85% of Global Wealth in hands of 10%

[TheBZ]

If you read the news fairly regularly, I'm sure that you have already come across this article. However, I wanted to put it up here because we've got some topics that are withering on the vine.

Ideally, I would have wanted to tie this article together with one I read a couple of days ago, attributing much of the continuing movement towards democratic socialism (and putting nationalism before globalism) in South America to the economic exclusion for majority segments of the population(s).

What could make more sense, really...If the majority is so much poorer than a minority, would they not vote for a government that promises to redistribute wealth more equally?

[url="http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Layout/Article_Type1&c=Article&cid=1165316588765&call_pageid=968332188492&col=968793972154&t=TS_Home"]http://www.thestar.com/NASApp/cs/ContentSe...4&t=TS_Home[/url]

[quote][b]85% of global wealth in hands of 10%[/b]
[i]Yawning gap remains between assets of rich and poor, report says[/i]
Dec. 5, 2006. 04:36 PM
ASSOCIATED PRESS


LONDON — The richest two per cent of adults still own more than half of the world's household wealth, perpetuating a yawning global gap between rich and poor, according to research published Tuesday.

The report from the Helsinki-based World Institute for Development Economics Research shows that in 2000 the richest one per cent of adults — most of whom live in Europe or the United States — owned 40 per cent of global assets.

The richest 10 per cent of adults accounted for 85 per cent of assets, the report said.

By contrast, the bottom 50 per cent of the world's adult population owned barely one per cent of the world's wealth.

"Income inequality has been rising for the past 20-25 years and we think that is true for inequality in the distribution of wealth," said James Davies, a professor of economics at the University of Western Ontario in London, one of the report's authors.

"There is a whole group of problems in developing countries that make it difficult for people to build up assets, which are important, since life is so precarious."

The gulf between rich and poor nations has long concerned politicians and economists, who say it is one of the biggest obstacles to development.

But Davies said there are some hopeful signs: China and India, which are developing rapidly, are gaining wealth and in countries like Bangladesh, the spread of micro-credit institutions — which make small loans to low-income earners — is helping people to increase their personal wealth, he said.

In other countries, land registration programs allow the poor to own land for the first time, he said.

According to the report, individual assets of $2,200 placed an adult in the top half of the world's wealth distribution in 2000.

Those in the richest 10 per cent of adults had assets of $61,000 or more while those in the top one per cent — who now number 37 million — had at least $500,000.

Researchers defined wealth as the value of physical and financial assets minus debts.

Household wealth in 2000 was valued at $125 trillion, equivalent to roughly three times the value of total global production, or to $20,500 per person, the report said.

Average wealth in the United States amounted to $144,000 per person in the year 2000, and $181,000 in Japan, it said.

In India, the figure was just $1,100 and in Indonesia, per-capita wealth was $1,400.

Even among high-income nations, the amounts vary, from $37,000 per person for New Zealand and $70,000 for Denmark to $127,000 for Britain.

The world's wealth is heavily concentrated in North America, Europe and the high-income Asia-Pacific countries, which hold nearly 90 per cent of the total world wealth, and where almost all the world's richest individuals live, the report said.

Although North America has only six per cent of the world's adult population, it accounts for 34 per cent of household wealth.

China occupies much of the middle third of global wealth distribution, while India, Africa and the low-income Asian companies dominate the bottom third.

Anthony Shorrocks, another of the report's authors, said despite its rapid growth, China does not yet feature among the super-rich because average wealth is modest and evenly spread by international standards.

"However, China is already likely to have more wealthy residents than our data reveals for the year 2000, and membership of the super-rich seems set to rise fast in the next decade," Shorrocks said.[/quote]

[Homer_Rice]

[url="http://today.reuters.com/news/articlenews.aspx?type=newsOne&storyID=2006-12-05T131213Z_01_L05333100_RTRUKOC_0_US-WEALTH-SURVEY.xml&WTmodLoc=Home-C2-TopNews-newsOne-8"]A similar piece via Reuters:[/url]

[quote]Richest 2 pct own more than half the world: study

HELSINKI (Reuters) - Two percent of adults have more than half of the world's wealth, including property and financial assets, according to a study by the U.N. development research institute published on Tuesday.

While global income is distributed unequally, the spread of wealth is even more skewed, the study by the World Institute for Development Economics Research of the U.N. University said.

"Wealth is heavily concentrated in North America, Europe and high income Asia-Pacific countries. People in these countries collectively hold almost 90 percent of total world wealth," the survey showed.

The Helsinki-based institute said its study was the first global research on the topic, for which there is only limited data.

"We've estimated that the richest 2 percent of adults own more than half of global wealth, while the bottom half own 1 percent," said institute director Anthony Shorrocks.

He likened the situation to that where, in a group of 10 people, one person has $99, while the remaining nine share $1.

"If you think income has been distributed unequally, wealth has been distributed even more unequally," Shorrocks said.

According to the study, in 2000 a couple needed capital of $1 million to be among the top 1 percent on the wealth list -- the richest 37 million people in the world.

More than one in every two of those people lives in the United States or Japan.

And it found that net assets of $2,200 per adult would put a household in the top half of the world wealth distribution.[/quote]

[Jamie_B]

Just to add... (although I still stick to the notion that a slimer more streamlined goverment that doesnt reproduce efforts and only raise taxes when the real waste is cut is the better way to go)


[url="http://www.cbc.ca/money/story/2006/12/06/tax-policyalternatives.html?ref=rss"]http://www.cbc.ca/money/story/2006/12/06/t...es.html?ref=rss[/url]

[quote][size=3]People in highly taxed countries better off: report[/size]

People who live in countries with higher taxes enjoy lower rates of poverty, have more equal income distribution, more economic security for workers and can expect to live longer, suggests a new study from a left-leaning think tank.

Written by two Toronto tax law professors for the Canadian Centre for Policy Alternatives, the report, released Wednesday, is blunt.

"Tax cuts are disastrous for the well-being of a nation's citizens," say authors Neil Brooks and Thaddeus Hwong.

The study compares four high-tax Nordic countries (Sweden, Norway, Denmark, and Finland) with six low-tax Anglo-American countries (the U.K., U.S., Canada, Ireland, Australia and New Zealand).

The four Nordic countries scored better than the lower-taxed countries on most of the 50 indicators measured in the report, including:

Rate of poverty, equality of income distribution, and economic security for workers.
GDP per capita.
Rate of household saving and net national saving.
Innovation, including percentage of GDP spent on research and development.
Growth competitiveness as ranked by the World Economic Forum.
Rates of secondary school and university completion.
Rate of drug use.
Leisure time.
The more lowly taxed countries came out on top in seven of the 50 indicators, including their sense of freedom, their suicide rates and the number of people reporting they are very happy.

Canada below OECD average
Of the high-income OECD countries studied between 1990-2002, Japan and the U.S. had the lowest tax rates, at 26.8 per cent and 28.0 per cent of GDP respectively.

Canada was ranked in the low-to-intermediate level at 35.7 per cent, close to the levels recorded in the U.K., New Zealand and Spain.

Countries with higher tax revenues included Norway (41.9 per cent), France (43.4 per cent) and Finland (46.2 per cent). Sweden topped the list at 50.5 per cent.

Report compares Finland, U.S.
The report also compares social and economic conditions in Finland with those of the United States, which has one of the lowest tax rates of industrialized countries.

The U.S. has a greater percentage of people living in poverty, lower incomes for the elderly and the disabled, less economic security for workers, fewer women in professions and senior civil service and "shockingly" unequal income distribution, says the report.

In the U.S., 17 per cent of individuals live below 50 per cent of the country's median income; in Finland, that number is 6.4 per cent.

Finland, by contrast, reports a lower percentage of people living below the poverty line, more equal income distribution between the elderly and disabled and the rest of the population, high economic security for workers and more women in senior civil and legislative positions.

Americans also have one of the lowest life expectancies among industrialized countries, two years behind Finland and three behind Canada.

"The United States spends over twice as much of its GDP on health care than Finland (15 per cent versus 7.4 per cent), and yet U.S. health care outcomes remain far worse — indeed, worse than most other industrialized countries," it says.

Workers in the Anglo-American countries also spend more time on the job, clocking on average 1,824 hours per year. This is 274 hours more than the Nordic average.

Canadians spend 1,736 hours on the job every year.

"By cutting taxes, the Conservative government is taking Canada in the wrong direction," says Brooks. "It wants to make Canada more like the United States, yet our findings show that Americans bear severe social costs for living in one of the lowest taxed countries in the world."

Best known for its annual alternative budget, the Canadian Centre for Policy Alternatives has issued news releases in support of the Kyoto Protocol, and against the softwood lumber agreement and NAFTA.[/quote]

[TheBZ]

[quote]The study compares four high-tax Nordic countries (Sweden, Norway, Denmark, and Finland) with six low-tax Anglo-American countries (the U.K., U.S., Canada, Ireland, Australia and New Zealand).

The four Nordic countries scored better than the lower-taxed countries on most of the 50 indicators measured in the report, including:

Rate of poverty, equality of income distribution, and economic security for workers.
GDP per capita.
Rate of household saving and net national saving.
[b]Innovation, including percentage of GDP spent on research and development. [/b]
[b]Growth competitiveness as ranked by the World Economic Forum.[/b]
[b]Rates of secondary school and university completion.[/b]
Rate of drug use.
Leisure time.
The more lowly taxed countries came out on top in seven of the 50 indicators, including their sense of freedom, their suicide rates and the number of people reporting they are very happy.[/quote]

I think the three that I bolded are extremely significant; if only because it has long been an argument of hyper-capitalists that a lack of taxation and greater corporate autonomy leads to a certain 'competitive edge'.

If these countries are producing more educated people, with more opportunities for them to innovate and invent (through R&D); with the acknowledgement of their growth competitiveness on a global economic level...I just can't buy the corporate model as the 'winning solution' for innovation and competition.

The only way I see this fallacy continuing to thrive is through the North American marketing/advertising insistence that 'winning against others' is somehow inherently more valuable than 'winning against yourself'.

It is a pretty hollow economic/social victory to come out ahead of the segments of the population that start with so little...So if you are inventive, creative or innovative; aren't you really just competing against your own ability to be productive?

I just don't understand then...What does a massive corporate model offer, other than a competitive playing field that already exists in other countries without massive corporate controls?

BZ

[Jamie_B]

[quote name='TheBZ' post='402589' date='Dec 7 2006, 12:52 PM']I think the three that I bolded are extremely significant; if only because it has long been an argument of hyper-capitalists that a lack of taxation and greater corporate autonomy leads to a certain 'competitive edge'.

If these countries are producing more educated people, with more opportunities for them to innovate and invent (through R&D); with the acknowledgement of their growth competitiveness on a global economic level...I just can't buy the corporate model as the 'winning solution' for innovation and competition.

The only way I see this fallacy continuing to thrive is through the North American marketing/advertising insistence that 'winning against others' is somehow inherently more valuable than 'winning against yourself'.

It is a pretty hollow economic/social victory to come out ahead of the segments of the population that start with so little...So if you are inventive, creative or innovative; aren't you really just competing against your own ability to be productive?

I just don't understand then...What does a massive corporate model offer, other than a competitive playing field that already exists in other countries without massive corporate controls?

BZ[/quote]


I’m not sure a massive corporate model is what I’m offering here, I’m speaking solely as someone who has seen the waste for my 10 year career here in DC now. Ask yourself this, why do the services each need separate helicopters with different contractors running up separate bills? Would not a joint helicopter that serves the purposes of each branch be suffice and save the tax payer a little money in return or even use that savings in areas that could help (like maybe healthcare)? This is just one example because if we did a massive audit by a non bias party I'd be willing to bet a lot money could be found that is spent on useless things. It goes to how congress appropriates money. If I get 500 million for my needs in one year, if I happen to save the government money in the next year, (lets say I save them 10 mil in that year) then in year three I only get 490 million. Well if I’m a manager I say to myself, "what happens if I need that 500 million in year three??) Thus I will spend it and many times it gets spent on very frivolous stuff. We need some sort of bipartisan committee to come up with an alternative that allows for us to give the money back that isn’t spent while still being able to get what I need to effectively run my area of business.

What I would propose is to allow for the companies/government departments to put that extra money into a savings account (or for you democrats a "lock box" ) and when the work is done if its a company let them keep a percentage to encourage the savings, and if a government department give it back at the end of the contract. You would see a massive change in how money was spent. Streamline this beotch!!

Then add on top of that a cut into reproduced efforts, with the example of the helicopter being just one of many things that I could see that duplicate effort type of things. Another example is these voting machines, do you really need separate ones for every state with multiple contractors doing each again? One machine for the country with one way to vote, save money there. (Seriously how many ways do people vote? A single toughly looked at machine would suffice.)

As much as I hate Rummy he was doing some of this within the DOD. It was the one thing he was doing right.

Mark Warner did some of this here in VA as well and ended up with a 76% approval rating in a “red state”. He also did it while cutting taxes for 65% of us in VA and still turned a turned a $6 billion deficit into a $544 million surplus.

[Guest bengalrick]

[quote name='Jamie_B' post='402611' date='Dec 7 2006, 01:16 PM']I’m not sure a massive corporate model is what I’m offering here, I’m speaking solely as someone who has seen the waste for my 10 year career here in DC now. Ask yourself this, why do the services each need separate helicopters with different contractors running up separate bills? Would not a joint helicopter that serves the purposes of each branch be suffice and save the tax payer a little money in return or even use that savings in areas that could help (like maybe healthcare)? This is just one example because if we did a massive audit by a non bias party I'd be willing to bet a lot money could be found that is spent on useless things. It goes to how congress appropriates money. If I get 500 million for my needs in one year, if I happen to save the government money in the next year, (lets say I save them 10 mil in that year) then in year three I only get 490 million. Well if I’m a manager I say to myself, "what happens if I need that 500 million in year three??) Thus I will spend it and many times it gets spent on very frivolous stuff. We need some sort of bipartisan committee to come up with an alternative that allows for us to give the money back that isn’t spent while still being able to get what I need to effectively run my area of business.

What I would propose is to allow for the companies/government departments to put that extra money into a savings account (or for you democrats a "lock box" ) and when the work is done if its a company let them keep a percentage to encourage the savings, and if a government department give it back at the end of the contract. You would see a massive change in how money was spent. Streamline this beotch!!

Then add on top of that a cut into reproduced efforts, with the example of the helicopter being just one of many things that I could see that duplicate effort type of things. Another example is these voting machines, do you really need separate ones for every state with multiple contractors doing each again? One machine for the country with one way to vote, save money there. (Seriously how many ways do people vote? A single toughly looked at machine would suffice.)

As much as I hate Rummy he was doing some of this within the DOD. It was the one thing he was doing right.

Mark Warner did some of this here in VA as well and ended up with a 76% approval rating in a “red state”. He also did it while cutting taxes for 65% of us in VA and still turned a turned a $6 billion deficit into a $544 million surplus.[/quote]

holy shit that was a good post... seriously, EXCELLENT post... finally some ideas that promote prosperity... as bad of a word as profit is becoming, it is the force that drives us to make things better... although, as i'm sure you will agree, the only way to by moral at the same time is to accept a higher power and to trust your conscience... but w/out competition, we are nothing but robots...

[Jamie_B]

[quote name='bengalrick' post='402645' date='Dec 7 2006, 01:49 PM']holy shit that was a good post... seriously, EXCELLENT post... finally some ideas that promote prosperity... as bad of a word as profit is becoming, it is the force that drives us to make things better... although, as i'm sure you will agree, the only way to by moral at the same time is to accept a higher power and to trust your conscience... but w/out competition, we are nothing but robots...[/quote]


Its somthing Ive wanted to see changed for a while now. However with business funding the campains of these guys, its not likely. The first order of busniess should be REAL campaign finance reform.

[Guest bengalrick]

[quote name='Jamie_B' post='402650' date='Dec 7 2006, 01:58 PM']Its somthing Ive wanted to see changed for a while now. However with business funding the campains of these guys, its not likely. The first order of busniess should be REAL campaign finance reform.[/quote]

the key to making capitalism work imo, is to cut out coorporate contributions... then the politicians are forced to sell the people their plans to get their money...

[Jamie_B]

[quote name='bengalrick' post='402653' date='Dec 7 2006, 02:09 PM']the key to making capitalism work imo, is to cut out coorporate contributions... then the politicians are forced to sell the people their plans to get their money...[/quote]


I can recall a number of years ago a company I was working at was talking with someone to do a security system type of thing that had a piece on it that was techologically incompatable with what we wanted to do. However because one of the people on the comitee (i think a congressmen but its been at least 7 years ago so I dont remember the specifics) had a friend that owned the company that made this reader (finger print reader if i remember right) it was insisted that it be attached to the contract. My boss at the time asked his boss if we could just pay the guy off to not use it, because it really was unfittable with what made technological sence, so we bid the contract without that piece. Needless to say we didnt win. I've always wondered why. [img]http://forum.go-bengals.com/public/style_emoticons/<#EMO_DIR#>/39.gif[/img]

[Guest BlackJesus]

[center][img]http://i83.photobucket.com/albums/j318/Tredcrow/bengals/sharing.jpg[/img]



[/center]

[TheBZ]

[quote name='Jamie_B' post='402650' date='Dec 7 2006, 01:58 PM']Its somthing Ive wanted to see changed for a while now. However with business funding the campains of these guys, its not likely. The first order of busniess should be REAL campaign finance reform.[/quote]

That would certainly cut my criticisms in half, Jamie and Rick.

If doesn't have to be about cutting business off at the knees; but more about assuring that corporations don't have a bigger ($$) say than voters do.

BZ

[Jamie_B]

[quote name='TheBZ' post='405757' date='Dec 12 2006, 09:50 AM']That would certainly cut my criticisms in half, Jamie and Rick.

If doesn't have to be about cutting business off at the knees; but more about assuring that corporations don't have a bigger ($$) say than voters do.

BZ[/quote]


Oh Im in complete agreement with you on that.

[Guest bengalrick]

i agree bz...

[Guest fredtoast]

If you want to see corporations (for example oil companies) spend more on research and developement (like alternative energy sources) then just double the corproate tax rate. That way instead of just taking profits out of the company (and paying taxes on it) they will reinvest it in research and developement (tax deductible business expensis) in order to avoid the tax.

[Guest bengalrick]

[quote name='fredtoast' post='405828' date='Dec 12 2006, 11:52 AM']If you want to see corporations (for example oil companies) spend more on research and developement (like alternative energy sources) then just double the corproate tax rate. That way instead of just taking profits out of the company (and paying taxes on it) they will reinvest it in research and developement (tax deductible business expensis) in order to avoid the tax.[/quote]

and then sit back and watch inflation rise like it hasn't since the great depression...

[Guest fredtoast]

[quote name='bengalrick' post='405832' date='Dec 12 2006, 12:03 PM']and then sit back and watch inflation rise like it hasn't since the great depression...[/quote]

The corporate tax rate drives inflation? How is that?

[Jamie_B]

[quote name='fredtoast' post='405828' date='Dec 12 2006, 11:52 AM']If you want to see corporations (for example oil companies) spend more on research and developement (like alternative energy sources) then just double the corproate tax rate. That way instead of just taking profits out of the company (and paying taxes on it) they will reinvest it in research and developement (tax deductible business expensis) in order to avoid the tax.[/quote]


I dont agree or disagree with this, but I wanted to make sure I said that as to not look like Im on any side with that. (since I did post in this thread)

[Guest bengalrick]

[quote name='fredtoast' post='405840' date='Dec 12 2006, 12:18 PM']The corporate tax rate drives inflation? How is that?[/quote]

if we doubled the tax rate on gas, who is going to pay the difference?

answer: we are... prices will go up a bunch, therefore inflation will rise...

[Chris Henrys Dealer]

[quote name='fredtoast' post='405840' date='Dec 12 2006, 12:18 PM']The corporate tax rate drives inflation? How is that?[/quote]

I think he might be alluding to the fact corporations would then raise prices on those goods to maintain profit (to fight off the higher tax rate). This would be done because a company's stock price basically reflects future earnings expectations. Any expectation of lesser profits would drive down the stock price. This would hurt not only stock holders (company employees, mutual funds who hold the stock, individual investors), but as many CEO's are measured by their stock market performance, they'd be leery of it. Additionally, a public co's stock price is frequently used as a weapon / protection against other companies. A surging stock price can fund acquisitions, while a lower one can lower the cost of your company overall and make it a takeover company. So the corporations would ensure the profit margin stayed up and stock price stayed up not only to protect their company, but to give it a chance to grow. This would be done by jacking up prices.

The greater prices on goods generally, would then mean that the core components used in calculating the consumer price index (CPI) would all go up, thereby sending the inflation rate up.

Inflation tends to hit people heavily, unless your earnings are indexed to inflation. People on fixed income earnings are hit the heaviest...and the group most heavily reliant on fixed income are seniors / retired people / or the baby boomers who will start retiring soon.

Additionally, the move to counter inflation would be raising of interest rates. This would reduce the money supply, and generally slow down the economy. Additionally, things benched of interest rates such as mortgage rates would then rise. This would mean more people not being able to afford houses, and a greater default rate. (although it might increase savings, and would send the currency higher)

But generally, the fallout from increasing the corporate tax rate would be felt a lot through the economy, in the form of higher prices, and possibly lay offs, as companies would attempt to reduce costs. And in a global economy like today, the companies would choose to move to a location where there was more favourable tax treatment.

An example would be Ireland, who made the move to cut corporate tax rates to about 10% in the eark 1990's. At the time, Ireland had a huge unemployment problem, and an economy in the doldrums. Since then, as corporations streamed in to take advantage of the favourable tax climate, the Irish economy has surged. Ireland has been reported to have the second highest per capita income of any country in the EU next to Luxembourg, and fourth highest in the world. Unemployment has fallen to 4.4%. One of the lowest rates in Europe.

Although they are beginning to experience some of the problems associated with a booming economy now...e.g. house prices going crazy, higher cost of living etc.

I think generally, companies act quicker when they sense an opportunity to make money. I really think the case for alternative fuels would be much strengthened if tax credits and the such were rolled out. The Scandinavian countries are great for this, where the government not only waives taxes, but provides long term interest free loans to companies in the field. Norway for example is one of the the world's largest oil producers, yet has a $3 billion fund to encourage renewable energy.

The US has been slow to react, but the IRS is providing tax credits to people as per the Energy Policy Act of 2005. [url="http://www.irs.gov/newsroom/article/0,,id=153397,00.html"]http://www.irs.gov/newsroom/article/0,,id=153397,00.html[/url]

I think if these were increased, so that there was greater demand for environmentally friendly products, companies would start working on that a lot quicker.

[Guest fredtoast]

The Corporate tax is NOT a business expense. It only applies to profits. A company would not have top cut costs in order to offset a higher tax rate. In fact if they cut costs they would just INCREASE profits and therefore INCREASE their tax burden.

If the costs of a product was based on a companies tax burden then a companiy with lower profits could charge less for a product than a very profitable company. That is just not the way the market works. In fact the largest companies with the highest profits are usually the ones that can charge less for their product.

Also a company's stock value would INCREASE if more money was reinvested instead of pulled out as profits. The more capital retained in the company the more it is worth.

The big mistake is that everyone tries to say that the corporate tax is a business expense. I always hear the line that a higher corporate tax keeps companies from creating new jobs when in fact the exact opposite is true. Every dollar spent on creating new jobs is a TAX DEDUCTIBLE business expense. Therefore the more jobs a company creates the less tax it pays.

The corporate tax is an INCENTIVE TO REINVEST. The higher the corporate tax the greater the incentive to reinvest. The people that oppose the corporate tax are stockholders who want to pull the profits out of the company and put it in their pockets instead of spending on research and developement.

[Chris Henrys Dealer]

[quote name='fredtoast' post='405913' date='Dec 12 2006, 02:13 PM']Also a company's stock value would INCREASE if more money was reinvested instead of pulled out as profits. The more capital retained in the company the more it is worth.[/quote]

Yes, but there is a difference between retained earnings and r & d, like you said earlier. So, I'm not sure if I follow you on the r&d expenses, and related to stock valuation.

In your example you stated, you said the money would be put into research and development. This is an expense on the income statement. And would be netted out on the income statement. It is not increasing the value the company on the balance sheet, but rather increasing cost of operations. (Until revenues associated with the r&d come in) Even if a firm capitalizes it's R & D expenses, there is no correlation between that and greater stock price.

The only way you could increase company value, by keeping money in, would be to either plug it into retained earnings, pay dividends on your stock, or purchase assets, (such as buildings etc), stuff that would increase the enterprise value of the firm. Even then, in this day and age of Earnings before income, taxes and depreciation (EBITDA -Homer, I know you're a fan of this ) being the rage in terms of determining stock price, increasing enterprise value of the company, doesn't always lend itself to a higher stock price.

I think the scenarios are completely different, but maybe I didn't understand your scenario for explanation.

[Chris Henrys Dealer]

[quote name='fredtoast' post='405913' date='Dec 12 2006, 02:13 PM']The Corporate tax is NOT a business expense. It only applies to profits. A company would not have top cut costs in order to offset a higher tax rate. In fact if they cut costs they would just INCREASE profits and therefore INCREASE their tax burden.[/quote]

If you factor in stock prices which I had said earlier would play a big part in the way companies behave. Then you can see how a company would cut costs to maintain stock price in light of a higher tax rate.

Using a hypothetical example, CHD Inc supplies widgets. Stocks in the widget industry, typically trade at a price to earnings multiple of $4.00

CHD Inc sells 100,000 widgets a year at $10 each

So in year 1

Revenue $1,000,000
Expenses $500,000

Earnings $500,000

Corporate tax rate 30%

Tax expense $150,000

net income $350,000

Shares outstanding $100,000

Earnings per share $3.50

P/E Ratio 4.00

Stock price $14.00

Market cap $1,400,000


if in year 2, everything remains the same, except the tax rate is increased to 50%

Sales: 100,000 units at $10.00

Revenue $1,000,000
Expenses $500,000

Earnings $500,000

Corporate tax rate 50%

Tax expense $250,000

net income $250,000

Shares outstanding $100,000

EPS $2.50

P/E Ratio 4.00

Stock price $10.00

Market cap $1,000,000

so, in light of the higher tax rate, stock price has fallen, by 28% as has the value of the company. Shareholders are pissed, including employees investing in the employee share plan, and outside investors. CEO has to act. And quickly. The CEO announces lay offs and a plant closure to cut expenses per year, from $500k to $300k.

here is what happens:

Sales 100,000 units at $10

Revenue $1,000,000
Expenses $300,000

Earnings $700,000

Corporate tax rate 50%

Tax expense $350,000

net income $350,000

Shares outstanding $100,000

EPS $3.50

P/E Ratio 4.00

Stock price $14.00

Market cap $1,400,000


So in this case, cutting costs by 200k, has maintained EPS at historical levels, and the company stock price is back to where it was despite a higher tax environment. shareholders are happier. (except the ones laid off)

The other way to keep the stock at the same price in light of a higher tax rate WITHOUT cutting expenses would be to increase revenue by $200k. This could be achieved by raising prices on widgets to $1.20

So,

Sales: 100,000 units at $1.20

Revenue $1,200,000
Expenses $500,000

Earnings $700,000

Corporate tax rate 50%

Tax expense $350,000

net income $350,000

Shares outstanding $100,000

EPS $3.50

P/E Ratio 4.00

Stock price $14.00

Market cap $1,400,000


So there are two instances, where either by cutting people or raising prices, a company maintains the status quo in terms of stock price in light of a higher tax environment.

[Guest fredtoast]

[quote name='Chris Henrys Dealer' post='405918' date='Dec 12 2006, 02:33 PM']In your example you stated, you said the money would be put into research and development. This is an expense on the income statement. And would be netted out on the income statement. It is not increasing the value the company on the balance sheet, but rather increasing cost of operations. (Until revenues associated with the r&d come in) Even if a firm capitalizes it's R & D expenses, there is no correlation between that and greater stock price.[/quote]

I see what you are saying, but it doesn't change the point I was trying to make. A corporation's ability to spend on R&D (or new jobs, or higher wages) is not dimished by their tax bill, and the more a company spends on R&D (or new jobs, or higher wages) the less it pays in taxes.

Most companies only spend R&D money with the intent of gettinga positive return on the money. Therefore most of them look at it as an investment instead of an expense. Sometimes the R&D money goes toward assets held by a company (lab equipment, corn futures, etc) and in these cases it does increase the value of the company. But the main point is that if companies invest their money in R&D they do it tax free, but if they pay it out in profits they pay the corporate tax. Therefore the corporate tax is an incentive to reinvest. The higher the corporate tax the higher the incentive to reinvest.

[Homer_Rice]

Some observations:

1) Fred's right, as far as he goes.

2) The Depression was not an inflationary period. Just the opposite. The inflation of the 20s (which affected primarily Europe) led to the drying up of capital which put the US economy into such a tailspin in the early 30s. There are lots of ways to go after this, research wise, but the fastest is probably to focus on the Bank crises which Roosevelt acted upon in his first days of taking office. Even more focus: why did Roosevelt and Hoover have such an unfriendly transistion period? (Fortunately, lesser technocrats were able to cooperate amicably in that period.

3) Fred's argument is old school, CHD's is new school. It's the old operations versus accounting struggle. Each has a different (and distinct) definition of value. Sadly, the latter has become predominant today, to the extent that, for example, we can watch our domestic car industry virtually disintegrate over the past couple of years with barely a peep from folks. All that idle or retired capacity, all the skills lost--which will have a tangible effect on our ability to actually build things in the near term--while people get recycled into lesser skilled and lower paying jobs. Meanwhile, vultures like Kevorkian do what they do best--swoop in the for the kill, chew on bone and suck out marrow, then fly off in search of another target, leaving behind a virtually useless mess.

3) There are basically two kinds of inflation: cost inflation and financial inflation. The former tends to result from an actual higher cost of physically producing tangible goods--for example, the depletion of resources; the latter from a proliferation of financial instruments which influence (by dilution) the actual physical production of goods.

4) One (proper) function of R&D is to handle the problems of cost-inflation by developing new techniques in extraction or production or distribution such that the overall cost to produce the goods (or deliver services in the case of the IT revolution) is significantly reduced and, in some cases, thoroughly replaced by a newer standard of measurement.

5) Industry-specific R&D as an accounting issue, is neither inflationary nor a dead cost passed on to the customer. (This is eventually true even in the case of "pure" science, which is the font of innovation in terms of both knowledge and applied technique. It just takes longer to work its way through the causal process.) There is sometimes dislocation as an indirect result of R&D, once it gets passed into the business arena as a new or revised and improved way of doing things. The classic example is the decline of the horse industry as motor transport became dominant. (And if that seems too arcane, compare the effects between rail and auto/truck industries in the early 20th century. Then, consider now, in which rail is making a minor comeback due to the rising costs of auto/truck distribution. It's about resource availability or depletion, primarily.)

6) Lastly, R&D accounting can vary. IMO, as far as taxes go, it is much preferred to give specific tax credits related to generally agreed upon R&D endeavors than it is to raise taxes. Targetted tax credits are better than capital gains tax reduction, too, mostly for their specificity. You can guarantee that businesses will put their bucks in important areas of inquiry if they can write it off. You can't guarantee that the savings from capital gains get invested in areas which society requires in order to flourish. (In fact, the past 40 years of new-schooling demonstrates just how destructive such policies can be--for the most part.) This is where the supply-siders and monetarists get it wrong, imo.

7) As those who are paying close attention are starting to see, the shit-storm has already started. The operations/accounting dichotomy is not the only way to review the situation, but it is useful, especially because it is amenable to plain language which everybody can understand. Make things. Have a set of stable monetary/financial standards by which those things are costed out. The steady depletion of resources without countervailing improvements in technique (or in pure science which makes a class of resource become better utilized or even obsolete), then cost inflation. Make the same amount of "stuff" but increase the amount of instruments by which such stuff is transferred, then financial inflation.

[Guest Coy Bacon]

[quote name='fredtoast' post='405840' date='Dec 12 2006, 12:18 PM']The corporate tax rate drives inflation? How is that?[/quote]


Yeah, how is that?