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
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
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
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.
© 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