Wednesday, October 24, 2012

Why Only Lower Small Business Taxes?

In watching the presidential and vice presidential debates I notice whenever they talk about lowering taxes for businesses, they are quick to point out it is for small businesses. Same thing in Canada. During political debates, they tend to focus on small businesses, while big business is vilified. It's usually said that big businesses should be taxed more because of their profits. This position makes no economic sense to me. But maybe that's the point. It's probably just another political way of gaining support. People image small businesses as being run by ordinary folks just trying to eke out an existence. On the other hand, "big business" is run by shadowy Wall Street figures who we never see in real life who live in Bel Air Mansions and have several servants. A couple of generations ago, these guys were depicted in cartoons as very rotund men who always wore top hat and tails and smoked a cigar. There is a HUGE flaw in this reasoning though. Think about the ordinary everyday products we buy. For example: Kellogg's cereal, Ivory soap, Hanes underwear, Cottonelle Toilet Paper, Esso Gasoline. These products are all manufactured by big businesses. Taxing these companies will only increase the price of the most common goods we buy. This will especially affect poor people who buy most of their products from large companies. On the other hand, small businesses, especially in the United States and Canada, often produce goods which are specialty items, whether specialty clothing, unique leather bags, fancy cars, etc. Who buys these products? Rich people! So ironically, by taxing big businesses at a high rate but letting small business off the hook, you are only helping the rich and hurting the poor. Talk about unintended consequences. Large companies have many attractive features which should be encouraged. They are able to take advantage of economies of scale. By producing in huge quantities, they can lower the cost per unit. Processes are streamlined. Also, large companies can make huge investments in facilities which are able to produce things quicker and easier. Taxing away this money will take money away from increasing production. Many people have a negative feeling toward the high profits many large companies seem to make. This should not be a cause for concern, however, in a free market. High profits entice competitors to enter the market. In order to maintain a high profit level, companies must be that much more efficient than their competitor. Otherwise, they will be priced out of the market. Profits, numerically speaking, may seem high. But often profit expressed as a Return on Investment, is not so extreme. In fact, it is very often much higher for small businesses. A small business might earn a 15% ROI out of total revenue of $1 Million - in other words, $150,000. On the other hand, a large company might make only 8% ROI, but when it out of $1 Billion revenue, it comes out to be $80 Million profit. Numerically this is much bigger and seems much higher to people, but the rate of return is in fact lower. The bottom line is, higher taxes on big businesses will not help the common man, but will indeed hurt him more.

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