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One problem with taxing on profit is that you encourage accounting tricks. Consider the reputation of the movie industry where actors and authors and everyone

by jerrya 14y ago

One problem with taxing on profit is that you encourage accounting tricks. Consider the reputation of the movie industry where actors and authors and everyone up and down the line are screwed because they took a percentage of the profits and it turns out according to the studio accountants, their megablockbuster never actually turned a profit.

aetherson 14y ago
But taxing on gross means that you penalize low-margin companies. Take two basically identical companies. They sell, say, computers. One company has a "luxury" brand and they sell 1 million units at $2,000 a piece with a $500 profit on each. They have gross sales of $2 billion and profit of $500 million. The other company has an "economy" brand and they sell 5 million units at $1,000 a piece with a $50 profit on each. They have gross sales of $5 billion, and a profit of $250 million. The luxury company is taxed at 1%, and the economy company is taxed at 5%. The economy company's entire profit is eaten by the tax, so they must raise their prices to $1,050. The luxury company may or may not raise their prices at all -- if they do, they raise them to $2,020, maintaining their profit level. We have effectively propped up the luxury company's business model. They have reduced the price differential between themselves and their competitor, and the people paying the difference are the tax-payer. Why did we do this? Do we like corporations having very high profits? I'm not aware of that as being a national goal.
- lifeisstillgood 14y ago
  Why are the two companies taxed at different rates? Surely they should both be treated equally - or is it a gross tax that has effective net rate of 1% of 500 million for luxury company - which seems a very small fraction to tax at ?
  - chongli 14y ago
    The article advocates for a progressive tax; that is, one which increases with gross income. The luxury company has a gross income of $1 billion while the economy brand company has a gross income of $5 billion. This is why they'd have different tax rates.
- fluidcruft 14y ago
  In your scenario, isn't the "luxury" company smaller than the "economy" company? The point is to encourage smaller companies. So the "economy" company could find some way to split into separate companies (say, one that produces desktops and one that produces laptops and one that produces computer displays).
  - aetherson 14y ago
    In my scenario, the luxury company is smaller than the economy company in terms of gross sales, but bigger in terms of earnings. The economy company is often going to have a hard time managing a split-up. It presumably benefits from economies of scale at the size that it is, and it is not clear that two companies half its size could get the same deals from suppliers etc. that allow it to make its products relatively cheaply. At the very least, the "two smaller companies" version of it will almost certainly increase administrative overhead. But, more so, it's unclear that the economy company is a bigger problem than the luxury company in this scenario. To the extent that it is lobbying for its interests, the luxury company has more money with which to do this than the economy company. The economy company probably employs more people, and puts more money into the local economy, and it can use those as a bludgeon. That is, in fact, the dynamic that Stallman appears to be envisioning. My point is that this dynamic that he is envisioning is a very narrow view of the entire situation.
    - fluidcruft 14y ago
      The proposal isn't to fix to lobbying--it's to fix the problem of corporations being so large that the public is forced to play helicopter parent and coddle them and these companies subsequently become emboldened to act like reckless entitled brats. The only point the article makes about lobbying is that it interferes with our current mechanism that is supposed to allow regulators to breaking up companies that are too big or that the Administration can just decide not to prosecute any cases. If companies are naturally downsized by market/tax forces then they won't be lobbying to maintain their monolithic state. Rather then the financial engineers in the companies working out perverse ways to keep "profit" low, they instead have to focus on carving themselves into optimally-sized independent units. I'm assuming gross revenue isn't as easily gamed as profit is. In your scenario, "luxury" going into bankruptcy isn't a problem--people can just buy the more common computer.
lifeisstillgood 14y ago
But that's the same as Starbucks in Switzerland buying the whole coffee crop and selling back to each country at inflated prices so Starbucks only pays profit in Switzerland (keeps things simple) It's just a game - but nations will have to get better at playing it. That is simple - however taxing Dell on income at the same rate as taxing a law firm is unfair on a basic level. Isn't it?
- bjustin 14y ago
  Why is it unfair? Are you suggesting that services should be taxed at a greater rate than goods?
  - lifeisstillgood 14y ago
    No it's unfair due to the relative profit margin - dell has thin margins so will find a tax on gross to be a far larger slice of profit than a law firm.

by jerrya 14y ago

aetherson 14y ago

But taxing on gross means that you penalize low-margin companies. Take two basically identical companies. They sell, say, computers. One company has a "luxury" brand and they sell 1 million units at $2,000 a piece with a $500 profit on each. They have gross sales of $2 billion and profit of $500 million. The other company has an "economy" brand and they sell 5 million units at $1,000 a piece with a $50 profit on each. They have gross sales of $5 billion, and a profit of $250 million. The luxury company is taxed at 1%, and the economy company is taxed at 5%. The economy company's entire profit is eaten by the tax, so they must raise their prices to $1,050. The luxury company may or may not raise their prices at all -- if they do, they raise them to $2,020, maintaining their profit level. We have effectively propped up the luxury company's business model. They have reduced the price differential between themselves and their competitor, and the people paying the difference are the tax-payer. Why did we do this? Do we like corporations having very high profits? I'm not aware of that as being a national goal.

lifeisstillgood 14y ago
Why are the two companies taxed at different rates? Surely they should both be treated equally - or is it a gross tax that has effective net rate of 1% of 500 million for luxury company - which seems a very small fraction to tax at ?
- chongli 14y ago
  The article advocates for a progressive tax; that is, one which increases with gross income. The luxury company has a gross income of $1 billion while the economy brand company has a gross income of $5 billion. This is why they'd have different tax rates.
fluidcruft 14y ago
In your scenario, isn't the "luxury" company smaller than the "economy" company? The point is to encourage smaller companies. So the "economy" company could find some way to split into separate companies (say, one that produces desktops and one that produces laptops and one that produces computer displays).
- aetherson 14y ago
  In my scenario, the luxury company is smaller than the economy company in terms of gross sales, but bigger in terms of earnings. The economy company is often going to have a hard time managing a split-up. It presumably benefits from economies of scale at the size that it is, and it is not clear that two companies half its size could get the same deals from suppliers etc. that allow it to make its products relatively cheaply. At the very least, the "two smaller companies" version of it will almost certainly increase administrative overhead. But, more so, it's unclear that the economy company is a bigger problem than the luxury company in this scenario. To the extent that it is lobbying for its interests, the luxury company has more money with which to do this than the economy company. The economy company probably employs more people, and puts more money into the local economy, and it can use those as a bludgeon. That is, in fact, the dynamic that Stallman appears to be envisioning. My point is that this dynamic that he is envisioning is a very narrow view of the entire situation.
  - fluidcruft 14y ago
    The proposal isn't to fix to lobbying--it's to fix the problem of corporations being so large that the public is forced to play helicopter parent and coddle them and these companies subsequently become emboldened to act like reckless entitled brats. The only point the article makes about lobbying is that it interferes with our current mechanism that is supposed to allow regulators to breaking up companies that are too big or that the Administration can just decide not to prosecute any cases. If companies are naturally downsized by market/tax forces then they won't be lobbying to maintain their monolithic state. Rather then the financial engineers in the companies working out perverse ways to keep "profit" low, they instead have to focus on carving themselves into optimally-sized independent units. I'm assuming gross revenue isn't as easily gamed as profit is. In your scenario, "luxury" going into bankruptcy isn't a problem--people can just buy the more common computer.

lifeisstillgood 14y ago

But that's the same as Starbucks in Switzerland buying the whole coffee crop and selling back to each country at inflated prices so Starbucks only pays profit in Switzerland (keeps things simple) It's just a game - but nations will have to get better at playing it. That is simple - however taxing Dell on income at the same rate as taxing a law firm is unfair on a basic level. Isn't it?

bjustin 14y ago
Why is it unfair? Are you suggesting that services should be taxed at a greater rate than goods?
- lifeisstillgood 14y ago
  No it's unfair due to the relative profit margin - dell has thin margins so will find a tax on gross to be a far larger slice of profit than a law firm.