Taxes: Who Pays? Really?

Mr. Obama's plan is to raise the taxes on the rich. Unfortunately, the so-called rich include companies and corporations that make over $250,000.

So, where do all those new tax dollars come from? Well, logically, they come out of company profits, and the average "Joe" on the street probably thinks that is just fine. Those greedy Wall Street bastards! But, the reality is something entirely different.

Most small businesses and corporations use those profits to create more profits by increasing the size of their businesses. Most well-managed companies do that by plowing that money back into the business. They expand; buy replacement equipment; they hire new people; they pay off debt; etc. When taxes are raised, they have no alternative but to limit those activities. But, usually, this type of business stagnation can't survive forever. What really happens as a result of higher taxation is that the businesses community will ultimately raise prices to regain the money they lost as a result of higher taxes. That means that "you and I" will all pay higher prices. That's who pays.

In some cases, marginal businesses won't be able to raise prices and survive the competition; especially from foreign competition. Who pays then? All the people who worked for that company, and who had to be let go as a result of the company either downsizing or going out of business. Then, you and I as tax payers pay. What may have been a profitable and "tax paying" business is now non-profitable or possibly in ruin. In those cases, raising taxes was really shortsighted because, overall, the federal tax coffers are reduced by failing companies. With less tax revenues, you and I will ultimately pay higher interest on our Federal debt/deficit.

Lastly, companies that are heavily involved in price competition won't be able to raise prices. To survive, they will just take a cut in profits. This will also have an adverse affect on their profits and their business. It will affect their borrowing capability because less profits means they are classed as a higher lending risk. Being a higher risk means that they will have to borrow money at higher interest rates and that further reduces their profits. As a result, they might not be able realize any planned business expansion. This means they buy less and hire fewer people. It also affects the stock price which is driven by both the current and forward profit capability. When stock prices fall by lower profit expectations, more than 50 percent of Americans are adversely affected because of investment losses. Investments that they either made directly, or own indirectly in investment activities like retirement funds, investment funds, etc.

While many Democrats like to play the game of class warfare, like Main Street versus Wall Street, as you can see from above, it is you and I who ultimately pay the price for all their games with taxes. For every dollar of service that the Federal Government provides, there is at least 25 cents that are eaten up in what is called "dead weight" or wasted administrative costs (See Page 7 of this Cato Institute Report on Downsizing the Federal Government). In other words, if Congress wants to give you a $1000 tax rebate check, it needs to collect $1250 in taxes to make this happen. Further, for every dollar of tax benefit that the government (like Obama) promises, you can almost bet that "you and" I will pay more in the marketplace in terms of higher prices for all the goods and services after the government raises taxes to give you that benefit. That's the reality of higher taxes and it is a complete con game.