Saturday, December 17, 2005

The Government Is A Big Fat Stupid Thief

So it turns out that the government is a bigger and fatter thief than
I had even imagined. I thought they took a lot of money in taxes.
Maybe 30% or so. Boy howdy was I wrong. Lets start from the

It turns out that there are three forms of businesses in most
countries, they are the corporations, partnerships, and single
proprietorships. Now, partnerships and single proprietorships are
basically for small, local businesses that don't have a large dollar
value of assets. They, like the rest of us, get screwed enough on
taxes. They must pay income tax on their profits, like the rest of
us, in the following marginal tax brackets:


What this (specifically, the word marginal) means is, if you earn
$100,000 in one year, then you pay 15% on the first $27,050, plus
27.5% on the next $38,500 ($65,550-$27,050), and so on. The total
amount you pay is thus (.15x27050)+(.275x38500)+(.305x[100000-65550])
which is $25,150, or 25.15% of your total profit.

What's that, you say? You don't like giving one quarter of YOUR money
to the government? My friend, never fear, the government is a step
ahead of you! If you decide to invest in a corporation, you can pay
much much MORE than a quarter of your profits to them! The reason is
a little phenomenon I like to call "big stupid government money
grubbers like stealing your money," but more commonly known as triple
taxation. Put your Sunday best on because yes, Virginia, it's about
time we've paid our dues to America - not once, not twice, but thrice
- by investing in its "free" market.

I came across this table which struck me first as odd, and then as I
looked at it more and more, it struck me as more and more odd. In
fact, if anyone can give me a reason why this table should be as it
is, I would love to know. Here it is, the table of the hour -
CORPORATE tax brackets:


I'll let that sink in for a minute. Just look at that table a few
times. Stop reading this, look at the table again...




OK. So, what do you think? I really don't know what to make of it.
This is why I call the government big, fat, and STUPID. Honestly,
there's no other word that adequately describes this marginal tax
bracket! What's the deal here?

Anyway, the point of this article is to show just how much money the
government steals from corporations taking part in our beloved "free"
market. It's like the government is a magician, and he's really good
at slight of hand. Every time you think you're making money, the
G-Man is really sliding it all into his purse!

"For my next trick... triple taxation!"

Imagine that Corporation XYZ invests in Corporation ABC. This is not
something so uncommon, in fact it happens all the time. Further,
posit that Mr. Smith buys stock in XYZ. Stock, for people unfamiliar
with economics, is basically an agreement that the company you invest
in will give you a share of its profits, but the amount and time
period of payment are undetermined. These payments are called
dividends. Now, suppose ABC pays a nice large dividend to its
stockholders. Of course, these dividends will go (in part) to XYZ,
and because XYZ profits from them, Mr. Smith will too.

But let us suppose that the initial dividend at ABC en route to XYZ is
D (or 100% of D, if you like). ABC, being a fairly large corporation,
faithfully pays its income taxes to the BFSG (Big Fat[cist] Stupid
Government), to the order of (lets just ballpark it here) 25%. So,
75% of D is going on to XYZ. XYZ again, pays its dues on the profits
it just made: another 25%. This leaves us with only 75% of the 75%
remaining from the first tax payment: or 56.25%. As you can guess,
the poor stockholder must again pay income tax on the dividend he
actually receives, which at this point is only 56 cents on the dollar
of the profits made at ABC. This leaves Mr. Smith with just 42% of
what he would have had without any taxation.

So much for taking a quarter of your profits - the government is
content to take well over half without so much as breaking a sweat!
In this example, we assumed a fairly low average tax rate of 25%.
Imagine that we are dealing with some large corporations and wealthy
investors. If we up the tax rate 10% to a total of 35%, these numbers
scale accordingly. The government will now take 35% of the first
dollar, leaving you with 65 cents. 35% again leaves you with 42 cents
- notice this is where we were before, and we have one more taxation
left! Finally, one last time the BFSG takes 35% of profits in taxes,
and Mr. Smith is left with a measly 27 cents.

Yes that's right Virginia, the government loves your money so much,
they're perfectly willing (and able!) take about three fourths of it
all for the humble prize of being able to invest in our wonderful
"free" market! God Bless America!

(That's the end of the article so feel free to stop reading now. I just wanted to note, however, that my facts are not entirely factual. Congress allows corporations to write off 80% of their dividend income as tax free, to avoid true triple taxation. However, the real tax rates incurred by investors are still "a little more than double." After all, what Radical Libertarian blog would be Radical without inflating the numbers?)


Delta said...

You have to remember that the richest corporations get huge sums of public money just given to them for no reason other than to help keep the rich on top. And of course corporations have the ability to decide who and why we war, so I wouldn't worry about how much they're technically taxed, considering they probably shelter most of it offshore anyway.

Salt said...

C-Corporations pay an effective 0% tax.

Any taxation when able to be sloughed off on another is an effetive 0%. The consumer pays 100% of the tax.

If I were a C-Corp and am taxed 10% on whatever I provide (eventually to you the consumer) that tax is in the price you pay.

Now the consumer, being the payer of last resort, absorbes all taxes as the consumer cannot slough it off on another.

Aaron Kinney said...

Hey Ed, Good post!

I knew double and triple taxation was an issue but I never crunched numbers like that before. Intense!

Ironically, the biggest corporate money makers are the ones that are in bed with the politicians. So those who get to pay the most taxes are actually the smaller businesses who dont have as many loopholes that they can take advantage of or politicians to help them out.

Free market my ass.