You hear it all the time: Businesses don’t pay enough taxes, or put another way business has to pay its fair share. True or false?
Let’s take a look first at a little Economics 101. What is the definition of profit? Well, in it’s simplest terms it’s sales less the cost of goods sold. And what exactly is included in “cost of goods sold?” Obviously it’s materials, labor, cost of distribution, debt service among other things. One thing that’s also included is taxes. So, if a business makes a profit then taxes are paid, but who pays those taxes? It’s the customer. Business must pass those along if they are going to be profitable and no business can succeed if they don’t make a profit. So, do businesses pay taxes, yes, but the real payer is the customer. Raise taxes on a business and the customer pays more for the goods or services they want.
When Adam Smith defined capitalism more than two hundred years ago in The Wealth of Nations, he described the essence of the system as a series of mutually beneficial agreements: “Give me that which I want, and you shall have what you want.”
A poll done by the Wall Street Journal/NBC News showed more people trust small business (54 percent) than large corporations (11 percent). Naturally politicians pander to the public’s distrust of large business describing the small business owner as gutsy and heroic and big business as some sort of boogey man to be vilified and hated.
Most small businesses hope they will grow into big businesses. Take Starbucks for example. The original, begun in 1971, was a cramped and unprepossessing shop that couldn’t accommodate more than twenty customers at a time. Now they have become a multi-billion dollar colossus straddling the globe with fifteen thousand locations in forty-four countries.
Henry Ford’s innovations enabled America to convert from horse-drawn transportation to automobiles built on assembly lines. Reducing costs allowed Ford to cut automobile prices six times between 1921 and 1925. His reduced price allowed automobiles that had up to that time been custom made and expensive to become affordable at a price less than three months’ wages for the average family. Ford also introduced a minimum wage and shortened the workday from nine hours to eight hours. Later he reduced the workweek from six days to five. None of these things would have been possible had the Ford Motor Company remained a small business and not been profitable.
Another company with national aspirations proved essential to the rapid growth of another technology drastically changing life for average Americans: the telephone. Gardner Hubbard founded the Bell Telephone Company in 1877 and quickly connected the nation with lines connecting users. Phone service was established between Boston and Providence by 1881 and between New York and Chicago by 1892. By 1930, half of American households had phones installed. What began as a small business gave way to large enterprises that connected the nation.
When it took the average American worker in 1900 two hours and twenty minutes to earn enough to buy a three-pound chicken, by 1999 it was twenty-four minutes. Not only that, in 1950 typical workers worked more than two hours to pay for 100 kilowatts of electricity; by 1999 the cost had dropped to fourteen minutes.
Businesses’ success made consumer goods progressively more affordable and the corporate heads made cultural resources increasingly more accessible.
Andrew Carnegie wrote that “a man who dies rich dies disgraced,” consequently he gave away nearly all of his vast fortune, building more than five thousand town libraries. Other wealthy captains of industry endowed many foundations and funded many campaigns against numerous diseases.
Recent corporate scandals (Enron, Tyco, Worldcom among others) has lead people to believe we need to turn to government to cleanse a hopelessly corrupt business world. This belief ignores the long history of corruption of public officials, elected or appointed. Offering tax breaks and subsidies makes the temptation for bribery and favoritism more acute, not less so. The idea that every government official is all-wise and incorruptible makes no more sense than the assumption that each corporate big wheel displays impeccable judgment.
We live in an imperfect world but for goodness sake capitalism is the best available system of economics. Its track record of improving lives and living standards is unparalleled.