Should Businesses Pay Income Taxes?

This is, of course, a trick question. The answer is "no". The reason is very simple - businesses never really pay taxes, they simply collect "hidden" taxes from their customers - some of which they pass on to the government. Let me illustrate with an example of two fictitious companies, Company A and Company B.

Both companies produce a "glibbitch" product. They each have the same market share, and their annual revenues are each $10,000,000.00 dollars. Because they have a fungible product, and their production costs are similar, they have the same Costs of Goods Sold. Let's assume that it costs each company $9,000,000.00 to make their product, pay salaries, cover advertising, etc. So each of them supposedly starts with a company income before taxes (Revenue - Expenses) of a cool $1,000,000.00. However, Company B has one significant advantage over Company A that is not related to the product they both sell - Company B has better tax attorneys.

So Company A pays the Coporate Tax on $1,000,000 at say 30% or $300,000.00. However, Company B's lawyers are REALLY good at ferreting out some loopholes, and at the end of the year Company pays $100.00 in Corporate Income Tax. Now, both companies have sold the same amount of goods, earned the same amount of revenue, and made the same amount of income before taxes. Yet company A passes on $300,000.00 of the tax money it collected, while Company B only passes on $100.00 of the same $300,000.00 of tax money it collected.

Why do I say that Company A and B both collected $300,000.00 in tax money? Well, for one thing, the Government says it's not theirs (initially). Secondly, all that money, regardless of how much gets passed on, came entirely from their customers! The customers paid the $300,000.00 to each company! It was built into the price! Company B was just better at not having to pay it to the Government!

Now suppose the world changes overnight and on January 1st, 200x the Business Tax Rate goes to zero. All of a sudden A and B are on the same footing. Company A is now looking at increasing their profits by $300,000 per year while poor old Company B, that was doing so much better before, is looking at a measly $100.00 increase in their profits for the year.

But will Company A really do that?  If they do, then there is nothing to really distinguish them from Company B. And frankly, if they lowered their price so their annual income was just $9,900,000.00, they would still be be making more money and cost less than Company B. Remember, Company B has been paying only $100.00 each year in taxes. If they lower their price to match Company A, their net profits (after taxes) would actually go DOWN. That's not good for the shareholders....

So Company A's market share will increase. Remember, "glibbitch's" are a fungible product. So now more customers are paying less money to get the same product, because the hidden tax is now gone.

Eventually, the Government would have to raise the sales tax on "glibbitch's" because their revenue has gone down. But that's OK. Because now it's clear how much money is the Government's.

But more importantly, and rarely discussed, is that now Company A and B have to complete solely on their primary business - which is making "glibbitch's". Company B will have to lower their price to match A's. But since B is now making less revenue, they'll have to figure out how to make their product either less expensively, or improve it to maintain the price they were getting before. The important issue is that they will now compete on the price/value of their product - not on how good their tax lawyers are. Isn't that better for us all? (Well, maybe not the tax lawyers...)