Corporations Don’t Pay Taxes, People Pay TaxesAugust 23, 2011
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Taxation is one of the most misunderstood concepts in all of economics. Few people want to feel the brunt of taxes and most want some other group to “share” the burden. In the last couple of years, plenty of people — including Warren Buffett — have argued that we increase taxes.
One of the favorite targets of the increase-taxes crowd is corporations. It’s easy to want to tax companies — after all, they don’t have families, retirements, or anything like real people, right?
Sadly, most people miss a simple concept when it comes to economics: taxing corporations isn’t just taxing corporations — it’s taxing people. Employees, retirees, families — people always pay the real cost, plain and simple. To learn more, just read below.
Who Really Pays the Taxes?
Let me explain what I mean; ALL taxes that are levied on a business are not just payed by that business but are passed on by that business. The tax on people is just hidden and is camouflaged through lower pay, lower investment capital, unemployment, lower quality products, or some other form.
Allow me to explain further. I love coffee! And for a while now Iʼve wanted to open up my own organic gourmet coffee business. For the sake of this article, let’s pretend I open that business.
I call it “Chris’ Coffee” and I import coffees from third world countries to an adoring fan base. The business makes $20 million a year. But (and this is a big but) it costs me $18 million a year to run the coffee business.
This includes wages, business expenses, employee beneﬁts, overhead, etc. At this point I now have a proﬁt of $2 million.
Not bad youʼre thinking, right? Probably right, but unfortunately, the Federal Government just came out with an increase in taxes that is roughly 5% of my profits. This means a $100,000 chunk is taken out of the proﬁt. We won’t go through how the math works out for the sake of saving time — instead, let’s look at where the money for taxes really comes from.
I have the get the money from somewhere, so where? Let’s look at the options:
Option 1: Cut Profits.
Profit is the easy target of all taxationists. Profit, they think, is excess that helps no one but a handful of rich investors. This is, of course, hideously incorrect. From profits come money for expansion of business, new investments, new businesses, and funds to act as a cushion during economic hard-times.
When corporate taxes go up to the extent that profits go down, not just the owners are impacted — anyone who would have benefited from economic and business expansion get hit. Fewer jobs, lower wages, etc — taking 100k out of profits isn’t just 100k anymore, but could effectly be several times worse because of lost investment opportunities in the future.
This doesn’t even begin to touch on a stock’s value going down, which means that workers might need to work literally years longer to have the same retirement with a lower tax. Real people get hurt.
In the end, everyone is victimized — rich, middle class, and poor alike. Everyone pays the tax.
Option 2: Raise Prices.
In this scenario, I could just add this new tax onto the price of my coffees. That way my shareholders are happy, my employees are happy, Iʼm happy, and everyone is having a grand old time. But wait. letʼs say you are one of the millions of people who loves coffee.
Now if you come to my place (or any coffee company if the tax is hiked for all of us) you have an increased price that takes away your money from other expenses. This hurts you, the consumer. Or even worse, it might mean you can no longer choose to consume the coffee at all — and we both suffer greatly for it.
If my business suffers then I might have to cut beneﬁts, lay people off, or cut the money retirees get as a shareholder. Everyone pays the tax.
Option 3: Cut Costs.
I could cut costs. But, unfortunately, nothing is free — not even cutting costs.
For example, cutting benefits would certainly help pay for the new corporate tax. But then that will harm my employees.
Or, I could layoff a few lesser performing employees! But there’s a reason they’ve been hired in the first place — there’s no one better to replace them.
Or we could change products; I could buy coffee from someone else. But changing where I purchase the coffee from has huge built-in costs — re-branding, new taste, potential customer loss, as well as the huge amount of time and resources to build new relationships with new coffee producers. This move could literally send the company under.
The Lesson of Corporate Taxes
Taxes are a, well, tax on the economy. People pay them. The money has to come from somewhere; there’s no such thing as a free tax. The more one studies about taxes, the more we’ll see that the tax burden will be greatly shifted on others. Either way, the economy is slowed down, and people are hurt.
Increasing corporate taxes passes on the tax to consumers, investors, and sucks growth out of the economy. This is inevitable, and is just a basic part of the most fundamental lessons of economics. Everybody pays the corporate tax.