Dear pigdog,
I'm gonna give it one more try, pigdog.
Corporate income taxes are calculated on an inclusive basis. One does not calculate a percentage of the after-tax profit, and then add that to the selling price. I wish it were so. ;-)
No, one multiplies the ENTIRE PROFIT before taxes to come up with the tax liability.
Let's look at the problems with the table you posted. Just one level:
$1.00 - Input
$0.33 - Profit margin of 33%
$0.11 - Tax rate of 34.4%
$1.44 - Selling price
Accumulated tax costs $0.11
Tax costs as % of selling price 7.86%
Okay. The selling price is $1.44.
How much is the net pre-tax margin on the sale? 44 cents.
The input was a dollar, and no other costs are identified. As well, 33 cents is identified as "profit margin," and 11 cents is identified as "tax."
But unless you're positing that there are 11 cents in other costs (unidentified), the only way to read your table is that 33 cents is the profit the business keeps, and 11 cents is the profit the business sent off to the IRS as corporate income tax.
Thus, the profit, before calculating the tax bill, is 44 cents.
Now, when you calculate your corporate income tax, here's how you do it:
Income tax = Net Pre-tax Profit X Tax Rate
So, we come up with the formula of:
11 cents = 44 cents X TR (where TR is the tax rate)
Solve this equation, and the answer is that the actual tax rate on which you've computed was 25%, not 34.4%.
If you wanted a 34.4% rate (and assuming the after-tax profit will still be 33 cents), it would look like this:
$1.00 - Input
$0.33 - Profit margin of 33%
$0.17 - Tax rate of 34.4%
$1.50 - Selling price
Here, there is 50 cents of pre-tax profit (selling price minus input [which is identified as the total costs of the product]).
34.4% of 50 cents is actually 17.2 cents, but, hey, I rounded.
So, with this equation:
Income tax = Net Pre-tax Profit X Tax Rate
We come up with the formula of:
17 cents = 50 cents X TR (where TR is the tax rate)
and TR = 34%.
To repeat, taxes are calculated by multiplying the tax rate on the ENTIRE PRE-TAX NET PROFIT.
"We're unconcerned about the tax as a percent of revenue ... that doesn't enter in at all."
Actually, pigdog, you appear to miss the relevance.
I haven't said that one figures out the amount of taxes owed by applying a percentage to revenues. Of course not. As I've explained to you repeatedly, one calculates taxes as a percentage of pre-tax profits.
However, if we're asking the question, "How much can the price of the product go down if the company no longer pays any corporate income tax?" then the tax AS A PERCENTAGE OF THE SALE PRICE, as you, yourself have shown, is relevant.
And to see what that effect is on a corporate level, one calculates how much the tax is as a percentage of the revenues of the corporation.
Let's try a simple example:
John owns a company that makes one sale this year.
The selling price is $1,000,000.
The profit is $100,000.
The tax rate is 35%.
The tax owed is 35% X $100,000 = $35,000.
John's company, after subtracting the tax out from the $100,000 profit, made $65,000 after taxes.
Now, if John's company paid no income tax (tax on profits), how much could John have sold the item for, and still made $65,000?
Well, that would be $1,000,000 - $35,000 (the amount of tax paid) = $965,000.
The customer saved $35,000.
So, how much did the price of the item come down?
3.5%. Which is the amount of tax paid divided by the original sale price. Which is the amount of tax paid by the entire company divided by the revenues of the entire company.
That's why we go to the trouble of figuring out what the level of taxation is as a percentage of revenue. To calculate possible savings if the tax isn't going to be paid.
I'm not getting the amount of the tax by applying a tax rate to the revenue, but rather, I'm getting the tax-as-percentage of revenue to identify potential savings.
With a company in your example, get rid of the tax, lose 11% of the price. Applied to all the sales of the company, 11% of total revenue wound up being the amount of profit paid in taxes. Get rid of the taxes, lose 11% of the prices across the board for the whole company. Cool!
Now show me 20 Fortune 500 companies where if you get rid of the federal corporate income taxes paid, you can lower the price by 11%.
I won't wait up.
sitetest
It's very clear that you don't understand the example (or don't want to more likely) and I certainly doubt you'll ever "get it" for either reason.
No matter. You don't get to redefine the example into something you might wish it to be and the income tax calculation for the example is just as I stated rather than as you try to redefine it. You seem to consider it an accounting example in calculating sell price. It isn't and you don't get to claim that it is.
It is you who do not seem to understand the method of calculating the income tax since you - from the first - have attempted to misstate the rate using revenue when that isn't how it works. The calculation is as shown in the cascading example. You can try as many times as you like ... it still will not change the example which shows the effect of cascading taxes.