Merry Christmas!

The is the core forum of BFC. It's all about informal and random talk on any topic.
Forum rules
Post a new topic to begin a chat.
Any topic is acceptable, and topic drift is permissible.
User avatar
Kellemora
Posts: 3033
Joined: 16 Feb 2015, 11:54

Re: Merry Christmas!

Post by Kellemora » 01 Feb 2019, 12:11

You're right, it's not one company, it is the CHAIN of manufacturing and distribution where the four extra dollars comes from. The bottom company on the list who paid out $1.00 to Uncle Sam, did in fact get back anywhere from $1.04 to $1.20 depending on their markup.

It works like this. Truncated:
Company 1 sells to company 2, with $1.00 in tax they paid out added to the Cost of Goods sold. They markup their product 10%. So that $1.00 hidden in their sale price will get them back $1.10 from company 2. They paid $1.00 to Uncle Sam and profited on the tax they collected by ten cents.

OK, Company 2 who bought the product, adds their $1.00 in tax they paid out to their Cost of Goods sold. They markup their product by 20%. Their Cost of Goods includes the $1.10 hidden tax from company one, plus their $1.00, so there is now $2.52 cents in hidden taxes in the price they sell their product to Company 3 for. They paid their $1.00 to Uncle Sam, $1.10 went back to Company 1, Company 2 makes forty-two cents profit on taxes collected.

OK, Company 3 bought from Company 2, added their $1.00 in tax they paid out to their Cost of Goods sold. They markup their product by 25%. To make this clearer for you. Hidden within their Cost of Goods Sold is the $1.10 from Company 1, the $1.42 from Company 2, and the $1.00 they paid out. $3.52 plus 25% markup = $4.40

Add now Companies 4 and 5 in the distribution chain. I've not included the Chain of Manufacturing in this sample.

I think you are getting the picture here. A retailer normally adds inbound freight to his Cost of Goods sold before doubling it to obtain the selling price. Even if the chain of distribution was only the three companies I listed here. The retailer would add his $1.00 in taxes paid out, included the $4.40 in his cost of goods sold, double the price which brings it up to $8.80 he is collecting on those hidden taxes.

Company 1 paid Uncle Sam $1.00, Company 2 paid Uncle Sam $1.00, Company 3 paid Uncle Sam $1.00 and the Retailer paid Uncle Sam $1.00 That's a total of $4.00 going to Uncle Sam, but $8.80 in hidden taxes was collected from the buyer of the product. Where did the other $4.40 go in taxes collected, but not paid to the government?
The corporations PROFITED on the taxes they collected. The Taxes didn't cost them one red cent.

Had I added in the fourth company, it would easily be over the $5.00 in taxes paid by the consumer.
Had I added in the chain of manufacturing, and then the chain of distribution, the poor consumer would be bearing the load for all the taxes paid by each manufacturer in the chain, each distributor in the chain of distribution, and the retailers 100% markup.

Corporations don't pay the taxes, YOU pay the taxes for them, at 5 to 7 times the amount actually going to the government.

User avatar
yogi
Posts: 5467
Joined: 14 Feb 2015, 15:49

Re: Merry Christmas!

Post by yogi » 02 Feb 2019, 12:41

I see the problem:
Gary wrote:The corporations PROFITED on the taxes they collected. The Taxes didn't cost them one red cent.
What you are calling PROFIT I am calling overheard. I don't know that it works the same for an individual business, but large corporations encounter a real expense when they have to send tax money to the government. The transaction does not happen magically. There are accountants, computers, and buildings required to make all this happen. None of that is free. That's why I told you earlier that if you asked ten different accountants to explain the costs involved with taxes, you will get ten different answers. Thus the 10% added to the selling price of the goods is a guess at best. You yourself show in your example how different companies under different circumstances (accountants) value the cost of tax paying differently. I agree with you that this black magic guessing most likely produces more income than the actual cost, but nobody really knows the actual cost. Thus the added percentage is the company's best guess at what the next guy in the chain is willing to pay for his product. It's hardly a line entry on a balance stating "Profit From Paying Taxes." LOL

It has always amazed me to read this profit on taxes argument. The purchase price does indeed include all willy nilly mark-ups, but it also includes employee fringe benefits, for example. Why not itemize the vacation to the Bahamas that the VP took because he was being overpaid for the work he is doing? Those vacations are damned more expensive than tax collections when you include each overpaid executive in each of the manufacturing companies in the supply chain. I'm certain what the end user pays for the VP's vacation is way more than the mark up for taxes. So why single out the inflated price for taxes only? So called hidden taxes take on mythological proportions for many a tax payer. But accountants deal with the real world an don't see it the same way.

User avatar
Kellemora
Posts: 3033
Joined: 16 Feb 2015, 11:54

Re: Merry Christmas!

Post by Kellemora » 02 Feb 2019, 16:19

All Overhead is included in the Cost of Goods Sold. It is the only way a company can determine their true cost to manufacture a product. Overhead includes everything, including bonuses, company perks, building cost and maintenance, land cost and maintenance, utilities, raw materials, office supplies, office equipment and repairs, and all taxes they pay out. Nothing is left out, not even refreshments if allowed.
Every dime a company spends on anything, whether it be materials, labor, product shrinkage (loss), damage, returns, or fancy bonuses for the big shots. Every cent is accounted for! Including marketing, advertising, and sales staff.
I don't see why you are not getting this?
Once a company has the Cost of Goods sold figure finalized, only then can they determine how much to markup their product to earn a profit. Taxes paid are included in that figure. So, if they paid out $157,862.39 in taxes that year, and their markup is 20%, the selling price of the product will have $189,434.86 as hidden taxes passed forward to the next company in line. The PROFIT made from the taxes they paid out and recouped will be $31,572.47
The cost of dealing with taxes was already included in the Overhead, so you cannot add those costs again, which is what you were trying to do in your comment.

I've handled the accounting for both small and medium sized businesses for over 50 years. One of our companies had over 250 full-time employee's, which was actually more like 400 counting part-time and transients. It was not uncommon to produce close to 500 W2's each year due to transients.
Accounting is an Expense that is also in the Overhead as is FICA and other payroll taxes, however, in the case of taxes like FICA, although a part of Overhead, are not included in the Cost of Goods Sold. What we take out of an employee's paycheck to cover their share of FICA goes directly to the government, along with our required contribution.
The employee payroll is included in Overhead. The part we take out of their paycheck is NOT Overhead, but a Transaction that does have an Accounting Expense associated with it which is part of Overhead and the Accounting Expense does end up in the Cost of Goods Sold.

Every company in the chain of manufacturing uses Overhead to determine Cost of Goods sold. Cost of Goods sold is marked up by the percentage the company desires for their profit margin.
Once a product reaches its final stage of manufacturing, it moves onto distribution. Each distribution company has their Overhead used to determine their Cost of Goods sold, and their markup percentage.

The amount of money paid by John Doe Consumer in hidden taxes truly is phenomenal.

In its most simplest form of explanation, the amount of money I paid out in 2017 as income tax on company profits, was added to the Overhead figure used to determine my Cost of Goods sold for 2018. Cost of Goods sold was marked up by 18% to determine the price I sold my product to our mfgr. rep.
So, regardless of how much my company must pay in Income Tax (disregarding all other taxes also included), I will get back from sales 118% of my Income Tax. That is the way business works. It's the only way it works, else you would go broke.

Let's say you make Widgets. You spend 100k on materials, 50k on labor, 5k on packaging, 2k on distribution, and 13k on all your taxes. That's 170k you paid out. But if you exclude your taxes paid out from your Cost of Goods Sold, you would only markup your product on the 157k. Because you are a manufacturer, your profit margin is only 8% if that.
157k plus 8% = 170k - - - 170k income -13k taxes = 157k - - - Your company did not make any profit!

User avatar
yogi
Posts: 5467
Joined: 14 Feb 2015, 15:49

Re: Merry Christmas!

Post by yogi » 02 Feb 2019, 18:52

When you make a Balance Sheet all the expenses (debits) are itemized. Likewise for any income (credits). The difference between income vs expenses is profit. or loss depending on which is greater. If we agree on nothing else, we certainly do agree on this accounting norm.

Taxes paid are on the debit side. The exception being those employee contributions you cite. Both those employee contributions and the amount the corporation pays are separate line items. It's broken out clear and simple so that even an IRS auditor can figure it out. Nothing can be hidden.

On the credit side of the ledger is the income from goods/services sold. Somebody does indeed have to calculate an appropriate profit margin, but that is not a line item on a balance sheet. Or is it? Did you specifically itemize a 10%/20%/30% (or whatever) charge to cover the cost of paying taxes? Was it itemized as price gauging? I'll guess not.

The cost of doing business, taxes et. al., is figured into the selling price. We agree again on this point. However, buying the product/service is a one-off transaction. I paid part of your total expenses when I bought your product. End of story. The taxes paid up and down the supply chain are not cumulative nor compounded. Each link in the chain is a separate independent step complete onto itself and not carried forward. To say I'm paying 5x the taxes Google paid to make their cell phone is erroneous. The cell phone in my hands sold for 5x the price of component parts at the beginning of the chain. Of course I would pay more because I'm buying something of greater value.

The taxes which are called "hidden" are not hidden at all. They simply don't exist. Again, taxes are paid at every stage of the supply chain and figured into the cost of the product or service. If the end user is paying hidden taxes, you must also be willing to apply that logic to each and every item on the debit side of the balance sheet. The hidden taxes are no more relevant than the hidden cost of toilet paper used by the employees all along the supply chain. :rolleyes:

I don't want to go political on you because I know we have our differences. But here is something obvious to think about. You certainly must be aware of the tax cuts and jobs act of 2017. Individuals and corporations are now paying less tax because of this bill. Have you seen the cost of living go down where you live as a consequence of corporations having a lower tax liability? If you take corporations out of the loop and pay all the taxes directly, what do you think would happen to the cost of goods? Nothing. Just like the reaction to the tax cut which amounts to the same thing. In fact inflation has increased slightly since that tax cut. Can you imagine that?

User avatar
Kellemora
Posts: 3033
Joined: 16 Feb 2015, 11:54

Re: Merry Christmas!

Post by Kellemora » 03 Feb 2019, 11:48

Yes I agree, accounting is a double entry system, and companies use either a cash based system or an accrual based system.

I think you are confusing the Debit and Credit columns in a Ledger with Income and Expense.
In a double entry system, Debits and Credits must always balance out.
While Income and Expenses will rarely if ever be equal. You are either operating at a Profit or a (Loss).

In order to be operating at a Profit, you must have an Income greater than the Expense.
In order to have an Income greater than the Expense, you must take your Cost of Goods Sold and apply a markup adequate to generate a Profit.

All of a companies Expenses is collectively known as Overhead.
You can divide up your Overhead Expenses into separate line items, such as Rent, Utilities, Maintenance, Office Costs, Labor, and Taxes. Regardless of how you divide them up, they are still under the main heading of Overhead.

Inventory and Production can also be separate line items, hundreds if not thousands of line items. But they too still fall under the collective heading of Overhead. Sometimes you will hear Overhead plus Expenses determines the Cost of Goods Sold. It's sorta like saying, everything I paid out of my left pocket is Overhead, and everything I paid out of my right pocket is Expenses. Regardless of how you separate your Ledger entries, it all boils down to one thing, Overhead.

I didn't want to get into the technicalities of a company having many different Cost of Goods sold headings, because they are irrelevant to the company as a whole.
But to make things a little more understandable. A company may make 100k of a particular item, and only 10k of another item which may cost triple to make, and yet another item they only make 1k of, but the equipment and labor to do so is astronomical.
Excluding Operational Overhead for a moment, and looking only at Materials, Machines, and Labor Overhead.
It may cost the company 70k to make the 1k item; 20k to make the 10k item, and only 10k to make the 100k item.
So, in determining the Cost of Goods sold for each item, they may spread out the Operational Overhead in a like manner. 70% of Operational Overhead is included in the Cost of Goods sold for the 1k item.
20% of the Operational Overhead is included in the Cost of Goods sold for the 10k item.
And 10% of the Operational Overhead is included in the Cost of Goods sold for the 100k item.

Assuming they desire to make a 20% overall company profit.
The cost of the 1k item is already so high, they decide to only use a markup of 5% on this item.
The 10k item is traditionally a long-term steady seller, so they mark it up 30%, about the peak of what the market will allow.
The 100k item is a top seller, and as such has a considerable amount of competition in the marketplace. They can only mark it up by about 19%, but mark it up by 26% and offer regular sale price dates, so their average holds at 19%.

None of this matters in the companies big picture, they are only concerned with the Bottom Line 20% profit margin.

Which brings us right back to what is included in the total Overhead for the company, which is their Cost of Goods Sold.
The Cost of Goods Sold is marked up by 20% to determine their selling price.
Hidden from the consumer is their Tax Expense which is included in the Cost of Goods sold, BEFORE it is marked up.
It is NOT HIDDEN in their Ledger Books! It IS HIDDEN in the final sale price of the product.
You want to buy my Widgets? Here is the price for 144k units!

Looking back at the Ledger books line item for Taxes, broken down to the various types of taxes paid out, you can see 100% of those taxes were included in the Operational Overhead, and the entire Operational Overhead was combined with the Manufacturing Overhead to determine the Cost of Goods Sold.

So YES, 100% of the Taxes paid by the Company is included in the Cost of Goods Sold, and marked up by 20%.
So, if they paid out 100k in taxes, their sale price will fetch 120k back on those taxes, therefore they made a 20k profit on the taxes.

You cannot leave anything out of the Cost of Goods Sold, else you will never know how much you are making.
Income - Expense = Profit or (Loss). There is no other way!

That ADDED 20k to their Profit from the collecting of Taxes is passed on to the Next company in the line of manufacturing or distribution, and they are doing the exact same thing. That 20k extra they paid out in the purchase price of the product, becomes a part of their Overhead, and it IS NOT separated by a tax line item.

All they know is they bought 144k Widgets for a fixed price. Now they are going to add these Widgets to their Thingamajig as a component part. When they add their Overhead to get the Cost of Goods Sold they use, their taxes along with the hidden tax in the purchase price they paid for the Widgets is going to get marked up by their profit margin percentage.
Assuming they work on a 20% profit margin also, that HIDDEN extra 20k for taxes in their purchase price will ADD 4k to their selling price. So, what started out at company 1 as 100k in taxes, of which they made 20K profit from. Company 2 in the chain will earn 4k Profit on the taxes paid by the first company. But in reality it is much more than that because 120k was the amount passed on to them, they will actually take in 24k, but 20k of that passed down to company 1, which leaves them with 4k profit on the previous tax burden, plus the profit on their own taxes added to their Cost of Goods sold and marked up to get their sale price.

Corporations, large or small, and Independent Companies too, all make a profit on the taxes they collect for the government. Yes it appears as an Expense in their Ledger, but the recapture of that expense, plus Profit appears in the Income side of the Ledger. They paid 100k in taxes as an Expense, but excluding the product itself and just looking at the 100k they marked up to 120k added to the selling price, the Income side of the Ledger is 20k higher than the Expense side of the Ledger for the tax burden. Ergo, they made 20k profit on the taxes they collected, and poor John Doe consumer is who gets hit paying well more than 100% of Corporate tax burdens.
Corporations don't pay taxes, WE pay the taxes for them, and they make a Profit for handling those taxes.

You can't claim it costs them money to collect those taxes, because the cost of accounting and labor and supplies is already added into the Overhead and becomes a part of the Cost of Goods Sold.

The government don't want the people to know this, else they will have to handle all the tax accounting themselves.

User avatar
yogi
Posts: 5467
Joined: 14 Feb 2015, 15:49

Re: Merry Christmas!

Post by yogi » 04 Feb 2019, 09:39

Thank you for the elaborate explanation, yet again. I do appreciate your efforts here. After due consideration of the course this thread has taken, I can only conclude that you and I have the same basic understanding of how businesses operate. And, just to clarify things, I did use balance sheet numbers and cost of goods numbers interchangeably. The two are interrelated but not identical.

From the very start of this discussion I was concerned by your reference to a markup on taxes and how that markup is compounded as the product moves up the supply chain. You make reference to that several times in your latest explanation. I'm glad to take note, however, that you concede there is no line item on any ledger showing the markup on taxes being forwarded. We agree totally up to this point.

There is an old argument still circulating in the sub-culture of certain business centers which says we Americans are being forced to pay taxes on taxes already levied. That is explicitly illegal, of course, but the argument goes on to say the taxes are hidden in the costs of the products we buy. That hidden tax is what I see you referring to constantly implying it is a conspiracy on the part of the government. The counter viewpoint is that which I have pointed out several times myself. It is misleading to single out the tax component of the overhead calculation and carry that error forward. The transaction ends once the product is purchased. Any taxes assessed after the initial transaction are not related to prior taxes paid along the way up the chain. It's all part of overhead and profit margin calculations which as you point out is arbitrary.

It looks like we reached the point of agreeing to disagree. :mrgreen: You see it as profit from a single component of the total overhead, while I see it simply as overhead with all costs included. It may not be a perfect accounting system, but it certainly isn't a conspiracy either.

User avatar
Kellemora
Posts: 3033
Joined: 16 Feb 2015, 11:54

Re: Merry Christmas!

Post by Kellemora » 04 Feb 2019, 10:46

When you go to buy tires for your car. If there is an Excise Tax on those tires, after enough complaints of it hidden in the price of the tire, and folks were paying Sales Tax on the Excise Tax, they FINALLY made it a separate line item, and you only paid Sales Tax on the selling price of the tire before the Excise Tax was added on.

I'll close by saying only one thing. I never cared how much tax my companies had to pay out because I collected back 20% more than I paid out in taxes on those taxes. So I did make a profit on the taxes I paid, and recouped those taxes as well.

Imagine how much cheaper things would be if Corporations did not have to pay taxes!

User avatar
yogi
Posts: 5467
Joined: 14 Feb 2015, 15:49

Re: Merry Christmas!

Post by yogi » 05 Feb 2019, 08:40

Imagine how much cheaper things would be if Corporations did not have to pay taxes!
To reinforce my point about taxes being irrelevant because the markup that determines profit is not based on taxes alone but on the entire overhead, I asked you earlier if you had seen any price reductions after the congress had passed a tax reduction act in 2017. The answer is no, because while the companies are paying less tax they did not pass that savings along to the consumer. If you eliminate taxes on corporations altogether you still would be paying what you pay today because their profit is based on overhead costs, not taxes alone. QED

User avatar
Kellemora
Posts: 3033
Joined: 16 Feb 2015, 11:54

Re: Merry Christmas!

Post by Kellemora » 05 Feb 2019, 10:46

I do agree that companies will sell at whatever price the market will bear. And most are greedy.
But there are a lot of steps along the chain of manufacturing, and then the chain of distribution, which affect the shelf price of a product.

If you think taxing corporations don't make a difference in the selling price.
Try adding another 20% tax on top of what they already pay and see what happens.

Reducing or eliminating the current tax rates may not show an immediate affect on shelf prices, but it will over time.
Mainly because the tax reduction eliminates the compounding of taxes currently in place.
Also, as competition lowers their prices, the most greedy will be forced to lower theirs.

Here is food for thought. Remember 33 cent a gallon gasoline? I remember 15 cent per gallon gasoline!
It will be impossible to see those kinds of prices ever again, because the TAX on a gallon of gasoline in many states is 41 to 46 cents. It does vary from state to state of course.
Right now gasoline at the pump is $1.79 to $1.89 here. If we took off the 46 cent tax we have here, it would be a whole lot less. If we removed the taxes on the corporations who produce our fuels, all those hidden taxes already in the price of fuel would also be eliminated. We could see 50 cent a gallon gasoline once again.

How do we offset the cost of running the country if they remove the taxes from corporations.
Simple.
Instead of John Doe consumer paying $5.00 in tax to the Corporations, we make him pay $1.00 in tax directly to the government. The consumer saves $4.00 and the government still gets the same $1.00 income.

User avatar
yogi
Posts: 5467
Joined: 14 Feb 2015, 15:49

Re: Merry Christmas!

Post by yogi » 05 Feb 2019, 14:26

gary wrote:Right now gasoline at the pump is $1.79 to $1.89 here. If we took off the 46 cent tax we have here, it would be a whole lot less. If we removed the taxes on the corporations who produce our fuels, all those hidden taxes already in the price of fuel would also be eliminated. We could see 50 cent a gallon gasoline once again.
During the month of December, 2018, the price of crude oil varied between $50/bbl and $86/bbl. Assuming a barrel consists of 55 gallons of liquid that's $0.91 to $1.56 per gallon of crude. That's the price at the well and doesn't include shipping or refining the oil into gasoline. We will never see 50-cent gasoline again.

Local and federal taxes are added to the price of a gallon of gas at the pump, or point of sale. No state that I know of sells gas where the added POS taxes double the price. It's misconceived to assume the POS taxes are compounded. Any taxes paid along the processing chain are overhead and not compounded taxes. I realize that there are different ways to look at this, but generally accepted accounting principles separate it all.

It would be a sea change to remove all tax liability from corporations. It's anybody's guess what would come of that. My guess is that you would see no change in prices at the retail level in the long term because the cost of doing business increases each year. Since the tax cut in 2017, for example, the Consumer Price Index has increased by 2% and will be even greater this year. Compare that to a 25% (on average) decrease in taxes paid by corporations. Why didn't the price of goods drop proportional to the cut in taxes? One explanation could be that the tax burden is a very small part of the overhead that goes into the cost of a product. Then again, I'm no economist. What do I know? :mrgreen:


Call me a socialist, but I had this thought many years ago when I became frustrated with all the taxes I had to pay. I was thinking that I would be happy to give the government ALL my earnings and let them handle my food, shelter, clothing, and medical needs. Give me a $20 allowance every week and I'll not complain anymore. We'd all be equal then, comrade. :cool:

User avatar
Kellemora
Posts: 3033
Joined: 16 Feb 2015, 11:54

Re: Merry Christmas!

Post by Kellemora » 06 Feb 2019, 12:33

You are correct that the amount of taxes included in the cost of goods sold is minuscule when compared to all the other expenses which appear in there.

Although as you pointed out, the tax is minimal in the overall scope of things. My point is that we are paying Tax on Tax compounded five to seven times, and it does not benefit the government, only drains our pockets.

My ancestors lived through hyperinflation, twice. The second time, inflation was so great, the cost of postage was doubling by the hour, as was everything else.

Every great nation fell when their tax base crossed 25%. The USA has been running nearly double that for a long time, being artificially held up, and in some cases taxes have tripled.

Socialism doesn't work, never has and never will. It ends when the rich run out of money, and everyone else won't work.
Look at Venezuela.

User avatar
yogi
Posts: 5467
Joined: 14 Feb 2015, 15:49

Re: Merry Christmas!

Post by yogi » 07 Feb 2019, 09:23

I proposed that socialism scheme tongue in cheek. It's a non-incentive system that is doomed from the start. If I were entirely supported by the government, for example, then I'd have no reason to work or make life better. I'll be paid either way. Governments don't have to run out of money given that they can print up their own currency and practice deficit spending. Us common folks don't have that privilege.

Well, what can I add that hasn't already been stated? You are paying taxes on taxes and I am paying taxes on the cost of goods. Either way the oligarchs are benefiting the most from it all.

User avatar
Kellemora
Posts: 3033
Joined: 16 Feb 2015, 11:54

Re: Merry Christmas!

Post by Kellemora » 07 Feb 2019, 12:13

Yeppers, it's about time to end this Christmas thread and start a new one on something else.

Post Reply