Taxing businesses.

If I accomplish nothing in my life but to open the eyes of a few U.S. citizens to the truth of the nature of taxing businesses, I will be satisfied that it was a life well lived. A life lived, I may add, as a worker and not as a wealthy business owner.

On TV last night a senator called for higher taxes on businesses to ease the burden on the average citizen. This senator, supposedly an educated man, proved that he is either sadly ignorant or that he is a purposeful liar--misleading the very average citizen he claims to protect.

Here is the truth: No business has ever paid taxes. No business ever will. Set the "business taxes" high or higher. Punish the businesses. Still, no business will ever pay taxes. Businesses may collect taxes and pass those monies on to the government, but, trust me, businesses don't pay taxes; their customers pay the taxes. Taxing businesses does more than indirectly take money out of the pocket of the consumer: It hurts the economy overall.

When a government wishes to collect taxes through a business, there are at least two basic ways the tax may be assessed, through a consumption tax, such as the new dollar per pack for cigarettes or a gas guzzler tax on thirsty autos. This method has the disadvantage (to a tax-hungry government) of being obvious. Consumers easily see who is paying the tax. The second method is to tax the businesses revenues or activities regardless of the consumer's choices. (If we consider fees, there are actually dozens of ways governments penalize the average consumer by taxing businesses.)

This is more oblique and less obvious to the consumer. But consider: If a tobacco firm sells 1,000,000 packs of cigarettes, a dollar per pack collects for the government one million dollars. And the consumer easily recognizes the cost as a tax and knows who is paying the tax. But if the government, instead, places a tax on the company's activities or revenues that will yield one million dollars in tax, what is the result? Assuming steady sales, the price of the pack of cigarettes has to go up one dollar per pack in this case as well. But since the tax is not obviously per pack, it is less clear to the consumer (who is paying for the cigarettes [and the tax]) exactly what it is that makes up the extra cost. The company collects one million dollars at a dollar a pack either way and passes the money to the government as a tax. But in the second case, the consumer likely thinks the business is gouging them and making great profits. Ask yourself, in which case did the business "pay" more taxes?

Answer: neither. The result is the same, consumers pay one dollar more per pack.

Now do you see why I say the good Senator is a liar? the business has no money except for the money paid to them for the products or services they provide. The only source of their money is from their customers. Who pays the tax? The customers.

If our elected representatives really wanted to protect the consumer, we would not have taxes on business revenues and activities nor on reasonable corporate profits. We should tax businesses only on their excess profits. Anything over, say, maybe 12% of gross revenues in profit. If a business is generating excess profits, they could either pay very high taxes on the excesses or they could lower the profits by reinvesting in the business (good for the economy); paying the employees more (good for the economy-and employees pay more income taxes); lowering their prices (which may increase sales volume: good for the economy); or, more likely, if the profits are really good, competition will move in and force the profits lower (again, good for the economy).

If our elected representatives do NOT care about protecting the consumer but are only concerned about short term personal gain and power, they would likely favor harming both the economy and the consumer by misleading us about the impact of taxing business revenues, activities, and all corporate profits. This form of taxation takes money out of the economy (and away from you, the consumer); it discourages and artificially limits business development and growth (bad for the economy); it encourages businesses to take their operations to a more favorable tax environment (bad for the economy). Worst of all, it hides from the taxpayers the true extent of the government's taxation of its citizens. Not even discussed here is the fact that it costs businesses money to collect and pass along the taxes, which increases costs to the consumer and hurts the economy even more.

Another way that the government collects monies from businesses is through employment taxes. Do you think the business really pays these costs? The business does not. Who does? The employee does. Now these taxes may be for a good cause, federal retirement and health benefits, unemployment insurance, etc. But we should be smart enough to know who really pays the costs. The costs come out of the total compensation the business pays for the employee's services. Were they not paid to the government, the business could pay more to employees in salary. Would they? Well, if the corporate tax structure only taxed excess profits the business would be motivated to leave more money in the employees checks or to reduce costs to consumers or grow the business. In each of these situations, everyone eventually comes out better.

For every penny of tax collected, more than a penny has to come out of the citizens' pockets. How we collect and allocate those monies is a societal decision. Perhaps we want to tax consumption in a way that raises revenues and impacts behaviors (like a “sin” tax or an excise tax on luxuries). Perhaps we want to tax all transactions, as most European countries do. Any and all taxes and fees on businesses (except for taxing excess profits) is, in effect, a consumption or transaction tax anyway, since all money to pay the taxes ultimately comes from the pockets of the citizens (and out of the economy). How much better off we would all be if our politicians would just be truthful to us about these matters.

So the next time you hear a politician calling for more and higher taxes on businesses so that you, the consumer, will get a break--ask yourself: Why is this politician not telling me the truth? What else is he (or she) misleading us about?