Using supply-side to break the permanent income hypothesis.

Lago PARANOIA · Post by **Lago PARANOIA** » Mon Nov 07, 2011 6:15 am

Okay, so, we know that supply-side economics (as implemented in the U.S. anyway) doesn't really work for a variety of reasons. So when certain people keep going 'cut taxes on the job creators!' it always ends up falling flat on its face because of the permanent income hypothesis. So an idea comes to mind.

What if these two things happened:
[*] The government implements a very progressive tax policy. I'm talking Eisenhower-level. And not just on income, but also estate, capital gains, the whole enchilada.

[*] Simultaneously the government puts corporate income tax to zero or near zero and even hands out tax breaks for corporations that hire people.

The basic idea is that instead of just using that money to create profits and sit on it, people circulate money within the company to grow their bottom line more rather than engaging in non-productive money-making pursuits like currency speculation or stock market trading. In other words, if your company made a 100 dollar profit, almost none of it would be taxed unless someone tried to cash out by selling stocks or assets. So the incentive would be to instead use that profit for business expansion or research or bonuses or whatever in order to make your company more profitable in the long run. So the choice comes between distributing that 100 dollars to you and shareholders and only seeing 10 dollars of it, or you could dump that 100 dollars into the company, see 150 of it next year, and cash out for 15 dollars. Or you could do the same again the next year. And the next. If someone does cash out prematurely early the progressive tax policy just distributes it back to the lower/middle class and the money filters up to companies that are Not Yours.

Would this work or not?

K · Post by K » Mon Nov 07, 2011 6:53 am

Corporations are already taxed on only the profits they take out.

So if a corporation made 100 million during a year selling widgets and then put 80 million into new research, they can write off that research and only get taxed on the 20 million they took out and distributed to their shareholders.

That being said, in a time of record corporate profits they have not created jobs.

Basically, supply-side economics is based on a false premise that business owners create business rather than demand allowing business to be created or expanded.

Sadly, demand is only created when lots of people have disposable incomes.

PS. Two thirds of US corporations pay no Federal taxes.

Lago PARANOIA · Post by **Lago PARANOIA** » Mon Nov 07, 2011 7:09 am

K wrote:That being said, in a time of record corporate profits they have not created jobs.

How are they making record corporate profits without demand? Are the processes becoming so much more efficient and profitable in such a short time that they can coast for a few more years? I find it hard to believe that productivity increased so quickly that it was able to more than make up for the drop in demand.

DSMatticus · Post by **DSMatticus** » Mon Nov 07, 2011 7:15 am

Huh. That actually puzzles me now that you mention. It doesn't actually cast any doubt on supply-side's massive failure, because the evidence against supply side is 30 years of flat employee wages and skyrocketing CEO and corporate profits. But I haven't noticed any massive price hikes. If they're making more money, where the hell is it coming from? This recession has not really hurt corporate profits.

K · Post by K » Mon Nov 07, 2011 7:19 am

Lago PARANOIA wrote:
K wrote:That being said, in a time of record corporate profits they have not created jobs.
How are they making record corporate profits without demand? Are the processes becoming so much more efficient and profitable in such a short time that they can coast for a few more years? I find it hard to believe that productivity increased so quickly that it was able to more than make up for the drop in demand.

You fire a bunch of people and ask the remaining ones to work longer hours without additional pay, you merge with other companies and eliminate redundant services, and you offshore.

Also, as some companies go out of business the remaining ones offering similar services absorb the remaining demand. That's basically why the banks are making mad money right now.

Corporations also run on bullshit amounts of fat. The semi-successful or successful ones are incredibly wasteful and can cut pretty easily in hard times.

Lago PARANOIA · Post by **Lago PARANOIA** » Mon Nov 07, 2011 7:30 am

Okay, but the guy you fired has had like a huge drop in demand at the cost of keeping your productivity about equal (there's only so much blood you can squeeze out of a turnip so there's a limit of per-worker productivity you can get just from increasing hours).

Moreover, how do mergers and horizontal acquisition increase demand and/or profits? A company's individual profitability would have gone up, but the amount of money being made in the private sector wouldn't have gone up all that much unless it was accompanied by a subsequent demand increase.

The only thing I can really think of is that money consumers would've gotten out of, you know, having a job is paid for by government unemployment insurance. But then again it's almost guaranteed to be less than what there would be for having a job, so there's still a drop in demand. So again the only real avenue is improved productivity which isn't really going to help if it comes from firing wage-earners.

erik · Post by **erik** » Mon Nov 07, 2011 7:31 am

Increased productivity has allowed them to make more money, while paying less people.

[edit]
Gah, I should refresh before posting. Yes, getting rid of jobs in order to make more money DOESN'T work out that well in the long term. But in the short term the rich get really rich, and the poor get a lot of peers.

Which is where we're heading right now.

K · Post by K » Mon Nov 07, 2011 7:47 am

Lago PARANOIA wrote:Okay, but the guy you fired has had like a huge drop in demand at the cost of keeping your productivity about equal (there's only so much blood you can squeeze out of a turnip so there's a limit of per-worker productivity you can get just from increasing hours).

The loss of demand for your product is super small when you fire a dude, but the gain in profit for your corporation is huge.

Lago PARANOIA wrote:Moreover, how do mergers and horizontal acquisition increase demand and/or profits? A company's individual profitability would have gone up, but the amount of money being made in the private sector wouldn't have gone up all that much unless it was accompanied by a subsequent demand increase.

You can increase profit by eliminating costs without even touching demand.

So when you merge with your rival, you lose an HR department, some VPs, and other people you don't really need. You can also use your larger size to get nbetter deals on health insurance and whatever arrangements you have with people like retailers and distributers and people you buy widgets from.

Lago PARANOIA wrote:The only thing I can really think of is that money consumers would've gotten out of, you know, having a job is paid for by government unemployment insurance. But then again it's almost guaranteed to be less than what there would be for having a job, so there's still a drop in demand. So again the only real avenue is improved productivity which isn't really going to help if it comes from firing wage-earners.

Demand for certain products remains static.... we are going to keep eating food and buying toothpaste regardless of whether we have a job or not because what little money we have is going there.

I suspect a large amount of money has also been redistributed by people moving in with their relatives. Money not being put into rent and housing by employed people who still can't afford housing is a bump in overall demand because it's still being put in other places.

The banks that are not being paid by the absence of loans for housing would be hurting, but a lot of banks went tits up so what money is being fed in that direction is enough.

Other industries are hurting super bad. Restaurants and construction are hurting super bad, but no one gives a fuck about small businesses that pay shit wages.

Username17 · Post by **Username17** » Mon Nov 07, 2011 12:12 pm

Drops in demand cap overall corporate incomes, but they do not imply that those income caps hurt all companies evenly or that they reduce profits of companies that are still standing. The first part is that with a decrease in demand, some companies will feel the hurt more than others. There are more corporate bankruptcies during a depression. The second part is that when a company sees lower demand in the future, then there is less incentive to reinvest in the firm, and the money they take in is more likely to be rolled out as profits.

The profits that the company takes are from sales made last month of goods made by workers paid the month before. But the payment of workers to make more goods this month would also come from last month's sales. If not all of last months goods sold, there is little reason to pay workers this month, and profits right now go up.

If things are growing, the corporations make very little profits as they take their incomes and reinvest. As things contract, corporations reduce reinvestment and take their earnings as profits.

-Username17

tzor · Post by **tzor** » Mon Nov 07, 2011 6:19 pm

Lago PARANOIA wrote:Okay, so, we know that supply-side economics (as implemented in the U.S. anyway) doesn't really work for a variety of reasons. So when certain people keep going 'cut taxes on the job creators!' it always ends up falling flat on its face because of the permanent income hypothesis. So an idea comes to mind.

I would tend to disagree. "We" don't know. It's not as wonderful and magical as some would insist. It's not a absolute failure as others would insist. A signficant part may be due to factors totally divorced from tax policy.

Now back to the rest of the conversation. There are a lot of corporations that literally "eat" other corporations. This proess is complex. Comany A that has products 1,2,3,4,5,6,7 and 8 may acquire Company B with products 1,2,3,4,5,6,7 and 8 (where A.1 may or may not have anything to do with B.1). Some of these products are duplicates, some are profitable, some are not.

After any such merger a period of time is spent in trimming the super corporation. It may be possible to convert users of A.1 to B.3, for example, thus eliminating A.1 if it is considered (for whatever insane reason) B.3 to be the superior product. It may be possible to drop or even sell off A.4. It may be possible to combine the management of A.5 and B.2 into a single department allowing a small fraction of the workers to become "redundant."

Since at this point you are massively reducing costs while at the same time minimially reducing revenue, profits should, in theory, rise.

fectin · Post by **fectin** » Mon Nov 07, 2011 8:27 pm

"Assume a spherical cow..."

RadiantPhoenix · Post by **RadiantPhoenix** » Mon Nov 07, 2011 8:32 pm

fectin wrote:"Assume a spherical cow..."

I have two cows. I will assume that they are both spherical.

Maj · Post by **Maj** » Mon Nov 07, 2011 9:41 pm

K wrote:So when you merge with your rival, you lose an HR department, some VPs, and other people you don't really need. You can also use your larger size to get nbetter deals on health insurance and whatever arrangements you have with people like retailers and distributers and people you buy widgets from.

Furthermore, when you merge with another company, you're also consolidating your customer base. Their customers [frequently] become your customers, so even if there are only 100 people buying vacuum cleaners, there's one less company selling them. Even if the models produced don't change, the company collecting the sales money has.

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Using supply-side to break the permanent income hypothesis.

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