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My interpretation of the argument being made against me is that they mean the tax rate(s) on corporate earnings is baked into product prices.
We do, and it is.
I worked for 13 years in a design & manufacturing environment at Harris. Everything which gets built has a couple of factors attached to it that exactly describe what you are (I think) claiming doesn't happen.
Materials which move through the facility have Overhead attached to them. Overhead is all of the ancillary costs of doing business which aren't directly related to the cost of the material itself. The utility bill, the building lease, the cost of servicing loans, the cost of paying for non-revenue departments like accounting / legal / marketing, etc. And of course, the various corporate earnings taxes are a part of this.
Labor performed within the facility has a Burden attached to it. Burden is all costs of having an employee other than direct compensation. So stuff like insurance benefits, pension or 401k contribution, paid time off, and so on. The employer-funded half of payroll tax also falls into this category.
I can assure everyone here that both overhead and burden are directly factored into the cost to design and manufacture a product, and of course this is the cost which is used in computing margin, which is a direct input into the process of calculating the price of the product.
If you increase any of the costs associated with producing and selling a product, then either the margin goes down, or the price goes up, or both.
Different companies in different markets obviously handle this in different ways. In a market which is highly competitive and highly price-sensitive, like retail sales, companies will usually take the margin hit and then figure out how to reduce cost later.
In a market like gasoline sales, we all get to see the result of this every day; when cost goes up, price goes right up to track it. Any nerds here remember when computer stores used to have a chalkboard behind the counter showing the daily price of RAM?
Things like wholesale distribution of sexual lubricant, electric vegetable peelers and cat toys no doubt all fall along a spectrum in between these two extremes.
Corp taxes including income, payroll, property, (and now healthcare) etc. are all calculated into the COST prior to markup of the product to the consumer. Anybody who's ever analyzed their P&L would know that.
After those costs are raised due to increased taxes the subsequent price to the consumer is increased.
When people think corporations pay taxes, I laugh. They are baked into the price of goods, so we just pay more tax as the consumer.
If the US Corporate income tax (already the 2nd highest in the world), was suddenly increased 10%..........................yeah, you're right. The price of goods wouldn't go up. *rollseyes and DOESN'T wonder why I drink*
This is what started my response, and he was talking about INCOME tax.
Taxes on company land, etc, I assume (not a CPA), could be classified as an operating expense and that would impact the product price, BUT taxes on income from the sale of the product is NOT a product cost.
Taxes on operations, yes I agree get priced into a product.
Taxes on NET INCOME, which started this whole debate, do not get priced into the product.
Here's a challenge: pick any public, for-profit company in the USA. Go to sec.gov. Find their gross margin (Sales-COGS) on their income statement, and also find the corporate income tax rate that they paid. For the argument that corporate income tax is priced into products, the gross margin MUST be higher than their income tax rate. Good luck!
Taxes on NET INCOME, which started this whole debate, do not get priced into the product.
I'm curious as to which company you work, where this is the case?
Because my direct experience (as stated at the top of this page) is that yes, taxes on corporate earnings fall into the same overhead bucket as fuel costs, debt service, and bribing foreign officials.
Things like wholesale distribution of sexual lubricant, electric vegetable peelers and cat toys no doubt all fall along a spectrum in between these two extremes.
ALL expenses including anticipated income tax are added into overhead costs which are used in the net margin calculation from a cost accounting perspective. Obviously, prices cannot just be raised on every product to account for increased taxes because the market will not always bear it. This is related to the specific price elasticity of a specific good which is affected by all sorts of things like viable substitutes and whether or not it is considered a luxury good. However, all industries have target margins based on the perceived risk of investment and the current state of the industry. If these margins cannot be hit the decision to divest from a certain product line, region, or industry as a whole may be made. All large companies have fairly large departments of highly paid finance and tax professionals who's sole job it is to minimize the tax burden and ensure that those taxes are properly accounted for in company forecasting and pricing. The costs always flow to the consumer if possible. In most cases, it is possible.
Read any income statement of any company. Adding income tax into sales prices creates a circular reference, and I absolutely guarantee you that no one in their right mind iterates to the limit of the price/tax correlation (like I just did) in order to price their product.
And seriously, did you say that income tax is an overhead cost...and that you're a CPA?
Saddened and more than a little wistful, Senate Republicans acknowledged on Tuesday that their long-standing dream of keeping poor people from living longer was at its end.
Choking back tears, Senator Lindsey Graham admitted that his crusade to halt the longevity of the poor had turned out to be a quixotic one at best.
“We made a solemn promise to the American people that we would do everything in our power to keep the poor from living so darn long,” he said, his voice quavering. “We didn’t get it done.”
While saying that he did not want to “play the blame game,” Graham could not resist pointing fingers at senators who broke ranks with the G.O.P. leadership over its quest to stall the poor’s unacceptably surging life expectancy.
“I always thought that preventing the poor from living longer was a bedrock Republican principle,” he said bitterly. “I guess I was wrong.”
On the House side, Speaker Paul Ryan urged Graham not to wallow in defeat but to move on to other Republican agenda items, like tax reform. “We may not be able to keep the poor from living longer, but we can still make them poorer,” he said.
Read any income statement of any company. Adding income tax into sales prices creates a circular reference, and I absolutely guarantee you that no one in their right mind iterates to the limit of the price/tax correlation (like I just did) in order to price their product.
Circular? From one point of view perhaps. This used to drive me nuts as a designer, it’s just how accountants work.
But if you think of it instead as a feedback system, it starts to make sense.
The mortgage payment on the building never changes. The electric bill is about the same from year to year, as is the finance cost on the equipment in the building. So are the salaries of the legal department, etc.
The amount of product which I manufacture, and the unburdened cost of the product, are variable.
Let’s say that the fixed cost of running my business (paying all the bills and salaries) is $100,000 per year. And we’ll say that my target margin on all goods sold is 50%.
Historically, my business has been selling about $400,000 worth of feline sex toys per year. That’s $400,000 in receivables.
At the beginning of the year, accounting looks at this history and says that in order to hit my target margin, the total cost of manufacturing and selling the toys has got to be $200,000. $100,000 of that is already spoken for as overhead and burden, so that means that the gross costs associated with the product (materials & labor) has got to be $100,000.
To break it down, here’s what our numbers looked like for the prior year:
Units sold: 20,000
Retail price per unit: $20
Revenue: $400,000
Labor & materials: $100,000
Fixed costs: $100,000
Thus, accounting determines that my overhead & burden rate is 100%. If I design a feline sex toy that costs $5 in labor and materials, they’re going to tack on another $5 worth of burden & overhead (net cost is now $10), and we’re going to sell it for $20 to achieve our desired margin.
Now, let’s say that I, as the director of engineering, figure out how to reduce the actual cost of the toy from $5 to $2.50, by using unsafe materials and exploiting my old mafia connections to break the union. I apply the same overhead & burden rate of 100% for a computed net cost of $5 (down from $10), and report to my VP that I’ve just cut our costs in half.
Because we’re an awesome company, we decide to pass these savings along to the customer. So we start the product for $10 instead of $20. On paper, we’re still nailing our goal of 50% margin. Because there is elasticity in the demand for feline sex toys, we ship 25% more products that year.
So, here’s the new breakdown:
Units sold: 24,000
Retail price per unit: $10
Revenue: $240,000
Labor & materials: $60,000
Fixed costs: $100,000
Dqfuq? Even though I cut our direct costs in half, and increased sales by 25% by passing along that cost reduction, we made less money. Why? Because I believed that the overhead & burden calculations were true.
So the company fires me, and the accounting department immediately re-computes the burden & overhead rates. The director who replaces me uses these new numbers, and determines that it is now impossible to achieve our desired margins. She reports this to her VP, who has a sit-down with the heads of sales and marketing, and the decision is made to re-brand our products as “lifestyle goods” in order to justify raising the retail price back up.
This is successful, and the company’s margins are higher than ever. At the following year’s shareholders meeting, the CEO reports this to the board and to the shareholders, and is rewarded with a handsome bonus package.
Read any income statement of any company. Adding income tax into sales prices creates a circular reference, and I absolutely guarantee you that no one in their right mind iterates to the limit of the price/tax correlation (like I just did) in order to price their product.
And seriously, did you say that income tax is an overhead cost...and that you're a CPA?
I'm not talking about financial reporting and it's not accounted for as an overhead cost when computing unit cost so maybe that was a poor choice of words. It is accounted for when there are internal calculations for ROI when analyzing whether a product is worth investment.
Read any income statement of any company. Adding income tax into sales prices creates a circular reference, and I absolutely guarantee you that no one in their right mind iterates to the limit of the price/tax correlation (like I just did) in order to price their product.
And seriously, did you say that income tax is an overhead cost...and that you're a CPA?
It is, and it is even tested on the CPA exam. I know because this year I've taken BEC and FAR, and it is tested in both sections.
There are plenty of circular references in the accounting world (SE Health Insurance with an ACA subsidy anyone?), and businesses absolutely factor income tax costs into the pricing of their products. However it is generally an assumed rate based on historical information rather than calculating the marginal tax on each widget. If income tax rates rise, the company will need to figure out how to compensate for that in order to keep the expected return to shareholders.
Well just in time and sure to liven up the debate on taxation. I, for one, can't wait to see how I'm going to get f***ed over. At least corporations will now be able to reduce selling prices due to the lower corporate rates [sorry, tongue in timely cheek snarkiness ]
Read any income statement of any company. Adding income tax into sales prices creates a circular reference, and I absolutely guarantee you that no one in their right mind iterates to the limit of the price/tax correlation (like I just did) in order to price their product.
And seriously, did you say that income tax is an overhead cost...and that you're a CPA?
Seriously, you're doing a great job.
Originally Posted by Joe Perez
But if you think of it instead as a feedback system, it starts to make sense.
Before 2009, football players standing for the national anthem wasn’t even a thing. The teams stayed in the locker room until after “and the hoooome of the braaaave,” and then ran onto the field. No one was offended, and no one was on cable news eliciting tears from disrespected military families. But then, the Department of Defense and the National Guard got involved. They began to pay the NFL millions of dollars to have ostentatious flag ceremonies before games.
In 2015, Senator John McCain and the Senate Oversight Committee issued a statement and corresponding report condemning practice of “paid patriotism,” as charades, “conducted not out of a sense of patriotism, but rather done “for profit in the form of millions in taxpayer dollars going from the Department of Defense to wealthy pro sports franchises.”
The report continued to detail its findings:
Unfortunately, contrary to the public statements made by DOD and the NFL, the majority of the contracts—72 of the 122 contracts we analyzed—clearly show that DOD paid for patriotic tributes at professional football, baseball, basketball, hockey, and soccer games.v These paid tributes included on-field color guard, enlistment and reenlistment ceremonies, performances of the national anthem, full-field flag details, ceremonial first pitches and puck drops. The National Guard paid teams for the “opportunity” to sponsor military appreciation nights and to recognize its birthday. It paid the Buffalo Bills to sponsor its Salute to the Service game.vi DOD even paid teams for the “opportunity” to perform surprise welcome home promotions for troops returning from deployments and to recognize wounded warriors.
Ultimately, the Senate was pretty clear in its conclusion that “paid patriotism” was not only distasteful, but also a gross misuse of taxpayer money:
Even if we accept the DOD’s assurances that the young men and women watching these games may be sufficiently inspired to military service by a half-time reenlistment ceremony, some of the displays funded in these contracts defy explanation as a legitimate recruiting purpose and may be little more than a taxpayer-funded boondoggle.
Senator McCain said it best:
Given the immense sacrifices made by our service members, it seems more appropriate that any organization with a genuine interest in honoring them, and deriving public credit as a result, should do so at its own expense and not at that of the American taxpayer. Americans deserve the ability to assume that tributes for our men and women in military uniform are genuine displays of national pride, which many are, rather than taxpayer-funded DOD marketing gimmicks.
09-27-2017, 12:45 PM
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