Thursday, April 7, 2011

Corporate Taxes

A lot of people have been talking about whether taxes on "the rich" and corporations should go up or down.  The problem I have with these discussions is that it's not a matter of opinion, it's simply economics and logic.  My favorite statements are things like "why do we keep rewarding these corporations that are moving jobs overseas with tax breaks?!?"  Are you kidding me?  How many of you have ever seen a cart pull a horse?

There are basically two types of businesses:  those that provide "vital" goods and services and those that provide "luxury" goods and services.  People may disagree about where to draw the line between the two but the beauty of this discussion is that IT DOESN'T MATTER!  Let's discuss . . .

Luxury Goods
I will define this type of business as one that people spend money on when they have "extra" money to spend . . . or excess resources.  For this type of purchase, as money gets tight, sales tend to decline.  This should not cause too many of you to have a question mark above your head, it seems pretty obvious.  If you don't "need" it, and you can't afford it, you won't buy it - at least not as much.

If you run a business that provides this type of product, how can you hope to survive during tough economic times?  The only way to stay in business at any time is to have a profit.  The only way to have a profit is for your sales to exceed your expenses.  That leaves two options:

  1. Lower Expenses - difficult to do while maintaining income because most savvy business personnel don't tend to be wasteful for no reason.  They tend to be as efficient as possible as a rule.
  2. Increase Income - increase sales or increase price while maintaining sales.  Hard to increase the price without seeing a decrease in sales for a product that people don't need to buy.
So, if you're trying to compete in this market, it's important that you maintain your prices low enough to convince people that they should spend their limited resources on your product.  What if you could replace your entire staff with people that worked for 50% of the money you're paying now?  What if you could cut your taxes to 50% of what you're paying now?  What if you could do both?  That would allow you to maintain (possibly even lower) your prices to make you more competitive in the marketplace for limited sales. SCORE!!!  But how do you do that?  Move your business to another country.

Vital Goods
I will define this type of business as one that people will spend money on as a priority because it's something that they feel must be purchased.  For this type of purchase, as money gets tight, sales will be fairly steady but could decline.  In the face of a large disaster or warnings of a wide-spread problem, sales may actually increase in the beginning (possibly even exceeding supply) as people stock up.  These businesses have no real reason to lower their prices and may even need to raise their prices to re-balance supply and demand.  During tough economic times, this makes things harder for those that are already struggling.

If you run a business that provides this type of product, there are two things that will force you to maintain lower prices to stay in business.  Competition and larger supply than demand will always serve to maintain lower prices and higher quality because the consumer, especially when they have limited resources, will vote with their dollars.  That means that if your prices are higher than your competitor or your quality is lower (or both), you will go out of business.

That last statement is true for all types of goods, but with "vital" goods, the strong demand is much more stable than the weakening demand associated with luxury goods.  In these cases, maintaining profit is still a matter of ensuring your income exceeds your costs . . . so if you can lower the cost of running your business, you can lower your prices.  If you can't get the cost down, you keep the prices high - it's all normal.

The Point

The key concept that you must, must, must understand is this:  IN A FREE MARKET, A BUSINESS WILL ALWAYS MAKE A PROFIT.  Seems obvious, right?  Then why is it so hard for socialists/liberals to understand?  If you increase the costs on a business, THE CONSUMER IS THE PERSON YOU HURT!

High corporate taxes will always drive luxury businesses out of the country and increase the price charged by vital businesses.  This increases unemployment, eliminates all tax income to this country from that business (50% of $0 is still less than 20% of anything), and increases the price of every vital good for the consumer.  Let me recap . . . raising taxes on corporations has the following effect on the "middle class" that we're always trying to "protect":
  • Causes some to lose their jobs - increases unemployment (and without jobs, they don't pay taxes either - in fact, the opposite occurs . . . they become consumers instead of providers and increase the costs to the rest of society)
  • Income from taxes goes down - fewer taxpayers due to loss of businesses and jobs
  • Increased price for vital goods - the people that still have to provide for their families will pay more for the products that they need.
So, when you hear someone talking about evil corporations and raising their taxes, ask them to explain how things work in their universe.  If they convince you, I only ask that you both move there and stop screwing up my country.

No comments: