It is well know that if you tax something, you get less of it. If you do the opposite, subsidize something, you get more of it. So “why” are we taxing business? Don’t we want more of what business creates? Like jobs? Lower prices? Seems to me that these are all desirable things. So why are we doing as we are? Anyone want to answer that question?
Before I go any further, it should be understood that businesses do “not” pay taxes as such. They increase the price of their goods or services so that consumer ends up paying the tax. In effect we end up paying in higher prices for every dollar a business sends to the IRS. I don’t really think this makes sense! The money we tax away from business results in higher prices, less employment, and because business has to find the money to pay the taxes, is forced to raise prices. Which in turn result in fewer jobs (because things cost more) than what we would have had we not taxed business. The revenue that results from these taxes does not completely return to the economy either. There is a “handling charge” every time a government tax agency collects taxes. Government employees have to be paid wages and benefits, there is a cost of preparation that the business has to pay. All of this means that taxation of this type (taxes on income, etc) tends to “burden” our economic system. They also “encourage” business to “outsource” both production and jobs to somewhere outside the reach of the IRS. Along with retaining business profits outside the country so that they can’t be taxed. The amount of money held is estimated to be well over a trillion dollars. However the money has to stay outside the US or it gets taxed. So there is less available money for creating economic growth here. In many cases the money ends up being invested outside the US, which then serves to grow the economy of our competitors who therefore also now enjoy jobs and a greater level of prosperity.
There are of course other taxes than the federal income tax that businesses pay. There is the unemployment compensation tax (state and federal) that is paid by employers. There are federal payroll taxes upon employers and employers that serve here to finance Social Security and Medicare. There are property taxes, which are generally local, much of which goes to pay for the public school system. There are also state and local sales taxes. When you add all of this together, it amounts to a sizable sum. Since business only can create an income when it sells goods and services to consumers, the price of these goods and services must therefore be high enough to insure a reasonable profit as well as covering the cost of all these taxes. Plus, with corporations, there are also stockholders to consider here too.
There is another aspect of business taxation that should be considered. Businesses incur costs in the form of seeking methods to reduce their tax burden. Then there is the cost of preparation of tax forms, reports, deposits, and so forth. Trying to avoid paying more in taxes also costs money. In effect the existence of the federal income tax creates work for those who have carefully studied tax rules and laws and have found ways that allow paying less taxes than otherwise. Needless to say, this can distort business practices, encourage businesses to move to other countries to lower their tax burden. All in all, the taxation of business appears to have more negative results than positive results so far as economic growth and employment is concerned. The amount of money actually collected does not justify the amount of economic harm that is caused by taxation of business income.
The total amount of federal income tax collected from business is somewhat around 11% of the total amount of money collected by the IRS from the income tax. A couple hundred billion a year. The social and economic cost however is likely high enough that taxing business might well be counter productive so far employment is concerned. Plus, when the consumer pays a higher price for goods and services, he or she has less money to spend on anything else. (this is why Obamacare will increase unemployment and reduce federal revenue) We are using the wrong tool to finance the government services we appear to want. The reason for this is because the rich gain most of their income through means that avoid the federal income tax. Capital gains are taxed at a lower rate than wage and salary income is. The taxation of business results in less employment, higher prices, and more and more “outsourcing”. We are in effect taxing ourselves into national poverty by using the forms of taxation that we are currently using. We are destroying jobs, creating more unemployment (the real level is far higher than what the government claims), and in general reducing the prosperity of the American people. Then because we import more than we export, we are becoming increasingly indebted to countries like China, who now holds over a trillion dollars worth of our national debt. The long term consequences of this will not be good for us, either as individuals or as a nation. Eventually we go bankrupt.
So what should we do? We do need some government revenues. But the method by which we obtain these revenues has far more importance than most people realize. The type of taxes we use today tend to cause economic harm by increasing unemployment, rising prices, encouraging “outsourcing” and keeping profits beyond the reach of the IRS.
The solution is the financial transaction tax. It is a simple tax, requires no complex calculation, and is a “pay as you go” tax. There are no deductions, allowances, or tax shelters. It replaces all other forms of taxation. At a rate so low it has less effect on the economy than anything other possible form of tax. I’ve estimated that a rate of 6% is adequate to meet “all” of our revenue needs, federal, state, and local. At this rate of 6% it will provide complete elimination of poverty, allows elimination of the payroll tax for Social Security and Medicare (both considerably reformed from what they are now). It also allows us to eliminate unemployment compensation, property tax, sales taxes, income tax. The IRS becomes a big computer system tended by a bunch of “geeks”. Using current levels of computer technology, the system can be automated almost to the point of being effectively “automatic”. So far as the individual is concerned, there are no forms, nothing. Every financial transaction that takes place in the US financial system is automatically taxed at 6%. The amount is sufficient to provide every adult citizen with a monthly check adequate for a minimal standard of living based upon the federal poverty level. It thus replaces Social Security, welfare, all forms of “public assistance”, unemployment comp, and everything else. I’ll go further into this with my next post.
Jerome Bigge, writing as “muskegonlibertarian.wordpress.com”.