Why Are Taxes So Hard To Understand

I often wonder what it is about taxes that people have a hard time understanding. Not your typical income taxes that you need a CPA, an expert in economics and a crew of lawyers to decipher the tax code. I'm speaking about the political arena where you and I and everyone else are, more often than not, spectators to the political battle over higher taxes vs. lower taxes.

In this bloody arena, we are like the ancient Romans watching a duel between gladiators, slogging it out in a vicious fight to the finish for supremacy. One political party is for lower taxes while the other party is all about raising taxes. Now, I understand that within the party for higher taxes, the people of the party are not for higher taxes for everyone. That is they don't want to be subject to those increased taxes themselves. The increase in taxes is specifically for someone else, not them. So as long as the tax doesn't effect them, they're cool with it. And I ask WHY? Why would anyone be cool with any increase in taxes? "Well, it doesn't apply to me is why I'm cool with it. It's a tax increase on those who make $250,000 or more. I don't make that much, I only make $30,000, so it doesn't effect me." Well, you're wrong. Every tax increase, no matter who it is aimed at, effects every single person who is a consumer. "That can't be. It's an increase on income taxes so it can't effect me." I beg to differ. Let's follow the logic.

Business is about profit

If I am in business, I'm in business to make money. That means that I take home a profit at the end of the day. Most people have a margin of profit that they prefer to stay within. This allows them to live the lifestyle that they prefer to live. As the cost of living increases, they have to increase the price of what they're selling to stay inside the margin of profit they desire. Same thing for when taxes increase. I have to increase my prices to keep the cross hairs on the bulls eye. So every time my costs increase, my prices follow suit, up, up and away!

So here's the scenario. Ten companies that make $100,000 a year. That's $1,000,000 for the US Government to tax. We'll start out at 25%. Every year, the government takes 25% of the $1,000,000 the these ten companies earn. That's $250,000 for the government. The political party in office is all about increasing taxes. They are only going to increase the tax by 5% on those companies that make $100,000 or more a year. So now the government gets $300,000 a year from these ten companies. As it turns out, two of those companies were operating pretty close to the low end of the margin that they wanted to stay in. The increase in taxes by 5% was too much for them to be able to compensate by increasing prices and the result is that they have to shut their doors. So - instead of having ten companies to tax, now there are only eight. That's $800,000 for the government to tax at 30%. The government takes $240,000. That's ten thousand dollars less than at the starting point of 25%. So the government is taking a smaller amount of money after they increased the tax margin. So they increase the taxes again, after all the purpose of the tax increase was to be able to increase the amount of money the government has to work with. Now there is less than what the government predicted with the tax increase so they have to increase it again. This time it's a ten percent increase. So 40% of $800,000 is $320,000. BUT of the eight companies, now three more have to shut their doors. So now there is a pool of $500,000 that is being taxed a total of 40% for $200,000. That's $50,000 less than the starting point of $250,000 AND now there are five fewer companies to tax overall. With the taxes increasing, and existing companies going out of business, It's very unlikely that any other business' will be able to start up.

What about lower taxes

Let's take the same ten companies, a tax rate of 25% and this time we lower the tax by 5% to twenty percent. The government gets $200,000 of the $1,000,000. The taxes lowered so now two entrepreneurs that couldn't afford to start up a business before now can. So now there are twelve companies that are making $100,000 a year for a total of $1,200,000 that the government can tax at 20%. So that's $240,000 to the government. An increase. Now three more people decide to start up so now there is a pool of $1,500,000 for the government to tax. That's $300,000 to the government. Another increase.

By lowering the taxes, business grew and the government increased the money that it was able to take for it's programs. So lower taxes, according to this model, increases the governments money, grows business (which means more jobs) without taking more money from any individual. The incentive to excel is kept intact and the economy grows and becomes stronger.

So why are people so hung up on making the rich pay for being rich? Let's face the facts, Big Tobacco became big because they provided a service that the people wanted. Even when they were forced to notify consumers that tobacco contributes to lung disease, the consumers still continue to buy it. Now who's fault is that? Is it my fault? No. Is it your fault? No. It's the fault of the consumer. So the consumer should be the one to pay the price. "But our children are susceptible to smoking." So do your job as a parent and teach them not to smoke. But at some point you have to let them go on their own and if they make the decision that you'd rather they didn't well, that's on them and not you.

People need to take responsibility for their own actions.

Still, an increase in taxes doesn't effect me

Yes it does. Remember when I said that all businesses have a profit margin they want to stay within? Well, let's examine that. Let's say that my profit margin is $500,000 a year. The government increases the taxes by a percentage that eats up $200,000 of my profit, That's unacceptable to me, so I get with my CPA's and find out just how much the price of my product (chewing gum) has to increase to stay within my margin. I sold it for $.95 a pack before the tax increase and now I have to sell it at $1.15 a pack to maintain my margin.

You thought that I finally got what I deserved for being a fat cat and having more money than I know what to do with. Yeah! That tax was only on those who make $250,000 or more. So screw you!! But all I did was increase the price of my product, I still keep my $500,000 a year and you (who thought that you were exempt from the tax increase) get to pay my taxes for me. Thank You SOOO Much!!

So, to sum it all up, increasing taxes takes more money from people, which diminishes the money pool, leaving you with less in your pocket. Lowering taxes takes money from more people, which increases the money pool, leaving you with more in your pocket. And that's how taxes work.