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Why You Should Care About High Corporate Taxes.

Written by | April 13th, 2009

Welcome to the United States! This is perhaps the finest place to live in the world and we welcome you to our midst. But be aware that as with any family, there are the misfits, malcontents and those who think of only themselves, and for those we have to look no further than our elected leaders. So, if you are one of those types, we still care about you, it’s just that sometimes we don’t like what you do, so please don’t take it personally if we tell you to sit in the corner while you think about what you did.

 

While the preceding paragraph sounds strange, it is also uncannily familiar. Have you ever considered that you are part of this community? Have you considered that every action taken by the government affects you, even if you don’t think it does? I think about my own family. When there is a budget shortfall, the leaders of this family get together and do what is right for the family, as a whole. One thing we don’t do however, is take money from our children’s piggybank. Unfortunately there are some in government who think this is an entirely legitimate practice.

 

I don’t like paying taxes any more than the next guy and while the necessary evil that is taxes is here to stay, there is no reason why the most powerful and richest country in the world cannot resolve its economic problems by having a meeting of the minds. Economics isn’t a terribly complex process; in fact it is surprisingly simple. However, lest I start getting phone calls from angry economics majors, let me explain how simple it is. If you don’t have money, don’t spend it, period. In its simplest form, this means that you shouldn’t have debt. If it is good for a family to be debt free, how much better would it be if our government were debt free.

 

It has been estimated that for every dollar spent by a consumer, it turns over five to seven times, and by the same token, for every dollar in wages where there is a supporting industry, the wage is nearly doubled. This means that if the government gives one dollar to a consumer, that it is turned over five times. So one dollar equals five. Sounds great, except what if we helped people start a business instead? For every dollar invested in a new business that draws a supporting business, the dollar is doubled before it makes it to the consumer. Therefore, that one dollar is equal to about ten. That is more bang for the buck every day.

 

So how do we as individuals resolve our economic problems? There are 2 legitimate answers. The first is that when there is a budget shortfall, we should spend less and reprioritize what constitutes a necessity. As money gets tighter, suddenly that necessary cell phone becomes unnecessary and the necessity of having the climate controlled in our home to exacting standards seems petty. In each of the dozens or hundreds as the case may be, where we spend money, expenditures are reviewed to determine if they are deal breakers. Those that break the bank are eliminated. The second answer to economic problems is normally the least desirable and is usually undertaken when all reasonable efforts under the first answer have failed to balance the budget. This second response is to generate more income. There are 168 hours in a week. If we are working full time 40 hours per week, then the time frame to gain more income is limited. After deduction of reasonable travel time and “at work” breaks, we are left with 118 hours to work additionally, but then most people require at least 6 hours of sleep, so we are left with 76 hours to possibly work on a second or third job. Considering the time for meals and other required daily things we must do, it is safe to presume that we could only work 80 hours per week without serious repercussions. This 80-hour level is our breaking point. It is what happens when we reach this breaking point that is important, because we realize that we didn’t look at the first answer hard enough. How this should relate to government is what we need to consider. The government’s answers to economic problems should be the same, in the same order, however, government always starts at the second response, and that is to generate additional income. Since the government’s only source of income is monies extracted from people, it is the people who are ultimately responsible for paying the bill. Government will only cease to tax when there is nothing else left to take, and government rarely cuts their budget when they have economic problems.

 

The breaking point for taxation surprisingly is not very high. It is estimated that for every percentage of increase in taxation rate, the resulting increase in revenues is about 1/4%, thus if the government has a 10% budget shortfall, the increase in taxation would have to be around 40%. Is it any wonder that we continue to run our federal government in deficit mode? As the tax burden increases, the incentive for people to work hard is reduced. If taxation rates are high enough, workers will cease working, as it is no longer profitable. In this mix also is business. Interestingly enough, there are millions of people who believe that businesses should be taxed at very high rates. It wouldn’t be surprising if most of these people have little or no economic sense. The real problem with taxing businesses is that you will never succeed.

 

Business operates on a bottom line return on investment. If the return levels are not being met, there are really only a few things that can happen. The first is to cut expenses. Since one of the major expenses in business is labor, employees get laid off, pay is reduced and the remaining employees are burdened with additional workload. So, in this instance, the employees are the ones who pay the price for increased cost of operations, of which taxes are a large part. The second line of defense for high taxes in business is to increase the cost of goods produced to make up for the shortfall produced by increased taxation. This is the most common means of maintaining the requisite ROI. The fact is that all taxation burdens on businesses are subsequently passed on to the consumer through higher cost of goods and services. We are all too familiar with the record profits of big oil companies, and while it seems to the uneducated consumer that consumers have been taken advantage of and the oil companies should be taxed into oblivion, most people do not understand that a full 23% of the cost of gasoline is direct taxes paid by the oil company. This does not include the national average of $0.40 per gallon tax at the pump (excluding local option sales taxes). That means that at the current national average rate of $2.05 a gallon, the consumer … you … are paying on average $0.87 per gallon in taxes. So the next time you rally against oil companies or any other business that appears to be making huge profits, you should ask yourself just how much of your money is actually being paid in hidden costs to the government by way of taxes. Better yet, every time you fill up your tank, and it costs you $50, imagine $21.22 of that being tax dollars.

 

The real solution to our economic problems is to allow businesses to supply their goods at a cost low enough for consumers to gain confidence in their ability to afford them. This will spur spending by consumers, increase the demand for goods, which will in turn spur business growth and increase employment. This isn’t a magic bullet though, it will take time for the masses to recognize and if this growth is uncontrolled, we will ultimately see the same type of meltdown we have been experiencing in the last couple of years.

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2 thoughts on “Why You Should Care About High Corporate Taxes.

  1. markross

    K,
    Great post!

    It is great to hear some commonsense solutions, and suggestions, in a way that the common person can understand it.

    Interestingly, the people that vote Democrat are (generally speaking) fine with the government taking more taxes, and a lot of them tend to be pro-unionization. However, both of these factors, when they become excessive, puts a strangle hold on business, which reciprocally causes businesses to have to cut expenses and ultimately layoff people.

    Therefore, if a company is taxed to the hills, and forced to pay out of control union benefits and wages; then, in the end, what jobs will be left to unionize and collect taxes from?

    I can not give a much more simpler argument for low taxation then that.

    I did not even get into the whole moral issue of excessive taxation; there is not much more a government can do to stimulate spending, and win the favor of the people, then to lower taxes.

    Mark

    Reply
  2. markross

    In the world of theory, we are stating a good case, however, in reality, we go back to “needing” new tax laws…

    Perhaps the fair tax would put us all on an even footing, closing the loopholes that the ultra wealthy have really abused and taken advantage of; all of which has made our case for low taxes, much harder.

    With simple tax reforms, and with low tax philosophies, then we as a nation, can likely get back on the right footing again.

    Mark

    Reply

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