Sunday, October 12, 2008

The myth of Corporate taxation

Does increased corporate taxation really level the tax playing field?

One of the big issues in this Presidential election is taxation. It has been in every election in my lifetime. Depending on the economic conditions at the time, it's more of an issue than others. So it's a particularly hot issue now.

Many believe that tax policy can be ethically and effectively used to correct economic conditions and benefit certain segments of the economy or populace. Obviously if you tax one person more than another you benefit the lower taxed individual. If you give tax revenues to one person and not the other, then that person is benefited as well. You could potentially double the benefit by reducing or eliminating taxes AND using tax revenues for rebates or additional entitlements to certain segments of the population.

As important as correct Constitutional and ethical tax code implementation is, I'm not going to argue the appropriateness of those sorts of policies. I do want to analyze one particular tax policy that has gained in popularity as we approach this election. That is increased corporate taxes.

Many believe that increased Corporate taxation benefits the "people" and that Corporate tax breaks unfairly punish the "people" who don't get those breaks. At first blush that may appear to be true, but we must look a little deeper into the flow of income and expenses in business and an economy to accurately understand how corporate tax policy works.

Taxes first must be understood as a "cost". Whether it's fuel, steel, labor, or taxes any increase or decrease in the costs of creating a product generally results in an increase or decrease in the price of that product to the consumer. Occasionally the retail price doesn't directly correlate to the change in costs depending on other market conditions such as profit margin, competition or other factors. But generally it does.

Costs go up - prices go up. Costs go down - prices go down. Makes sense right? Who pays an increased price and who benefits from a reduced price? The "people"! So an increased corporate tax is a VERY poorly veiled increase in "tax" to the "people".

Turns out that a politician that is using a corporate tax hike proposal to try to persuade you to vote for him is either an utter fool, or thinks you are one.

So... which is it?


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