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.