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Corporate tax rates can be lower, ideally at 0, but I doubt our current system incentivizes corporations retaining profits. On the contrary, recently many neede

Corporate tax rates can be lower, ideally at 0, but I doubt our current system incentivizes corporations retaining profits. On the contrary, recently many needed to be bailed out because they paid out too much to shareholders instead of saving enough for a rainy day. Making a better product also doesn't necessarily lead to profits. That's an oversimplified perspective. There's a far greater correlation between monopoly power and profit. In some cases this monopoly status comes from truly groundbreaking work. Not in all cases though.

AnthonyMouse 6y ago
> Corporate tax rates can be lower, ideally at 0, but I doubt our current system incentivizes corporations retaining profits. Multinational corporations commonly avoid taxes by keeping profits offshore in a low tax jurisdiction. In order to pay the money to shareholders they have to repatriate them and pay corporate income tax on the money, and then the shareholder has to pay tax again on the dividend or the capital gain from the buyback. Or they can leave the money where it is, not pay any of those taxes and invest it in some index fund from there. But then the money is stuck inside the corporation, and gets invested in some index fund instead of potentially going to some higher risk/reward investments that some of the original shareholders would have chosen. > On the contrary, recently many needed to be bailed out because they paid out too much to shareholders instead of saving enough for a rainy day. COVID-19 isn't a rainy day, it's a once in a century pandemic. Most companies have never made enough money to be able to survive it, and the ones that did still shouldn't be hoarding it just in case. Systemic problems get solved through systemic actions, e.g. lowering interest rates or sending stimulus checks. To expect companies to have saved enough money to survive rare systemic events without that is to penalize and destroy any company lean enough to have been unable to save it to begin with. > Making a better product also doesn't necessarily lead to profits. Making a worse product in a competitive market has a strong relationship with going out of business. > There's a far greater correlation between monopoly power and profit. But that's an independent problem. The solution there isn't to raise taxes, it's to break up monopolies.
- andrewjl 6y ago
  > Multinational corporations commonly avoid taxes by keeping profits offshore in a low tax jurisdiction. That does happen, but many including the biggest tech companies found a clever way around it. Via a combination of ultra-low interest bearing bond sales and share repurchases. It does the same thing but avoids those taxes. So there's no incentive for profit retention on net. > COVID-19 isn't a rainy day, it's a once in a century pandemic. Part of going into business is accepting risk, including systemic risk. That's why the corporate veil exists and it's generally positive for the overall economy when weak businesses fail. A strong business would have an operating model that can withstand such risk. > To expect companies to have saved enough money to survive rare systemic events without that is to penalize and destroy any company lean enough to have been unable to save it to begin with. Maybe those companies shouldn't have been in business then and that capital would have been better deployed somewhere else. I'm surprised that opportunity costs of capital allocation are ignored when defending bailouts. They introduce market inefficiency and reward complacency. > Making a worse product in a competitive market has a strong relationship with going out of business. In principle, yes. In reality, most markets are not competitive to that degree. Perfectly competitive markets don't exist in a modern regulated economy. We can talk about removing regulatory burden to make this true, but that's not where we are now.
  - AnthonyMouse 6y ago
    > That does happen, but many including the biggest tech companies found a clever way around it. Via a combination of ultra-low interest bearing bond sales and share repurchases. It does the same thing but avoids those taxes. So there's no incentive for profit retention on net. The loans allow the money to be transferred back into the domestic entity, but there are then restrictions on issuing more in dividends or buybacks than you have in profits, and borrowing isn't considered profit. So they can get the money back into the US and use it for wasteful empire building but they can't give it to the shareholders -- it makes the problem worse. And buybacks have more advantageous tax treatment than dividends but they're still taxed as capital gains on the difference between the price you bought the shares and the price you tender them for, which doesn't happen if the money stays inside the corporation. > Part of going into business is accepting risk, including systemic risk. That's why the corporate veil exists and it's generally positive for the overall economy when weak businesses fail. A strong business would have an operating model that can withstand such risk. You're using two incompatible definitions of weak. In the first case you want weak businesses to fail because they're inefficient, i.e. they're consuming more resources than they produce and go bankrupt. In the second case the business fails because there is a situation resulting in a temporary loss of revenue (shutdowns) but the business still has operating expenses (e.g. rent) and is too efficient to have enough slack to bridge the gap. The inefficiency wasn't caused by the business occupying space it couldn't use, because at the time nobody could use that space -- the loss was a sunk cost to society at large. If you let them fail then when the temporary situation ends there is greater market concentration because the leanest companies failed, which allows the remaining ones to charge higher margins due to the reduced competition to the detriment of their customers or suppliers. > I'm surprised that opportunity costs of capital allocation are ignored when defending bailouts. They introduce market inefficiency and reward complacency. This is why "bailouts" should be distributed uniformly without regard to risk of failure, e.g. through lower interest rates or fixed sum payments to everyone. Then you're not rewarding the most precarious companies because they get no more than anyone else, but you still prevent them from failing. Meanwhile those in a stronger position can use the money they received to increase investment or consumption, which is what you want in a down economy anyway. > In principle, yes. In reality, most markets are not competitive to that degree. It still works like that in practice much of the time. Blockbuster's product wasn't as good as Netflix and now they're gone. GM's product wasn't as good as competing ones and it led them into bankruptcy. Blackberry, Sears, RadioShack, Circuit City, AOL. It could happen more than it does, but it still does.

AnthonyMouse 6y ago

> Corporate tax rates can be lower, ideally at 0, but I doubt our current system incentivizes corporations retaining profits. Multinational corporations commonly avoid taxes by keeping profits offshore in a low tax jurisdiction. In order to pay the money to shareholders they have to repatriate them and pay corporate income tax on the money, and then the shareholder has to pay tax again on the dividend or the capital gain from the buyback. Or they can leave the money where it is, not pay any of those taxes and invest it in some index fund from there. But then the money is stuck inside the corporation, and gets invested in some index fund instead of potentially going to some higher risk/reward investments that some of the original shareholders would have chosen. > On the contrary, recently many needed to be bailed out because they paid out too much to shareholders instead of saving enough for a rainy day. COVID-19 isn't a rainy day, it's a once in a century pandemic. Most companies have never made enough money to be able to survive it, and the ones that did still shouldn't be hoarding it just in case. Systemic problems get solved through systemic actions, e.g. lowering interest rates or sending stimulus checks. To expect companies to have saved enough money to survive rare systemic events without that is to penalize and destroy any company lean enough to have been unable to save it to begin with. > Making a better product also doesn't necessarily lead to profits. Making a worse product in a competitive market has a strong relationship with going out of business. > There's a far greater correlation between monopoly power and profit. But that's an independent problem. The solution there isn't to raise taxes, it's to break up monopolies.

andrewjl 6y ago
> Multinational corporations commonly avoid taxes by keeping profits offshore in a low tax jurisdiction. That does happen, but many including the biggest tech companies found a clever way around it. Via a combination of ultra-low interest bearing bond sales and share repurchases. It does the same thing but avoids those taxes. So there's no incentive for profit retention on net. > COVID-19 isn't a rainy day, it's a once in a century pandemic. Part of going into business is accepting risk, including systemic risk. That's why the corporate veil exists and it's generally positive for the overall economy when weak businesses fail. A strong business would have an operating model that can withstand such risk. > To expect companies to have saved enough money to survive rare systemic events without that is to penalize and destroy any company lean enough to have been unable to save it to begin with. Maybe those companies shouldn't have been in business then and that capital would have been better deployed somewhere else. I'm surprised that opportunity costs of capital allocation are ignored when defending bailouts. They introduce market inefficiency and reward complacency. > Making a worse product in a competitive market has a strong relationship with going out of business. In principle, yes. In reality, most markets are not competitive to that degree. Perfectly competitive markets don't exist in a modern regulated economy. We can talk about removing regulatory burden to make this true, but that's not where we are now.
- AnthonyMouse 6y ago
  > That does happen, but many including the biggest tech companies found a clever way around it. Via a combination of ultra-low interest bearing bond sales and share repurchases. It does the same thing but avoids those taxes. So there's no incentive for profit retention on net. The loans allow the money to be transferred back into the domestic entity, but there are then restrictions on issuing more in dividends or buybacks than you have in profits, and borrowing isn't considered profit. So they can get the money back into the US and use it for wasteful empire building but they can't give it to the shareholders -- it makes the problem worse. And buybacks have more advantageous tax treatment than dividends but they're still taxed as capital gains on the difference between the price you bought the shares and the price you tender them for, which doesn't happen if the money stays inside the corporation. > Part of going into business is accepting risk, including systemic risk. That's why the corporate veil exists and it's generally positive for the overall economy when weak businesses fail. A strong business would have an operating model that can withstand such risk. You're using two incompatible definitions of weak. In the first case you want weak businesses to fail because they're inefficient, i.e. they're consuming more resources than they produce and go bankrupt. In the second case the business fails because there is a situation resulting in a temporary loss of revenue (shutdowns) but the business still has operating expenses (e.g. rent) and is too efficient to have enough slack to bridge the gap. The inefficiency wasn't caused by the business occupying space it couldn't use, because at the time nobody could use that space -- the loss was a sunk cost to society at large. If you let them fail then when the temporary situation ends there is greater market concentration because the leanest companies failed, which allows the remaining ones to charge higher margins due to the reduced competition to the detriment of their customers or suppliers. > I'm surprised that opportunity costs of capital allocation are ignored when defending bailouts. They introduce market inefficiency and reward complacency. This is why "bailouts" should be distributed uniformly without regard to risk of failure, e.g. through lower interest rates or fixed sum payments to everyone. Then you're not rewarding the most precarious companies because they get no more than anyone else, but you still prevent them from failing. Meanwhile those in a stronger position can use the money they received to increase investment or consumption, which is what you want in a down economy anyway. > In principle, yes. In reality, most markets are not competitive to that degree. It still works like that in practice much of the time. Blockbuster's product wasn't as good as Netflix and now they're gone. GM's product wasn't as good as competing ones and it led them into bankruptcy. Blackberry, Sears, RadioShack, Circuit City, AOL. It could happen more than it does, but it still does.