John Edwards has unveiled the details of his $120 billion universal health plan, so sayeth the New York Times.  It includes the usual populist Robin Hood theme of taxing “the rich” and giving to the poor.

The plan would be partly financed by eliminating tax cuts for households earning more than $200,000 a year, cuts that Congress approved in the Bush administration.

Never mind that tax revenue has increased since, I say because of, the Bush tax cuts (one of the few things he has done right).  Also, never mind that the top half of wage earners already pay 97% of all income taxes.  The top 5% pay over half!

But, I’m not writing to highlight class warfare, I’m writing to highlight how politicians take advantage of economically uneducated Americans.

One provision of the Edwards proposal certain to draw fire is a requirement that companies provide health insurance for all workers or pay 6 percent of their payrolls into a government fund to buy insurance for them.

Pretend you run a business.  Any and all costs you incur in the process of doing business (purchasing raw materials, paying workers, buying or leasing facilities, etc.) are passed on to one of three real people:

  1. Consumers, in the form of higher prices
  2. Workers, in the form of lower wages
  3. Owners, in the form of decreased profits

Taxes are a cost of doing business and they are passed on to one of the groups of people listed above just like all other costs.  Politicians of all stripes love proposing taxes on businesses as a way of “shifting the burden away from the American people.”  But what it really amounts to is a tax shell game that obfuscates the true amount of taxes eventually borne by Americans.  Edwards boldly announces that he wants to add an additional 6% in taxes to companies and basks in the applause from people who think that the evil businesses are going to be bearing the brunt of the costly health care plan.  Those same people will be paying for that 6% increase.

Worse yet, taxes on American businesses make our companies less competitive internationally with companies from countries with lower corporate tax rates.  Ireland is a case study on the effect of low corporate taxes.

Here is a little example of exactly how corporate taxes hurt American companies (the ones that hire American workers).  One thing that must be understood is that businesses are investments and as such, each business has a target rate of return (profit margin).  If a business is habitually unable to turn the desired profit on the capital that was put at risk by the owners then those owners will divest themselves of the business.

Let’s say there is an American company and a Kerplakistani company that each produces fleece blankets.  Both companies have exactly the same costs for raw materials, labor, etc.  Those costs come to a total of $1,000,000.  The going cost for a fleece blanket is about $100.  The owners of each company expect a rate of return of 10%.  The corporate tax rate in America is a flat 30% (it is actually graduated up to 39% - it maxed out at a mere 1% when it was first introduced in 1909) and the tax rate in Kerplakistan is a flat 10%.

In order to maintain their 10% profit margin, the American company would have to sell their blankets for $103, while the Kerplakistani company could charge $101 (based on selling 10,000 blankets each).  The market for fleece blankets is ultra competitive, so the American company can’t put theirs on the market for $2 more because no one would pay that premium for an identical blanket.  If the American company wanted to price match the Kerplakistani company then they would have to drop the profit margin all the way down to almost 3%.  The owners of the American blanket company will not accept this (you wouldn’t if you owned the company).  They have two options: move their business to Kerplakistan or get out of the blanket business and put their money at work elsewhere.  Either option hurts Americans.

The sad part of my admittedly simplified scenario is that the American government could have placed the tax burden directly on the people and the total amount paid into federal coffers by those people would have stayed the same - and the American business would have been able to compete.  Instead our politicians knowingly place our companies - our employers - at a significant competitive disadvantage because they know that a majority of the American voters don’t understand the effects.

John Edwards and his rhetorical compatriots will undoubtedly continue the drumbeat for more corporate taxation.  I just hope that enough American people realize that they are simply trying to get a pound of flesh without most of us realizing it.  Don’t be fooled.

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This entry was posted by Brian on Tuesday, February 6th, 2007 at 11:11 pm and is filed under Health Care, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Please note the copyright policy.