Replies

Regardless of what you claim, you example does not show cascading taxes. What is being taxed in your example is profits, and the effective tax rate on profit is the same in the first level as it is in last (and all levels in between). What you are mistaking for cascading is happening because each level adds profits which, in you simplistic and unrealistic model, accumulate from level to level in the price of the product. If profits accumulate and profits are being taxed, taxes will accumulate with the profits, but this is not cascading.

If your example was demonstrating cascading, the effective tax rate would be changing from level to level and it would be possible to achieve an effective tax rate higher than the statutory rate. This isn't possible with your example - as you go level to level, and more and more profits accumulate (with no value added by any company), the percentage of taxes as related to the price will approach the nominal tax rate on income, but not surpass it. If you want to call what's happening in your unrealistic example anything, call it "accumulating taxes" because they are not cascading.

BTW, in you example, every business gets to set the market price. This is not case for the vast majority of businesses in the real world - they are price takers, not price makers. If one business in your example has to sell there products at the market price (they may even have to sell at a loss), then all of your "accumulated taxes" from the previous levels would be completely wiped out. The business wasn't able add their crystal ball estimate for income taxes on to the price. They took exactly what the market would give them. Nothing more, nothing less and what they paid for the product had nothing to do with that price. If they couldn't make money selling that product, then they would discontinue selling it (and probably sell their remaining stock at even more of a loss). This is the way most items are priced in the real world of market economics, not the simplistic fantasy world of your example.

"If your example was demonstrating cascading, the effective tax rate would be changing from level to level and it would be possible to achieve an effective tax rate higher than the statutory rate."

If you consider the accumulating taxes which get passed up from one level to the next, that is exactly what is happening. The cumulative tax rate is significantly higher than the stated tax rate based only on taxes paid at that level with no consideration for the taxes which are indirectly paid.

Not at all, Nightie. The example in #88 illustraates cascading very well, indeed. As a tax cost from one level is passed to the next, that next level's numbers have within them the tax from the previous level and that is operated on by the multiplicative effect of the calculations.

I seems likely looking at the way the example is made that it may cause the calculation to limit at 25% eventually in the case of the example, but that's not the point. The point is that it is an example that shows the mechanism you SQL types claim does not exist - and now you're attempting to suggest a better method of calculating cascading. If it doesn't exist, why try to "improve" upon it?

I've certainly never offered this an an example of any particular set of companys, but of the mechanism involved. It also is not offered as a pricing mechanism or anything of the sort. It is an understandable, simple example of tax cascading that does not include parroll taxes or compliance costs. And it illustrates that quite well in a simple manner. Whether or not the tax rate is the same or changes from level to level also is not the point - merely demonstrating the cascading mechanism was the point and the example does that nicely.

If, say, level 4 were to mis-price its thing (though this was not the assumption of the example, but your assumption in your effort alter the example to defeat it) and sold with no profit, then that level wold contain no cascading but it would have in the price the cascaded effects from the earlier 3 levels (rather than have them "wiped out" as you claim) and would resume cascading with leverl 5. The cascading would still be there with the same mechanism but with a lower overall accumulated cascaded cost at the end of level 6.