Posted on 12/18/2005 4:46:00 PM PST by FairOpinion
A business wants $100,000 after-tax profit; It must adjust the selling price of the product to bring in more than $100,000 pre-tax profit.Me:
I wasn't aware prices were soleley calculated on after tax "wants".Retard:
Beside not being aware of much at all, you aren't aware that what you posted wasn't said.
If income taxes and costs associated with them is not a cost factored into pricing decisions why doesn't the government just increase business taxes. After all, the increased tax, say 90% won't be reflected in the end price of the product. The demand for profits is not effected by the underlying supply. Similar to how hurricane Katrina cut the supply of oil but there was no price increase in a gallon of gasoline. OPPS!!!!
Why don't you read the bill. Go to thomas.loc.gov and search HR 25.
Yeah, business taxes of 90% won't affect pricing at all! ROTFLMAO.
Still a mystery is why one would ever limit a price if one can just add whatever is desired to the cost to achieve any profit desired?
In my response to you at 228 I answered the same basic premise that you again put forth. in post 223. Which I note you chose not to acknowledge with a reply.. I repost it below.
justshutupandtakeit: That is simply not the way the world works. Prices are not subject to the wishes of CEOs. And such a theory flies in the face of ALL microeconomic concepts. Prices are set by the market not by tax rates.223
To: justshutupandtakeit
We (other people on these threads) have gone over this before. You are comparing apples to oranges.
Apples: If the business foresees that it can't make it's desired after-tax profit it will chose accordingly 1) not go forward into the market or, 2) accept less than the desired profit and enter the market.
Oranges: In either case the business will set their projected after-tax profit by including the projected tax due.
Suppose Wal-Mart -- or any business -- opts to under price competitors and seeks a 5% after-tax profit. It sets it's product prices so that it makes 7% pre-tax profit. The market will allow for higher price, say 10% after-tax profit, but Wal-Mart opts to gain a larger share of the market by setting a lower price. Wal-Mart factored the projected income tax to be paid into the price of its product. The difference 7% - 5% = 2%. That 2% is embedded into the price of the product. 228
1. There is a huge difference between collecting 5 or 6% and 35%. A business selling 500,000 in sales will collect 25,000 of sales tax at 5% and at that rate many of them do not send in everything they collect. Raise the rate to 35%, and you are talking $175,000.
Think about the corner cfamilg convience store. They are sitting on $175,000 in tax dollars. There is no way to verify there sales except by taking their word. How much do you think we get paid?
What you miss is there is a huge difference between 25k and 175k. The system that is used to collect 5% will not be adequate to collect 35%.
Businesses cannot foresee their profit hence have no way of knowing what the tax will be. The inability to do this is show with every earnings report cycle.
You example uses gaining market share as a reason to lower a price but that was not because of tax considerations.
You need to carefully read what I write. I did not say tax considerations play no role in investment decisions, I said they play no role in decisions within a class of investments. Big difference. Clearly a tax free bond has advantages at times but, in general, the return on a tax free is lower than that on a taxable bond. But the decision to buy a bond from the taxable class in unaffected as is the decision to buy one from the tax free class.
Businesses all pay the same marginal business income tax rate so decisions to enter or leave are only determined by projections of Profit again taxes have no role there.
Max price does not always mean max profit. Good. It is also true that bumping the price up to include income tax does not always mean that will be the optimal profit-maximizing price either and you may have higher profits by forgetting any tax consideration and not putting it in the price.
Not income taxes.
Since there are still a few politicians who understand that taxing away profits in a capitalist economy will destroy that economy they have not raised it. It is not price considerations that restrain them.
Demand for profits is irrelevant since profits are the end of the economic process not a factor in production. It is ONLY factors of production which have costs. Land, labor, capital.
Business income taxes of 90% would not affect pricing decisions other than accomodating elasticities. If you believed you had to increase your price to account for the tax you might conclude that there was no way you could increase your price that much because the elasticity of demand is such that it would cause your sales to drop drastically thus it could mean you would LOWER the price to prevent demand from falling too much.
Business taxes of 90% would drastically impact the ability to invest since profits are the source of investment funds.
That would be the principle impact of so high a tax rate.
Businesses cannot foresee their profit hence have no way of knowing what the tax will be. The inability to do this is show with every earnings report cycle.
When the earnings report comes out it almost never shows the profit exactly as it was projected prior to the close of the quarter. Often seen effecting stock prices are the projected revues a company foresees, and publishes, prior to the close of the current quarter and the forthcoming quarter. When the quarter has passed companies report the actual earnings and stock prices are adjusted again. For cripes sake, banks determine whether or not to make a business loan based on projected revenues and profits, or lack thereof, of the business applying for the loan. Corporate bond yields are adjusted to what the market thinks the future revenues and profits for the corporation will be.
Projected income tax liabilities are considered in the same regard.
You example uses gaining market share as a reason to lower a price but that was not because of tax considerations.
You obfuscate, You know that it wasn't meant as a tax consideration to lower price. It clearly showed how corporate income tax is embedded into the price.
If my income tax from business was factored in, my prices at the beginning of the year would be lower. As I made more money throughout the year, I would have to raise my price to reflect the higher marginal rates. That simply does not happen. If I have a high-profit year I may take extra steps to try to reduce my tax bite, such as buying equipment, but I don't change my pricing structure.
I agree. I can't see how income taxes on business profits could possibly be factored in. The goal is to maximize profits. Coming up with tax strategies to lower taxes is a different issue that has nothing to do with pricing.
And that's exactly what I'm talking about.
Nearly every business sells a widget for $100 because that is what the market will pay. It costs every widget maker $88 to manufacture a widget. Widget makers want an 8% after tax profit. The income tax rate is 33%. With a pre-tax profit of $12 the 33% income tax is subtracted: $12 - $4 = $8.
One widget maker seeks only a 5% after-tax profit. Each widget cost him $88 to manufacture. He realizes that if he sets his widget sell-price at $92.40 his pretax profit will be 5%. When he subtracts the 33% income tax his after-tax profit is $2.95. Thus the widget maker makes a bit more than 3% after-tax profit.
But the widget maker wants a 5% after-tax profit. So he recalculates what the sell price of the widget must be in order to recoup the projected 33% income tax. His calculations are that he must add $2.16 to the sell price. $2.16 is the 33% income tax paid on $6.56 pretax profit. Subtract the $2.16 income tax and his after-tax profit is $4,40. Exactly 5% after-tax profit. The widget maker will sell his widgets for $94.56 each.
Clearly the market will pay $94.56 for his widget. Especially since that price is less than the $100 per widget the market has demonstrated it is willing to pay. The widget marker considered the income tax he expected to pay in the future and included that into his final selling price of a widget. He embedded the income tax into the final price of the widget so that he could, in all expectations, receive his desired 5% after-tax profit.
A widget maker has a breakeven price of $100 per widget. Every dollar
above $100 he is able to successful sell his widget at, thirty-eight cents
of each dollar is an income tax liability. For the widget maker to earn
one dollar after-tax profit per widget he must sell each widget for more
than $101. To earn his $1 after-tax profit he will have to sell each
widget for about $101.50. The fifty-cent projected income tax is embedded
into the selling price of the widget. The consumer pays the fifty-cent
income tax and the widget maker remits it to the government.
That is all well and good but businesses cannot set the price for long unless they are consistent with what the market will bear.
Markets set prices. And they do so without reference to income taxes. Any competent and coherent microeconomic text can explain this to you.
Rep. Bill Archer, Chairman, House Ways and Means Committee:
"A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."
It is obvious to those CEOs that your argument is absurd.
Be careful what you ask for, you may just get it.
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