What Happens to GDP when you Remove Government Spending?

[iguanaman]

Your concept of "profit" and what happens to it is incorrect. It's a common misconception but still incorrect.

Let me give you a VERY simplified example:

Alpha Corp. sells widgets. In a given year their gross sales were $1M and their expenses, which include executive compensation of $100k, were $750k. This gives Alpha Corp. a net profit of $250k. Alpha Corp then takes that profit and invests it in new equipment which will allow them to meet production goals more easily.

The profit DOES NOT sit in some bank account waiting to be used. Cash that is sitting static is generally useless because it produces nothing and does not appreciate in value.

Furthermore, if all cash from operating profits was withdrawn from the corporation for personal use then no growth could happen. If a widget costs $4 to produce and sells for $5 then that dollar in profit was taken out of the system there would be no resource with which to produce any more widgets than are already being produced. If, under such circumstances, a customer wanted 10 widgets instead of the 9 they ordered there would be no cash available to cover the production cost of that extra widget unless it was paid for up front.

LOL You don't have a clue about what business does with their profits...

Corporations are hoarding cash: despite dividends and buybacks, cash is likely to hit another record high.

Cash set a record in the first quarter of 2013 on an absolute basis: $1.093 trillion in the S&P 500. It has set a record for 18 of the last 20 quarters.

Companies sitting on cash pile of over $1 trillion

 

[Lutherf]

LOL You don't have a clue about what business does with their profits...



Companies sitting on cash pile of over $1 trillion

Corporations are sitting on cash now because lending has been tightened dramatically. Basically, they don't have a choice in the matter. However....if they're just sitting on the cash isn't that a little bit weird since, according to those in the know, they should just be taking that cash and giving it to the executives?

 

[jaeger19]

Sorry, Jaegar, Investment comes from profits. Investment is a capitalized expenditure. It is not counted in the P&L, but is rather a use of profit That is the pure accounting view of the world. Granted, our current tax law allows for expensing of a lot of capital equipment (Section 179 and bonus depreciation), but that for tax purposes, it is not GAAP (accounting convention).

Now, you can make an investment when you company does not have profit, but then that investment money must come from another source.

gotta love accountant doublespeak. Sorry, but my accountant makes my head hurt with his terms too. At the end of the day.. its not profit.. because it goes back into the business and I am not taxed on that money. That's the big point to all this.

If I buy more equipment or update equipment during this tax year.. its expensed.

I don't have to declare money as profit.. pay tax, and then go buy replacement equipment with it.

 

[jaeger19]

Corporations are sitting on cash now because lending has been tightened dramatically. Basically, they don't have a choice in the matter. However....if they're just sitting on the cash isn't that a little bit weird since, according to those in the know, they should just be taking that cash and giving it to the executives?

Luther.. its not because of lending... We are sitting on cash because we don't know which way to jump. Actually IF to jump.

Most businesses took hits during the recession. Which means cutting back on staff, delaying equipment or expansions etc. Now the reality is that most companies weathered the storm pretty well and are making money.. in some cases a LOT of money.
Most of us want to get back to normal and expand if possible... because obviously it means more money for us.

But WHEN? Right now we want the liquidity to be able to move if necessary or to hunker down if necessary.

The problem is that we are in very unsettled time economically but also importantly politically. the political landscape is the craziest I have seen in two decades of business.

For example... the House is poised to fight over increasing the debt limit over Obamacare. The house is willing to potentially shut down the government over funding for Obamacare. Well, any business that does business with the government could end up being adversely effected. From healthcare, to defense, to retail, to oil and gas. etc. The last abomination "sequestration" already cut into my business.

Who knows whats going to happen. Now.. if lets say I am run grocery stores that accept food stamps. If I am thinking about maybe putting in another grocery store because I have seen business increase and might be able to capture market share with another store, right now I am torn between seeing potential business, and knowing that in the next month, suddenly that business might drastically be cut when welfare benefits are cut, or because the government call center in town could be laying off hundreds of workers, or furloughing them..

Or if I am a medical clinic thinking of hiring more staff because we have a patient backlog... should I hire more staff when my medicare, Medicaid and VA payments could be put on hold for 6 months while they fight over the debt limit?

That's why cash is sitting out there. Businesses are doing okay, but they don't have enough security to put the money back in.

 

[Samhain]

You include SS expenditures in GDP because you "borrowed" it from previous years GDP. That's why you never increase SS taxes without a corresponding SS benefit increase. If you did, it would be a permanent reduction in potential GDP.

 

[Samhain]

LOL You don't have a clue about what business does with their profits...



Companies sitting on cash pile of over $1 trillion

And they want to, because they've been shown in the past that investing that money is too risky, compared with the safety of a rainy day fund.

 

[upsideguy]

gotta love accountant doublespeak. Sorry, but my accountant makes my head hurt with his terms too. At the end of the day.. its not profit.. because it goes back into the business and I am not taxed on that money. That's the big point to all this.

If I buy more equipment or update equipment during this tax year.. its expensed.

I don't have to declare money as profit.. pay tax, and then go buy replacement equipment with it.

Its not profit for tax purposes because you get to write off assets.... but that is just how taxes work (rapid depreciation is what many call a "loophole".. though it really isn't). But, from a pure accounting perspective, which is what defines profit and loss, capital expenditures generally come from profit or outside investment.

 

[jaeger19]

Its not profit for tax purposes because you get to write off assets.... but that is just how taxes work (rapid depreciation is what many call a "loophole".. though it really isn't). But, from a pure accounting perspective, which is what defines profit and loss, capital expenditures generally come from profit or outside investment.

See. that's why I pay someone to work my accounts. "It's NOT profit.. but it is".... its that kind of stuff that drives a regular guy crazy.
:shock::shock:
Bottom line.. for tax purposes.. which is the thrust of the "redistribution" issue of the thread.. its not profit.

 

[Glen Contrarian]

No offense but not true. In fact.. in things like social security.. that's what tends to produce and sell "more stuff"... that's because the money to more people generates more economic activity (essentially GDP)...

I make 1 million dollars in profit a year. Profit mind you.. so that's not the money that I put back into my businesses.. the money I put back into the business does not count as profit.

You let me keep all the profit. Great.. I buy a big house, maybe a few more rentals.

OR.. you tax that money and I pay 500,000 dollars in taxes. and that tax goes to social security, welfare, roads, schools, etc etc.

I still by the bigger house and rentals.. but now hundreds of people have the cash to go by groceries, roads are being built, other infrastructure, kids are getting educated and then creating industries and innovations...

Much more economic activity in the second example..

Finally! A conservative who gets it!

 

[Glen Contrarian]

Your concept of "profit" and what happens to it is incorrect. It's a common misconception but still incorrect.

Let me give you a VERY simplified example:

Alpha Corp. sells widgets. In a given year their gross sales were $1M and their expenses, which include executive compensation of $100k, were $750k. This gives Alpha Corp. a net profit of $250k. Alpha Corp then takes that profit and invests it in new equipment which will allow them to meet production goals more easily.

The profit DOES NOT sit in some bank account waiting to be used. Cash that is sitting static is generally useless because it produces nothing and does not appreciate in value.

Furthermore, if all cash from operating profits was withdrawn from the corporation for personal use then no growth could happen. If a widget costs $4 to produce and sells for $5 then that dollar in profit was taken out of the system there would be no resource with which to produce any more widgets than are already being produced. If, under such circumstances, a customer wanted 10 widgets instead of the 9 they ordered there would be no cash available to cover the production cost of that extra widget unless it was paid for up front.

Problem is, there's no money in your example allotted to pay for the education of the people (who someday become the (hopefully) educated) workers, no money for roads, for fire and police protection, or for the legal, regulatory, and legislative systems that we all hate but that we all need.

 

[Khayembii Communique]

See. that's why I pay someone to work my accounts. "It's NOT profit.. but it is".... its that kind of stuff that drives a regular guy crazy.
:shock::shock:
Bottom line.. for tax purposes.. which is the thrust of the "redistribution" issue of the thread.. its not profit.

Retained earnings is profit...

 

[jonny5]

No offense but not true. In fact.. in things like social security.. that's what tends to produce and sell "more stuff"... that's because the money to more people generates more economic activity (essentially GDP)...

I make 1 million dollars in profit a year. Profit mind you.. so that's not the money that I put back into my businesses.. the money I put back into the business does not count as profit.

You let me keep all the profit. Great.. I buy a big house, maybe a few more rentals.

OR.. you tax that money and I pay 500,000 dollars in taxes. and that tax goes to social security, welfare, roads, schools, etc etc.

I still by the bigger house and rentals.. but now hundreds of people have the cash to go by groceries, roads are being built, other infrastructure, kids are getting educated and then creating industries and innovations...

Much more economic activity in the second example..

Not true. If you I don't tax you, maybe the money stays in a bank, which loans it out to someone to start a business, which employs people and spends money, thus generating economic activity. This is a bigger multiplier than taking your money, paying bureaucrats to waste a bunch of it before giving to some poor person who consumes it instead of producing something.

 

[jaeger19]

Retained earnings is profit...

I am not taxed on it if I put it back into my business.

 

[fmw]

Finally! A conservative who gets it!

Actually, he doesn't. Money reinvested in the business comes from profits so, of course it counts as profits. He buys a big house. The business doesn't. The house has nothing to do with anything. The money was already taxed because it was profit. The profit was earned, some of it went to government in taxes and some was reinvested in the business. Where did the people get the "cash to buy grocieries?" Truth is he doesn't understand business, economics or accounting in the least.

 

[fmw]

I am not taxed on it if I put it back into my business.

You're dead wrong about that.

 

[jaeger19]

Not true. If you I don't tax you, maybe the money stays in a bank, which loans it out to someone to start a business, which employs people and spends money, thus generating economic activity. This is a bigger multiplier than taking your money, paying bureaucrats to waste a bunch of it before giving to some poor person who consumes it instead of producing something.

Quite true.. first.. the banks don't need my money.. that's why they are paying SQUAT on interest.. because they get it cheaper from the Fed.

However, lets say you are right..

The only reason that a person starts a business.. IS BECAUSE HE HAS CUSTOMERS. That means folks with money. and a few rich folks isn't that big a customer base. Now.. if we were more exporters and importers.. then you MIGHT have a point to a degree.. but that fact is.. its the US consumer base that runs this economy.

If you doubt me.. go borrow a million dollars and start a business selling 8 tracks.. and see just how much economic activity you have!.

Whats interesting is that very idea you are stating? that was one of the problems with Obama's stimulus. They gave all sorts of tax credits, tax breaks and subsidies to businesses with the idea that encouraging more business would generate more economic activity. That's how we ended up with something like Solyndra. Because business doesn't generate activity on its own.. it needs to have a demand and a demand with the money to pay for it.

However, there is another point here to be made. You stated that taking tax dollars and giving to bureaucrats to waste before giving it to poor people who consume...
That is a salient point.. and it points out why things like the minimum wage are more effective means of getting helping the economy rather than taxing folks and then turning around and giving it as welfare.

 

[jaeger19]

You're dead wrong about that.

Wow.. then I need to talk to my accountant.. because I just bought some supplies.. so apparently, I am supposed to take the money out of the business.. pay my quarterly taxes on it.. and then go buy supplies... huh? Who knew... (insert sarcasm here)

No.. I am not dead wrong on that.

 

[jaeger19]

Actually, he doesn't. Money reinvested in the business comes from profits so, of course it counts as profits. He buys a big house. The business doesn't. The house has nothing to do with anything. The money was already taxed because it was profit. The profit was earned, some of it went to government in taxes and some was reinvested in the business. Where did the people get the "cash to buy grocieries?" Truth is he doesn't understand business, economics or accounting in the least.

Dude.. your completely off your rocker...

Yes.. I buy a big house.... if I do that, I can't take it off the business.. ... (unless I call it a corporate retreat or some other sole business purpose)

If I hire another person because I have more business well..thats is an expense and goes against my profit.

I am afraid the truth is you don't understand business or economics or accounting in the least.

 

[jonny5]

Quite true.. first.. the banks don't need my money.. that's why they are paying SQUAT on interest.. because they get it cheaper from the Fed.

However, lets say you are right..

The only reason that a person starts a business.. IS BECAUSE HE HAS CUSTOMERS. That means folks with money. and a few rich folks isn't that big a customer base. Now.. if we were more exporters and importers.. then you MIGHT have a point to a degree.. but that fact is.. its the US consumer base that runs this economy.

If you doubt me.. go borrow a million dollars and start a business selling 8 tracks.. and see just how much economic activity you have!.

Whats interesting is that very idea you are stating? that was one of the problems with Obama's stimulus. They gave all sorts of tax credits, tax breaks and subsidies to businesses with the idea that encouraging more business would generate more economic activity. That's how we ended up with something like Solyndra. Because business doesn't generate activity on its own.. it needs to have a demand and a demand with the money to pay for it.

However, there is another point here to be made. You stated that taking tax dollars and giving to bureaucrats to waste before giving it to poor people who consume...
That is a salient point.. and it points out why things like the minimum wage are more effective means of getting helping the economy rather than taxing folks and then turning around and giving it as welfare.

How exactly are you a conservative?

 

[American]

Blue is real GDP per capita. Red is the same but after removing government expenditures.

Does anyone else notice a significant widening? Since most measure national wealth with GDP, does this show that GDP is becoming less and less reflective of prosperity?

Govt spending comes from taxes. If you don't collect taxes, people would have the money. So they would either save it or spend it. Chances are they'd spend most it, and even that which is saved is loaned or invested. It wouldn't sit in a pile somewhere unused.

 

[jaeger19]

How exactly are you a conservative?

I believe in fiscal responsible government. Which entails understanding the truth and reality of taxes,business and government and how they interact.

I also believe in limited and efficient government and that entails believing in keeping government expenditures as low as possible WHILE maintaining enough funding and expenditures to be effective.

 

[jonny5]

I believe in fiscal responsible government. Which entails understanding the truth and reality of taxes,business and government and how they interact.

I also believe in limited and efficient government and that entails believing in keeping government expenditures as low as possible WHILE maintaining enough funding and expenditures to be effective.

How is wage controls limited govt?

 

[Kermz]

Wow.. then I need to talk to my accountant.. because I just bought some supplies.. so apparently, I am supposed to take the money out of the business.. pay my quarterly taxes on it.. and then go buy supplies... huh? Who knew... (insert sarcasm here)

No.. I am not dead wrong on that.

Correct me if I'm wrong here.

But aren't you supposed to pay your taxes even if you reinvested ALL of your profits?

This is only for a sole proprietorship so considering it goes directly to the Personal income tax return it could be much different for corporations.

Do Sole Proprietors Pay Tax on Reinvested Profits? | Chron.com

The Internal Revenue Service says that sole proprietorships are the most common form of business organization, in part because they are easy to set up and can be formed by a single person. A sole proprietor has total control over what his business does and receives all of the benefit of the revenue the company makes. The income generated by a sole proprietorship flows directly to the personal income tax return of the owner. The sole proprietor must report all business income to the IRS and pay taxes on it. If the owner chooses to reinvest earnings back into his company, he is free to do so but the income is still subject to taxation. In other words, the owner can only reinvest the profit that remains after paying taxes on business income.

Here's something on corporations. What I'm understanding here is that Corporations DO need to account for taxes before their reinvestment. They just pay a lower rate and have limits as to how much profit is retained without being taxed.

How Corporations Are Taxed | Nolo.com

Maybe the taxable income just depends which accounting period you reinvest in? Somebody help me out here.

 

[phattonez]

Govt spending comes from taxes. If you don't collect taxes, people would have the money. So they would either save it or spend it. Chances are they'd spend most it, and even that which is saved is loaned or invested. It wouldn't sit in a pile somewhere unused.

It would be used more efficiently.

 

[Glen Contrarian]

Actually, he doesn't. Money reinvested in the business comes from profits so, of course it counts as profits. He buys a big house. The business doesn't. The house has nothing to do with anything. The money was already taxed because it was profit. The profit was earned, some of it went to government in taxes and some was reinvested in the business. Where did the people get the "cash to buy grocieries?" Truth is he doesn't understand business, economics or accounting in the least.

Guy, I don't know who taught you how business finances are run, but you need to get your money back. What I've learned being a small business owner is that when I put money back into my business, I don't use that money to buy a house - I use that money to buy equipment for my business. Because it is used for the business and not for my personal use, it is deducted from my taxable income from that business.