Why Governments Should Not Tax Business Profits Instead of Personal Income

The debate surrounding taxation policy often centers on the effectiveness and fairness of income tax versus corporate tax. While the US Constitution (Amendment 16) permits income tax, there is a case to be made for taxing personal income exclusively. This article explores why taxing business profits might not be the ideal approach from a policy perspective and how it impacts economic growth.

Historical Context and Constitutional Considerations

The foundations of taxation in the United States, rooted in the Constitution, were never intended to protect individuals from paying taxes. The concept of taxation without representation was a significant driver of the American Revolution, which led to the formation of the country. However, the Constitution does not stipulate that citizens should be exempt from paying taxes to support their nation.

The argument that the Constitution was designed to protect individuals from excessive taxation is challenging to substantiate. High-population states might argue that their representation in the Senate reflects a form of protection against oppressive taxes, but this remains a debated point. The primary mandate of the Constitution is to establish a framework for a functioning government that can levy taxes to sustain the state.

The Case Against Taxing Business Profits

Taxing business profits instead of personal income would be economically impractical and counterproductive. Here are the key reasons why:

Tax Collection Mechanism

Businesses act as tax collectors rather than net tax contributors. Corporate taxes, sales taxes, and other business costs ultimately get passed on to consumers and shareholders. For larger corporations, this often translates to reduced dividend payments. When businesses cannot consistently generate profits, they face insolvency, which is detrimental to the economy as a whole. Profits are essential for business growth, both directly from profits and through financing based on profit projections. This growth positively impacts wage earners and consumers.

Redundant Taxing

Money is inherently taxed multiple times. Sales tax, for example, is levied on goods and services that have already been subject to income tax. This duplication of taxation is already a well-established mechanism without the need for additional cross-subject taxation.

The justification that taxing business profits would avoid double taxation is flawed. Double taxation occurs when an individual pays tax on the same income twice, not when businesses effectively collect taxes that are ultimately passed on to individuals. Businesses are still contributing to the overall tax revenue, just indirectly.

Politicians and Fiscal Policy

Politicians often appear to favor taxing businesses due to the misconception that it helps taxpayers at the expense of business owners, or 'Fat Cats'. However, this narrative is a misrepresentation. In reality, end-of-the-line taxpayers, such as employees and consumers, ultimately bear the brunt of these taxes. Politicians do not create a net reduction in the tax burden by diverting corporate profits; they merely redistribute it, often in ways that benefit themselves rather than the general populace.

The desire to maintain an appearance of favoring the common folk can lead to deceptive policies. Probing deeper reveals that business profits spent directly on growing the economy increase everyone's purchasing power, which is the ultimate goal for wage earners and consumers.

Conclusion

Taxing business profits instead of personal income would undermine the economic incentives required for growth and stability. The Constitution does not provide a mandate for such a shift. While politicians may exploit public sentiment by portraying themselves as advocates of the common people, it is essential to recognize that the impact of such policies primarily benefits the political class at the expense of the general population.

Key Points to Remember

Businesses function as tax collectors, not net contributors, and any corporate taxes are ultimately paid by consumers and shareholders. Multiple taxation is already a well-established mechanism in the economic system (e.g., sales tax on previously taxed income). Politicians may perpetuate misleading narratives to appear favorable to taxpayers, but ultimately, the tax burden is redistributed rather than reduced. Business profits spent on growth increase overall purchasing power, benefiting wage earners and consumers more than corporate taxes.

Understanding the complexities of tax policy is crucial for fostering a more informed electorate and promoting effective economic policies.