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This is 100% wrong. Walmart buys[1] goods for 97 cents and sells them for a dollar. Google produces technology for 50 cents and sells it for a dollar. A 5% tax

by harryh 9y ago

This is 100% wrong. Walmart buys[1] goods for 97 cents and sells them for a dollar. Google produces technology for 50 cents and sells it for a dollar. A 5% tax on revenue would make Walmart a money losing enterprise while being a minor annoyance for Google. This is why we tax profit and not revenue. Different industries have radically different cost structures.

bluecalm 9y ago
The lower margin businesses will raise prices, and higher margin businesses will be forced to lower prices long term as people will have less money it's not a problem. Taxing profits encourages all kinds of undesirable behavior: buying expensive company cars, conferences in exotic locations, other perks because you get a huge discount (tax deduction) on them. I would argue it's immoral because you're taxing both efficiency and honesty. There is no reason that out of two companies producing the same thing you tax the one being more prudent with their expenses more. Tax pollution, land, access to local work force or revenue. You can just raise personal income tax as well. They are all better and more just taxes than loop sided incentive wise tax on profit.
- candiodari 9y ago
  And taxing revenue punishes economic activity per se. For small firms, it will force them out of business, and only high margin ones will remain (as explained). In other words, for the 2/3rds or so of the economy that is small and medium businesses this will be a tax on having economic activity at all. That's why it'll never fly (or should I say never be enforced). And don't worry, as usual, for large businesses there's an easy way out : simply don't transact in money. Then negotiate what the value is of the transaction with the tax department. For instance, buy Disney Club 33 access for all executives and their family in trade for 10% cheaper plumbing for the park. Do huge transactions for suspiciously low monetary value, and they won't get counted in revenue, or only partially. Problem solved. In case people doubt that such negotiation works, I would like to point out that the most powerful man in Europe, the president of the European commission, Jean Claude Juncker, got where he is by negotiating preferential tax deals with large international corporations. I'd say for years, but the guy is no spring chicken. For decades. All taxes that are less than 100% enforced (all of them, but these revenue taxes are a particularly bad example. Utterly unrealistic to do this for small businesses) are a tax on honesty. Thing is, you can't have global supply chains without "taxing honesty". And without global supply chains, you won't get an iPad.
  - jon_richards 9y ago
    I think a better explanation is that taxes on revenue favour vertical integration. Imagine a product that requires building widget A, then turning that into widget B, then turning that into widget C. If we have the following companies: C: revenue $6m, purchase costs $4m, other costs $1m B: revenue $4m, purchase costs $2m, other costs $1m A: revenue $2m, purchase costs $0, other costs $1m then taxes are paid on $12m. If we instead have: Alphabet: revenue $6m, purchase costs $0, other costs $3m then taxes are paid on $6m, even though the same amount of stuff is being made with the same efficiency, same profits, etc. Whether this is relevant for tech giants is another matter. Software tends to be quite vertically integrated (financially speaking, at least).
    - vidarh 9y ago
      This is typically the argument for VAT over other sales taxes. In the EU, A would charge $2m + VAT. Let's say 10% for ease. So B would have purchase costs of $2.2m, and would charge $4.4m. $400k of that is VAT, but they get a $200k VAT refund for the VAT paid on the purchase from A. C would charge $6.6m, of which $600k is VAT, and claim $400k VAT back. End result is A, B, and C would all pay $200k VAT each. In your second example, the VAT inclusive price would still be $6.6k, and the VAT due would still be $600k. In practice many non-VAT sales taxes also counters this problem by trying to define what makes a "final" sale or a sale to consumers as opposed to other companies, and taxing only that.
- harryh 9y ago
  Walmart's profit margins aren't smaller than Google's because they are wasting money on expensive cars or exotic conferences.
AnthonyMouse 9y ago
> This is why we tax profit and not revenue. Different industries have radically different cost structures. That is completely irrelevant as long as the tax is only collected once at final sale and not every time the goods change hands within a supply chain. If Walmart has 97 cents of cost per dollar in revenue then the sum total profit within their supply chain is 97 cents. Somebody is getting every penny in the dollar. If the government says that for every dollar in revenue you have to pay 20 cents in taxes then Walmart will either raise prices by ~20% or require their suppliers to lower prices by ~20%. In no event do they go out of business, because their customers still need what their suppliers produce. It's possible for a tax to destroy a market, but it has nothing to do with margins of the final retailer and everything to do with how much total surplus exists. If the government demands a certain number of dollars in taxes and either the manufacturers or customers can eat that and still be willing to engage in the transaction, that's what happens. But if there isn't that much surplus in the transaction, it no longer happens. Because before somebody was spending an hour to make a certain amount of money and after they have to spend an hour to make only 80% that much money, which can cross over the threshold where they say screw it and fold up shop. That has nothing to do with whether you call it sales tax or income tax. It's true of any tax on any product. There are products with high margins that a small tax could nonetheless destroy because the industry is high risk, so investors won't invest without high returns. If the tax makes the risk-adjusted returns fall below what it is for other investments, the product ceases to exist despite high margins, because the high margins may be entirely necessary to compensate for the risk.
- conanbatt 9y ago
  > If the government says that for every dollar in revenue you have to pay 20 cents in taxes then Walmart will either raise prices by ~20% or require their suppliers to lower prices by ~20%. In no event do they go out of business, because their customers still need what their suppliers produce. You are assuming there is no elasticity here. People would stop working for walmart and go work for google, in this example, so yes, the tax would destroy walmart.
  - discodave 9y ago

by harryh 9y ago

bluecalm 9y ago

The lower margin businesses will raise prices, and higher margin businesses will be forced to lower prices long term as people will have less money it's not a problem. Taxing profits encourages all kinds of undesirable behavior: buying expensive company cars, conferences in exotic locations, other perks because you get a huge discount (tax deduction) on them. I would argue it's immoral because you're taxing both efficiency and honesty. There is no reason that out of two companies producing the same thing you tax the one being more prudent with their expenses more. Tax pollution, land, access to local work force or revenue. You can just raise personal income tax as well. They are all better and more just taxes than loop sided incentive wise tax on profit.

candiodari 9y ago
And taxing revenue punishes economic activity per se. For small firms, it will force them out of business, and only high margin ones will remain (as explained). In other words, for the 2/3rds or so of the economy that is small and medium businesses this will be a tax on having economic activity at all. That's why it'll never fly (or should I say never be enforced). And don't worry, as usual, for large businesses there's an easy way out : simply don't transact in money. Then negotiate what the value is of the transaction with the tax department. For instance, buy Disney Club 33 access for all executives and their family in trade for 10% cheaper plumbing for the park. Do huge transactions for suspiciously low monetary value, and they won't get counted in revenue, or only partially. Problem solved. In case people doubt that such negotiation works, I would like to point out that the most powerful man in Europe, the president of the European commission, Jean Claude Juncker, got where he is by negotiating preferential tax deals with large international corporations. I'd say for years, but the guy is no spring chicken. For decades. All taxes that are less than 100% enforced (all of them, but these revenue taxes are a particularly bad example. Utterly unrealistic to do this for small businesses) are a tax on honesty. Thing is, you can't have global supply chains without "taxing honesty". And without global supply chains, you won't get an iPad.
- jon_richards 9y ago
  I think a better explanation is that taxes on revenue favour vertical integration. Imagine a product that requires building widget A, then turning that into widget B, then turning that into widget C. If we have the following companies: C: revenue $6m, purchase costs $4m, other costs $1m B: revenue $4m, purchase costs $2m, other costs $1m A: revenue $2m, purchase costs $0, other costs $1m then taxes are paid on $12m. If we instead have: Alphabet: revenue $6m, purchase costs $0, other costs $3m then taxes are paid on $6m, even though the same amount of stuff is being made with the same efficiency, same profits, etc. Whether this is relevant for tech giants is another matter. Software tends to be quite vertically integrated (financially speaking, at least).
  - vidarh 9y ago
    This is typically the argument for VAT over other sales taxes. In the EU, A would charge $2m + VAT. Let's say 10% for ease. So B would have purchase costs of $2.2m, and would charge $4.4m. $400k of that is VAT, but they get a $200k VAT refund for the VAT paid on the purchase from A. C would charge $6.6m, of which $600k is VAT, and claim $400k VAT back. End result is A, B, and C would all pay $200k VAT each. In your second example, the VAT inclusive price would still be $6.6k, and the VAT due would still be $600k. In practice many non-VAT sales taxes also counters this problem by trying to define what makes a "final" sale or a sale to consumers as opposed to other companies, and taxing only that.
harryh 9y ago
Walmart's profit margins aren't smaller than Google's because they are wasting money on expensive cars or exotic conferences.

AnthonyMouse 9y ago

> This is why we tax profit and not revenue. Different industries have radically different cost structures. That is completely irrelevant as long as the tax is only collected once at final sale and not every time the goods change hands within a supply chain. If Walmart has 97 cents of cost per dollar in revenue then the sum total profit within their supply chain is 97 cents. Somebody is getting every penny in the dollar. If the government says that for every dollar in revenue you have to pay 20 cents in taxes then Walmart will either raise prices by ~20% or require their suppliers to lower prices by ~20%. In no event do they go out of business, because their customers still need what their suppliers produce. It's possible for a tax to destroy a market, but it has nothing to do with margins of the final retailer and everything to do with how much total surplus exists. If the government demands a certain number of dollars in taxes and either the manufacturers or customers can eat that and still be willing to engage in the transaction, that's what happens. But if there isn't that much surplus in the transaction, it no longer happens. Because before somebody was spending an hour to make a certain amount of money and after they have to spend an hour to make only 80% that much money, which can cross over the threshold where they say screw it and fold up shop. That has nothing to do with whether you call it sales tax or income tax. It's true of any tax on any product. There are products with high margins that a small tax could nonetheless destroy because the industry is high risk, so investors won't invest without high returns. If the tax makes the risk-adjusted returns fall below what it is for other investments, the product ceases to exist despite high margins, because the high margins may be entirely necessary to compensate for the risk.

conanbatt 9y ago
> If the government says that for every dollar in revenue you have to pay 20 cents in taxes then Walmart will either raise prices by ~20% or require their suppliers to lower prices by ~20%. In no event do they go out of business, because their customers still need what their suppliers produce. You are assuming there is no elasticity here. People would stop working for walmart and go work for google, in this example, so yes, the tax would destroy walmart.
- discodave 9y ago