Centerfield

For whatever reason (my settings or a code glitch) the link just recycles the blog page. But cut & paste got me there.

I was happy to see that the top reasons were listed--no profits to pay taxes on, or carry-forward losses from previous years. Not all businesses make money every year, or even at all, and yes, they get to offset previous losses against current gains to some extent. The tax credit wipe-out is worth checking, and the transfer pricing gimmick has ALWAYS been the top way that multi-nat'l corps avoid taxes. That last deserves some explanation for clarity.

Simple Example: A multi-nat'l has two "captive corps" plants in different countries, both operating at the same internal profit levels. But both plants use materials made by the other plant. One country has a 40% tax rate and the other has a 10% tax rate. So the company inflates the price of materials sold by the 10% plant to the 40% plant to reduce the profits of the 40% plant, effecting a de facto "transfer" of those profits to the 10% plant, and thus paying lower taxes for the multi-nat'l as a whole. Yes, this is illegal almost everywhere (as tax evasion) but it's tough to catch and even tougher to prove. The only real cure is to be a competitively low-tax country, then YOU capture the taxes instead of sending them to another nation.

Tax credits--gotta go straight to Congress on those. The biggest barrier to real tax reform is that both parties stay healthy trading off goodies to their donors, which is how the tax code got so thick in the first place. There is great resistance on all sides to changing this patronage/reward system. The big loser is the American taxpayer.

And even those corporations that paid "no taxes" actually did pay the matching portion of the SS/Medicare tax on their employees.

In the final analysis, of course, the consumer pays ALL taxes. Corporations don't have magical money printing presses in their basements (not if the Secret Service can catch 'em at it!) so all the money they have must come from the consumer, or from the government as subsidies. If we raise corporate taxes, the corporations just raise prices to compensate. The buyer pays. Put another way, if you rent your dwelling you may think you're not paying property taxes, but the truth is they're built into your rent and you're still paying them.

Great post, Tully.

Right, no such thing as a free lunch. Presumably there is some diffusion though. The market isn't maximally efficient. Business doesn't always pass on all costs to customers and they don't usually share the decreased costs with them if they get a tax break either.

And in the case of renting, the amount charged isn't always determined via some elaborate cost analysis, especially if you rent from a small landlord. I'm quibbling, though.

Nope, the market's not maximally efficient--but business still has no money it doesn't get from somewhere else. None. And no matter how you slice it, all costs will always be covered by the consumer--or they're out of business. The only slack is in profits. Or bankruptcy.

Of course, in a maximum-efficiency market, all large corporations would produce at the most efficient profit-maximizing level of production, and they don't. Instead they produce well past that peak in the curve, well into the diminishing-return downslide, at the highest production level that produces the minimum percentage return required to keep their capital sources from abandoning them. (Why this is so is another rant about corporate reality versus capitalist theory, but it IS so. Astute observers will figure it out quickly. Think "agency effects.")

The strange upside of this is that a large corporation pressed on expenses can actually make a higher profit by cutting production. Thus gives some cushion against price increases and profit hits, but you rarely see that you're paying more because they insist on riding that far side of the curve in the first place.

All of which is a bit off-topic. But there still ain't no free lunch. You pay for every bit of it, taxes and all.

Well, my point is only that someone always pays. While I agree that it is usually the consumer, it is sometimes the company or the landlord in the form of lower profits.

When you say that a company can sometimes increase profit by reducing production, are you talking about absolute net profit, or rate of return as a percent of investment? I'm assuming it's the latter in most or all instances, but I'm not an economist.

Rate of return on capital, Brian, though that can sometimes mean absolute net as well. Depends on the determinants of that return curve. Noticed that was unclear as soon as I posted but was too busy to go back and add on.

The agency problem, the reason that corps go to the (investor's) limit of diminishing returns, is that the bigger the corp, the greater the executive perks and powers. If they step past that point on the downslide where capital flight becomes a reality, they can then "downsize" to a more efficient position on the curve and easily produce a higher %age profit on the lowered capital, all while telling the remaining investors how they've gotten "leaner and meaner" and "increased production efficiency and profitability." This lets the top execs look like heros and keep their cushy jobs, when the problem was that they were pumping the well past the peak for their own porky reasons in the first place.

This is why young growth companies produce higher profit margins than mature companies in settled industries, and why small-cap stocks consistently out-perform large-cap stocks in the long run. It's not all "risk bonus" as we are led to believe. Younger and smaller growth companies haven't institutionalized their pork.

But it sucks for the rank and file and middle management in those big corps. That some of them weren't necessary in the first place, that they were luxuries in an efficiency sense, doesn't make it any easier for them when they're laid off. They probably didn't do anything wrong or perform poorly at all--they got hacked for structural efficiency reasons in response to situations created by the top execs, so those execs could cover their own butts.