Wednesday, April 7, 2010

Embedded Taxes or Why You Can't Tax Businesses

A  point I think I failed to clarify in my discussion of the VAT yesterday, and a key problem with half our tax structure today, is the idea of embedded taxes.  So let me simplify it in two sentences, with as much ornamentation as I can get without making it an image:

YOU CANNOT TAX BUSINESS.  YOU CAN ONLY TAX INDIVIDUALS.

(If you look at the HTML code, there's more code than there is sentence on that one.)

This is a point that I can't stress often enough whenever we discuss any "tax on businesses."  Because the business does not pay that tax.  They take the tax, classify it as an expense, along with whatever costs are involved in complying with the tax, and they add it into the price of the item.

So when you buy something, not only do you pay the costs to produce the product (fixed, materials, labor) plus the profit margin, but you also pay for every tax that the business has added to the cost and every cost incurred in complying with those taxes (including the 3 payroll taxes).

This is what I refer to when I talk about embedded taxes.  I challenge anyone to calculate how much embedded taxes is in any one item, and produce that math in a comment.  I know it won't happen because that requires the work of a full time analyst.  The best number I've found (and I tried searching but I haven't found the math myself) is approximately 22%.  And remember, this is IN ADDITION to the taxes you can look and see on your paycheck and the various other behavior taxes (like on gasoline, cigarettes, and beer) that you know exist.  And I haven't even dealt with state and local taxes yet.

This is one of the reasons that radical tax reform (links are coming), including eliminating the concept of "taxing business" is about the only way to make the government accountable for the amount of tax pain they bring.

And before I go, here's the requisite FairTax link (as though I could do a tax post without one), the Wikipedia entry for the FairTax (for those of you who want to argue with the objectivity of first link), and the Online Tax Revolt link (and a reminder to sign up or DIE!!! (and be taxed for it)).

17 comments:

Beth said...

I wish everyone understood basic economics.

CHAIRMAN TAO said...

Lets see, I have been in business for like 35 years....

I know the state sales tax because that gets paid monthly...and since 99% of my business is out of state and to retailers I pay no sales tax and collect none.

Then there is the payroll taxes and unemployment insurance.

I don't pay taxes on my cost of goods or manufacuring expenses/supplies...

I do pay property taxes because I own the land my business is located on.

I pay a couple of other taxes to the city for tangiable assets but so does an individual.

Then at the end of the year I pay a tax on my profit....which would be my net profit....after all expenses....

It would not only take a financial analyst but it would also take a crystal ball to figure out what that is going to be at any given time....

So...where did you get your 22% number? If the government got 22% of all profits from all companies in a given year then that would TOTALLY wipe out our debt in about 5 years!

Why not go and study the S&P 5oo and check and see how much the five hundred largest companies in the US paid in taxes in lets say 2005....

Pamela D. Hart said...

Tao: Wow, you're pretty lucky not to have to pay "sales tax". What about "use tax"?

My company has a "tax exempt" status; HOWEVER, if we CONSUME the item, say an office product, we are REQUIRED by state LAW to pay a USE TAX on that product. We also have to pay USE tax on our motorcycles, ATV's, etc., that we use for "demonstration", plus we pay sales/use tax on advertising, services like window cleaning, lawn care, etc. I never knew a business that didn't have to pay sales/use tax, so I'd be laughing all the way to the bank--or have one hell of an accountant to cover my tracks!

CHAIRMAN TAO said...

Sorry, we don't have a sales/use tax for services in Kentucky...so no taxes on window cleaning, or any of those issues...

If I buy office supplies then of course I pay a sales tax...

In Kentucky if you are a tax exempt corporation then you pay no sales tax or use tax.

Now, we do have tangible property taxes, which covers vehicles and inventory....

Looks like you should move here Pam...

But don't you expense those items and then claim a credit on your federal taxes?

Patrick M said...

Beth: That would require government schools to teach it....

Tao: Like I said above, I had problems finding the original research where the 22% average embedded tax number comes from. To clarify, that is an average, and can vary depending on the product. You'd be in the lower end (about 15%, maybe) while a product like an automobile might have the most embedded taxes (around 30%). And note that these numbers apply only to federal taxes, not state and local, which vary drastically from state to state and city to city.

As for the original source of the number, I traced it back to here and a study by Dale Jorgenson. That's about as clear as I could find without spending hours I don't have hunting down the minutia behind the numbers.

The point is that there is a cost in everything that is a product of embedded taxes and compliance that sucks productivity and wastes potential.

Beth said...

Tao, if a tax rates on taxes that your business actually pays went up, would you pass the increase onto your customers or would you allow your profit margin to decline?

Pamela D. Hart said...

Tao: Yes, a business can claim the “cost” of the items as an expense on its return.

But residents are legally required to pay sales tax even if they aren’t charged. For example: if a Pennsylvania resident purchases something on-line and the company doesn’t charge sales tax, the resident of Pa is “supposed” to submit the required sales/use tax to the tax revenue department. Same if a Pa resident purchases a sofa out of state and the sales tax is less than that in Pa; the resident of Pa is required to submit the difference to Pa.

As a resident of Pennsylvania I KNOW we ALL follow the sales tax guidelines to a “T”.

Kentucky does sound better though. What is your tangible rate and do you have a state income tax, and if so what is that? Ours is 3.07%. Pennsylvania is a highly taxed state and I live in one of the most highly taxed counties to boot.

CHAIRMAN TAO said...

Before anyone goes off and discusses corporate taxation read this:

http://bigthink.com/ideas/19511

Beth said...

So Obama wants US corporations to pay more in taxes, but then the costs are going to be passed on to consumers! GM is not going to take a big hit on the profit margin, would you?

CHAIRMAN TAO said...

"pay more?"

How about PAY taxes?

How could GM sell cars if the government did not build roads? What would the oil companies do for oil if we did not have a navy to protect the shipping routes from the middle east or if we did not have the relationships that we do in the middle east all based on our military?

What would the drug companies do if they did not have the government to protect their patents on drugs?

Our healthcare system derives half its income from the government via medicad and medicare.

If GM were to pay for all the benefits they derive from the government and then pass these costs on to you then guess what? GM wouldn't sell any cars!

Beth said...

Those aren't direct benefits to GM, so what is your point?

Toad734 said...

One 8 year study by the GAO here in the US found 72 percent of foreign-owned corporations went at least one year without owing taxes, and the same was true for 55 percent of domestic corporations.

Even huge companies like GE generally go without paying taxes. In 2009 GE not only didn't pay taxes but received 1.1 Billion in Tax Credits. If your theory is true, shouldn't the price of GEs light bulbs have gone down since every tax they pay is passed on to the consumer and since they got money back, it would stand to reason they then lowered the prices of all their goods right? I mean, your point is that if we stopped taxing corporations they will lower their prices. Why don't you find out how much the cost of GEs goods went down in the years they didn't pay taxes. Or Exxon for instance, Exxon didn't pay any taxes last year either....At least, not in the US yet my gas isn't cheaper this year.

This is precisely why we have to tax the rich fucks who run these companies and force them to pay the same tax rates that you and I pay... Well, you have two kids so you probably pay no income taxes either but you get what I am saying.

TAO said...

Now Toad, everyone here seems to believe that taxes are massive and constantly passed onto the consumer.

So, if they find out that there are no taxes on corporations then it is only logical that these 'savings' have also been passed on...

So, since no taxes have been paid and all these savings from no taxes have been enjoyed by the consumers...

THEN TAX THE CONSUMER TO DEATH!

Especially the 47% of Americans who pay no taxes....

Storm-Rider said...

TAO sounds like a hippy doper.. After seeing Jerry Garcia shows, i decided he was a deadhead also.

Toad734 said...

What I am saying is that we don't get these savings passed on to us because they don't know, how much of a tax credit they are going to get until the end of the year, by that time we have already purchased their widget.

And like I always say, has your shoes or clothes gotten any cheaper now that they are made in Mexico, China or Sri Lanka? No, of course not, the companies saved money by outsourcing to cheaper labor and raised the cost of the goods. No savings were passed on to the consumer with maybe the exception in the electronics industry. So if they didn't pass on their savings to the consumer with labor in their shoes, why does anyone think that the consumers will get a 20% decrease in costs when the MFGs see a 20% reduction in their taxes??

dmarks said...

Toad asked: "And like I always say, has your shoes or clothes gotten any cheaper now that they are made in Mexico, China or Sri Lanka?"

Very much so. I've found lots of nice new $3 shirts when I looked recenty. I was surprised.

I don't begrudge Mexicans, Chinese, or Sri Lankans for being better at making certain things. And it is always easy to detect the hint of racism that comes from those who oppose free-and-fair trade.

Toad734 said...

Dmarks:

They aren't better, they are worse, they are just cheaper. Since Gap has been outsourcing their Tshirts to different parts of the world I have stopped buying them because there is no consistency in the way they fit. One exactly the same T shirt made in Sri Lanka fits me fine but others are made in Bangladesh and they are way too loose...These are the same Tshirts with the same bar code, same size and are completely different.

All I know is that when Chuck Taylors were made in NC the shoes cost about $25, now that they are made in China, they cost about $35. When Levis were made in the US, they cost about $35 now they can cost up to about $50 depending on where you go.

Yes you can get $3 T shirts from China but you could get the same thing from Hanes when they were made in KY.

And you just called a $3 shirt, "nice".

I don't oppose fair trade.