Looking Out From the Garage

Why tax business?

I often wonder about this.  I hear all of this campaign rhetoric...  "Don't cut taxes for 'big oil' or 'fat cats on Wall St', instead, we need to raise taxes on big business." 

That is when it becomes obvious that most of our politicians have NEVER run a business.  They simply don't understand that increased expenses lead to increased prices.  Like Hillary Clinton talking about a "Windfall Profits Tax" on "Big Oil" to be used to send money to the consumers (oddly, at the time, Obama said it was a gimmick, now he has proposed something similar)...  Did she not realize that the windfall profits tax would be an added expense for the oil companies... and that the result would be higher prices at the pump? 

And honestly, ALL taxes on business only accomplish the same thing.  Taxes on businesses are hidden taxes on consumers.  When you buy a gallon of gas, you are paying (on average) about $0.50 in state and federal taxes.  You are also paying about $0.575 in taxes that are paid on the incomes of the various companies that have handled the oil.  In contrast, the actual profit to the oil company for that gallon of gas is about $0.20. 

And it isn't just oil.  Wal-Mart paid $6.6billion in income taxes in 2007.  Do you think that the $6.6billion came from shareholders?  Executives?  Employees?  Consumers?  It came from all of those.  But, competitive pressures would indicate that the bulk of it came from consumers.  Higher prices.

And it is true for just about ANY company. 

But it doesn't stop there.  Because of the arcane and unintelligible tax laws, businesses make strange decisions because of tax benefits.  It is terrible that business base expansion and financial planning on tax consequences rather than on the other needs of the business.  Wouldn't it be nice if companies didn't need to spend millions of dollars looking for ways to save on taxes... or worse, BILLIONS of dollars figuring out what they owe? 

Instead, we get politicians telling plumbers that they need to pay higher taxes to "spread the wealth."  Too bad we can't get some politicians that actually have a bit of business knowledge.

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9 comments • Lane Bailey - REALTOR & Car Guy • October 14 2008 11:27AM

Since I brought up the FairTax...

Since I brought it up, I figured I should post up how I believe real estate would be handled. 

The tax is only on new items and services.  So, obviously new homes would be taxed.  The tax would be included in the sale price when the home is sold the first time.  Under the FairTax, the rate is 23% (inclusive), so that means if the taxed price is $300,000, the house is $231,000 and the tax is $69,000.  Opponents of the tax like to paint this as actually being a 30% tax, and $69k/$231k is 29.9% so they aren't being totally dishonest... totally.  What they are failing to mention is that they current income tax (which the FairTax would be replacing) is also figured on an inclusive basis.  When we make $100,000 and pay a tax of $31,000, we are paying 31% inclusive, or we are paying 45% on an exclusive basis.  This corresponds to the 23%and 30% quoted for the FairTax. 

Back to the subject...

So, the $231,000 brand new home has $69,000 in tax attached to it.  Sounds bad so far, right?  But, as the house is built, there are no taxes being charged on the incomes of the builder or his sub contractors.  There are no taxes being charged on any of the companies that supply products.  Also, the buyer is getting their ENTIRE paycheck.  If they make $50,000/year, they actually get paid $50,000/year.  

Ok, that sounds a little better, but it looks like all of the companies are cleaning up... no taxes, so they make more money.  Well, what happens when one builder lowers his prices because his costs go down?  And, since the builders know how much their costs have gone down, do you think they will expect their subs to drop their prices too?  And what about their suppliers?  We all know that when one commodity producer lowers prices, ALL have to lower prices.  When the gas station across the street drops their price, all of his competitors do too.  

Used homes (we like to call them existing homes) would be unaffected by the tax.  If prices go up for new homes (because of the included tax), the value on existing homes will also go up.  Back to our gas stations... we know that they all raise prices within minutes of each other.  But, as a side effect, conservation and recycling will be positively affected.  Although, building supplies for retail (DIY) would be taxed. 

But, how will it affect real estate agents...

Well, we won't need an accountant to figure out our taxes.  The money we spend for business would be without the tax.  The money we spend for personal things would be taxed.  If I buy a new laptop for my business, I don't have to pay the tax (or I can get it refunded).  If I later sell that laptop, I would have to collect the tax on that sale.  Same for a new vehicle.  We won't have to pay Federal Income Tax, Self Employment Tax, Medicare Tax, Social Security Tax, Inheritance Tax, etc.  Get the idea?  Our cost of doing business would go down.  However, we would have to collect the sales tax (actually our brokers would).  So, if we received a $10,000 gross commission, we would get $7,700, and $2,300 would be paid as tax.  Personally, I can honestly say that I would absorb the cost of the tax.  I wouldn't be paying income taxes and other taxes, and I wouldn't have to have an accountant for tax purposes (I would be using my accountant to figure out ways to make me money...).  I can honestly say that I think I would net more money after taxes and tax compliance costs with the FairTax than under the current system.  

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1 comment • Lane Bailey - REALTOR & Car Guy • August 10 2007 03:37PM

It's time for the IRS to go!

Well, if you've wandered around my blog at all, you've probably figured out that I am opinionated, and libertarian in my views.  I have tried to keep my political opinions out of this blog, but I heard something today and it just chapped my hide... I can't take it anymore.

Some of you might know that Barry Bonds recently knocked out the home run that puts him in first place for lifetime home runs.  A young guy caught the ball... and he might have a serious problem.  I can't tell you much about him, except that I've heard he was a college student.  But, he might have to start looking over his shoulder for the tax man. 

Some experts are saying that the IRS will be looking to collect a bit over $200,000 from him for catching the ball.  You see, experts think the ball is worth about $600,000, and the $210,000 is the amount of gift value this guy received when he caught the ball.  So, if he wants to keep it, he'll have to cough up the cash.  it doesn't matter if he would never sell the ball... the IRS would say that he has already received the value... and it is income.  

It is time to adopt the FairTax.  We need to get back to a point where taxation is something that can be understood.  If you aren't familiar with the FairTax, please go to the link and read up.  It is the most studied article of legislation... ever.  It would make our live a LOT easier.  Think of what you pay for tax prep and accountants to get ready for tax season.  Think of the time you spend in tax prep.  And, think of the consequences if you make a mistake.  And, despite the fact that the IRS itself can't consistently answer their own questions correctly, making a mistake at some point is likely.  

It would make life easier for us, for our buyers and sellers, and even our builders.   

<rant off> 

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4 comments • Lane Bailey - REALTOR & Car Guy • August 09 2007 11:05PM