Re: Taxation Thought Experiment

["Michael Froomkin - U.Miami School of Law" <froomkin@law.miami.edu>]

I think there's some funny accounting here...

On Tue, 12 Nov 1996, Joseph M. Reagle Jr., for whom I have considerable
respect and who ordinarily posts very sensible things but appears to have
lent his account to someone else appeared to have written: 

> o TAXES THOUGHT EXPERIMENT
> 
>  1) I generate $100 of productivity for my company

I will assume you measure productivity by "sales". 

Note also that it's debatable whether this $100 of sales is exactly "your" 
productivity.  In some sense it's really the company's, ie a joint product
of your labor, their capital, and the labor of other people in the
production/sales chain: If you could do it alone, you would, so as to
capture the full benefit yourself.  That is why economists sometimes
measure labor productivity by "salary" on the theory that the market
accurately measures what your output is worth.  

Note also that the analysis that follows is not really affected by whether
you meant "sales"  or "my contribution to the sale". 

>  2) Company is taxed %30, $70 left

No.  Company is NOT taxed on gross sales. Corporate income tax does not
work like sales tax.  With some minor exceptions relating to pass-through
rules, foreign sales, and some complex timing issues, corporate tax is
ordinarily levied on NET PROFITS.  Thus, the company first deducts all the
"costs" it can identify, even if those were not necessarily involved in
producing that (or any) sales.  E.g.  advertising, your salary, corporate
junkets, rent, etc.  And lets not forget corporate tax sheltering too... 

>  3) Company pay shareholders and costs, $30 is left

Again, no.  Shareholders come AFTER payroll and costs.

>  4) Company pays me

See above.

>  5) I pay 40% in taxes, so $18 left

I'm afraid you are conflating the MARGINAL rate (and when you consider
federal, state and local taxes varies by state) with the AVERAGE rate.
Here in FL. for example there is no state or local income tax.  With tax
sheltering, mortgage deductions etc. no one pays 40% -- the middle class
pay a lower average rate, the upper class pay a much lower average rate.

>  6) With $18 I can buy a $16.82 object (%07 sales tax).

By now we are into science fiction.

> 
> Results:
>  1) I see $16.82 realization from $100 productivity increase.
>  * Govt. gets $49.26 of my productivity, or nearly 3 times the amount I get.

Totally skewed, sorry.  I don't know what the real numbers are, but the
government gets *much* less than this.  I'm sure the aggregate numbers can
be found in the statistical abstract of the U.S. or the council of
economic advisors' annual report to the president, neither of which
happens to be in my office right now.

A. Michael Froomkin        | +1 (305) 284-4285; +1 (305) 284-6506 (fax)
Associate Professor of Law |
U. Miami School of Law     | froomkin@law.miami.edu
P.O. Box 248087            | http://www.law.miami.edu/~froomkin
Coral Gables, FL 33124 USA | It's warm here.