Tax Reform

Businesses Don’t Pay Taxes – People Do

The United States is home to nearly 28 million businesses – about one for every 12 Americans. Some are large enterprises, but the vast majority are small businesses – and many times have just one employee – the owner. Still, political rhetoric frequently leads to a disconnect between the business as an entity, and the person or people behind them.

The truth of the matter is this: When government taxes a business, there is nothing that business can do but pass that tax burden on to individuals, in one form or another. Hardworking individual taxpayers pay the true burden of business taxes. This hidden tax shift happens in three ways. The first to pay are the employees – people who do not get that raise or end of the year bonus – or perhaps even lose their jobs. Next are the millions of Americans who have investments in businesses — people who earn a lower return for their retirement in their 401(k). Finally, American consumers pay more as a result of higher business taxes, since taxes get passed along in the form of higher prices. Hiking business taxes leads to higher prices at the gas pump, a larger bill at the grocery store and less disposable income.

Unfortunately, everyone’s pocketbooks suffer when the government raises taxes on the people who run businesses. The average grocer makes just one percent profit, most restaurants make around two, and gas stations make around three. Small though they are, these profits are what allow the people who run businesses to stay open, expand operations and create more jobs. Raising taxes on people who own businesses cuts these margins even thinner and perhaps even forces businesses into the red.

While all business taxes create a burden for individual taxpayers, business gross receipts taxes (GRTs), also known as margin taxes, are an especially hidden form of taxation. While having largely fallen out of favor in places like Texas and Michigan, due to their negative impact on consumer well-being and business growth, GRTs are the epitome of bad tax policy. The generally low rates of GRTs make them especially attractive to those who wish to raise revenue without raising the alarm bells of their constituents. However, traditional gross receipts taxes, which are levied on total receipts, regardless of whether a business had record profits or lost millions, are particularly destructive to economic opportunity and growth.

Forced to work with less money, people who own businesses have to redesign how they do business, and may have to lay off workers, raise the prices for their goods and services – often both. It is not just the people who run businesses who get hurt by new taxes – it is every day hardworking Americans. Whether it is realized in people losing their jobs, or people being unable to find jobs, increases in the prices everyone pays for milk, for gas, for homes, for electricity, or for babysitters, or more plausibly, a combination of all of these sad outcomes, raising taxes businesses hurts everyone.  Regardless of the political rhetoric, taxpayers should always keep in mind the well documented economic axiom: Businesses don’t pay taxes, people do.

In Depth: Tax Reform


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