April 10, 2011Posted by on
Something that alot of people, especially those on the left, espouse in this debate over state and federal budgets is that we need to close “Corporate Tax” loopholes and raise their rates. The people that espouse that either do not understand how business works or they are deliberately trying to mislead people. Here is the dirty little secret about “Corporate taxes”: The money to pay those taxes comes from you the consumer not from the corporations or the “rich” people that own stock in them. You close the so called “loopholes” or raise those rates and all you did was ensure that everything you buy just went up in price, costing you more money. To put it bluntly a corporate tax is nothing more then a VAT once removed.
Here is how things work people:
For a business to stay “in business” they must take in more revenue then they pay out, this is called a profit margin. The profit margin must be high enough that the people that invested in that company (stockholders) get a return (divided or increase in stock price) they feel is high enough to compensate for their investing (risking the loss of ) money in that corporation.
Now lets put this in simple terms using the largest completely private employer in the world, Wal-Mart, as the example.
Wal-Mart buys products such as different brands of sodas, TV sets, to clothes and much much more. For each of those products they determine what they need to charge the customer to:
1. Pay for the products they sell.
2. Pay salaries to employees.
3. Contributing to Healthcare for the employees.
4. Paying for insurance against damage to the store, for insurance incase a customer gets injured and so forth.
5. Paying for electricity that runs the lights, the AC in the summer and the heat in the winter.
6. Pay for water and sewer services (in some locations).
7. Paying for upkeep of the Building and the Parking lot.
8. Paying for maintenance of the cash register and the computer system.
9. Workers Comp and Unemployment insurance.
10. Pay Taxes to the state and federal governments.
11. Other items I can’t remember off hand.
12. Pay a return on Investment that keeps people investing in the corporation
Now if the cost of any of those 11 items listed goes up the corporation has two choices in how to fix the problem of maintaining their profit margin:
1. Cut Expenses
2. Raise Prices
Now lets say you get your wish and close all the loopholes and raise the “Corporate Tax” rate lets logically look at how a corporation like Wal-Mart responds. Well they can’t stop paying for numbers 5 & 6 and they really can’t “cut” how much they use du to size of scale (trust me turning off 2 light bulbs in a back office will not net big savings when coolers have to run 24/7 due to health regulations). They can play with the thermostat but most of the time corporations like Walmart already squeeze as much out of that area to save costs.
They also can’t do without numbers 7 and 8 since in number 7’s case there is building and health codes they must meet and in if they don’t pay for number 8 they start having problems actually collecting money to pay for those new higher taxes. Also if they try and skimp on cash register repair and can’t open enough lines they piss customers off and they leave and go somewhere else, again hurting the amount of money they collect.
Can’t get rid of number 4 either, matter of fact the cost of insurance might go up because those corporation also had their taxes increased.
That just leaves us numbers 1, 2, 3 and 9. Well they can’t stop buying products or they wouldn’t have nothing to sell. Matter of fact the cost of buying products might go up if the corporations that make the products can’t lower expenses themselves enough to pay their newly increased taxes. So number 1 will stay the same or increase, which leaves us with 2,3 and 9. Now I know you are all thinking they can’t stop paying number 9 and they would really have to be heartless to do away with number 3 but they can lower those cost of those by lowering the cost of number 2. The reason for that is you layoff or fire employees, therefore your salary expenses just went down, you don’t have to pay for as much healthcare or as much Workers Comp and Unemployment insurance. However that can only go so far, if you cut to many employees service goes into the toilet and you lose customers and cause some of the employee’s you still have at that point to quit from overwork. So basically you just put a bunch more people out of work from multiple corporations while the country is suffering high unemployment and a rocky economy. Great way to send us back into a recession not so much in closing budget shortfalls since those newly unemployed also start getting foodstamps, Medicaid for their kids and other government services thus increasing how much the government spends. Those increased taxes will not make up for the necessary increase in “entitlement” spending.
As a last resort corporation like Wal-Mart raise the prices on their products because they have a certain amount of other expenses they must maintain and that profit margin if they want to stay in business as well as pay that “Corporate Tax” you want them to pay. Now for you the consumer you take it in the shorts since not only is Wal-Mart raising their prices so will Target, Kmart and Sears, so there will be no place for you to go where prices didn’t rise. That means that instead of buying that new computer this year, you try and make do with that old one. You don’t make unnecessary trips such as a vacation to the beach. You put off buying a new pair of shoes, so what if there is a small hole in the side. Everything that isn’t an absolute necessity gets looked at in a different light because you have less and less money to spend on things. This in turn causes Corporations to have a harder time meeting their budgets. It also will cause small mom and pop business to close because the cost of staying open becomes too much and they can’t make a profit.
So there you go, you got your wish the corporations now have no loopholes and an increased rate. You also got increased spending from the governments, larger budget shortfalls then the one your law was suppose to fix, everything you buy costs more and the economy goes back into recession. Brilliant! With tax policy like that you too can write for the NY Times.
Oh for those that think stores like Walmart make gobs and gobs of money off those big ticket items like TV sets, think again. Walmart only makes, usually, around at most 6% profit on a TV. So for a $1000 TV Walmart makes $60 profit. That low of a profit margin is what allows Walmart to charge less for a TV then just about anyone else. Now on clothes they make a higher percentage (45% to 60%) but how much in is that on a $8 shirt?
I used to be a Department Manager for a Walmart. I ran the areas that covered snacks, canned goods, sodas, candy and other food items. For the Candy department the profit margin was 26% back in 2007. That means for every thousand dollars of sales that department turned a profit of $260. In canned goods the margin was 14% so for every thousand the profit was $140 and for Sodas and Snacks the margin was 18% so for every thousand the profit was $180.