Corporations Don't Pay Taxes

Yesterday's post, Lift the Middle Class Act of 2018, mentioned that corporations don't pay taxes or fees, they collect them from customers and send them to the government, today I wanted to explain how that works. In my career I spent 20 years helping develop pricing for products intending to be sold by several different companies. These were components going into cars sometimes with some sub-assembly required.

When a company starts to developing the price of a new product, all the costs involved in producing that product are taken (or attempted to be taken) into account. The system was different for each company I worked for but a simplified example may look something like this:

Cost	Amount
Material	$22.50
Direct Labor	$16.25
Indirect Labor	$3.13
Overhead	$4.37
Capital	$3.43
Utilities	$2.15
Manufacturing Cost (Subtotal)	$51.83
Sales, General, and Administration (19%)	$9.85
Taxes (21% of profit)	$2.01
Production Cost (Total)	$63.69
Profit (15%)	$9.55
Sales Price	$73.24

Although this will be different from company to company, the basic principle remains about the same. The Manufacturing Cost is the cost it takes to physically make the item being sold. It includes not only the material to make the item and labor hours to do so but also money to pay for the building being used, gas or electricity, any special machines required (capital), and those on the manufacturing floor that don't do the manufacturing like supervisors and inspectors (indirect labor).

The next section on Production Cost includes those other items required to actually run the business. This is were a bank may put in money required to pay any special fees to the government. Making a product to sell and running a business are two different things. Making a product involves meeting a schedule to provide the customer with goods when he needs them. Running a business involves making sure the company will be around over the next few years to continue providing customers with the items the want to buy.

You can see that not only do companies roll the taxes into the pricing of the product but usually they make profit on the taxes. An accountant explained this to me when I was much younger, his comment went along the lines of

If we are going to collect this money, keep it organized, and send it to the government, we should get paid for that.

Makes sense to me, who wants to work for nothing?

In 2017, the Trump administration and Republicans pass a tax reform cutting the corporate tax rate from 35% to 21%, the same tax reform that put more money in the pocket of most Americans. No Democrats in either the House of Representatives or Senate voted to pass this legislation. This reduced the taxes on our hypothetical product by $1.34 without adding the profit charge. Maybe a $1.34 doesn't seem like that much but imagine the impact it can have on something being made of hundreds or thousands of parts, like an automobile or an airplane. Plus, automobile companies don't make one vehicle of a certain model, our hypothetical part could be made hundreds of thousands of times in a single year. That $1.34 per part really starts to add up.

Lower corporate taxes in the long run mean lower prices for all of us when we go buy the products. Democrats not only didn't vote to put money in your pocket and lower prices by cutting corporate taxes, one of their ambitions is to take this away. Instead, we'll get more programs like the "Lift the Middle Class Act" that only works to increase the size of our federal government while giving away our tax dollars.