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Attention Conservation Notice: ranting about a topic that I know very little about; accuracy is sacrificed for the sake of cute analogies.

Taxation happens when you have transactions between separate entities. For example, when you buy/sell something, or pay/receive money for services. It makes no difference whether the tax is charged to the buyer or the seller, the employer or the employee.

Income tax on services encourages do-it-yourself and informal transactions: if you get your child to do it, no one is going to come into your house and audit your child. And the bigger your house, the more taxation you can avoid. Analogously, corporate income taxes encourage mergers & acquisitions: by bringing your supplier inside the organization, you no longer have to "buy" their product, since it is now made in-house! (Kinda like erecting an eruv). This may explain why corporations, unlike people, are taxed on profits; if supplies couldn't be deducted as business expenses, we would have double taxation and a huge effect on efficiency. (But surely double taxation is alive and well, no?)

It would seem natural to want to acquire your most important supplier. (Kinda like the signing up for a "best friend plan" on your mobile service). But are acquisitions just a simple way to dodge taxes? For one thing, now your big organization has to run a business that may be outside of its expertise, the newly-acquired business can end up insulated from market forces, and gradually lose its competitiveness, yadda yadda yadda. Now, this analysis conflates ownership with management. Of course, it is possible to buy the expertise required to run the sub-company (it will likely come with the package), but managers' interests won't necessarily align with company's. It is also possible to simulate a competitive environment (some large corporations implement competitive markets for supplies, machines, workers, and even venture capital).

The common justification for stopping mergers (and breaking up monopolies) is that they would make it impossible(?) to enforce rules against price-fixing.

I would like to see an empirical study of mergers. If we have a scenario in which a supplier has a single customer, is there any reason not to merge?

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UPDATE: I've just convinced myself that corporate income taxes, if flat, have the nice property that they can't be gamed by mergers (Proof: the total profit after the merger will be the sum of the profits; this assumes that profits are positive). However, sales taxes can be avoided this way, for products that they use themselves (rather than resell).

Does a Major Company like Walmart have to Pay Sales Tax when Making Major Purchases From Another Business?
<< Businesses pay sales tax on items they purchase for their own use.
They don't pay sales tax on transactions in which they obtain products for resale in the store. This applies to all businesses of all sizes. Its also universal across state lines. >>


This means that merging along the production chain will not save on taxes. However, Walmart could save on taxes by buying a company that produces flooring or security cameras. Similarly, software companies could save on sales taxes by buying a coffee company.

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UPDATE:

* 5 tricks corporations use to avoid paying taxes

* When supply chains merge: 5 mistakes to avoid

* One Big Mutual Fund, or, The Ownership Society, by Cosma Shalizi
<< ... Ambitiously, Miller tries to explain why hierarchical corporations exist at all, why they take some of the forms they do, and how, in part, their form relates to their performance. ... >>
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