The Musings of the Big Red Car

Who Actually Pays Corporate Income Taxes?

I am chatting the other day with a chap in the aftermath of the election and how he sees the implication of future tax increases on the country. He is a smart chap with an MBA from a fine school and he is a wizard businessman, but he is a liberal.

We get focused on the issue of corporate taxes and he says, “I get it that corporations really don’t pay those taxes.” He looks at me with his chin out like he is bluffing at Texas Hold ‘Em and thinks that makes him look confident.

I smile because it is a new thought he has never expressed before, so I say, “How so?” And he explains it thusly.

Corporate Tax History

When the Orange man came into office, corporate taxes were then currently set at 35% of earnings — earnings being a number that is arrived at thusly:

Gross Revenue minus Cost of Goods Sold = Gross Income

Gross Income minus Operating Costs = Net Income

Net Income minus Taxes = Earnings

Gross Revenue is the total of all revenues.

Cost of Goods Sold (CoGS) is all the fixed, direct costs that go into the production of a good or service.

Operating Costs are the costs that the company incurs — like rent — which must be paid whether the company makes 100 or 100,000,000 widgets.

Taxes are what we are talking about.

Note: Accountants will give you an earful about the definitions, but for people who run businesses and consumers who buy products made by companies this is how the numbers shake out.

One More Thing

There is always one more thing and that is called Unit Cost Accounting — it could  be called a number of different things — in which the bean counters report to the CEO what it costs to make a single widget thereby arming him to deal with the pricing of widgets.

This is done by taking the entirety of COGS, Operating Costs, and Taxes and dividing the resultant sum by the number of widgets made or to be made.

If COGS is $3; Operating Costs are $2; estimated Taxes are $1; and the CEO produces a total of 10 widgets then the cost/per unit is $0.60/unit.

($3 + $2 + $1 = $6) divided by 10 units = $6/10 = $0.60/unit.

To make a profit, the CEO must sell those units for more than $0.60/unit which provides the frame of reference for price ruminations.

The CEO will charge more than $0.60/unit and will make a profit and upon that profit will pay taxes.

You being a smart person on the edge of brilliant will recognize something very important — THE COST OF CORPORATE TAXES IS BAKED INTO THE COST OF EACH AND EVERY WIDGET.

Who is paying corporate taxes?

Which brings me to the core of my friend’s observation: Indeed, the cost of corporate taxes is built into the cost of every widget which is used to set the price of every widget and, as we all know, the ultimate consumer is the one paying the price of the widget with the cost of corporate taxes baked in.

So, when Donald Trump and the US Congress lowered corporate taxes from 35% to 21% the unit cost went down, corporations were able to lower their prices to be more competitive, and the American consumer had their indirect payment of corporate taxes lowered. [The public got a tax break in a roundabout fashion.]

Conversely, if Joe Biden gets a chance to raise corporate taxes from 21% to 30% the unit cost will go up, corporations will increase their prices to create a profit, and the American consumer will see their indirect payment of corporate taxes increased. [The public gets a tax increase in a roundabout fashion regardless of your income.]

This is why when Joe Biden says, “Ahh, Hell, I’m only going to raise taxes on those heartless, shameless, predatory corporations. Nothing to worry about,” he is speaking with forked tongue.

Because, amigo, you are the one paying corporate taxes. Always have been. Are currently. Always will be.

And, that, dear reader, is how the cow eats the cabbage in the land of corporate taxes. It’s you paying them — every stinking penny. You are looking down the barrel of a tax increase.

But, hey, what the Hell do I really know anyway? I’m just a Big Red Car. Have a great week and Merry Christmas!

But our discussion didn’t stop right there in that moment of truth. I asked him, my pal, “Is this a good time to raise taxes on our recovering, anemic pandemic economy?”

My pal hung his head, shook that brain depository, resigned himself to coal in his stocking, and said, in a timid, weak voice, “It could not possibly be a worse time to raise taxes. It’s going to crush the economy.”

That cow is getting no Christmas cabbage, amigos.