The Taxorporation

As a business owner, I am privy to knowing tax law and loopholes. In my best understanding of taxation, though, I’ve found that its sole purpose is to encourage spending. Governments can’t continuously distribute cash to the masses, so it relies upon taxation to encourage its citizens to spend their cash and thereby reduce their tax burden. That’s a clever use of taxes by the government, for sure, but something else is going on with taxation in the modern world.

The Romans levied taxes on their citizenry as a “tribute” to being Roman, and to pay for their protection by the Roman Guard. During the time of Romans, and the medieval era, there were no nifty accounting systems that allowed us to track where money was exchanged. Sure, the Incans and Chinese were tying knots on ropes as their financial records, but there was no historical archive or traceability. That meant levying taxes on the individual at a fixed rate, based upon their assets. Good thing we don’t do that anymore otherwise most of California would be broke paying their property taxes.

In the modern world, though, we have a variety of taxes. There is sales tax on sold goods, value-added tax on services, tax on your income, and extra tax on those vice-related items, such as cigarettes, alcohol, and gasoline. Then you have municipal taxes for business, property taxes for homes, and capital gains taxes on your investments. Phew! Everywhere you turn there is a tax, and they keep going up.

Even though there are lots of little taxes here and there, the biggest, and most invisible tax, is the income tax. The income tax serves one purpose: to remove money from the economy and prevent devaluation of the currency. This is a good practice for the economy, but really doesn’t do much good for the people who do the most spending. The poorest people in the economy are those that have the highest amount of cash flow. At the end of their money cycle, they have nearly zero residual. It’s these very people who suffer the most double taxation in the economy because of their spending.

Considering income tax, first we have to identify what income tax really is. Income is when money is given to you in exchange for a good or service. The government levies its income tax on that amount given to you. Let’s say you are paid $1 for working and the government levies a 23% tax on that income, so you really have $0.77. You don’t just stop with that $1 and put it in the bank, right? You have to pay your rent, which is $0.10, then your car payment, which is $0.05, and then groceries, which is $0.15, and your credit card interest, which is $0.07, and then gasoline to commute to your $1 paying job, which is $0.06. Let’s add all of that up:

$1 - $0.23 - $0.10 - $0.15 - $0.05 - $0.07 - $0.06 = $0.34

So where did your employer get that $1 to pay you? Let’s say you work at the local gas station. That $1 they pay you comes from the $0.06 you pay them. Well, you and 25,000 other people in your community. The gas station counts that $0.06 as income to itself and has to pay tax on it as well. Fortunately for the gas station, though, it gets to DEDUCT your $1 from its income before computing its tax burden. That doesn’t seem very fair. Let’s take a look at the gas station.

They start out with buying gasoline, which is called COST OF GOOD SOLD (COGS). This is a big deduction for them because it’s income to their supplier. Hmmm, interesting how they get to deduct that from their income, but you don’t. Next, they have their payroll expense, which is that $1 paid to you, which is another deduction. The list goes on for business deductions because they get to deduct outflow that is counted as income to other entities. Their final tax would look something like the following, considering a $0.01 sales tax, $0.02 for COGS, and $0.0015 for payroll:

($0.06 - $0.02 - $0.01 - $0.0015) * 33% = $0.0094

Yet, here you are, paying income tax on $1, which includes the $0.06 that is paid to the gas station as income. That really means YOU are paying the income tax burden for the business, and the business pays another income tax on the $0.06 you paid to it. This is double taxation on your income.

Imagine if you could play like a business and deduct your outflows that are income to your suppliers. What would your tax burden look like?

($1 - $0.10 - $0.15 - $0.05 - $0.07 - $0.06) * 23% = TAX

How much is that? I compute this to be about $0.13, which is significantly less than the $0.23 computed against the $1. Since you are actually reporting a net income of $0.57, your tax bracket would likely go down to something like 15%. That would further reduce your tax burden to $0.09! The new tax figure is a whopping 60% less than the double-taxation figure. Imagine what you could do with an additional 60% of cash in your pocket? You could buy that Maserati that you’ve always wanted!

Anytime you purchase a good or service from a business or person, you should be able to deduct it from your operating income. That way, the final person left holding the dollar will pay the tax for holding that dollar. In this way, the people who spend the most money and contribute the most to the economy will be the ones who pay the least amount of tax. Best of all, the government will only levy a tax on the current cash in the economy, rather than phantom cash from antiquated tax policies.