Final nail in the coffin of "trickle down theory"

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Well, that would be a literal interpretation of the term. For a little more background if you care to know: Correlations are usually represented as R2 (that's R squared - I can't do superscripts), and can range from -1 to +1. +1 means a completely positive correlation: as the one factor increases, the other does by an identical amount. -1 is a complete negative correlation, as one factor increases the other decreases by an identical amount. (Note that getting +1 or -1 is nearly impossible - I've never seen a study with a R2 value of +1 or -1. Also the minus sign is there to show it is a negative correlation; you obviously cannot square any number and come up with a negative result.)

Of course, for all numbers in between, there may or may not be a statistically significant correlation. An R2 value of 0 means absolutely no correlation either way, and that's almost as hard to acheive as a +1 or -1. It varies greatly depending on the sample size and methodology, but a good rule of thumb is that you need an R2 value of a at least 0.2 (either positive or negative) for it to be considered statistically significant. Anything less and it is typically considered statistically insignificant (meaning that the correlation could be due to random chance).

 

That depends on a few factors. Obviously there will be less sales if prices increased dramatically over a short period of time, but if market power is largely held in a few hands, or if the product could be considered a necessity, is addictive, or simply really popular the decrease in sales won't be so dramatic, especially since tax increases are almost never very high anyways. It almost seems like you have to "fight" with buisness to actually extract revenue, but again this is going off topic and isn't relevant.

I would actually have to agree with Gaer on this subject, however, when he said that this was a case of indiscretion. I'm perfectly willing to admit that i'm against the neoliberal ideology, for reasons that are more evidentially sound than this subject. I came into this with a bias, and though many people do the same, I try to keep myself from such fallacies and will remember to do so in the future.

 

To be fair, the argument that small increases in business taxes translates into exponentially larger increases in consumer costs ignores a very large and very crucial point. Monopolies are not legal, and brand loyalty isn't what it used to be. Higher taxes (on profit) can cause prices to rise or wages/benefits to drop. The flip side, however, is the assumption that every company, every employer, will uniformly cut benefits or raise prices. Manufacturers and retailers don't work in a vacuum, and they are not cartels. They have to deal with competition and, more to the point, with competitor pricing. While some employers will almost certainly choose to preserve their profit margins, others will take a page from Wal-Mart. By not raising their prices, some companies will see an increase in volume at the expense of profit per unit, effectively edging their competitors out, expanding their customer base, and increasing their net profit. As a result, those competitors will, in order to stay alive, reduce their prices back to a more "reasonable" level. Thanks to competition, the central pillar of modern capitalism, instituting a fair corporate tax while simultaneously removing exploitable loopholes will not affect pricing nearly as much as the supply siders would have us believe.

Benefits are not what they used to be, so it is unlikely that we would see them drop. Moreover, we are unlikely to see drastic cuts in worker pay, either, since not all employers will make those cuts -- and company loyalty on the employee end is also not what it used to be. Training new employees to replace the ones that left for a fatter paycheck somewhere else is expensive. Cutting wages, reducing benefits, or eliminating jobs also makes for really bad PR.

 

Agreed.

 

Drew, your points are certainly applicable for private companies where the owner can accept lower profit margin for higher overall profit. But publically traded companies cannot use such simple calculations -- investors want to see things like margin dollars and return on investment on a quarterly basis (Wall Street investors are too intelligent to be fooled by companies just making money ). Prices are usually dictate by supply and demand; once the demand will no longer command a price necessary to maintain profit margins I'll usually see one of two statements:

1. Profits for Brand X are down due to higher regulatory requirements and pressures from raw material suppliers.

2. Profitibility of Brand X continued to decline and the brand was divested to allow for investments into more profitable sectors of the market.

Comment 1 is a big negative and most investors run away from companies who will retain a low margin business while comment 2 is seen as a proactive stance. Companies will nearly always pass increases down to the customer (although they may do it incrementally); if the product cannot command a high enough price to satisfy investors the product is eliminated from the line.

 

T2, don't get me wrong -- I'm not suggesting that costs will not go up. The reality of the situation, though, is that closing up loopholes will more or less cut against every publicly traded company equally. As such, it is unlikely that this will cause anything more than mild annoyance among wall street investors. I'm not talking about returning the tax rates to pre-Harding levels or, for that matter, necessarily bumping the rate at all. We can raise a lot of revenue by simply shoring up loopholes and reducing corporate welfare. As a percentage figure, our corporate tax rate is probably just fine and, after shoring up the exploitable loopholes, we may even have just cause to reduce the rate a little, which would help the smaller companies constantly losing ground to larger competitors capable of structuring their finances and activities in such a way that they pay less taxes than they should.

As it stands now, some companies pay their full tax requirement while others find ways to pay very little, pay nothing at all, or get paid themselves. Some of this is unavoidable where personal income taxes are concerned, because a person who lives below the poverty line still has to eat while a business that "breaks even" does not absolutely need to close its doors (since we're talking about corporate taxes, it can be reasonably assumed that the owner of a smaller corporation will put himself on the payroll), but it really isn't excusable for large, profitable, and massively successful corporations like GE to be getting paid at tax time rather than paying their fair share.

 

I think the biggest loophole I'd like to see closed is the "off shore" manufacturing. Where companies basically outsource (or even produce the products themselves) in countries with lower standards for the environment and employee welfare. The current rage is outsourcing to Viet Nam. Those products (whether made by a US company or not) should be taxed to make-up the difference. The gap is closing to some extent, but not enough.

 

Absolutely, but closing that type of loophole wouldn't be easy. Tariffs often backfire, particularly when they are applied unevenly, and will almost certainly lead to unnecessary litigation both from the affected country and the affected corporations. Moreover, the affected nations and nations friendly to them would almost certainly reciprocate the tariffs.

Wherever possible, we should use a carrot instead of a stick. The carrot looks more expensive at first, but companies will do anything they can to get rid of the stick. They'll challenge it in court, look for loopholes, do anything they possibly can to circumvent both the letter and spirit of any new tax or regulation. By contrast, no company is going to try to circumvent a carrot.

Our best bet would probably be to put pressure on (in other words, buy off) the governing elites in countries that benefit from western companies stepping in to exploit the lower manufacturing standards within their borders. A fat enough check can encourage such governments to raise safety and environmental standards within their borders without running the risk of pissing off the business community or alienating their governments. If American companies operating overseas still had to meet American safety and environmental standards, a lot of them wouldn't bother exporting those jobs. The countries that stand to benefit from the US business presence could just as easily benefit from US aid earmarked for infrastructure improvements contingent on raising environmental and labor standards.

 

What you are talking about is called protectionism and is generally frowned upon. It would backlash quite severely. If the US start putting tariffs on products made in other countries what do you think other countries would do on products made in the US? It would be a severe blow to international free trade.

 

The US Government already does this. Just in a more covert way. It's called Anti-Dumping(ADD) and Counter-Veiling Duties(CVD).... it helps force American companies to do business in America. Bearings are a great example. Almost every moving part requries Bearings. They are needed in industry the world round. The ADD hits American companies take on goods from flagged foreign companies around the world are nasty. They extra duties to import to the US can cost up too as much as 200% of the costs of the goods themselves. Try forecasting that into your numbers and come up with a profit margin. Every American company who is a heavy importer has eyes on ways around ADD/CVD, as the hits can be huge. Clinton's adminstration is the one who really started enforcing it. these days, CBP and the US Governmanet need money, so its the biggest flag they are checking right now. Importers, fear the audit....

 

There're also the Buy American provisions of the American Recovery and Reinvestment Act and the new proposed American Jobs Act.

 

I hope that isn't the message you were taking from my post, Joacqin, since I was advocating the opposite of protectionism, citing the dangers of it backfiring. I did pretty explicitly refer to reciprocal tariffs. My suggestion was to put pressure on nations with lower safety and environmental standards to raise them by offering them big, fat aid checks earmarked for infrastructure improvements and contingent on raising environmental and safety standards. The only way to bring a corrupt government to your way of thinking is to buy it off, after all.

Good lord, I'm sounding like a Neo-Con...

 

I think protectionism is really only frowned upon when the US does it. My company runs into it all the time in Europe. Some things only go one way across the pond.

 

Protectionism is great -- until you're the one trying to sell something and the one who a country is protecting itself from!

 

I was more speaking to T2 Drew as for other countries doing it, of course. I think the US is among the "worst" simply because they can get away with more as more countries are dependant on them than the other way around but every country tries to get away with as much as possible. From the point of view of each individual country it is great if everyone else follows free trade ideas except them.

Subsidizing is one very common way of screwing over other countries, especially when it comes to food production something the EU does a lot of which in many places around the world are running local food producers out of business as they can't produce food to compete with subsidized American and European prices.