A Taxing Dilemma, Part 2

By Dave Smith, USDR Contributor

In his aggressive campaign to promote his plan to increase taxes on the “millionaires and billionaires” in the US economy, President Barack Obama has been touring the country to make his case that high-wage earners in the United States aren’t paying what he considers to be “their fair share”.  The centerpiece of his economic plan is a series of spending measures that he claims will create jobs and stimulate economic growth; the tax increases, while a stated goal of Obama since the 2008 campaign, would be enacted to pay for the spending proposals.

What the President and other supporters of raising taxes on the “rich” seem not to realize, however, is that such increases in the top marginal tax rates would not just fall on wealthy wage earners, but would also fall on businesses large and small – those same businesses that the President wants to be creating those jobs the economy needs.

It seems like common sense, but apparently needs to be stated:  every dollar that a business sends to the government in the form of taxes is a dollar that it doesn’t have to invest in new infrastructure, hire new workers, improve salary or benefits for employees, acquire new assets, invest in research & development, or even pay dividends to shareholders.

During the economic slowdown, businesses have been making intense efforts to cut costs; one obvious method of doing so is reducing payroll expenses by laying off workers.  Taxes are another line-item cost, so it would seem illogical to expect businesses to hire new workers while increasing the expense pressure on their tax bills.

Taxes aren’t just another business expense, however – they are worse.  Businesses are always worried about increasing expenses from inputs like raw materials, labor, energy, transportation, real estate, etc.  But with most expenses, there are ways to get around additional costs, or at least minimize their impacts.  For example, if a supplier seeks to raise the cost of a raw material, a business owner might seek to find another supplier, minimize the use of that material through innovation (e.g. recycling), negotiate longer payment terms, or perhaps sign longer-term contract in return for lower prices.  An investment in land or an expansion could be postponed.  Such options don’t exist when dealing with the government and the tax bill:  there is no long-term contract with the government – tax rates can be raised at any time at the whimsy of Congress – and “innovations” that result in lower tax bills are often met with unfriendly skepticism by the enforcement arm of the IRS.

Thus, to reduce its tax burden, a business must conform to government incentives.  This is accomplished either by making less profit or by engaging in activities favored by government subsidies or so-called “targeted” tax incentives.  Neither option is optimal:  profit is, obviously, the ultimate purpose of any business, and if a particular investment or activity were considered by the business’ leadership to be the most efficient use of company funds, it wouldn’t require special incentives.

Jumping through the hoops required to achieve special tax benefits can be especially difficult for smaller businesses.  The large corporations can afford to employ multitudes of tax attorneys and accountants who scour the tax code for ways to take advantage of its complexity; they can also afford armies of lobbyists to encourage the passage more such complexities that skew towards their own benefit.

The small business, however, is less well-equipped to exploit tax code loopholes or to effectively lobby for special benefits.  The tax bill represents an expense not easily minimized.  This would explain why, according to a survey conducted by the National Federation of Independent Businesses, 18% of small business owners consider “Taxes” to be the “single most important problem” they face.  Only “Poor Sales” (25%) and “Government Regulations and Red Tape” (19%) polled higher.

The business tax debate can be summed up in a simple question:  how are workers better off if their employer is paying more money to the government?  Especially now, when US business taxes are among the highest in the world and other countries are looking to lower, not raise, their own taxes, the answer is simple:  they aren’t.  Raising taxes on businesses is the wrong approach to improving the economy and lowering the unemployment rate.

Born in the same county as Davy Crockett in East Tennessee, Dave Smith has been living in Texas for over 10 years and involved in politics in for over 15 years.  He has been blogging for nearly 10 years, has contributed to Town Hall Magazine and other publications, and has been on ABC and Fox discussing election issues.  He is a graduate of Tennessee Tech University with a degree in chemical engineering.

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.

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