The Corporate Erin Brockovich?

By Ian

Pardon the echo-chamber post, but this one really deserves an airing, I think. Via Asymmetrical Information, this post from Matt Yglesias.

The key point?

Speaking of which, fuck the small businessman.

Just a reminder, from the government Matt apparently so apparently and fervently believes has original claims on our money: over 99% of the employers in the US are classified as "Small".

Which makes Matt's suggestion rediculously narrow in vision, not to mention sounding really quite tiring.

Honestly, this sounds similar to the argument about drug company profits being "too large", and believing that simply scaling them back through capping prices won't have any effect on the number of new drugs that might (or might not) get developed. That is to say, this can't be viewed as a static action that simply lowers the coffers of the government. With the repeal of the estate tax comes a reduction in the contortionist practices people go through in order to avoid those same taxes. Add to this the possibility of increasing activity once the money that is currently taxed is back in the hands of the business owner.

To head one thing off now: no, I don't generally believe that tax cuts pay for themselves because of increased economic activity alone. In this case, however, businesses changing hands and retaining more capital create owners far more likely to reinvest in that business than possibly non-owners are to go out and spend their tax cut (of course, while people worry that tax cuts are spent on reducing debt or are simply being socked away, much heavy weather is made of the US savings rate being "irresponsibly low"). One of the major benefits, to me, of simplifying/eliminating taxes is avoiding the productive efforts spent in trying to avoid those taxes. In Matt's laughably naive formulation of "inheriting X" and having to "pay Y", and thus getting a net increase of "X-Y" -- the "very good problem to have" -- there is no mention of liquidity. That is, the business is worth a sum total of X, but possibly only because of its assets. The payment Y can, and in fact often does, surpass the liquid capital within the sum X. To pay Y, X has to be sold.

How many small businesses can you name are able to pay employees and produce goods...with no assets?

-- April 14, 2005 3:39 PM |

Comments

Kevin Brancato wrote:

If the estate tax is permanently repealed, look to see the Waltons -- of Wal-Mart fame -- move up their plans to donate up to $20billion to education reform.

They were waiting until Helen Walton died, but if they no longer have try to counter the estate tax, they might start early...

The timetable has not been made final, Walton says. But the family will likely be forced to take action because of estate taxes potentially due when Helen Walton, 84, dies, leaving behind as much as 20% of the family's Wal-Mart stock.

Hence, estate tax elimination should make the teachers' unions very nervous...

-- April 14, 2005 7:32 PM ∞

Paul in NJ wrote:

I shudder whenever I read tirades against small business from those with little (and quite often no) knowledge, or experience, with a small business. Matt Yglesia's level of ignorance is, sadly, all too typical.

-- April 15, 2005 8:53 AM ∞

Half Sigma wrote:

Matt means that he's tired of the "small business" being glorified on this big pedestal.

I have to agree with his point that someone inheriting a million dollars is darned lucky, and if he has to sell the business to pay the taxes, he's still darned lucky.

-- April 15, 2005 3:48 PM ∞

Ian wrote:

Sigma:

I think this still has the same basic problem as Matt's argument.

Inheriting a business is simply not the same as inheriting a million dollars. The value of the company may be tied up in a vast number of illiquid items that have to be dealt with -- liquified -- if they are to bring that person some monetary value. The argument might seem nitpick-y (the potential for a million dollars not being the same as getting a million dollars), but it holds the crux of the issue. The items that went into the business -- those same assets -- were taxed on creation and taxed on sale. Labor that goes into their use is taxed. The write downs for things like depreciation don't really make up for the sum total of the taxes that are collected to add up to the one asset. Nor should they, really. Steps along the way are taxed as they add value (to some extent) -- the question being, what hasn't been taxed in this that now should be? The increase to someone's "income" is that thing to be taxed, is apparently Matt's answer, since he seems to think that there is simply no difference between a million dollars of, say, welding equipment, and a million dollars in a bank account.

This ignores, among a whole slew of things, the fact that a lot of businesses are stuctured so that the ownwer and the company are a single tax entity (S corporations); the person who just "inherited" a company now technically has an income on par with the revenues of the company. Once again, this sounds like a great thing, but remember that this individual now pays taxes at the level of the corporation. For instance, my father owns a small company, which means he "earns" millions of dollars a year because that's the income (not the profit). He and the company pay taxes of some amount that DWARFS what he takes home as his salary. The rest is reinvested into the company.

The future ability to appropriate revenue from the productive capability of the assets is largely where we find that a company is worth that "million dollars". The tax, on the other hand, is due now, in cold hard cash to the govenment. If the immediate liquidity is low, then the new owner may have to sell it off. But this means that the people who worked for the company now lose their jobs and the country loses them for some period of time as being productive individuals participating in the economy.

By the way, this could also be a boon for big companies. Since a larger firm is more likely to have the cash/ability to borrow in order to buy the inherited assets of the small business, RIGHT NOW (since that tax bill is due RIGHT NOW), then things like neighborhood convenience stores get swallowed by CVS, etc.

I personally have no problem with consolidation. But people like Matt shouldn't whine about hearing how great small businesses are and suggest that the government can waltz over them all it likes, then complain that places like Wal-Mart are unfair since they hold more power when employees don't have other job options.

Business in general should be glorified. It's an endlessly beneficial and fascinating thing. Not without it's problems, but since the world works on trade-offs, nothing's perfect. Telling 99% of that population it can go take a flying leap, however, seems an act of either profound elitism, or simple trolling for hits. Either way, I think it's worth confronting.

-- April 15, 2005 4:21 PM ∞

Mark wrote:

Matt has a degree from Harvard. One of those two was cheated.

-- April 16, 2005 8:03 PM ∞

OccupleSlosseas wrote:

http://www.newunit.net/forum/viewtopic.php?p=139681 139681 "zepeJedlowl" http://wow-heros.com/phpBB/viewtopic.php?p=107307 107307 Result: GET- 1

-- April 26, 2008 2:29 PM ∞

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