“Don’t tax you, don’t tax me, tax that fellow behind the tree!” This short verse is thought to be attributed to the late Louisiana Senator Russell Long. We recognize that “taxes are what we pay for a civilized society.” At least, that’s how Supreme Court Justice Oliver Wendall Holmes put it. We all want protection for our families, both at home and abroad. That protection requires a police force and a military. We want to drive on good roads and have a solid infrastructure. We want a lot of other things as well. And these services require money.
There’s a popular idea out there now to raise taxes on corporations. After all, they make billions; certainly, they can afford to pay their fair share. But before we deal with the big guys, let’s do a small experiment. Suppose I raise a patch of watermelons and set up a roadside stand selling them. I charge $10 for a melon (they’re seedless!). An IRS agent drives past my stand and inquiries about the business. He notes I’m pocketing the entire $10 and not paying taxes. He immediately requires me to charge $1 in taxes for each melon sold. I figure I’m entitled to $10 since the melons are a lot of work, so I raise the price to $11. And the melons continue selling. The $1 tax was placed on my business, but who ends up paying it? The customer does, of course.
The same principle applies to large corporations. Let’s take Wal-Mart, for example. Their latest annual reports revenue of $611 billion and net income before taxes of $17 billion. Taxes are reported at $5.7 billion. It’s easy to rationalize that they could certainly contribute a few billion more to the public coffers. But if we raise taxes on Wal-Mart, they may raise prices on their merchandise, or at least slow the pace of price rollbacks. Either way, who pays in the end? You and I do, in the form of prices higher than they otherwise might have been. Taxing the man behind the tree ends up taxing you and me!
Back to my watermelon stand, suppose a competitor sets up down the road, also at $10 a melon. The IRS nabs him for a dollar tax as well. But he absorbs half of the tax in reduced profits, and only raises his price to $10.50. I then must decide whether to meet his price or continue at the $11 price. Market reaction will soon chart the course of action for me.
If you agree that consumers end up paying at least some or all of the tax imposed on companies, let’s think outside the box for a minute. What if we got rid of corporate taxes completely? Yes, hard to imagine no doubt. But taxes are a cost of doing business. My first job out of college was at a furniture factory in Arkansas. 1200 workers in Ft. Smith cranking out quality furniture in six plants. Those plants are all mothballed as the furniture manufacturing has moved overseas where costs were lower. Down the street was a Whirlpool factory making 5000 refrigerators and freezers every day! That plant is also shuttered with production moved to Mexico. That puts people out of work, people who were paying taxes. Some will find other jobs but many may now become dependent on some form of government assistance. If those manufacturing firms didn’t have to pay income taxes, they might then be competitive with foreign costs. Then when the companies’ profits are distributed, tax the stockholders who receive them. Currently such dividend distributions are taxed twice, once at the corporate level and again at the stockholder level. Does that make any sense, taxing the same income twice?
Tariffs are another attempt at taxing the man behind the tree. Suppose I work at the local widget factory and our widgets retail for $50. Foreign widgets are imported at $40. So the government puts a $10 tariff on imported widgets. Who wins? The relatively small number of people who work in the U.S. widget industry. Who loses? Consumers who buy a widget at the higher cost! Yet another example of taxing the man behind the tree!
Your takeaway: Most Americans understand that there is a cost to the services we want from government. And tax revenue is required to pay for those services. But don’t be fooled by backdoor efforts to tax the man behind the tree through corporate income taxes or tariffs. Directly or indirectly, we individuals pay the bill.
