I’ve heard some people say “When I started a business, I didn’t think about taxes. Taxes don’t affect my business decisions.” This is an excuse for higher tax rates.
That is nonsense. Taxes are a cost. They should be factored into every decision.
If taxes don’t affect business decisions, then why does every large corporation use offshore accounts and other accounting tricks?!
Suppose a business has a profit margin of 5%. If taxes are raised 10%, that business now has a loss of 5%. Higher taxes turn a profitable business into an unprofitable business.
You must consider all the direct and indirect taxes a business pays. Most people only consider corporate income taxes. There are many other taxes.
There is the cost of a license, if a business requires a license. Most businesses require a license.
There are sales taxes. If customers pay a sales tax of 8.5%, that’s money taken away from purchases. If customers didn’t pay the 8.5% tax, they would have more money to spend.
There are income taxes on employee salaries. If there were no income taxes, salaries could be lower and workers would have the same take-home salary. Remember to include the employer-paid Social Security, Medicare, and unemployment tax. If businesses are required to buy employees health insurance, that is another tax.
There is the cost of regulation compliance. In State tax calculations, that does not count as tax paid. It is an expense. Most businesses pay a lot of money just to make sure they are following the payroll tax law correctly.
For many businesses, especially tech-based startups, there’s the patent tax. If you have a successful business, then other people may threaten you with a patent lawsuit. It’s cheaper to settle than go to trial. If you go to trial and win, you normally don’t recover legal fees and the time spent on the lawsuit. The threat of a patent lawsuit is a tax. It reduces the reward for success.
A pro-State troll says “Don’t infringe any patents and you have nothing to worry about.” Most patents are vague and the legal system is corrupt. Frequently, the victim in a patent lawsuit never heard about the patent until he was being sued.
All these taxes reduce the reward for starting a successful business. With high taxes, the reward for success is less. Notice that the business is nickled-and-dimed by many small taxes added together, rather than one huge tax.
It’s a “seen vs. unseen” fallacy. Nobody sees the businesses that aren’t started due to high taxes. People only see large corporations that receive massive State subsidies, and they think that’s the natural outcome of a free market. With high taxes and high corruption, the most profitable businesses are those large enough to cash in on State subsidies.
A pro-State troll says “Taxes never affected someone’s decision to start a business.” For a Ponzi-based business like Facebook, Zygna, Groupon, and LinkedIn, taxes don’t matter much, because the underlying business model is fraud. For a business with real goods and services, margins usually are thin. Taxes are a huge cost. High tax rates change a profitable business into an unprofitable one.