Taxing Business? Who Actually Pays?

There are a lot of people (Democrats more than Republicans) that believe that taxing business is a good idea. Unfortunately, it is actually “not” a good idea. Taxing business usually destroys jobs, encourages “out sourcing”, and also encourages businesses to move themselves to nations that tax businesses at a lower rate than we do here in the USA. The supposed “gains” do not come close to the adverse consequences we create.

I speak as a former businessman. Going by my own experience, any “tax” places on a business ends up being “paid” by the consumer of the goods and/or services created… Lets say I produce a product that sells for $10. Society decides to tax me, therefore now increasing the costs of running my business and producing something consumers want. This increase in cost created by taxes forces me to raise my prices. So instead of charging $10 for my product, I now have to charge $11 because of the taxes I have to pay. There may be some consumers who will not buy my product at the higher price, so now having fewer sales than before, I lay off one of my employees because he/she is no longer needed. So because of the decision society made to tax me, the price of the product that I produced has now risen from $10 to $11. Also, one of my employees got laid off, so she goes and starts collecting unemployment compensation. This in turn will increase the “tax” that I have to pay to my state for unemployment compensation. So maybe I now increase the price of my product from $11 to say $11.39 to cover this additional tax that I’m paying. No doubt my customers don’t like paying this higher price either, but as they voted the politician into office that raised my taxes, they are the ones who now have to pay the higher price. Actions do have consequences.

I likely have competitors who make and sell the same product as I do. Our costs of production are probably rather close to the same for all of us. However, one of my competitors decides to “pull up stakes” and move to Mexico where labor is cheaper. Given that the US tax rate on business is one of the world’s highest, most likely that competitor of mine also is paying less taxes there in Mexico. He can manufacture the same product I manufacture for less money because of lower wages and lower taxes. Realistically I’m going to have a hard time trying to compete with him. Maybe my product is of better quality, but quite a few of my customers just want to buy the item in question for the lowest price. Also he is more likely than I am to get a contract with a “superstore chain” (like Walmart) because the superstore chain gets a “better deal” on product pricing. My own sales are falling, I’m having to lay off more of my employees. Maybe it gets to the point that I say, “To the *** with it, I’m quitting this business!”  It has gotten to the point that there is really no reason to continue staying in business…

Repeat this scenario enough times and you can see what the consequences are today. The three levels of government here in the US all tax businesses at a higher rate than what other countries do. We also pay higher wages, have more “overhead costs” due to covering the cost of unemployment because our system of business taxes “encourages” businesses  to relocate to places where they do not face these taxes.

Corporate taxes (for 2013) amounted to $280 billion dollars. This is 1/10th of total federal revenues. However the “adverse consequences” effective result in added costs for the federal government in the form of welfare and unemployment compensation that in fact probably come close to using up that $280 billion dollars collected by “Uncle Sam”. Additionally these taxes have created a problem called “inversion” where the business moves its headquarters to another country (with lower taxes) to avoid paying so much. This of course is a “loss” to the US, to the American people, and is perhaps “proof” if any is needed that taxing business is a rather stupid way to collect revenue. Especially as the consumer back here in the US ends up paying the tax in the form of higher prices and fewer jobs. Most likely the country is actually taking a loss if we view this as a “cost accountant” would. The $280 billion collected ends up costing the country and the American people “more” than if the tax didn’t exist… Especially when you consider that more people will have jobs, many will effectively earn higher pay because prices will be lower even if wages do not increase. Plus more “small businesses” will expand operations because they have more money to put back into the business instead of paying “Uncle Sam”.

It is also obvious that the same idea of not taxing businesses applies to state and local governments. Here in Michigan Governor Snyder has pretty much eliminated the state corporate income tax. However there are still other taxes (the business personal property tax) that the people have just voted yesterday (August 5) to eliminate. So things are “looking up” here in Michigan at least. Hopefully this will lead to more jobs, as Michigan still has a relatively high unemployment rate even with the auto industry back on its feet.

 

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