Who Really Pays Income Taxes Imposed On Businesses

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As I watched the presidential campaign unfold this past election cycle I listened intently to the various promises that the nominees were making.  In this post I want to focus on one promise made by Obama.  He said that he was going to give a tax cut to 95% of the people while raising taxes on the wealthy and businesses.  If you want to examine his proposals in more detail you can visit The Tax Foundation website.

My purpose in this post is not to discuss Obama’s tax proposals.  It is, however, to discuss who really pays taxes in our country.  Who will be most affected by the proposed tax increases one businesses and the wealthy?  It is my contention that all taxes are ultimately paid by individuals in our country.  Here’s how:

First, lets establish that businesses do file federal and state tax returns.  When taxes are due, they also send money with the returns.  As such it can be argued that business pay taxes but this is a superficial argument.  In reality, businesses view taxes as a cost of doing business.  If taxes are raised on businesses then these higher costs must be dealt with in one of two ways by the businesses:  increasing revenues or decreasing other costs.  If they choose to increase revenues then they must raise the price they charge for the products or services they produce.  If they choose to decrease other costs, they must look to costs that are not fixed…the largest of which is usually labor (employees).  Lets trace each option to see how it works.

To increase revenues, the cost is passed to their customers by raising the amount they charge for the products or services they produce.  If their customers are other business then the cycle repeats and magnifies itself.  Eventually the higher costs are passed along to the end consumer (you and me).  The cost we pay for the finished product that we purchase includes all the embedded taxes that were added all along each step of the process.    The individual consumer bears the burden of the costs of the higher taxes imposed on businesses.

To cut costs, businesses are forced to examine expense that they can control.  As I said earlier, labor (employees) is usually the largest controllable expense businesses have so it is naturally one of the first places they look.  As evidence, think about all the cutbacks businesses make that you hear about on the news.  They are always announcing job cuts…not some other expense.  The cost of higher taxes can be passed along to employees of businesses in a couple ways.  First, in lower wages or benefits and second in the form of fewer employees.  Either way, the individual employees bear the burden of the costs of the higher taxes imposed on businesses.

As you can see, businesses only serve as a collection agent for the government, they don’t pay taxes themselves.  All taxes are paid by individuals.  With this in mind, I have a question for you:  How should we respond when we are told that a politician, or political party, plans to increase taxes on businesses in order to pay for their various spending proposals?  Hopefully now you can understand that all taxes are paid by individuals.  I you want more information, or a better explanation (I won’t be offended) , check out the Fair Tax Plan.

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