I don't do it much nowadays, but I recently got in a conversation with a hardcore socialist. Some frustration ensued, thus a rant.
Price optimization is the the process in which a company determines the optimal price point for a product to maximize profits. It's done by analyzing how the consumers react to prices in a particular market. It's no coincidence that a gallon of milk has a particular price point; it's the result of price optimization, as well as competition in the market for that particular product.
Even if you really wish to buy a gallon of milk, there's a certain price level that you're willing to work with. No one would pay a hundred bucks for a gallon of milk, for instance. Depending on how much you need the milk, you're willing to pay a little extra if you have to, but there's always a breaking point.
The market has done this ever since its emergence, but for some reason, a lot of people hold on this idea that taxes are exempt from this.
I feel this is false.
If you really look at it, taxes are the price tag for the product that is the society in which a company operates: the infrastructure, the level of education of the people, different services that the government provides through public money, etc.
A company can be willing to pay an X amount of taxes for whatever he feels the benefits of operating in a certain country are, but just like with the consumer and his gallon of milk, companies, too, have their breaking point. Just like every individual in general, rich or poor.
A good example of what I'm talking about is Finland.
Over here, alcohol has always been the favorite thing to tax by law makers for years, and to a certain point, increases in alcohol taxation have lead to more tax revenue for the government. But recently, there's been an increase in people buying their alcohol "south of the border", if you will, from Estonia, since its taxed less there, and therefore costs less. It's cheaper to pay for a boat ride to Estonia to buy your alcohol than it is to buy the alcohol from Finland.
This has lead to less tax revenue, since, instead of it working the way a lot of people seem to think, which is "the more you tax something, the more money you make", consumers have decided that the price of alcohol has reached its breaking point, and they no longer buy it from Finland.
This is the same with companies, and this is really important if governments wish to keep the jobs within their borders.
Every time there's an increase on taxation and expensive regulations, they move closer to their breaking point. For some, the the bar is lower, and for others its higher, but every economic actor has his or her breaking point, and once its reached, it's a-bye-bye. People who are poor have less opportunities to take their ball and go somewhere else, but those who have the resources to do so, will. And the poor suffer even more due to the lack of jobs and opportunities that the rich create.
People, particularly in the left, need to understand that the economy consists of people, all looking to maximize either their profits or well being in general, and you can't just increase the price tag forever, and expect people to just keep buying the product. It doesn't work in business, it doesn't work here.
A company will remain in a country as long as keeping it in said country best serves the people running it: as long as its worth the tax price tag. Reasons to keep a business in a country can vary: it might be the owner's home country, he may have good partners, good work force, etc. in that country, but that doesn't mean that he's willing to pay more than their value in taxes.
So, the idea that oh, we just need to tax the rich more to gain more tax revenue is just erroneous to begin with, since it's likely to not increase tax revenue at all. Businesses are not in business for you, they're in business for themselves. Whether you like it or not is completely irrelevant.
If you don't believe me, start selling milk for a hundred bucks per gallon, and report back to me.
Of course I am not, but if I were a government, instead of just taxing people, I'd actually ask people how much they feel the society is worth, to get a feel for how much they value whatever it is that they get out of society, in order to determine tax rates through the process of price optimization. Right now, businesses are moving abroad from the west, and governments seem to have very little answers other than "Welp, tax revenue is decreasing, so we need to increase taxes!"
Not taking into account that perhaps the taxes were the cause of the problem.
And this has nothing to do with whether or not taxation is "moral", or anything like that. It's just that it's a faulty system to begin with.
Cool post. Essentially what you're referring to is the Laffer Curve whereby increasing taxes beyond a certain point causes people to work less and therefore less tax revenue to be collected. .http://www.investopedia.com/terms/l/laffercurve.asp
Yes. :)
Higher taxes enlarge the Welfare State, so people that are actually working get their lives ruined with bigger and more taxes, while people on welfare get more free things , pay for nothing and vote for bigger goverment. This is the system that destroyed western civilisation.
When VAT was raised to 21% from 19% in The Netherlands, total VAT revenue went down; people bought less stuff than expected. It also placed an unfair burden on the lower incomes. It's silly economic thinking that leads to this sort of tax hikes. You would expect them to reduce the tax again after this failure, but that is not an option, it seems.
I'm not so sure about companies leaving because of taxation. Company tax is very low in The Netherlands, and Deals Can Be Made, but all that achieved is that production is still outsourced to abroad, and only a shell of the company remains in The Netherlands.
You can, of course, force a company abroad through taxation, but that is not what I see happening in The Netherlands at the moment, just the usual split between geographic locations of production and consumption that, I think, will lead to no good.
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Really good post and the fact it came off the back of socialist discussion really serves to illustrate the provenance of the argument, with no idealist society yet having achieved nirvana.
The economics of this post relay human nature and instinct. Price is elastic, but even "bungie" cords snap when stretched too far. The scales of temperance and acceptance are also related to opportunity. I worked for a Finnish company for 17 years and yes they like to drink and it was never cheap. Take the party boat to Estonia and have great weekend and bring back the goods.
If however the borders and govt control stop this, the frustrations grow and the checks and balances of a decent society fade. (Finland seems to have most things correct). The internet has helped to clarify other countries commercial and social impositions and starts to remove centralization of transactions and tax opportunities. Quite topical on this site!
A very good article and a deep analyse. It was a pleasure to read it.
Fast I, software and hardware inovațional and low price for transportation make world a huge virtual country, called Globalization.
This came with advantages: low price for technology because they are made in china (laptops, tablets, cellphones, etc). But also it comes also with disadvantages: job loses, professional reconversion, etc
And you're right our guvernaments are not able to handle this.
Anyway, my expectation is in maximum 100 years our planet will become a unique country.
There is a problem with this thinking, the way I see it governments are too large and exceed what should be prudent tax rates that would not put unnecessary pressures on companies and individuals because they just keep increasing government spending, on things like the military, high salaries for bureaucrats etc. But on the other hand if you do give companies a free ride they will squeeze consumers until they are completely dry. A case in point here in Honduras there is fierce competition between Pepsi Cola and Coca Cola, but when it comes to raising the price of the procuct both companies agree on what they will charge for the product so that both companies offer the same product for the same price always, the same happens with phone companies. Now if things were fair don't you think they would lower their prices against their competitors price to get a larger share of the market? But they are not interested in that, all they want is to get as much money from consumers as they can. so this free market thing isn't as great as people seem to think it is, it is just as always, the rich getting richer off of the masses.
I remember in the '80's Chiquita Brands left Costa Rica on the pretext that the unions were asking for too much and the government was taxing too much. This was used here in Honduras by the banana companies to pressure for a reduction in taxes and decrease the power of unions, this did happen. But the result was that 10 years later Costa Rica without Chiquita was producing more than twice as much bananas as Honduras and their workers were making 2-1/2 times more money.
I have no problem paying taxes, and neither should a company. I think we have forgotten that a company does not only exist to make its owners a profit, a company exists at the pleasure of a social fabric where the company has ethical obligations beyond profit.
This isnt socialism, this is what we should consider to be rational thinking. If we take the pure profit angle, we move back to 18th century industrial revolution Britian, where if the dangerous machine you are working on cuts your arm off, you get fired because one-armed employees are less efficient than two armed employees.
Everyone should be happy to pay taxes, provided the state provides good value for what is being contributed. I see party politics as the primary barrier to getting value from taxes. Every few years governments change, and the new lot come in and re-organize everthing that the old lot just finished
fucking upbuilding. Consider school meals for children; party A says every school must provide food for every child, so large canteens and cooking equipment is installed, maintneance contracts and staff are organised, practical hurdles overcome, parents convinced and so on. Within no time at all another government comes along, and says that school meals are not for everyone because its prooved too expensive, and more money is spent dismantling infrastructure, terminating contracts, paying off employees and so on.Polititians are the problem, not taxes. Polititians who only care about their time in power and pushing their own agendas. If we remove polititians from government, we can start spending taxes properly, and the tax burden will reduce.
Efficiency is what we need.
Shit, I've got to stop reading or my voting power is just going to go to zero.
Yes, exactly, you are 100% correct.
The problem here in Murica is that the US$ is still, somehow, the reserve currency of choice and the Government doesn't rely on tax revenues to support it's programs.
It merely creates money out of thin air and the People's Will can be ignored.
I would expect then, that the Finnish government will eventually have to obey the market forces and change.
I'm afraid the consequences here are going to be much worse than most people can imagine.
Can't all of the fundamental principles you just expressed also be applied to the Universal Basic Income?
How is that going to play itself out there?
Good article. You are so right, In Ireland, the straw that broke the camels back was the WATER CHARGES the government tried to bring in.
The people finally rose up in their tens of thousands and took to the streets. Week in, week out, rain sleet and snow the people marched until the government backed down but not before they spent over 700 million euro installing a water meter in every house.
The campaign suspect the government will try again in a few years.
For most of the part I may agree with you, as it's true that people will always find ways and other roads to do what they want (your point of "their breaking point").
"Businesses are not in business for you, they're in business for themselves." - True, but every industry has rules and regulations a business has to follow. In the end businesses are created for profit FROM YOU - the end user. There is no ifs or buts about it.
With taxes - it simply comes to a good, working model (yes, created by the government).
It's just not the matter of "tax the rich more" but give "the poor" (or the less fortunate by whatever reason) a fairer chance. For example if your business wants to build machines in China, then sell them in China and see how much profit you're gonna make. What is the fair trade here? Every item that is imported from somewhere must have "fees" that are way higher than local production. I am against giving the work away (anywhere on Earth) then bring it back to your people as the end consumer. That's not the way for society, definitely not a way for your people to prosper (disregarding which your country (community) is).
Businesses are always moving where they can profit the most. Period. (and we see this occurrence more and more for the past 20 years due to digitalization and easy global communication as well).
Another thing with the alcohol example in your post (which I liked as an example btw), you can buy limited quantity for consumption, but not tons of it since then it will be simply considered a contraband.
Makes economic sense to me. Raising taxes results in aggressive avoidance schemes & lowering them doesn't produce enough.
Great post!
Higher taxes reduces the incentive to work often
That, too, of course. Taxing alcohol and cigarettes reduces the incentive to buy alcohol and cigarettes, while taxing labour..
Well said. That's exactly why companies are moving from the US to Ireland and other very low tax locations. And by move, I mean move on paper...physically they can be anywhere.
This is also why reporters and whoever else comes up with estimates for what a particular tax code will actually bring in are so far away from reality.
I think there are those who are not interested in the economy and instead interested in maximizing their worldview, and thus the moral output generated from society. Money, economies and markets don't mean anything, only 'ethical' outcomes. With that thought, it is hard to justify this in the face of reality, as much as we want to be upstanding citizens.
I feel this is driving the minimum wage debate in the US, as an example.
I was just telling an artist the other day, that people will impulse buy, (without blinking) an art book that is priced the same or below what they will spend on a meal at a restaurant. That is the way to gauge pricing in retail.
Especially if there are tons of social welfare programs. No incentive to work if they are gonna take most of it.
In Philadelphia, a city near me, they instituted a tax on "sugary drinks" (sodas, sports drinks, energy drinks, etc) at the rate of $.015 per ounce. So a 24 pack of 12 ounce cans which may normally cost $6.50 would have an extra $4.32 of tax on it (plus the city adds another 6% sales tax, in addition to the state's 6% sales tax). Needless to say, it killed the retailers and opened up a black market.
Now the the coca cola and pepsi bottling plants in the city are laying off people, and the city is getting less revenue than before, and more people are out of a job.
Even a 3rd grade student could see that was going to happen, but the papers report it as an "unexpected consequence". Absolutely ridiculous.
Great post!! Keep it up :)
By the way, I'm following you now
Cheers
The same thing is true on the other end of the spectrum. It's true that taxes can become prohibitively high, which effectively stifles economic activity. When taxes are too high and resulting in dead weight loss, a decrease in the tax burden can increase economic activity and actually generate more tax revenue. But past a certain point, that doesn't hold true. When economic activity isn't being suppressed by exorbitantly high taxes, there is little benefit to decreasing taxes. It actually has unintended consequences like encouraging hoarding and/or speculation. The multiplier on tax cuts is often below one... meaning, for every dollar of taxes that is cut, it stimulates less than one dollar of economic activity. In that case, lowering taxes will not increase revenue, either...