So much talk now about companies and the rich paying more taxes. In every definition I have seen I am one of the rich, even though I don’t see it myself. I do know rich people – but I guess everything is relative.My business partner and I own a small software business. We employ only around 15 people, but we have pretty good revenue. We pay our employees a very good salary, above the market rate by any measure, and the business pays us (the owners) very well. However it was not always the case – I personally have struggled financially at several times in my life.
Here is my point – I control every aspect of my company’s operation. The majority of my decisions involve how to pay less taxes, and I could write a short story on the things I have done to keep as much of our revenue as possible. But if we don’t have the revenue we project we have to cut expenses. And one expense I am not going to cut at this time is my salary.
So this makes operating a business essentially a math problem. ‘X’ dollars come in and ‘Y’ dollars go out. The difference between the two is profit for the corporation.
‘X’ is made up of several revenue sources, and in our case the largest portion by far is customer support. This is good because it is consistent but bad because it can’t easily be changed.
‘Y’ (our expenses) have more components, the largest of which are our salaries. And the largest salaries are those of the two owners.
My personal finances are mostly like yours. I have certain payments I have to make and a paycheck that is used to cover those payments. I, however, have one advantage you do not. While I can’t print money when I need it, I can do the next best thing. I can simply take more out of the business.
What does this do to the math problem I mentioned earlier? It puts it out of balance. What do I do in response? I either raise revenue or cut expenses.
Companies Don’t Pay Taxes
This is a vital point that is not well understood. While technically my company pays a tax on any profit, my company is really just a few legal documents filed with the State. You can point to our building (which I own, by the way) or our employees, or our product, or our customers, but none of these are actually the company. They are just assets, revenue sources or expenses. So a tax increase is just another expense, and I have to find a way to pay that expense by increasing revenue or cutting costs. So in a very real sense the additional tax revenue does not come from the company. It comes from, as PBS is so fond of saying, people like you – the employee who gets laid off, our landscaper who has his contract cancelled, our customers who have to pay higher prices, the junior soccer team that no longer gets our sponsorship.
The bottom line is this – at the end of each year I will have taken a certain amount of after tax money for my own use. Whether they raise my personal taxes or my company’s taxes I will make whatever changes are necessary so that I STILL have the same amount of money. I will simply make adjustments to our business (or employee salaries, or product prices) to make up the difference. The tax increase will not hurt me personally.