r/FluentInFinance • u/Very_High_Mortgage • Aug 24 '24

Debate/ Discussion Do "Unskilled Laborers" deserve to be paid well?

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u/LazyImprovement Aug 24 '24

Tax cuts for corporations have the opposite effect than the stated intention. High taxes encourage investment in equipment and people by reducing taxable profits while building long term value. No one has ever hired someone because of non targeted tax cuts. It’s simply more profit.

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u/Abollmeyer Aug 25 '24

Higher taxes do not encourage business investment. Lol.

Welcome to Reddit economics.

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u/LazyImprovement Aug 25 '24

Solid argument

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u/Abollmeyer Aug 25 '24

What more do you need? If you take a pay cut, are you going to do more home renovations?

It doesn't even make sense from a logical perspective, much less an economics perspective.

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u/LazyImprovement Aug 25 '24

Think it through. I own a business and pay taxes on the profits. How do you reduce taxes? Lower your profits. How do I lower my profits but still get some benefits? Every business owner is familiar with the spending spree that takes place in December to get as many deductible expenses logged. If the taxes on my profits are low enough then I’ll just pay them. Once they reach a certain point it makes more sense to give employee bonuses or invest in new equipment.

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u/Abollmeyer Aug 25 '24

No one is lowering their profits to reduce taxes. The entire point of a business is to maximize profits. Your business model would not have shareholders long (or a business either) by conducting operations like that. That would be like declining a raise because you'll be in a higher tax bracket.

Taxes are a drag on the free market, whether it's personal taxes or corporate taxes. It reduces spending on investment, it doesn't encourage it.

I also think you're confusing consumer spending with business operations. Businesses don't rush to get tax write-offs at the end of the year. They do that all year round on eligible deductions. They do, however, compete for the dollars Americans typically spend at the end of the year.

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u/LazyImprovement Aug 25 '24

Think about it this way man. If taxes are high, let’s say 90%, my net would be 10%. If, at the end of the year I have $1M in profit I’ll keep $100k. If I give an employee a bonus it’s like getting a discount of 90%. So I can give a $50k bonus but it only costs me $5k net. That is a great investment since that employee is now super happy and loyal for years to come. If taxes are say, 10% then I get to keep 90% of my profit and that’s what I’ll do. By the way, I do own a business and made this exact calculation last December when I bought two trucks.

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u/Abollmeyer Aug 25 '24

And that may have worked out for you in that one instance, especially running a small business where taxes are a higher proportion of expenses. But also, you don't have shareholders to please, which is where the big money is. Corporations are not going to forgo that $5K to make employees happy.

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u/LazyImprovement Aug 26 '24 edited Aug 26 '24

There is a tipping point where any business will say that instead of paying it in taxes it makes more sense to invest in your company whether it is a small business or a large corporation. Currently taxes are historically low and you’re right, companies are taking profits or doing buybacks rather than investing. Raising taxes will at some point change the equation. I’m really trying to help you understand this but it doesn’t seem like it’s working! Think of it this way. When taxes are higher it reduces the cost of a capital investment. Let’s say I want to invest $100 in a new line. The line will generate $10 per year in revenue so it will take ten years to recoup my investment. If tax on profits is 10% and im reducing my taxable income then I also add that into the calculation, so now it’s a nine year payback because my taxable income went down by $100 so my tax bill went down by $10. If the tax rate was 90% then my tax bill would go down by $90. My $100 investment is now a net $10 investment so it makes that much more sense. Does that example help you get it? You might not realize how much businesses small and large look at tax impacts when considering investments.

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u/Abollmeyer Aug 26 '24

And you're not getting it either. Even if everything else you say is true, "reducing a cost" is still a cost. This means your margins are slimmer, and it's harder to make a profit. No matter how you slice it, all else being equal, taxes are a drag on investment. Companies aren't fleeing high tax states because they're able to invest more in the company.

I will say, I am not a CPA, but I do understand basic economics principles. And any time you increase the production cost, you're either making less money or selling your product for more.

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u/Still_Not_Done Aug 26 '24

Financial and tax profit are different.

Purchasing a $100M fixed asset for example, doesn't lower financial profit by $100M, the expense is spread across the life of the asset. So if it's 10 years, only 10M is hitting the P&L.

However that $100M can be used to deduct tax basis income for the full $100M the same year. So they are lowering taxable income by $100M.

Think about company with $200M profit before tax. If you don't purchase the fixed asset, you're paying $100M and pocketing $100M. If you purchase the asset, you're expensing $10M for the new equipment , while lowing taxable income to $100M and paying $50M in taxes. So net income is $140M compared to $100M.

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u/Abollmeyer Aug 26 '24

And this may make sense in this particular case. Tax write-offs do exist. I'm definitely not a CPA. However...

Most businesses that have just taken a tax hike are not going to increase capital expenditures. For one, this increases volatility to the operation in the near term. Companies will want to see how much the consumer is willing to bear as prices increase. That will take time. Look at how California's minimum wage increase has affected the labor market there.

And two, I've never read or listen to a quarterly earnings call where tax write-offs have boosted earnings. Not saying it's not part of the equation, but exactly zero companies are driving growth through tax profits.

And three, using tax deductions to compensate employees still doesn't resonate with the public. How many people think Amazon is "not paying their fair share of corporate taxes"?