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First, your are calculating the total collective wages of a corporation's employees. I refer to the individual wages. Corporate taxes do not decrease individu

by rprasad 15y ago

First, your are calculating the total collective wages of a corporation's employees. I refer to the individual wages. Corporate taxes do not decrease individual wages, though they may impact the total number of employees hired...in smaller firms which have less resources. In larger companies (i.e., publicly traded companies), the company's tax rates do not affect hiring decisions. Business considerations other than tax rates affect hiring. Second, you misunderstand the time-value of money theory. The theory posits that the money saved in taxes, if actively invested back in the business or other investments, will result in sufficient income to completely offset the eventual tax payment when it comes due. Low interest rates may change the expected timeframe, but the theory assumes that the company will attempt to maximize the return on its investments.

JumpCrisscross 15y ago
Empirically, "approximately 50 per cent of an exogenous increase in tax is passed on in lower wages in the long run" [1] through wage bargaining. Generally this will happen through a reduction in real versus nominal wages due to the documented stickiness of wages. Anecdotally, having worked at a private equity firm, taxes are an input into not only hiring capabilities at a firm but the wages and bonuses payable to those hired. Regarding the time value of money, if a firm defers $1 in taxes today for 8 years it would need to earn about a 9.1% annualised return on that dollar to have $2 at the end of those 8 years, $1 for the taxes deferred and $1 to keep so that it is as if "as if the tax was never owed". Given that the S&P 500 had an annual average return of 3.46% (1.42% annualised) over the past 10 years your assumption that a 7-8 year deferral even nearly wipes out taxes includes a substantial risk assumption. An American firm should expect to wait 26 years for its tax deferral to be wiped out by time if we use the US's average GDP growth rate since the 1970s of 2.7% [2]. Note: above I was doing the inverse of this, asking what the discount rate would have to be to discount $x in 10 years to almost zero today [1] http://repec.iza.org/dp5293.pdf http://repec.iza.org/dp5293.pdf [2] http://en.wikipedia.org/wiki/Economy_of_the_United_States http://en.wikipedia.org/wiki/Economy_of_the_United_States

by rprasad 15y ago

JumpCrisscross 15y ago

Empirically, "approximately 50 per cent of an exogenous increase in tax is passed on in lower wages in the long run" [1] through wage bargaining. Generally this will happen through a reduction in real versus nominal wages due to the documented stickiness of wages. Anecdotally, having worked at a private equity firm, taxes are an input into not only hiring capabilities at a firm but the wages and bonuses payable to those hired. Regarding the time value of money, if a firm defers $1 in taxes today for 8 years it would need to earn about a 9.1% annualised return on that dollar to have $2 at the end of those 8 years, $1 for the taxes deferred and $1 to keep so that it is as if "as if the tax was never owed". Given that the S&P 500 had an annual average return of 3.46% (1.42% annualised) over the past 10 years your assumption that a 7-8 year deferral even nearly wipes out taxes includes a substantial risk assumption. An American firm should expect to wait 26 years for its tax deferral to be wiped out by time if we use the US's average GDP growth rate since the 1970s of 2.7% [2]. Note: above I was doing the inverse of this, asking what the discount rate would have to be to discount $x in 10 years to almost zero today [1] http://repec.iza.org/dp5293.pdf http://repec.iza.org/dp5293.pdf [2] http://en.wikipedia.org/wiki/Economy_of_the_United_States http://en.wikipedia.org/wiki/Economy_of_the_United_States