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To: Hostage

What makes you think an estimate of their income taxes is not also figured into their pricing ?

A corporation is responsible to its shareholders as the owners of the business. Those owners have invested money and must see a return commensurate with their risks beyond what a riskless investment would return. That means the minimum after-corporate-tax ROI is predetermined by the market forces acting on the shareholders and the share prices, just as the prices of the company's products is subject to market forces of the consumers and the competitors' products.

The long and short of it is that the shareholders won't buy shares in a company that doesn't offer an ROI beyond what a safe investment would offer.

This means a corporation cannot simply wait until the end of the year to find out how much taxes it will owe, and the shareholders get whatever profit is left. They estimate the cost of the taxes they'll owe as part of the process of determining prices. They must, or they won't know whether to go ahead with a particular product or even whether to stay in business or not.

Corporate income taxes are not simply paid out of whatever happens to be left over as profit -- unless the corporation is being run by incompetents. The after-tax return is protected as much as possible while determining prices, and that means the corporate income tax is passed along just as any other cost -- resulting in higher prices, lower wages, or lower returns to shareholders, with their effect felt in that order.


38 posted on 12/12/2006 8:18:13 AM PST by Kellis91789 (Sarcasm should never need a tag.)
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To: Kellis91789

Corporations cannot embed their ***income*** taxes into their pricing because they will be left with a larger profit (EBITDA) from which they must pay income taxes.

It becomes circular reasoning otherwise.

Shareholders never know what a ROI will be when they purchase stock unless dividends are paid and the stock price in stable. Earnings and growth are what shareholders pay attention to. ROI is more for initial founding investors or bondholders.

Where the misconception comes into play is sales taxes are passed on but those are not linked to corporate profits. The only way a corporation can get around this tax structure is to offer rebates. But rebates are not so common.

Corporations do pass on other taxes though as part of their cost. For example, corporate property taxes, payroll FICA contributions, state and local taxes they pay for services and products they use, etc.

Here's a simple example @35% rate:

Revenue 1000
Expense 900
Profit 100
Income Tax 35

If they try to embed their income tax into pricing, then we get:

Revenue 1035
Expense 900
Profit 135
Income Tax 47

but although estimated profit net taxes may increase, their products are less price competitive. Hence, actual revenues from sales may not be as high as estimated.

Corporations will charge what their markets will bear.


39 posted on 12/12/2006 10:28:25 AM PST by Hostage
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