Taxes And Profit Margins

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.

4 Responses to Taxes And Profit Margins

  1. October 11, 2012 at 6:55 pm

    You are absolutely right – when taxes are taken into account many profitable activities are no longer such. I believe that in order to end the recession all that needs to be done is to lower taxes. I have never understood why it is socially acceptable to add sales tax to a price. Why only sales tax, why a store would not add other taxes such as federal, state etc

    • The other taxes are included in the price (income, corporate, property, etc.). They aren’t explicitly added, but they’re in there. When a business has property tax as an expense, that cost must be added to the price. When a business has corporate income tax on profits, they must charge more for the same profit margin.

  2. People are so oblivious or just being slaves. When I lived in a state with an income tax, I figured out before and after my check I worked darn close to 5 months of they year and that is what I could visibly count. I could only guess how much of my rent was taxes and other fees paid by the property owners.

    • In NYC (and most other states), the property tax rate for rentals is higher than the property tax rate for single family homes. It’s a subtle way of tax gouging the poor, because the property tax expense is invisible to them, paid by the landlords. If you own your home directly and paid off the mortgage, you pay the property tax directly yourself, and it’s more visible.

      In NYC, if a commercial property is fined for a building code violation, it’s added to the property tax bill if unpaid. Many owners never find out about the fines, due to bureaucratic incompetence. Most commercial properties have mortgages. The property tax addition is added to the mortgage, and the bank adds it to the bill without itemizing it.

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