Friday, April 07, 2006

There's No Such Thing As a Business Tax

I cringe whenever someone proposes a business tax (or tax increase). Businesses don't pay taxes; we all pay business taxes, one way or another.

It is true that a static, microeconomic analysis can "prove" that a particular kind of tax falls on business owners, under certain circumstances. But that is a first-order effect; it overlooks the dynamic, long-run effects of business taxes.

Even if a business tax can be contrived so as to fall (immediately) on the owners of certain kinds of businesses, the result is to drive up the costs of operating those businesses. Some businesses may be able to recoup higher costs by increasing prices, which means that the consumer is able to buy fewer units of a good or service, thus reducing the demand for the labor and capital used in the production of that good or service.

To the extent that a business tax can't be passed along to consumers (and, indirectly, employees), the affected businesses experience lower profits. That makes business formation and expansion less attractive, thus reducing economic growth and job creation.

In any event, it should be clear that business taxes are "bad business" for consumers, workers, and business owners (who happen also to be human). A business tax has many victims, most of them unintended.

Government executives and legislators resort to business taxes because (a) they don't understand who really pays those taxes or (b) they do understand and don't care because their constituents don't understand. And it makes their constituents feel good when a politician "sticks it to business." (It's sort of like rooting for the executioner when you're next in line for the guillotine.)

So, when your mayor, city council, governor, or State legislature proposes a business tax (or an increase in a business tax), shout "no!" and hold onto your wallet.