Presidential Candidate Joe Biden is fond of saying that he won’t raise anyone’s taxes if they make less than $140,000 per year. If we assume that this is the individual rate, then married couples filing jointly should expect to see a tax increase if they make less than $280,000 per year. This is a substantial income in places other than New York City and San Francisco, which many working people have fled or are fleeing anyway. So this seems like a good thing for most Americans. But will your taxes really not go up under the Biden plan?
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But Joe Biden is also saying that he will raise taxes on corporations. At first you may look at their profits and think, “Good, we should tax these corporations more. They have the money, why shouldn’t they pay a bigger share?” Why wouldn’t we raise taxes on a company making $1 billion each year in profits? Raising taxes on corporation, however, actually raises taxes on everyone. Here’s how.
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What is a corporation?
A corporation is a company that is established in such a way that its owners are protected from liability. If the business fails, creditors can’t come after the owners’ personal assets. Once the corporation has paid out all that it can, all other debts are uncollectible. It becomes like a non-human entity where people run things but it lives on by itself, sometimes even firing its founders.
A corporation is run by a set of executives and a board of directors who do get salaries and do often have an ownership stake in the corporation, but when you tax a corporation more, it doesn’t mean that the CEO or the board of directors send you a bigger check out of their salaries. In fact, it is unlikely that they’ll even see their salaries cut at all as taxes are raised. They may actually get bigger salaries as the sales of the company increase.
A corporation is owned by a set of shareholders. For a public corporation, the owners can be really anyone, and many of the big corporations are largely owned by people making less than $100,000 per year thanks to 401k accounts and mutual funds. If the owners were to pay, you’d be raising taxes on a lot of people making less than $140k per year as you raided retirement accounts and the college funds of middle-class Americans. But while these shareholders will see a drop in their stock price when taxes are raised, at least for a short period of time, they also do not pay the increased taxes out of their money. You don’t get a tax bill from your 401k each year to cover the taxes of the stocks you own.
So, who does pay the taxes?
When you raise taxes on corporations, people buying their products are the ones who pay them. Taxes are just a business expense, just like rent, payroll, and raw material costs. If the company cannot find ways to cut their taxes (which they spend a lot of time doing), they will just raise the price of the products they sell. The consumer pays more to cover the taxes.
And the company doesn’t try to find ways to cut their taxes because they’re worried about paying for it out of their profits (because they don’t). They do it since if their competitors find a way to cut their taxes while they do not, the competitors will be able to sell products for less and take away market share. That would cause their profits to drop, so they work to minimize their taxes to stay competitive. As long as everyone is paying higher taxes, it really doesn’t matter to the corporations. They’ll just make $1 billion on $100 billion instead of $1 billion on $95 billion in sales.
If the company is a yacht maker, then, sure, most of their customers would make more than $140,000 per year. But if you’re taxing most companies, their customers make considerably less. Most people won’t even understand what is going on when taxes are raised. They’ll just see prices go up and think, wow, things are costing a lot now. They won’t connect the dots that the higher corporate taxes put into place by people like Joe Biden are causing those prices to be high.
In places like New York City and Los Angeles, they just say, “Gee, prices in the city are high. It costs a lot to live in the city, making it hard to make enough to get by.” They’ll respond by charging more for things they sell. If they work for others, they’ll require that they be paid more before they will take a job. They don’t get that prices are high in part because taxes are high. Without high taxes, things might even cost less in the big cities than elsewhere because there is so much competition.
Note that taxes affect the cost of everything, so not only will the cost of goods be higher in high tax places, but so will the cost of rents, electricity, gasoline, transportation, and other items. Even insurance will cost more since it will cost more to replace things. The higher the cost companies need to pay, the higher the cost to the consumer. Taxes are just another cost.
Politicians like high taxes because, the more money they’re bringing in, the more power they have. They can also take more money for salaries and lavish offices since it is still a small percentage of the money being collected. No one thinks twice if the Mayor of New York City makes $260k per year and gets all sorts of services provided that add up to tens of thousands of dollars more. But if the mayor of a town of 20,000 made the same salary or had the same expenses, it would seem outrageous.
If you want to profit when corporations do, buy stock
If you actually want a cut of the profits being made by corporations, buy shares of stock. Trying to get at their profits by raising taxes will just result in higher prices for you and a lot of money wasted in the government (and higher government salaries, again raising the cost for you). Anyone can go out and buy shares of a mutual fund. Some brokerage companies are now even offering to sell fractional shares, so you could go out and buy a “slice” of Amazon for $100 if you wanted to. You could then get a portion of the profits that Amazon is making.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.