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Sunday, April 25, 2010

News Flash- Businesses Don't Pay Taxes!

This may be a surprise to some and will likely outrage others, but here is a news flash; Businesses DO NOT PAY TAXES! Business owners may be crying foul, but the fact of the matter is that any person who operates a business that wants to stay in business rolls the cost of their taxes into the price of their goods or services.

That simple fact alone should have every person in the United States screaming mad and running for the phone to call their elected officials! No! Not to protest that businesses don't pay taxes but to make in absolutely clear that the Obama administration floating the possibility of a value added tax or VAT is a non-starter and would destroy any makings of an economic recovery.

For those not familiar with the VAT, it is a tax that is rendered on every step of the process of taking a raw material and adding value to it. Let's take a bolt for example. Take all of the raw materials that go into making a steel bolt, now add a tax on each one of those steps. The cost of that bolt rises dramatically. Think about it; the raw materials are formed into a steel bar, tax. The steel bars are formed in into steel rods, tax. The rods are machined into the form of a bolt, tax. The bolts are threaded, tax.

Imagine that multi-taxed bolt is used as part of the manufacturing of a car, along with thousands and thousands of other parts, each taxed every step of the way. What do you think is likely to happen to the cost of that car? Certainly the automaker isn't going to eat the cost of the increased taxes, anymore than the the bolt maker would for all of the taxes on the bolts. So the costs get passed along to the final end purchaser, you the car buyer.

Now to multiply the effect. Say the car manufacturer buys new equipment for building the vehicle, the company that makes that equipment is hit with taxes every step of the way so the cost of that equipment goes up and naturally get factored into the cost of doing business for the automaker and gets passed along to you once again.

The Obama administration will try to sell this as a way to cut down the Federal Government's spending deficit and the debt built up by decades of overspending on he part of the Federal Government. This tax will have a detrimental impact on any economic recovery we may be experiencing. The tax will hit hard on the lower and middle class as well as higher income earners.

The only way to avoid the VAT will be to avoid any unnecessary purchases and history has shown that to be the reaction. As part of the 1990 Omnibus Budget Reconciliation Act, then President George H. W. Bush, broke his “read my lips, no new taxes,” pledge by placing stiff tax on luxury items like cars, planes, yachts, and other items costing in excess of $100,000. Sounds about right, right? Tax the rich who can “afford” to pay the cost if they can buy $100,000 plus boats.

The Joint Committee on Taxation projected that the lux-tax would generate $31 million in 1991. The actual number, $16 Million. Why? Because even so-called rich people don't like to waste money. George Will ran the numbers in a 1999 column as follows: “According to a study done for the Joint Economic Committee, the tax destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in the boating industry. The job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. So the net effect of the taxes was a loss of $7.6 million in fiscal 1991, which means the government projection was off by $38.6 million.”

So when the Obama administration starts floating out wondrous projections for the impact of the VAT, take it with a grain of rock salt. They won't talk about the negative impact on jobs, purchasing and the economy as a whole. Keep in mind we live in a consumer driven economy, with consumer spending generating two-thirds of the U.S. economic engine.

Unlike the healthcare mess where they sold us a bill of goods, we need to demand answers up front on the impact of this ridiculous idea. Unless the goal is to make the United States a Third World Country, this idea should not see the light of day!

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