Taxing Businesses

Businesses are taxed on their profits. Businesses that do not have profits do not pay taxes. Therefore cutting taxes will not help a company become profitable. Taxes are not a “cost.” The costs of doing business (salaries, cost of goods, other costs of doing business) are deducted before profits are determined. That’s what a profit is. Taxes are calculated as a percentage of profits. (This discussion leaves out any property taxes, and tax breaks that some companies purchase with campaign contributions, hiring a politician’s son or other relative, or other bribes, or otherwise obtain by doing things like opening a Post Office box in Bermuda or moving patents overseas…)

Well-run companies hire and fire based on their need for employees. If a drop in business leaves little for employees to do the business will lay off employees, retaining just enough to do the work necessary to meet the demand for the products or services offered. If there is an increase in business the company will hire enough employees to meet the demand.

Handing a bunch of cash to employers will not cause companies to hire employees if there is no demand for their products or services. It might, however, cause them to increase campaign contributions or payments to politicians’ Swiss bank accounts. Or, it might be a reward for previous contributions or payments. (I would rather not not be sidetracked by a discussion of the merits of pre-paying your bribes or waiting until after the tax break is received.)

Giving tax breaks to companies or to rich people does nothing to increase employment.

Another implication from businesses being taxed on their profits is that businesses do not “just pass on taxes to the customer.”

A well-run business charges the most it can get for its product or service. If the business has competitors it has to price its product or service in some relationship to competing products or services. Were a business to add to to prices to cover taxes this would increase the price above what had been determined to be the optimal price! Perhaps a competitor is not as profitable, and therefore doesn’t pay as much in taxes. That means the competitor will have a pricing advantage. If a company were to raise prices to cover taxes the it would mean the company was previously negligent in not pricing as high as the market would bear. Finally, increasing prices to cover taxes would increase profits, which would increase taxes, which would require an additional price increase, which would increase profits which would increase taxes.

Companies do not pass on taxes to their customers.