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The truth about who pays taxes: Everyone and No One Simultaneously

Conservatives often challenge the logic and rationale behind taxing corporations because the tax is essentially a ‘pass through’ item;  the tax is paid by the consumer, in the form of higher prices for the product or service.  On this view, then, a tax on a corporation is actually a tax on the end user.  And this view is essentially correct.  It cannot be disputed at its core, because it is exactly the way the real world works- and will always work.

However, you can nibble around the edges, and since people will want to sock it to ‘big business’ they will make the attempt, saying, for example, that a corporation might choose to eat the lost revenue themselves, rather than pass the cost themselves, in order to retain a competitive advantage.  This type of calculation certainly does happen, since businesses know better than bureaucrats what the markets will bear for an item.  However, this is no salvation for the Occupy Wall Street crowd or your standard liberal, either, because in their quest to stick it to Big Business in support of Small Business (ostensibly), the entities more likely to be able to eat that kind of loss will be the Big Business.  If the same situation is foisted on the little business, it is a more serious issue.  Walmart can build an empire by making 1 penny in profit per item, but your local mom and pop would have closed their shop long ago, and gone to work at Walmart.

Trying to make the tax load ‘progressive’ ‘helps’ in some ways but generally just obscures what is really going on.  But you can see the general outline:  in the end, it is the smallest entities that bear the bulk of the burden regarding taxes- even when, and perhaps especially if, the policy is directed against the bigger entities.

Given the above, it is a bit ironic that not too long ago, General Electric paid little to no income tax, and the liberals pretty much gave the company a pass, but the conservatives were outraged.    One would have thought that conservatives would be happy that a company was keeping more of its money, and one would have thought liberals and OWS would be besides themselves.  No doubt, the respective attitudes had much to do with the buddy-buddy relationship between GE and the Obama administration, and this colored the response greatly.  As indicated in the article I linked to, it is likely that GE did pay some taxes, but for my next point let us assume that in fact GE did not pay any taxes, and ask if that is really the proper view of things.

So, assuming that GE did not pay any taxes at all, can we really say that GE did not pay taxes?  The question seems like tautological nonsense until we remember that GE employs 304,000 people.  Wow!  That’s a lot of people.  And guess what!  Those people pay taxes.  They pay taxes on the income they receive from their employer, property taxes, sales taxes, and so on and so forth.

If we posited that each employee paid $10,000 in taxes, a number that is certainly seriously understated, that would mean that those employees paid $3,040,000,000 in taxes.  That’s $3 billion bucks, and that’s a lot of money.  And where did the employees get their money?  From their employer, GE.

Did GE pay taxes or not?

Clearly, they did, even as they didn’t.

This kind of fact is why it really burns me up when I hear people go after ‘big business’ or business in general to pay ‘their fair share.’  In the first place, they pass their cost of the ‘fair share’ down to the consumers, the very people that liberals say they want to protect.  In the second place, the businesses already pay 100% of the taxes in a community as it is, but a huge portion of it comes through their employees.

Therefore, we must conclude that in ultimate terms, nobody pays taxes.  That is, no individual does.  Corporations and businesses pay taxes, either directly through corporate income taxes, or indirectly but nonetheless inexorably, through their employees.  A reasonable person would adjust their attitude about taxing businesses if they understood this.

The astute among us will have already seen the next point in the making.  If corporations pay taxes through their employees by distributing a portion of their profits to those employees, we must ask:  where did those profits come from?   Businesses get their profits by selling a product or service at a price higher than the cost to provide that product or service, and keeping the difference.  That is, the profits come from the end user of the product or service, more often than not, the consumer.

The consumer got his money from somewhere- more often than not, an employer!  Since every business got their money from the consumer who is in turn an employee of the businesses that pay the taxes, we must conclude that in ultimate terms, everybody pays taxes.

Is your head turning yet?  This is the sort of madness that we are driven to by a realistic look at the true nature of taxation.  What I have said so far is absolutely true.  Nobody and everybody pays taxes, simultaneously.  Each individual of society bears the cost and burden of taxes, no matter where it is directed.  This notion that you can have taxes that target this group or that group is fundamentally nonsensical.  Every tax must be regarded, ultimately, not as a tax on any particular interest group, but as a burden on society as a whole.

(I say that with relative confidence, having thought through several areas of taxation, but given the creativity government employs in finding new taxes, I will concede that perhaps there may some instances where a tax only collects from on particular group and does not impact any other group… maybe ‘sin’ taxes?).

Since every tax is really a portion of the nation’s productivity and every tax is, in ultimate terms, a burden born by the entirety of society, we must ask ourselves about the moral and ethical implications of taxation.  This goes for the average American, of course, but especially so for the liberals and leftists and OWS so-called ‘99%’ crowd, that frames the legitimacy of taxing people, businesses, and organizations, in terms of those entities being compelled to ‘pay their fair share.’

Such an attitude, brought to bear on tax policy, is doomed to abject failure.  For one thing, a tax on the 1% is, as I have shown, a tax on the 100%.  If you can imagine a bunch of people running around shooting themselves in the foot- or head- on a mass scale, you will have the proper image of people who think this way.  But for another- and this is important- there is a presumption buried into this way of thinking that is positively dangerous:  someone must decide just what is a ‘fair share.’

As I alluded to above, only the people who create products and services with a mind to make a profit understand the real value of things.  For example, an oft repeated mantra of the left is that businesses make their profit because of society’s infrastructure, such as public roads.  This sounds nice, in theory, but no bureaucrat could possibly determine what the ‘fair’ percentage of a business’s profits came, proportionally, from a particular piece of infrastructure.  And for this leftist to say, “The people paid for that road” is to forget what I have just explained, that in fact, “The companies who paid the people paid for the road.”  Which is to say, “The people who paid the companies paid the people who paid for the road.”

Only the people (and businesses) who actually made the road know the real value of that road, and only the people who use that road know its proportional effect on their income- if it can be known at all.  But since the road was paid by the people who paid the companies who paid the people who paid for the road, to target the businesses for their ‘fair share’ in paying for the infrastructure that they are using to make their profit, in fact targets the people who already paid for the road.  Insofar as anyone every knows what is really the ‘fair value’ of a product or service- even a government service- it is only by way of market forces.

The ‘market’ gets a bad rap among liberals, but all the ‘market’ is, ultimately, is an ongoing negotiation between various parties about the value of their time and expense in relation to the product or service offered or desired.  Everyone protects their own interests all the way through the process, and the resulting transaction signifies the only reliably somewhat-objective measure of what constitutes a ‘fair share’ of anything.  The producer determines that for his time and expense for producing a product or service he should be paid X.  The consumer determines that for his time and expense, he is willing to have that product or service for amount Y.  The two work in concert until X=Y, or else there simply is no transaction.

When the government steps in to procure tax revenue to pay for its services, it does so by fiat.  That is, there is no negotiation.  The ‘value’ of the product or ‘service’ is determined by people who are able to forcibly extract from the other party whatever amount they can pragmatically get away with.   Political realities dictate that they attempt to extract that money from particular groups, under the cover of ‘they need to pay their fair share.’  However, as seen, all taxation is a burden on the whole of society, and without negotiation between the interested parties, there is no way to calculate what really is a ‘fair share.’

Round and round we go, where it stops, nobody knows!

What is the only sane way out of this nonsense?

If one cares about morality, ethics, sound reasoning, and the like, the only conclusion is that the complete elimination of all taxation at every level is what is required.  That’s right, taxation must be abolished.

Not a ‘flat tax’, but no taxes at all.  Not a ‘progressive’ tax, but no tax.   You’ve got to get rid of them.  They can only be rationalized by muddled thinking, envy, and lengthening the chain of causes and effects to such length that it is difficult, if not possible, to see how a tax ‘here’ effects some person or entity ‘there.’

But you ask:  how then shall we pay for the services that government should offer?

Before you can answer that, you naturally have to decide which services the government should offer.  I here wish to head off the criticism that I am ‘anti-government.’ In advocating for the elimination of all taxes, I am not advocating for the elimination of government.  I am a conservative-constitutionalist, which means, by definition, that I can generally get behind the level of government outlined in a plain reading of that text.  In sum, I’m a proponent of limited government.

How limited?  And how shall it be decided?  How can we ensure it remains limited?  That last question is THE question.   The best way to ensure the proper amount of government is to ensure that people are willing to pay the real value of the services that they desire to have.   For example, if I go into a store and see a flat screen TV for $4,000, I can decide whether or not, first of all, that TV is actually worth that amount, and second of all, if I’m willing to actually part with that amount to secure it.

Now lets say we’re considering having the government pay for health care.  You go to your doctor and ask for a particular procedure to be done that is covered by the government.  Now, you have no idea what the value of this procedure is.  You are wholly unaware of the cost of any supplies that may be involved, the cost to acquire the technology the procedure requires, the cost from the salaries for the doctors, nurses, and secretaries, to provide the procedure, and the cost to the hospital to build and run the clinic.  If this all could possibly be parsed out, we may suppose the cost of the procedure ends up being a solid $4,000.  Now, if it were a matter of you forking out four grand for the procedure out of your own pocket, you may very well decide that you didn’t care all that much, anyway, and forgo the procedure.  (Of course, if the procedure will save your life, you may decide differently!)

But this is health care provided by the government, which means that the average person who goes to the clinic to make use of that health care thinks he is getting it for free.

Gosh, if I could get 60 inch flat screen televisions for free, I think I’ll take a dozen!

Of course, from the above we recognize that our citizen is not getting his health care for ‘free.’  All of society, not just the rich people, is bearing the cost of that ‘service.’   Because the connections are so convoluted and obscured, he has no way of knowing whether or not he is willing to give the clinic the amount of money the clinic thinks their time, effort, and expertise is worth.

And every service provided by the government on the basis of being paid by taxpayers (rich or poor) suffers from this problem, which is one reason why the costs of government provided services are always bloated and exaggerated and always go up.  It is also why societies that continue to add services willy-nilly find themselves with economies that tank, with no one being able to figure out why (ala, Greece).  The true weight and impact of the tax policy is difficult to assess at any level.

What needs to happen is that a clear correlation between the actual costs of a product or service provided by the government is known and put in front of the citizen so he can decide if he wants that service bad enough to pay for its REAL cost.  But the real cost can only be reliably be known through the negotiation process that market forces provide.  A government subsidizing its services by taxation necessarily obscures and distorts those costs- the bigger the government, the more the obscuring and distorting.

So how then to pay for those services that citizens really insist on having and are willing to pay for?  Obviously, the first thing that comes to mind is that in this case, a citizen could just as easily find a private entity to provide that service.  No government necessary.  But we can imagine certain services, such as police and fire service, that are perhaps better suited for a ‘public’ service, administered by a government.  How to pay for them transparently and determine ‘fair share’ if we are dispensing with taxation?

Bonds, James.  Bonds.

Believe it or not, it has not always been the case in the US that there was an income tax.   The sixteenth amendment, ratified in 1913, changed that dramatically.   This amendment made it legal for the Federal government to directly tax the income of American citizens.  As you may surmise, I believe this was a terrible blow for ‘limited government.’  The sixteenth amendment should be abolished forthwith.

Before the income tax and automatic withdrawal of taxes from revenue became common, governments often funded their operations by offering bonds.  Bonds are basically loans, and loans typically are paid back with interest.  World War 2 was funded heavily with ‘war bonds.’ Bonds are a much better way to fund government services, because they give each citizen the ability to decide whether or not they wish to loan the government that money to provide that particular service.

It is the ultimate check and balance on uninhibited growth of government:  the government knows it will have to pay that loan back, and must work extra hard to ensure that it gets a return on its dollar- ie, it makes the government interested in cost savings, and thus a negotiation partner that doesn’t operate as though it is offering something for ‘free.’  Also, if a particular service cannot generate enough citizen-investors to take out the bond and provide the service, it is almost certainly the case that there isn’t much demand for the service in the first place.  Remember the free flat screen TV- if they were free, I’d paint my walls with them.  If they were four grand, maybe I’d buy one, but chances are I’d probably just forgo it completely, or get a more affordable one.

(If this happens on a grand scale, the producer will either lower his asking price in the ‘negotiation’ or simply cease to offer the ‘service’ if it can’t, in its estimation, be fairly compensate for it.  Quite the opposite with the government- they will offer the service until kingdom come- even if the price skyrockets.  Hello, 15 trillion dollars in debt!)

Bonds are the best way, and possibly the only way, to ensure that only those who are most interested in a service being offered by the government are the ones who actually pay for it while preserving at least some of the ‘negotiation’ elements of market pressures.  We’d find out very quickly how many services Americans are perfectly willing to go without once they see the real costs involved in offering them, instead of laboring under the illusion that they are ‘free.’  Moreover, the unseen, but very real, wet blanket that taxation is on our society as a whole will be stripped away.

Prosperity will be right around the corner as producers stop hiding the cost of their taxation in the price of their products and services and people will have more of their own dollars to commit towards things that they truly desire.  If it is a $4,000 television, that is their choice.  But every one of those dollars goes to the REAL ‘fair share’ of the item, making each dollar much more valuable, and therefore able to go much further than it does now.   There will be more of their own dollars in their pocket and those dollars will be worth more.

With all that valuable cash floating around, I bet that folks- even ‘poor’ folks- won’t have much problem paying out of their own pocket for the services at their real value if they really feel they need them.

When nobody pays taxes, everybody prospers.

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2 comments

  1. Nailed it.

    I always wonder, though, about the claim of an America without taxes; I mean, wasn’t the tea-party all about proper representation, not the absence of taxes? Or have I swallowed a fable?

    • Anthony on November 15, 2014 at 5:55 pm
      Author

    The original ‘tea party’ was, but it doesn’t follow that the present one must have the same impetus.

    However, if you ask me, a lot hangs on your statement “all about proper representation.” Many would say–and you can count me among them–that we are not actually properly represented, which is actually the problem.

    The original ‘tea party’ wrote the Constitution with sufficient checks and balances to ensure that people were actually properly represented, most notably by checking the power of the Federal government to tax. This ‘check’ has now been obliterated.

    Taxation probably has a proper use, but we cannot fool ourselves about what it is and what it does.

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