Small Business Owners

That would be incredibly dumb for high volume / low markup businesses such as mine.

 

Regulations? For web development?

Taxes are easy. It's paying your taxes legally without losing your butt at the same time that's hard.

 

Because a lot of money changes hands very often. Every time it does, you're looking at 5% of it disappearing. The way it's proposed, if somebody is a reseller that does $500,000 worth of business and $450,000 is profit, you're looking at a 5% charge on $450,000 that you pay to a manufacturer, then 5% on the $500,000 that is collected from the customers and put in the bank.

In case people here can't add, suddenly your profit on all that work is more like $2,500 because the 5% taxes adds up to $47,500. In other words, you would have to raise prices astronomically or find yourself a different job. If you want to argue a sales tax that's one thing but just automatically taking out 5%... even with the previous example, that's half of everything you make.

 

If the reseller pays $450,000 to the manufacturer and then sells it for $500,000, I think you meant to say that the reseller makes a $50,000 profit, not $450,000.

The tax would work like this:

Reseller pays out $450,000 to manufacturer. Manufacturer receives $427,500; manufacturers bank keeps $11,250; resellers bank keeps $11,250.

Reseller sells the product to a customer for $500,000. Reseller receives $475,000; resellers bank keeps $12,500; customer's bank keeps $12,500.

So net-net the reseller made $25,000, or 5.5% profit.
Without the electronic automatic tax the reseller would have made $50,000 or 11.1% profit.

The upshot is that anybody that sells something is losing 5%. You are correct that in a low profit margin business this could be crippling. However, if all corporate taxes, all other sales taxes, all capital gains taxes, all income taxes, and all FICA and Medicare taxes were eliminated it might be a viable system.

 

Everybody is not invited to the ball. Somebody has got to work a lot--just to make bread.

There are more filthy rich folk, less middle-class and more living in poverty. Our system is making a full circle. We are still the best place for opportunity; but many of the opportunities are based on exploiting the masses--not as much as the socialists and fascists to be sure. Remember affirmative action and CETA?

Union contracts are not made among gentlemen.

Fear not, Jesus is coming soon. He will make some serious changes in Internal Revenue.

Curious: 95% of business start-ups fail.

Even so, come, Lord Jesus.

Bro. James

 

Indeed, I meant costs would be $450,000. Profits $50,000.

Yes, the total tax is exactly what I said.

If they're making $50,000 now, you can't just introduce $47,500 worth of taxes into this process and act like nothing changed. This stuff can't just be absorbed like it's nothing. You're talking about a tax that is higher than the profit margins in many businesses. You're talking about instant large price hikes.

Again, you're assuming that the manufacturer would just absorb their part as if nothing happened and prices would stay the same. That's just not reality.

Even with your highly optimistic outcome, you're saying that sellers in the above example would see half their income disappear, no matter what tax bracket they are in. I got hammered last year and my effective tax rate was 22.5%, which is about twice what most people's effective rate is if they knew what they were talking about. You're talking about more than doubling that, with no new benefits to show for it. It's a ridiculous idea.

I'm sure consumers would love the idea of a sales tax of sorts being put on everything, and that replacing everything else. When you are a producer, that mess doesn't fly. It's absolutely stupid to punish the supply chain with taxes. They do this with liquor and the end result is ridiculously expensive. You're talking about doing this with everything.

 

The plan calls for a graduated increase in the tax rate starting at 0.1% in the first year and increasing by a fraction every year over 20 years. In this way any harsh adjustments could be avoided. Prices would necessarily rise but if the tax were adjusted upwards by 0.25% per year that would not be burdensome.

And I'm not endorsing this plan. I'm trying to have discussion. You have hit on the main negatives.

We don't know what the manufacturers profit margin is, we only know the resellers margins. If you start out with only an 11% profit then yes, employing a 5% tax on top of that would cut it about in half. Not many companies operate at a gross profit margin of 10%. It's way too skinny.

Sounds like you are a sole proprietor, which means you are paying both sides of FICA and Medicare. The plan would remove ALL of your taxes and replace it with a 5% tax on sales.

Absolutely. And no more tax forms. Or tax filings. No more government burden on business owners to collect payroll taxes and income taxes and make timely tax deposits. No more April 15th deadlines. No more IRS.

You've nailed the main problem with this scheme, namely, taxation all the way up the manufacturing chain. Raw materials, taxed. Equipment, taxed. Supplies, taxed. FOR EVERY BUSINESS from manufacturer, to distributor, to retailer, to consumer. That's a lot of layers.

For this scheme to work the things that were removed--income taxes, corporate taxes, FICA, Medicare, capital gains taxes, etc. would have to make up for 5% in multi-level sales taxes. Or maybe the number after 20 years is 3%.

Another problem would be people going to cash based or barter transactions, which could not be tracked. Of course the solution would be a tax on ANY DEPOSIT in any financial institution which would be insane.

Also, the 16th amendment would need to be repealed.

 

LOTS of manufacturers and online retailers operate below that, even large corporations with expensive items. Look at GM, even the gross margins are less than 10%. After expenses you're looking at more like 3%. Look at Dell, they're at like 2.37%, gross. It's not uncommon.

The idea that every manufacturer and retailer is operating at a 40% margin just isn't reality nowadays, it's often more about high volume in competitive markets.

It would still make my taxes go up significantly even though i'm getting hammered now. Part of what you don't get is the idea of tax write-offs. A flat tax based on transactions would not take these into consideration at all. It doesn't matter what profit margins are, a 5% tax on every transaction would screw over every business out there. Too much money is changing hands too often to justify that.

Doing away with write-offs is economic suicide as well. If a business saw its tax footprint go down significantly that would be one thing, but high volume low markup businesses that suddenly has to pay 5% on every transaction AND lose all its deductions? Insane and naive.

Basically what this plan would do is instantly force every low markup high volume company out of business or force them into an entirely different business model where they do a smaller amount of business with much higher markup, effectively killing the producers who manufacture goods at a low markup.

 

It is uncommon.
Amazon's gross margin is 29.4%

How about some other online retailers/sellers?
ebay 67.6%
Netflix 30.9%
Google 64.7%
AliBaba 68.3%


Here are the top 10 US manufacturers and their gross margins:

Apple 38.4%
General Motors 8.9%
General Electric 43.5%
Ford 12.4%
Hewlett Packard 23.8%
IBM 50%
Boeing 15.4%
Microsoft 64.5%
Proctor and Gamble 48.7%
Johnson and Johnson 68.9%

Yes, there are sectors where this occurs--automotive comes to mind.

No tax write-offs means no loopholes, means less paperwork and a more level playing field. I call those things advantages.

To really know the definitive answer as to whether or not various sized companies in different industry sectors would be punished or rewarded by this scheme would require a bunch of studies.

Maybe the number doesn't have to be 5%, maybe it's 3%. Who knows?

Well, every one of these high volume, low markups businesses would have to adjust their business plan. There would be some casualties, for sure.

The result would not necessarily be a smaller amount of business--by definition "high volume" means people buy a lot of it--but definitely would require a higher markup. If McDonald's decides they have to raise prices to maintain their margins then so would Wendy's and Burger King. Same thing with airlines.

 

https://www.aei.org/publication/the...-36-profit-margin-which-is-about-5x-too-high/

But, it's also misleading when people start mixing up net vs. gross profits. Most literature mentions net profits.

Uh, no. That would mean you don't know the difference between profits and revenues, or just don't care. Without write-offs, all revenue would be considered profits, net vs. gross profits would be the same thing, which is a pretty dumb idea. That's the problem with this tax, it does not differentiate. You're basically saying well if you brought in 100 grand, and it took a $30,000 piece of equipment and a person making $40,000 operating it that used $5,000 worth of electricity, took a $5,000 installation cost, and was rented inside of a building that costs $10,000 per year to rent and insure... that you made $100,000. See the problem? That's literally what you would end up with when you say there should be no write-offs.

In the meantime in the above example, you're proposing that the $100,000 that got brought in gets taxed 5%, the salary, electricity, rent, installation, etc., also gets taxed 5%. Suddenly instead of making $10,000 and getting taxed on that, you're paying $9,500 in taxes based on some misled idea that write-offs are unfair and you get to keep $500 of it. It's a naive approach that has nothing to do with profitability or who uses the most public resources. It's a random shotgun blast approach based on some kind of usage that some netwit decided would be simple but would not be fair whatsoever.

If anything, this approach would be more favorable to companies who did not reinvest into the community or paid decent salaries. Rather than get taxed on profits, they would pay less with higher profits that they keep for themselves, rewarding the largest companies.

 

Puh-leeze....

No, no, no.

"Write-offs" as you call them, are actually called expenses. There will still be expenses--payroll, utilities, rent, etc. Revenues will never be 100% profit because there will be offsetting expenses.

No, I don't see the problem. Looks like you don't know what an income statement is or a balance statement. And I'm not saying that $100,000 was "made".

* the $30,000 piece of equipment would be a depreciable asset. The depreciation expense (or as you say, "write off") would be calculated using a formula usually covering a 7 or 10 year period.

* the operator's $40,000 salary is a payroll expense ("write off")

* $5,000 worth of electricity would be a utility expense

* $5,000 installation cost could be included in the depreciation expense.

* $10,000 rent would be a rent expense.

All told you have $55,000 in direct expenses, and approximately $5,000 in depreciable expenses. That is $60,000 in tax write-offs. Realize that the term "tax write-off" is meaningless under this new scheme because there is no corporate tax.

Nope. Nada. Sorry.

Under the plan only products and services would get taxed, so salaries are not taxed, electricity is not taxed, rent is not taxed. Only the sale of $100,000 would be taxed and the $5,000 installation would be taxed, but over 7 or 10 years.

It's obvious you don't understand how the plan works. Or how depreciation works as an expense. Under the new plan the tax would be $5,000 on the $100,000 sale and $250 on the equipment and installation (($35,000/7 years) * 5%)). So $5,250 in taxes.

Now let's look at the current system.

FICA and Medicare payroll taxes on $40,000 salary is $3,060 for the company to pay; $3,060 comes out of the employee's paychecks. So right there is $6,120 in payroll taxes alone.

There would likely be some sort of a local sales tax on the sale of the $30,000 piece of equipment.

So there is no limit on profitability, no tax on profits, only on revenues. That has an attractive quality to it.

 

But in terms of taxation with your proposed system, it doesn't matter.

No I'm pointing out that if you do away with the current system and only tax transactions, then such things don't matter.

Then you're not getting away from anything if this will continue to be the case.

Why does it even matter? If you're only taxing the transactions, none of this would matter, it would all fly out the window.

So is it a sales tax, or a tax on all transactions? There's a huge difference. What you are describing here is a national sales tax. That's not what the original link sounded like, and hardly what we've been talking about until this point.

To be honest I don't really care that much to do a deep dive on such a naive idea.

What you are describing here is hardly an automatic electronic tax on a transaction. Who decides whether something is depreciated or not? Who enforces that decision? You're not getting rid of the IRS, tax preparers, or manual filing of forms and whatnot.

 

The company still needs to keep track of profits and losses for the shareholders.

Sure, they still matter.

Payments of dividends, credit-worthiness, profit/loss amounts, etc. all matters.

As I understand it, it's a tax on the sales of goods and services.

 

I am intending on starting a vending business soon. I think around me there is a clientele that prefers the individually wrapped candies over the bulk vending. I have found a site that is legit and going to purchase from there. I am going to first attempt to put a savings for these machines on the spread sheet then I won't need to finance more. I am tired of living the traditional American way. I want to live debt free, or at least as close to it as possible.

 

I am currently working as a freelance writer, and although this career is really fulfilling on my end, it's not that profitable enough. That's why I am also planning to start my own online clothing store. Aside from writing, fashion is also my passion. I am thinking about utilizing Instagram, and Facebook for this business.

 

I have an limited liability company. Taxes are always complicated so I just hired someone to help me. I got an accountant to help me organized my system so it's almost completely automated so at the end of the year I can just pass the file and have H&R Block deals with it. I'm a illustrator and writer and the biggest problem I have is marketing. It's just tedious and foreign trying to get customers.