Personal Finance

Taxes, taxes, taxes: Who really pays the most?

Each April our thoughts turn to the coming of spring and the coming of the tax man.

I hear a lot of people complaining about taxes at this time of year. Not just that they have to do their taxes and spend hours pouring over old records and trying to figure out indecipherable forms, but also musings and opinions about taxes in general.

I often hear the opinion expressed that businesses, property owners and “rich people” do not pay their fair share of taxes. And I agree. I agree that they don’t pay their “fair share” as defined in most people’s minds. But I also think that in certain circumstances, these businesses and people shouldn’t have to pay any taxes.

That may sound a bit radical for many people reading this, but allow me to explain my reasoning.

First, why are we taxing businesses on their profits?

A business exists, whether it is a sole proprietorship or a large international corporation, to make a profit. People create businesses and invest in stocks with the idea that they will get a share of the profits. This is the basis of our system of capitalism. It is the motivation for a free marketplace and private ownership of property.

Why would anyone go to the trouble of starting a business unless they expected a significant return on their investment of money and time? Why would you bother buying stock in a company if the company never gave you any dividends (yes, stocks can appreciate, but bear with me)?

There comes a point when deciding where to invest your time and money that you have to figure out how much return you need to make your effort worthwhile. If you work at a job and earn $30,000 a year, how much will your business have to make to replace your income? How much more do you want it to make for taking the risk of quitting your job and building a business?

If you can’t make much more than the $30,000, it hardly seems worth it to spend all the extra time and take the extra risk of starting the business. So let’s say that you figure you can earn $50,000 with your business. And that is enough to take the risk.

But now the government comes along and tells you that you have to pay $7,000 in taxes on your $50,000 business profit. Now you have a choice. Live with less or increase your business income. Living with less defeats the whole purpose so let’s look at increasing your business income.

You can either increase your business income by getting more clients, selling more goods or raising your prices. When you are in a less competitive market, raising your prices is the easiest thing to do. So you raise your prices. Now you are earning the $50,000 you wanted in the first place and you have effectively passed your business taxes on to your customers.

But not only are your customers paying a higher cost for your product or service but they may also be paying more in sales taxes. They get a double-whammy. If your customers are businesses, they will pass on their increased costs to their customers. This cycle continues until the cost of every business’ taxes are eventually passed on to the consumer – me and you.

Let’s look at a specific and simpler example of how this works. I know a person who owns some rental units. The city in which they are located passed a tax on rental units.

Some politicians and local activists were anxious to punish the “gouging landlords” and “rental robber-barons”. They figured that they could play Robin Hood and redistribute some of the rich landlord’s profits to the “needy”.

Now my friend’s costs have gone up. So what did he do? Naturally, he raised the rents to cover the cost of the additional tax. And since it is easier to accept a reasonable rent increase than to move, his tenants stayed put and paid more.

Ironically, most of his tenants are the same people who the politicians and activists consider the “needy”. So now the government takes an extra $20 a month out of their pockets through the “tax on the landlord”.

If the tenant is on an assistance program they may get some of this money back. Of course the amount they get back will be reduced by expenses and administrative costs for the government to collect, control and distribute the money.

So who really paid for this tax? The landlord? No, in the end it is always people – you and me.

All taxes are paid by the citizens themselves, regardless of whether they are paid directly, as in sales and income taxes, or through increased prices of products and services, or through “fees” imposed by governing agencies. How does your car registration “fee” differ from a tax?

Not only does each citizen directly or indirectly pay every penny of tax money that is collected in this country, but most people’s perception that the “rich” and “corporations” don’t pay their “fair-share” is accurate.

These people and businesses can afford to pay an attorney $10,000 to show them how to save $500,000 in taxes. Most likely, you can’t. The tax laws are made with loopholes for the “rich” and for certain businesses.

Part of this is because it is these people who own or control the majority of the property in this country. And no progress can be made with out a significant investment of capital. If these people and businesses are given the right reasons to invest their capital (such as tax breaks) the economy will continue to function and grow.

If they are overburdened with taxes they will either move to Bermuda or start a cycle of inflation by raising prices. Either way, you, Joe Citizen, will end up paying more either directly in the form of taxes or indirectly as your cost of living increases.

It is a double-edged sword. Joe Citizen wants “rich people” and businesses to pay their fair share (though Joe does not realize that he ends up paying it anyway) but the government knows that they can’t kill the golden goose (and the economy needs a good “goose” every once in a while).

So tax laws and regulations are passed which seem to target the “rich people” and businesses but with enough loopholes so that no real tax increase occurs. And the politicians can blame the other party for the loopholes. But both know this is business as usual.

Make Joe Citizen feel good about paying his taxes by raising taxes on the “rich” and “wealthy corporations”, but give them loopholes so that little more is accomplished than adding another volume added to the tax code.

And Joe Citizen continues to pay his taxes each year.

About the author
© Simple Joe, Inc.
David Berky is president of Simple Joe, Inc. a marketing company that sells simple software under the brand name of Simple Joe. One of Simple Joe’s best selling products is Simple Joe’s Money Tools – a collection of 14 personal finance and investment calculators. This article may be freely distributed so long as the copyright, author’s information and an active link (where possible) are included.