Free Markets… Case against taxes

I am going to try to make the argument that we should not tax any profits made by businesses.  The main reason for not taxing businesses, is because businesses do not pay taxes.  Let me say that again, you could tax a business any amount and the net effect will be that their profits will not be a whole lot less then before, because they will not pay that tax.  The simplest thing they will do is past that tax on to you the consumer.

To explain this I will relate an example that my father told me to show how a business works.  Let say you own a company that makes fishing bobbins.  Now let say that the cost for materials and other items that go into each bobbin is 5 cents.  And you pay someone 3.5 cent a bobbin to assembly each unit.  Now if you sell the bobbin for 15 cents you will make a 6.5 cents profit.  Now my dad was teaching me about the cost of living so he raised the employee pay by 1 cent, but in this case our friendly government will now imposed a 1 cent tax on each bobbin.  So you as the owner of the company will now have do one of two things, cut your profit to 5.5 cents a bobbin or you can raise your price to 16 cents.  Most business people will raise their price 1 cent to cover the increase of taxes, because their cost of making the unit will have gone from 5 cents to 6 cents.  It does not matter what tax is or how it is structured, the business will work things out to make them the most amount of profit by passing the tax to the consumer.

Another way for the government and business to use taxes restrict free markets, is fixing the tax laws to benefit some businesses at the expense of their competitors.  What happens is that some businesses lobbies the government for a new tax or helps the government write the tax laws for a new tax that the government is already planning to implement.  As “experts” they can tell the government the best way to implement the tax.  When they do this the legislation is written so that there are loopholes that they can take advantage of, which their competitors can not take advantage of because they either do not qualify or it will take more money they they will save to qualify.

One example of this is how in some states the tax on the profits in that state is calculated.  Basically the formula takes the percent of the companies facilities, percent of the payroll and the percent of the sales that are in the state.  Adds those together and divides by the three parts.  So if a company has 50% of it’s property in a state, 50% of it’s payroll and 25% of it’s sales then using the formula (50 + 50 + 25) / 3 you get 42.  That means that 42% of that companies profits are taxed in that state.  Now the Federal law does not allow a state to tax the profits of a company that does not have a physical presence in that state. Thus if the company has sales in others states, but no facilities in those states, they can gain a benefit.  If the new states make up 10% of the sales and the old states make up the remainder 90% of the sales the formula (100 + 100 + 90) / 3 only 96% of that company’s profit will be taxed.  Some states make it worst by increasing the effect of the profit by giving it two parts using the formula (100 + 100 + 90 + 90) / 4 which yields a result of 95%.  In both examples you have 4-5% of the company’s profits that are not taxed.

Another example is one that takes advantage of the fact that other states do not tax certain types of profit.  For example some states do not tax profits from intangible assets.  So you would create a subsidiary in that state and then move ownership of lets say your logo to that state.  Then each of your stores in other states are charged a high fee for using the logo.  The money they pay for that right is an expense in the taxing state of the store, and since the profit the subsidiary is not taxed, no tax is paid on that money.  Some business do the same thing with real estate.  Their stores are owned by one company in another state and they pay a high rent for use of the store.  So as we can see the tax laws can and have been written to benefit those business that can take advantage of them over those that can not.

Then you add to this the tax credits for products or business that the government wants to promote, which gives them an unfair advantage over the competing products or businesses.  If you make the products that do not qualify or your business does not qualify, then your cost will be higher then then your competitor that does qualify.  Lets take the example at the beginning about the bobbins you make.  Lets say that you have a competitor that makes a bobbins out of cork and you make yours out of plastic.  If without taxes the cost of everything else is the same, you both will sale your bobbins for the same amount of 15 cents. If you have to pay the 1 cent tax because yours is made out of plastic and if they do not because theirs is made out of cork. The result is that they can sell their bobbins for less then you and make the same or close to the same profit.  In any case you and your customers are negatively effected by the taxes charged on the the plastic bobbins.

I am not trying to make the argument of the advantages of big business over small or small over big.  What I am trying to show can be summed up in simply.  Taxes are not paid by business because they past them on to us, in all cases.  Secondly businesses work with politicians to write the taxes to eliminate competition and limit the choices you as the consumer have.

Now I realize that eliminating these taxes will have issues that will have to be dealt with, but I think that we can deal with those issues and minimize the impact on the consumer if done correctly.  The reason for this is that I know that competition will lower prices overtime, once the cost of taxes is removed from the cost of goods.

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