reckless intuitions of an epistemic hygienist (gustavolacerda) wrote,
reckless intuitions of an epistemic hygienist

economic organization and taxation

Attention Conservation Notice: ranting about a topic that I know very little about; accuracy is sacrificed for the sake of cute analogies.

Taxation happens when you have transactions between separate entities. For example, when you buy/sell something, or pay/receive money for services. It makes no difference whether the tax is charged to the buyer or the seller, the employer or the employee.

Income tax on services encourages do-it-yourself and informal transactions: if you get your child to do it, no one is going to come into your house and audit your child. And the bigger your house, the more taxation you can avoid. Analogously, corporate income taxes encourage mergers & acquisitions: by bringing your supplier inside the organization, you no longer have to "buy" their product, since it is now made in-house! (Kinda like erecting an eruv). This may explain why corporations, unlike people, are taxed on profits; if supplies couldn't be deducted as business expenses, we would have double taxation and a huge effect on efficiency. (But surely double taxation is alive and well, no?)

It would seem natural to want to acquire your most important supplier. (Kinda like the signing up for a "best friend plan" on your mobile service). But are acquisitions just a simple way to dodge taxes? For one thing, now your big organization has to run a business that may be outside of its expertise, the newly-acquired business can end up insulated from market forces, and gradually lose its competitiveness, yadda yadda yadda. Now, this analysis conflates ownership with management. Of course, it is possible to buy the expertise required to run the sub-company (it will likely come with the package), but managers' interests won't necessarily align with company's. It is also possible to simulate a competitive environment (some large corporations implement competitive markets for supplies, machines, workers, and even venture capital).

The common justification for stopping mergers (and breaking up monopolies) is that they would make it impossible(?) to enforce rules against price-fixing.

I would like to see an empirical study of mergers. If we have a scenario in which a supplier has a single customer, is there any reason not to merge?


UPDATE: I've just convinced myself that corporate income taxes, if flat, have the nice property that they can't be gamed by mergers (Proof: the total profit after the merger will be the sum of the profits; this assumes that profits are positive). However, sales taxes can be avoided this way, for products that they use themselves (rather than resell).

Does a Major Company like Walmart have to Pay Sales Tax when Making Major Purchases From Another Business?
<< Businesses pay sales tax on items they purchase for their own use.
They don't pay sales tax on transactions in which they obtain products for resale in the store. This applies to all businesses of all sizes. Its also universal across state lines. >>

This means that merging along the production chain will not save on taxes. However, Walmart could save on taxes by buying a company that produces flooring or security cameras. Similarly, software companies could save on sales taxes by buying a coffee company.



* 5 tricks corporations use to avoid paying taxes

* When supply chains merge: 5 mistakes to avoid

* One Big Mutual Fund, or, The Ownership Society, by Cosma Shalizi
<< ... Ambitiously, Miller tries to explain why hierarchical corporations exist at all, why they take some of the forms they do, and how, in part, their form relates to their performance. ... >>

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i know that you do (or at least can be) taxed on a merger, but i don't know how or if they incorporate the "future value-add" into this. probably not.
I've updated the post.
Business mergers are not necessarily so seamless that you can make parts and use them. Sometimes your part of the corporation may have to buy products from other parts of the corporation because the other parts of the corporation are in separate business units.
but do they pay sales taxes on products bought from inside the corporation?
I think some of this works quite differently under a Value Added Tax regime. I think the idea is that you tax an entity on the difference between the value of its outputs and the value of its inputs. Thus, if two entities merge, so that an intermediate transaction disappears, then the difference for the final process is just the sum of the differences in the two intervening steps. I don't know how this interacts with corporate income taxes - my understanding is that it is supposed to replace sales taxes.

I think the idea is supposed to be to find a way to get a source of revenue for the expenses that society (in the form of government) incurs, and to do so in a way that has the least distortionary impact on an idealized market system. (Obviously, you need to do all sorts of other regulation and taxation to internalize externalities and minimize the effect of irrationalities in human decision-making.) I have this mental metaphor of the market as a huge mechanism with lots of separate moving parts, and the tax as being a sort of friction that is imposed at every contact. Ideally you'd have the friction imposed proportionally at every contact so that you don't get distortions of any of the pieces, and "value-added" is supposed to be a way to measure what it should be proportional to.
VAT doesn't particularly interact with corporate income taxes.

I'm pretty sure the way it works is you collect up all your coffee receipts for coffee you bought, and all the receipts from software you sold. Sum up the VAT you collected on sales, subtract the VAT you paid on purchases, fork over the difference. Buying a coffee shop therefore has no effect on your taxation.

Corporate income tax is much easier to game: you can hide a lot of the profits via accounting, setting up shell companies, etc. Mining companies in particular are experts at this game, so governments are moving to collect royalties on mineral sales rather than on profits.