well as flows. I literally don't understand what you're talking about.

    ...Who cares?

    Right, so you are trying to make a moral statement. Don't try and dress it up in economics then.

    Don't understand what's going on here. Though you mention "which stashes can be raided during 'demand-side' government intervention". No such intervention is ever necessary. There's never any justification for government fiscal stimulus.


    Again, I don't care about "money flows". I care about allocative inefficiency that the government causes by taxing.
     
    Last edited: Apr 21, 2012

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