03 August 2006

The Fallacy of "Corporate" Taxes and What That Has to Do With Campaign Finance Reform

On paper, taxing corporate profits sounds like a good idea. We, individuals, get taxed on our income, why shouldn't companies pay tax on their's? The problem is that in the real world the corporate profits tax is just another sneaky way of taxing us - you and me.

Who do you think pays corporate taxes? We all do. Like every other cost of doing business they are simply factored into the prices that companies charge for their goods and services. And, thanks to simple mathematics, we pay corporate taxes - on behalf of companies - at a higher rate than the companies are charged.

Here's how it works: Acme Widgets makes a pretty good premium DooDad. It costs them one thousand dollars to make, distribute and sell the gizmo. Included in that cost is the physical cost of the materials, worker's salaries, rent, utilities, advertising, insurance, delivery, etc. - and taxes. You don't think they're going to leave out taxes as part of the cost of making their premium DooDad do you? Now Acme's management has decided it wants to make ten percent profit on its premium DooDad, so they charge $1,100 for it.

But now someone comes along and thinks it's a good idea to raise Acme's taxes to pay for something worthwhile. And the great thing is that they'd be raising taxes on a company, not on voters like you and me. So they raise the corporate profit tax rate, say, 0.2 percent. What that means is that Acme now has to pay twenty cents more (0.2% of its $100 profit) to make and sell its premium DooDad. If it wants to maintain its ten percent profit per DooDad, it has to raise the price by 0.22 percent.

But wait, it doesn't stop there. Acme makes its premium DooDad out of aluminium, plastic, oyster shells and polyester thread. It buys the machinery it uses from eight other companies. It buys packaging materials from three different companies. It ships via two different trucking companies and one airline. It pays rent to a company. It uses a law firm and an accounting firm. All of those companies are now paying twenty cents more for each hundred bucks of profit. If they all want to make ten percent - which is not an unreasonable profit margin - they've all got to raise their prices to Acme.

And guess what? Acme passes all those price hikes along to its customers. By the time the smoke clears it is now costing Acme $1,020 to make its DooDads and to maintain its ten percent profit margin it has raised the price to $1,122 per DooDad - a price rise of 0.22 percent to the consumer, caused by a tax hike of 0.2 percent to the company.

Acme's biggest customer buys 10,000 DooDads a year, so that raises their cost of doing business $220,000 per year. What it really raises is your cost of buying from them.

What This Has to Do With Campaign Finance Reform
Here in California there is a proposition (#89) on the November election ballot. It is yet another attempt at campaign finance reform. I'm all for campaign finance reform. I think it's one of the most vital issues in any democracy - especially ours. I'm even willing to pay a little more in taxes to pay for the reforms.

One of the big selling points of the bill is that it will finance its reforms by a 0.2 percent increase in corporate taxes. The supporters of the bill are trying to make voters believe it won't cost them anything because companies are going to pay for it, not them. That's utter bullshit. (See above.)

I support much of what the bill is trying to do and even some of how it's trying to do it. I'll probably vote in favor of it. But I'd appreciate some honesty from time to time. I know there's no free lunch. I can take it. If you want me to help pay for something worthwhile, just ask. Don't try to disguise it as something else.

1 comment:

santia said...
This comment has been removed by a blog administrator.