Snap General Election called

[Son of Mathonwy]

If I recall correctly, extraordinary supernormal profit shouldn't exist if we have perfect competition (because prices are driven down until only ordinary profit is possible). Which gives you some idea how far we are from perfect competition.

Edit: I'm rusty. The correct term is supernormal profit, or abnormal or excess profit. Extraordinary profit, or gains, losses, items, is an unusual, non-recurring item in the accounts.

[Mellsblue]

Do you know how the tipping point from ordinary to extraordinary profit is calculated?

[Son of Mathonwy]

Do you know how the tipping point from ordinary to extraordinary profit is calculated?

Actually, see my corrected point above, the correct term is supernormal or abnormal or excess profit.

Normal profit provides a business's owners with a normal (market equilibrium) return to capital. If a company is only making normal profit (AND the owner takes his or her return as salary, not dividends) the the company will make zero accounting profit*.
Supernormal profit is anything above this.

There's no precise measure of this. It depends on the level of reward an owner would need to wish to remain in the business. If the business didn't make this, in theory, the owner would close the business and do something more rewarding.

* So in this case, tax on accounting profits is tax on supernormal profit.

[Mellsblue]

Do you know how the tipping point from ordinary to extraordinary profit is calculated?

Actually, see my corrected point above, the correct term is supernormal or abnormal or excess profit.

Normal profit provides a business's owners with a normal (market equilibrium) return to capital. If a company is only making normal profit (AND the owner takes his or her return as salary, not dividends) the the company will make zero accounting profit*.
Supernormal profit is anything above this.

There's no precise measure of this. It depends on the level of reward an owner would need to wish to remain in the business. If the business didn't make this, in theory, the owner would close the business and do something more rewarding.

* So in this case, tax on accounting profits is tax on supernormal profit.

Cheers.

[Digby]

Which at least means I've not forgotten about extraordinary profit, but doesn't speak to my objections to corporation tax

[Mellsblue]

Which at least means I've not forgotten about extraordinary profit, but doesn't speak to my objections to corporation tax

The way the state derives an income from business needs overhauling, or at least questioning, from top to bottom.

[Digby]

Which at least means I've not forgotten about extraordinary profit, but doesn't speak to my objections to corporation tax

The way the state derives an income from business needs overhauling, or at least questioning, from top to bottom.

It should face constant questioning on such front. The idea we're ever going to land on the right idea seems itself flawed imo, even if we did, and we haven't, things change. As per usual though none of the parties have anything sensible to say on this going into an election, christ, they can't even raise themselves to addressing business rates never mind the big taxes

[Son of Mathonwy]

Which at least means I've not forgotten about extraordinary profit, but doesn't speak to my objections to corporation tax

The way the state derives an income from business needs overhauling, or at least questioning, from top to bottom.

In an ideal world we would have perfect competition, and most business revenue would be needed to pay the costs of the business, so there would be very little profit to be taxed. However, since we don't live in that world, it seems reasonably to take a % of the profits of these businesses which are taking advantage of less-than-perfect competition (especially those with near monopoly or oligopoly positions). [Of course, governments should also seek to move markets closer to a state of perfect competition (eg through encouraging new entrants, breaking up monopolies, punishing cartels, increasing transparency, reducing misleading advertising - or advertising in general etc).]

In fact, I think corporate taxes would be a good model to base personal taxes on - I think there should be a basic level of income. This is equivalent to Normal Profit. Anyone earning less should be given a helping hand by the state and anyone earning more (equivalent to Supernormal Profit) should give a % of this extra (less essential) income back to the state.

[Stom]

Which at least means I've not forgotten about extraordinary profit, but doesn't speak to my objections to corporation tax

The way the state derives an income from business needs overhauling, or at least questioning, from top to bottom.

In an ideal world we would have perfect competition, and most business revenue would be needed to pay the costs of the business, so there would be very little profit to be taxed. However, since we don't live in that world, it seems reasonably to take a % of the profits of these businesses which are taking advantage of less-than-perfect competition (especially those with near monopoly or oligopoly positions). [Of course, governments should also seek to move markets closer to a state of perfect competition (eg through encouraging new entrants, breaking up monopolies, punishing cartels, increasing transparency, reducing misleading advertising - or advertising in general etc).]

In fact, I think corporate taxes would be a good model to base personal taxes on - I think there should be a basic level of income. This is equivalent to Normal Profit. Anyone earning less should be given a helping hand by the state and anyone earning more (equivalent to Supernormal Profit) should give a % of this extra (less essential) income back to the state.

You shouldn’t give a helping hand, IMO. Just the minimum wage should be actually the minimum wage and it should face 0 income tax.

And I disagree that personal income tax should face a very high %age, too. If a company owner takes a salary increase to avoid paying Corp tax...I want that to be a real opportunity, so Corp tax should be a lot higher than personal income tax.

[Son of Mathonwy]

The way the state derives an income from business needs overhauling, or at least questioning, from top to bottom.

In an ideal world we would have perfect competition, and most business revenue would be needed to pay the costs of the business, so there would be very little profit to be taxed. However, since we don't live in that world, it seems reasonably to take a % of the profits of these businesses which are taking advantage of less-than-perfect competition (especially those with near monopoly or oligopoly positions). [Of course, governments should also seek to move markets closer to a state of perfect competition (eg through encouraging new entrants, breaking up monopolies, punishing cartels, increasing transparency, reducing misleading advertising - or advertising in general etc).]

In fact, I think corporate taxes would be a good model to base personal taxes on - I think there should be a basic level of income. This is equivalent to Normal Profit. Anyone earning less should be given a helping hand by the state and anyone earning more (equivalent to Supernormal Profit) should give a % of this extra (less essential) income back to the state.

You shouldn’t give a helping hand, IMO. Just the minimum wage should be actually the minimum wage and it should face 0 income tax.

And I disagree that personal income tax should face a very high %age, too. If a company owner takes a salary increase to avoid paying Corp tax...I want that to be a real opportunity, so Corp tax should be a lot higher than personal income tax.

I don't understand your last point - why do you want to encourage owners to pay themselves larger salaries?

[Digby]

In an ideal world we would have perfect competition, and most business revenue would be needed to pay the costs of the business, so there would be very little profit to be taxed. However, since we don't live in that world, it seems reasonably to take a % of the profits of these businesses which are taking advantage of less-than-perfect competition (especially those with near monopoly or oligopoly positions). [Of course, governments should also seek to move markets closer to a state of perfect competition (eg through encouraging new entrants, breaking up monopolies, punishing cartels, increasing transparency, reducing misleading advertising - or advertising in general etc).]

In fact, I think corporate taxes would be a good model to base personal taxes on - I think there should be a basic level of income. This is equivalent to Normal Profit. Anyone earning less should be given a helping hand by the state and anyone earning more (equivalent to Supernormal Profit) should give a % of this extra (less essential) income back to the state.

You shouldn’t give a helping hand, IMO. Just the minimum wage should be actually the minimum wage and it should face 0 income tax.

And I disagree that personal income tax should face a very high %age, too. If a company owner takes a salary increase to avoid paying Corp tax...I want that to be a real opportunity, so Corp tax should be a lot higher than personal income tax.

I don't understand your last point - why do you want to encourage owners to pay themselves larger salaries?

I'm going to suppose what he's concerned about is more companies sitting on assets in their accounts such there are large sums of capital not being active enough in society. When really if the money is being taken out in salary there's an entirely separate conversation to be had around perusal taxation rates

[Puja]

Which at least means I've not forgotten about extraordinary profit, but doesn't speak to my objections to corporation tax

Glad to see my dusty memories of economics classes are clear as ever though - thanks to Son of Mathonwy for the correction!

On corporation tax, as Son of Mathonwy notes, the idea of markets is that they should prevent people from earning supernormal profit. If someone is, then competitors should enter the market (as it's clearly worthwhile having a business in that sector) and the increase in supply reduces the profit until everyone is earning the amount needed for it to be worthwhile them being in the business. And conversely, if demand shrinks, people leave the industry (cause they can't make a profit worth being in it) and the reduction in supply balances everything out at normal profit again.

As with so many things in economics, it falls down when it meets real life and the massive barriers to entry and exit of various industries, meaning that supernormal profits abound. The government seizes upon this to have corporation tax, which becomes another cost in the industry. If it is too high and cuts into the normal profit, then companies leave the market. However, most shrewd chancellors pitch it at a level where it's biting into some of the abnormal profit of most firms, without cutting into the normal profit. While no-one likes paying tax, a well-pitched corporation tax isn't "encouraging bad companies and penalising successful ones" as it's still letting everyone have the profit that is worth running a business for (and often quite a bit more, as chancellors will rarely push right to the edge), it's just taking a bite out of the stuff that's surplus to that.

tl;dr - Tax money has to come from somewhere and a well-pitched corporation tax is taking money from places where people aren't going to miss it as much as others.

It's why the arguments against raising the minimum wage never bear fruit in the real world - it cuts into extraordinary profit, but (unless raised to silly levels) rarely cuts into ordinary profit.

Is this true about the minimum wage rarely cutting into ordinary profits. Those sectors that employ a large % of people on those wages - care providers, retail etc - are struggling in part because of this. This is particularly true in the care sector where raising minimum wages is probably the main cause of problems. Though, that opens up another issue about coughing up enough in tax/organising the health and care sectors to properly fund the provision and the staff within it. It’s also true that local govt have had to significantly raise their wage bill and therefore divert funds from other areas to cover it.
I’m also not sure extraordinary profits, within reason, are a bad thing. It’s where the funding for R&D, staff training, expansion etc etc comes from.
Don’t get me wrong, the minimum wage is nowhere near the disaster many on the right predicted. However, I don’t think it’s true that it ‘rarely’ cuts into profit. Also don’t get me wrong about whether it’s a good idea, I think it’s great and should go further. I’ll never understand why the state tops up people’s wages because their employer doesn’t pay them enough.

There will always be examples where the minimum wage has caused a massive problem (same with maternity leave, sick pay, etc). However, on a larger scale, every time it's been raised it's caused negative job losses (so the ones lost are fewer than the ones gained by people having more money to splash around the economy), which suggests that there's few areas where it caused a situation where it's better to not be in business than to pay this extra cost. There's obviously going to be a limit somewhere, but I suspect we're a reasonable distance off that as things stand.

Puja

[Digby]

tl;dr - Tax money has to come from somewhere and a well-pitched corporation tax is taking money from places where people aren't going to miss it as much as others.


Puja

I'm not saying there shouldn't be tax on companies, but put it on consumption, put it on transactions, and don't put it on profits. It's sort of correct voters (most voters anyway) don't miss it, so it's an easy tax for politicians to claim, but by allowing more successful (more profitable) businesses to pick up the slack we're not seeing those more successful businesses left with additional revenues to expand, to invest, to hire more.

We could, should, have business tax that allows for more economic growth and actually into the bargain given we need to actually think more about consumption we can, should, deliver more for the environment.

As is Corporation Tax acts to prevent a more efficient use of capital across society, and just 'cause it's easy for politicians doesn't seem a good enough reason to keep on doing the same thing.

Imo I'm asking for a win win, bar getting the actual detail right is going to prove tricky and then some

[Stom]

Now we have the rarity of a civilized, clear debate in the politics forum that sticks to topic across pages and actually goes somewhere.

Congrats all involved

[Son of Mathonwy]

tl;dr - Tax money has to come from somewhere and a well-pitched corporation tax is taking money from places where people aren't going to miss it as much as others.


Puja

I'm not saying there shouldn't be tax on companies, but put it on consumption, put it on transactions, and don't put it on profits. It's sort of correct voters (most voters anyway) don't miss it, so it's an easy tax for politicians to claim, but by allowing more successful (more profitable) businesses to pick up the slack we're not seeing those more successful businesses left with additional revenues to expand, to invest, to hire more.

We could, should, have business tax that allows for more economic growth and actually into the bargain given we need to actually think more about consumption we can, should, deliver more for the environment.

As is Corporation Tax acts to prevent a more efficient use of capital across society, and just 'cause it's easy for politicians doesn't seem a good enough reason to keep on doing the same thing.

Imo I'm asking for a win win, bar getting the actual detail right is going to prove tricky and then some

The problem with transaction tax is that all companies are taxed, not just the profitable ones, hence this is more likely to put companies out of business. Or to put it another way, this tax is not linked to a company's ability to pay it: it's not progressive.

I'm skeptical about your view that the most profitable businesses are those which make the best use of capital (and therefore should be allowed to keep more of it). In many cases their supernormal profits are the result of great imperfections in the market, eg Microsoft, Amazon, Facebook all had (or stole) a good idea and were lucky at the start. But since establishing their dominance (a near-monopoly in their market) (in Microsoft's case, over a generation ago) they simply rake in the excess profits (while lobbying to make sure no politician even thinks of breaking up their monopolies - which the US anti-trust laws ought to have done years ago for Windows).

Often it's the companies with limited resources which use them most efficiently - because they have to. They don't have the surplus to spend on corporate palaces and vanity projects. I know which I think should be taxed more heavily.

[Puja]

tl;dr - Tax money has to come from somewhere and a well-pitched corporation tax is taking money from places where people aren't going to miss it as much as others.


Puja

I'm not saying there shouldn't be tax on companies, but put it on consumption, put it on transactions, and don't put it on profits. It's sort of correct voters (most voters anyway) don't miss it, so it's an easy tax for politicians to claim, but by allowing more successful (more profitable) businesses to pick up the slack we're not seeing those more successful businesses left with additional revenues to expand, to invest, to hire more.

We could, should, have business tax that allows for more economic growth and actually into the bargain given we need to actually think more about consumption we can, should, deliver more for the environment.

As is Corporation Tax acts to prevent a more efficient use of capital across society, and just 'cause it's easy for politicians doesn't seem a good enough reason to keep on doing the same thing.

Imo I'm asking for a win win, bar getting the actual detail right is going to prove tricky and then some

The problem with transaction tax is that all companies are taxed, not just the profitable ones, hence this is more likely to put companies out of business. Or to put it another way, this tax is not linked to a company's ability to pay it: it's not progressive.

I'm skeptical about your view that the most profitable businesses are those which make the best use of capital (and therefore should be allowed to keep more of it). In many cases their supernormal profits are the result of great imperfections in the market, eg Microsoft, Amazon, Facebook all had (or stole) a good idea and were lucky at the start. But since establishing their dominance (a near-monopoly in their market) (in Microsoft's case, over a generation ago) they simply rake in the excess profits (while lobbying to make sure no politician even thinks of breaking up their monopolies - which the US anti-trust laws ought to have done years ago for Windows).

Often it's the companies with limited resources which use them most efficiently - because they have to. They don't have the surplus to spend on corporate palaces and vanity projects. I know which I think should be taxed more heavily.

SoM has pretty much nailed the response, but I will also note that a transactional tax comes out before profit, not after. So corporation tax will never take a company from being profitable to non-profitable, whereas a transaction tax can.

There is also the possibility that transaction taxes are just passed straight onto the customer like VAT, which tends to be very regressive, as poor people spend a greater percentage of their income than rich people do and thus get more tax compared to their income.

Puja

[Digby]

Transactional taxes need not be limited in the sense you'd create a new VAT model which targets those at the lower end of the earnings scale and frees up some constraints on the owners of the capital. You can look at processes undertaken across the board and query what would make sense to levy a tax on, you can look across the board and decide what represents a sale. Put another way for transaction you could read undertakings of a business (or arguably any social enterprise)

If you were for instance to levy tax based on the assets of a company, you might want to focus on distributed income, you might want to look at consumption, whether energy or raw materials, and you could be looking at the change to be revenue neutral or consider whether you want to reduce the tax burden or seek higher levels of redistribution.

The point remains taxing capital is not an efficient model to use, and that there are other inefficiencies is a poor excuse to maintain a poor model.

[Son of Mathonwy]

Transactional taxes need not be limited in the sense you'd create a new VAT model which targets those at the lower end of the earnings scale and frees up some constraints on the owners of the capital. You can look at processes undertaken across the board and query what would make sense to levy a tax on, you can look across the board and decide what represents a sale. Put another way for transaction you could read undertakings of a business (or arguably any social enterprise)

If you were for instance to levy tax based on the assets of a company, you might want to focus on distributed income, you might want to look at consumption, whether energy or raw materials, and you could be looking at the change to be revenue neutral or consider whether you want to reduce the tax burden or seek higher levels of redistribution.

The point remains taxing capital is not an efficient model to use, and that there are other inefficiencies is a poor excuse to maintain a poor model.

I'm not really clear what you're trying to achieve with these alternative forms of transaction tax. They will still hit struggling companies, pushing them into losses, or increasing their losses or putting them out of business completely. They're not progressive. Also, if the tax focuses on one item, eg revenue or purchases or energy use, then companies will reorganise their operations to minimise that particular thing. That leads to disfunctional decision-making. In contrast, tax based on overall profit is more difficult to avoid (generally companies are looking to maximize profit), so is less disruptive.

Corporation tax does not tax capital - it taxes profit.

As I said before, I don't agree that taxing companies according to their profitability is especially inefficient because I'm not convinced that the most profitable companies are the most efficient. Obviously tax extracts money from businesses, so it is necessarily an inefficiency. The question is not whether tax on profits is inefficient but whether there is a better tax model to replace it with. For the reasons already given, I don't think transactional tax is a better model.

[Digby]

I'm taking profitability to be a measure of success, and I want to promote that success. Failing companies should be allowed to fail seeing that capital and labour return to the markets. As before Corp Tax is in essence a handbrake on the economy seeing more successful companies support struggling companies, and whilst I favour such approach at an individual level I don't at a business level.

And yes, fair enough, it's not a tax on capital as is but a tax on capital income, poor wording there on my part.

[Stom]

I'm taking profitability to be a measure of success, and I want to promote that success. Failing companies should be allowed to fail seeing that capital and labour return to the markets. As before Corp Tax is in essence a handbrake on the economy seeing more successful companies support struggling companies, and whilst I favour such approach at an individual level I don't at a business level.

And yes, fair enough, it's not a tax on capital as is but a tax on capital income, poor wording there on my part.

So the success of a company is purely measured in how much profit it can make and not the level of service it can provide?

That’s what gives us Thames Water.

Surely the point of a company should be to provide its core product or service at a high level and any profit should be poured back into r&d

[Digby]

I'm taking profitability to be a measure of success, and I want to promote that success. Failing companies should be allowed to fail seeing that capital and labour return to the markets. As before Corp Tax is in essence a handbrake on the economy seeing more successful companies support struggling companies, and whilst I favour such approach at an individual level I don't at a business level.

And yes, fair enough, it's not a tax on capital as is but a tax on capital income, poor wording there on my part.

So the success of a company is purely measured in how much profit it can make and not the level of service it can provide?

That’s what gives us Thames Water.

Surely the point of a company should be to provide its core product or service at a high level and any profit should be poured back into r&d

I'm not saying this would mean no money going into R&D, though you cannot have all monies poured into R&D, it is the shareholders money, there is a cost to capital, and there then does need to be some capital income, of course you can then separately tax that distributed income

If we tax activities not capital income I'm seeking to incentivise productivity (partly through R&D) not as now attempts to simply avoid the tax. Efficiency and productivity are imo the key to the overall business model, what you then do with that is a political decision based on where on sits on the spectrum from highly regulated to a largely free/open market, but the aim should be to promote in the first instance that productivity, and we're shit at it

[Stom]

If I’m honest, I kind of see the current shareholder system as breaking the system...

It means that the company has a duty to return money rather than a duty to customers. The customer needs to come first. But because we have so many monopolies and pseudo monopolies now, the market doesn’t do that itself

[Sandydragon]

If I’m honest, I kind of see the current shareholder system as breaking the system...

It means that the company has a duty to return money rather than a duty to customers. The customer needs to come first. But because we have so many monopolies and pseudo monopolies now, the market doesn’t do that itself

But at a certain level of growth, shareholders provide capital which may not otherwise be obtainable. Whilst it may seem unfair, in reality shareholders lend their money at risk and without such investment many products we take for granted may not have been available.

The alternative is to lend from the banks which could be more expensive and is still money that a business needs to pay out and potentially benefits fewer people.

[Puja]

I'm taking profitability to be a measure of success, and I want to promote that success. Failing companies should be allowed to fail seeing that capital and labour return to the markets. As before Corp Tax is in essence a handbrake on the economy seeing more successful companies support struggling companies, and whilst I favour such approach at an individual level I don't at a business level.

And yes, fair enough, it's not a tax on capital as is but a tax on capital income, poor wording there on my part.

Couple of things:

1) Who's talking about supporting struggling companies? Corporation tax income doesn't go towards paying crap companies!

2) Promoting success is all well and good, but above a certain level, profit is just socked away in savings and investments and doesn't reenter the economy. The theory that cutting corporation tax removes a handbrake on the economy doesn't hold true below a certain level, because the additional money just goes in dividends to people who won't spend it. In fact higher tax can encourage investment as it's better to spend the money on futureproofing the company than to declare it as profit and get taxed upon it.

One point where I definitely do agree with you is that transaction taxes are a hell of a lot easier to administer. Profit can be hidden and moved around, especially for multi-nationals, and relies on a certain amount of honesty from the companies. A transaction tax makes a lot of sense for someone like Amazon or Starbucks who refuse to play ball with HMRC.

Puja

[Stom]

If I’m honest, I kind of see the current shareholder system as breaking the system...

It means that the company has a duty to return money rather than a duty to customers. The customer needs to come first. But because we have so many monopolies and pseudo monopolies now, the market doesn’t do that itself

But at a certain level of growth, shareholders provide capital which may not otherwise be obtainable. Whilst it may seem unfair, in reality shareholders lend their money at risk and without such investment many products we take for granted may not have been available.

The alternative is to lend from the banks which could be more expensive and is still money that a business needs to pay out and potentially benefits fewer people.

Oh, I agree! It’s a problem we’ve created with no obvious way out.