[ashokrajagopal]

Originally Posted by carboy

I don't understand the question. By "no hope involved" - I meant that there is no need to hope.

Are you suggesting that sales reduced to half because the price was reduced?

The profits after decrease in prices & reduced sale and reduced tax will be the same as the profit you would have made at the old price, reduced sales & higher tax.

When demand is going down, a tax cut was provided. I guess the whole discussion from Samurai was that its a gamble if price is reduced with hope that demand will pick up.
If the demand goes down sufficiently low, no amount of price reduction is going to make any impact. If the production and marketing has been done already with reduced price, all you have left is hope that the demand will at least stay flat. With the reduced price, the business has already taken a gamble.
In short, sales is not reduced to half because of the price, but sales may reduce to half despite the price. Where the production has already taken place accounting for lower cost price, it is certainly a hopeful gamble.

[carboy]

Originally Posted by ashokrajagopal

When demand is going down, a tax cut was provided. I guess the whole discussion from Samurai was that its a gamble if price is reduced with hope that demand will pick up.

Nope. What he said was "Reducing price when no other cost has gone down, hoping you will make up the difference from reduced tax rate."
So the hope as per him was you making up the difference caused by the new reduced selling price by using the reduced tax rate. This is not a hope or a gamble. If you calculate the new lower price right, you will make up the difference between the earlier price and the new lower price.

Originally Posted by ashokrajagopal

If the demand goes down sufficiently low, no amount of price reduction is going to make any impact.

That would be the case even without the corporate tax cut.

Originally Posted by kiku007

Does this explain why the stock market responded positively?

Because the intrinsic value of each company which gets the reduced tax rate has gone up. It's Profit after Tax (PAT) will be more today for the same revenue and the same Profit Before Tax (PBT) as compared to without the tax cut. So assuming a constant earnings multiple, the stock now has a higher intrinsic value. And this is just the first order effect. There would also be 2nd & more order effects.

[Samurai]

Originally Posted by carboy

No, it's a simple calculation. There is no hope involved. To keep your current year profits, you need to reduce your selling price from C to (0.05A + 0.70DC + 0.05DB)/0.75D

The calculation may be simple, but the reality is not. The biggest problem with your simple math is that we don't know D. The D is just a guesstimate with a wide standard deviation. Also, C isn't fixed either. For different clients, depending on the volume or strategic importance of a customer or region, C can vary a lot. In a situation where D is a guess and C is varying wildly, it would take a very brave CEO to reduce price upon the promise of compensating via tax cuts.

Another reality, companies loathe to pass any savings to customers unless they are getting something for it. Consider a demand curve, any salesperson would want to be at the highest point of the demand curve. They move downward in the demand curve only to maximize profit, nothing else.

Originally Posted by carboy

Very, very few companies distribute all their profits as dividends.

I don't remember claiming otherwise.

Originally Posted by carboy

So the hope as per him was you making up the difference caused by the new reduced selling price by using the reduced tax rate. This is not a hope or a gamble.

Assuming a fixed C and assured D is gambling on hope.

[carboy]

Originally Posted by Samurai

The biggest problem with your simple math is that we don't know D.
The D is just a guesstimate with a wide standard deviation.

No. D is an exact value. It's the number of units of the widget sold in the year before the tax cut.

Originally Posted by Samurai

For different clients, depending on the volume or strategic importance of a customer or region, C can vary a lot.

If your C is a range, then you can trivially extend the formula to produce a range as output and then find the proportional price in your range for each old price.

Originally Posted by Samurai

Another reality, companies loathe to pass any savings to customers unless they are getting something for it.

Well, one thing they get it a possible volume increase. If a company has pricing power, then it's fine even if they do not decrease price. The tax cut means that they have more PAT which can be used for Capex thereby reducing the need for debt.

That a tax cut helps businesses is a well studied economics theory. A tax cut even increases tax revenues. This is basic Mundell Laffer supply side economics. Mundell is the father of Supply Side Economics & also a Nobel Prize Economics winner. So I will refrain from debating further on this - if anyone is interested they can look up Supplied Side Economics Theory.

[Samurai]

Originally Posted by carboy

No. D is an exact value. It's the number of units of the widget sold in the year before the tax cut.

How will that help you reduce the price for next year, where future D is unknown, especially in this slowing economy?

Originally Posted by carboy

That a tax cut helps businesses is a well studied economics theory. A tax cut even increases tax revenues. This is basic Mundell Laffer supply side economics. Mundell is the father of Supply Side Economics & also a Nobel Prize Economics winner. So I will refrain from debating further on this - if anyone is interested they can look up Supplied Side Economics Theory.

Supply side economics or trickle down economics has failed to deliver big time. It created a huge income inequity, all this is water under the bridge.

Also, his Laffer curve has been discredited so many times, I wouldn't bother addressing it.

[carboy]

Originally Posted by Samurai

How will that help you reduce the price for next year, where future D is unknown, especially in this slowing economy?

I addressed this in my reply to ashokrajgopal, so won't bother again.

Originally Posted by Samurai

Supply side economics or trickle down economics has failed to deliver big time. It created a huge income inequity, all this is water under the bridge.

I thought your argument was that businesses don't think so much about tax cuts. Now your criticism is that it created a huge income inequity. If true, it would be because the businesses & business owners increase their profits. So you net argument is that businesses don't care much about stuff which increases their profits. No wonder Bush41 called this as "Vodoo Economics"

[Chetan_Rao]

Originally Posted by carboy

...Bush41 called this as "Vodoo Economics"

Bush Sr. called Reagan's supply-side economics 'Voodoo Economics', because he thought increasing spending while reducing taxation was BS and won't achieve much except handing corporates free money.

your criticism is that it created a huge income inequity

Cause and effect. Hand someone extra money on the assumption (pretense is a much more accurate description) they'll pump it back into the economy, without obligating them to do so. Over a period of time, they hoard the money instead (because why not?), and the promised 'jobs' and 'prosperity' the tax cuts were supposed to bring never materialize.

This isn't necessarily a rich vs. poor thing either. If everyone hoarded what they had instead of using it to meet their needs/wants, entire economies would collapse. They rich just have more to hoard, compared to someone living paycheck to paycheck. Tax cuts are a good thing if they're targeted to specific purposes, and can incentivize flagging markets. Horse and sparrow stuff doesn't work, never has.

[carboy]

Originally Posted by Chetan_Rao

Bush Sr. called Reagan's supply-side economics 'Voodoo Economics', because he thought increasing spending while reducing taxation was BS and won't achieve much except handing corporates free money.

Yes. And what Samurai said is that businesses don't care much about tax rates. Which means businesses don't care much about profits.

Originally Posted by Chetan_Rao

Cause and effect. Hand someone extra money on the assumption they'll pump it back into the economy, without obligating them to do so. Over a period of time, they hoard the money instead, and the promised 'jobs' and 'prosperity' the tax cuts were promised to bring never materialize.

This is a different debate & not one which I debated at all as yet.

[ashokrajagopal]

Originally Posted by carboy

I addressed this in my reply to ashokrajgopal, so won't bother again.

Did you really ? I thought the assumption from my side was that demand is low, and there is no guarantee on D staying there, and your reply sounded like that is not what the formula is about.
In a season where demand is going down, your D is a function of something in future. If Laffer curve is the reason for demand not going down, we are really not talking economics.
The number one myth about Laffer curve is that it says something about "reducing taxes". Laffer curve only talks about that imaginary optimum tax level, where deviations either side will reduce revenue. Of course it has been used by politicians in arguments for lowering taxes.

[Chetan_Rao]

Originally Posted by carboy

Yes. And what Samurai said is that businesses don't care much about tax rates. Which means businesses don't care much about profits.

You're joining dots you presumed into existence.

Sharath's made this point before, and as far as I can tell, he's alluding to businesses not accounting for tax cuts as input costs, not that they don't care for tax rates at all. Two different things.

This is a different debate & not one which I debated at all as yet.

It really isn't, but I'm not surprised by the response. Economics has to look at both supply & demand, but it's a common problem with supply-side economics failing to account for demand, and the social aspects of it.

If people don't have (enough) money to spend, income inequality becoming a long-term effect of the supply side hoarding resources, demand ultimately drops and no amount of increased supply with convince someone to spend money they don't have.

[carboy]

Originally Posted by ashokrajagopal

Did you really ? I thought the assumption from my side was that demand is low, and there is no guarantee on D staying there, and your reply sounded like that is not what the formula is about.

Yes, that's not what the formula is about at all. The formula is to find a reduced price at which there isn't a risk in reduction of price with the same demand. The formula doesn't say whether demand will increase or decrease or remain the same.

Originally Posted by ashokrajagopal

In a season where demand is going down, your D is a function of something in future.

Yes. But your profit after reduction of price, reduction of tax rate & reduction in demand will be the same as without reduction in price, without reduction of tax rate & **with** reduction of demand.

Originally Posted by ashokrajagopal

The number one myth about Laffer curve is that it says something about "reducing taxes". Laffer curve only talks about that imaginary optimum tax level, where deviations either side will reduce revenue. Of course it has been used by politicians in arguments for lowering taxes.

The criticism of the Laffer curve is about whether it does increase revenue. My debate with Samurai was not about that.

Originally Posted by Chetan_Rao

You're joining dots you presumed into existence.

No, I am not. Read the original comment to which I replied.

Originally Posted by Chetan_Rao

Economics has to look at both supply & demand

Of course.

[Chetan_Rao]

Originally Posted by carboy

....
Of course.

I think you'll make far more headway in the discussion if you considered demand is driven by more than just pure economics. Supply can be and often is, but demand is relatively complex.

It has a social and a human aspect to it, something you cannot calculate purely by mathematics.

[carboy]

Originally Posted by Chetan_Rao

I think you'll make far more headway in the discussion if you considered demand is driven by more than just pure economics. Supply can be and often is, but demand is relatively complex.

It has a social and a human aspect to it, something you cannot calculate purely by mathematics,

Of course. But I have hardly debated any demand side stuff at all till now in this thread. I am only debating whether supply side changes like the tax cut could increase profits for the companies or not & whether businesses think about it or not. And whether companies can cut prices because of the reduced tax rate without much risk **if** they want to.

[ashokrajagopal]

Originally Posted by carboy

Yes, that's not what the formula is about at all. The formula is to find a reduced price at which there isn't a risk in reduction of price with the same demand. The formula doesn't say whether demand will increase or decrease or remain the same.

If you are applying a D in your formula, and saying it does not look at whether the value of D moves, the formula isnt really of any value, is it ?

Yes. But your profit after reduction of price, reduction of tax rate & reduction in demand will be the same as without reduction in price, without reduction of tax rate & **with** reduction of demand.

Even the most rational, economics trained businessman would not call it anything other than a gamble if
-by virtue of corporate tax cut, the govt already gives additional cash to sit on and wade the tide, but still
-you reduce your price so that the total profit remains the same as last year, using a formula based on demand from last year, all the while knowing that demand is totally unpredictable.

The criticism of the Laffer curve is about whether it does increase revenue. My debate with Samurai was not about that.

If you bring in supply side economics as a proven theory, much of it is based on Laffer curve, which also points to the optimum tax thing. If you assume all tax cuts automatically translates to increase in sales, it is going against the definition of the optimum tax thing, which is important in supply side economics.

[Chetan_Rao]

Originally Posted by carboy

Of course. But I have hardly debated any demand side stuff at all till now in this thread. I am only debating whether supply side changes like the tax cut could increase profits for the companies or not & whether businesses think about it or not...

If a corporation is handed extra money (via tax cuts or incentives) but they don't really see extra demand for what they sell, why would they invest the funds (in people and/or infrastructure) to ultimately create potentially dead inventory they may need to take losses on (both the investment and the inventory)?

Why bother risking investing the money on the supply side that may or may not create extra demand (ergo the opportunity to generate profit after adjusting prices with whatever mechanism/model you think best), why not just pocket the money and profit directly (and hand out a few small 'bonuses' to quell any employee unrest)?

Look at the recent tax cuts in the US, for example. Most industry leaders open admitted they will (and did) use the money for share buybacks and consolidation (basically the corporate way of saying 'pocket the money').

Targeted tax cuts at certain industries may possibly encourage new players to join in by making their business models viable (electric mobility, for example), but tax cuts to the supply side of existing, established businesses don't have much direct impact on business because the cut does nothing to enhance demand, which is the primary driver of the business. Hand that cut to the consumer, on the other hand, and the corporate may see increased demand without reducing (or even marginally increasing) prices.

whether companies can cut prices because of the reduced tax rate.

Companies can, in theory, but you'll see the only factor that usually accounts for price adjustments is demand. If their costs are reduced due to tax incentives, they won't reduce prices just because they can.

Apple could sell iPhones for significantly less prices and still make decent profits, would you bet they'll reduce prices if they got a tax cut? Why would they, when there's solid demand at existing prices, and the tax cut just lets them make more money (or keep more of what they already have)?

Tax cuts drive profits only in the sense they're free money, unless they come with investment obligations.

companies can cut prices because of the reduced tax rate without much risk **if** they want to.

To address your edit, because it illustrates a good point.

It isn't straightforward. Extending the Apple example, they may refrain from cutting prices even if they can absorb the difference, to maintain their 'premium' brand standing. If iPhones were more affordable, they'll lose the aspirational value that drives a lot of Apple's business, so in this case, a price cut may ultimately, in the long-term, hurt both demand (from the 'aspirational value' customers) and profitability (less margin per piece sold a reduced pricing).

Like I said, it isn't straightforward.