- Aug 19, 2008
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When Corporate Taxes are increased the Companies need to take measures continue to be profitable: Increase the prices of the goods and services they provide. ( Competition is world wide now )Countries with lower Corporate Income Taxes tend to attract Companies to relocate to them. China is a perfect example of this fact. The other options are laying off employees at every level( use to be called Down Sizing ) and increase work products by using Robots and other electronic devices and programs.They won't. In fact, prices for things will increase as the higher taxes are passed along. So a negative on several fronts.
Really. So show me the price drops when corporate income taxes were cut. You can't, because they weren't, and the economic reality is that the price of something has nothing to do with cost, or the corporate tax rate and everything to do with demand.
And riddle me this. All those bonuses that were passed out when the corporate tax rate was cut, how come they were passed out before the corporate tax rate went into effect and how come they are not passing them out now, with the lower corporate tax rate? Show me one company, just one, that handed out bonuses under the lower corporate tax rate.
First, the hard reality of the matter is that the weighted average cost of capital is inversely related to the marginal tax rate. That is an accounting fact. And then there is an economic principle called opportunity cost. Granted, it is poorly understood. The truth is a stay at home mom operating on a shoestring budget knows more about opportunity cost than most Economic professors. But here is the deal. The corporate tax rate is currently 21%. A corporation has a million dollars in profit as they close the year out. If they invest that money it will cost them $799,000. If they are looking for a ten year return on that investment they will need to make $79,900 a year. The "opportunity cost" of not making the investment is $210,000 in taxes paid.
Now, the corporate tax rate is 28%. The cost of that same one million dollar investment is now $792,000. Now they only need to make $79,200 a year to get that ten year return. The opportunity cost of not making the investment is now $280,000. In which scenario is the company more likely to invest? In which scenario is the IRR, that is internal rate of return, lower in order to justify the investment? And take note, the opportunity cost of NOT making the investment is higher under the higher corporate tax rate.
Companies on the Stock Exchanges can decrease or no longer pay dividends. This results in the loss of investors which cuts off their revenue stream.
The most important factors in an economy are Supply, Demand and Price. If you don't understand the relationships you will never understand Economics 101!
Supply-side economics destroys the law of supply and demand.
Economics 101 was for babies.