“Who pays the corporate income tax?” is a question I pose to my students each semester. Most are immediately alerted to the “”who’s buried in Grant’s tomb?” atmosphere of the question and hold back looking for the trick.
There is no trick. From an accounting standpoint, revenue comes in (cash in) and is used to pay all the expenses (cash out) of the company. Taxes are an expense and require cash to be paid out. For the company, the only place cash comes in is from the sale of goods and/or services. The expense of taxes has to be covered by the sales of goods and/or services. So, the customer pays the corporate income tax—it is built into the price of everything.
My students are not happy with that conclusion. It is not politically correct thinking by any means. On one exam each semester, I ask if the corporate taxes should be raised on Big Oil or Wall Street so those companies pay their “fair share”. You can see the pencils quiver on that one. Most get it. Raising taxes punishes the consumer not the company. Nonetheless, I do get a few die-hards who say that raising taxes is good because the government needs the money to spend on “things” and besides, Big Oil is bad. Lots of minus points and red ink on that page!
The reality is, unfortunately, politicians respond to what is asked of them. That is the way our system is built. So people ask for various programs whether the program is good, bad, or irrelevant. The programs then develop their own vested interests. In the meantime, the people running the program morph the program in directions not envisioned by the original establishers. In the end, we have President Ronald Reagan’s observation that “the nearest thing to eternal life we will ever see on this earth is a government program”. The only way to lower corporate taxes (and prices) is for we the voters to stop acquiescing to every program that comes along on the grounds that it (may) help someone no matter how sentimental the argument . If we want government to back off, as some people say, then we have to stop asking the government to step up and do something/everything. Tough to do.
Personal financial management is the same way. We like certain things in our daily lives, but the only way we can get control over our spending is, sometimes, to give them up. We don’t need as much as we think we want.
I was trying to explain this concept to Riley, our golden retriever dog, on our walk one morning. She was definitely miffed that I was throwing a regular tennis ball for her to chase instead of a ball that has a little squeaker in it. She loves to chow down on squeaker balls and make them…squeak. She thinks the sound is funny and will roll on her back while playing with the ball. With the regular tennis ball, she just picks it up, chews it once or twice, and spits it out rather indifferently.
I told Riley that we were really out each morning for the exercise of walking and that if I found a tennis ball over by the tennis courts that she could play with, so much the better. As much fun as they are, we do not need special squeaker balls to have fun on our walks.
Dogs don’t like that anymore than humans do. But we have to start somewhere to get our financial lives under control.
Note from a Vietnam Vet: June 3rd is primary day in California. Are you registered to vote? By voting, you thank our veterans and honor those military members who did not return.
CPA CFP EA
IRS Circular 230 Disclosure: if this newsletter contains any type of tax advice, please be advised that, based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to the matter.