Taxes Are Cumulative  

Taxes Are Cumulative By William Cate

In Europe or any country with a VAT (Value Added Tax), it's self-evident that the consumer is paying all the taxes on an item at each stage of its production. In the States and countries without a VAT, it isn't a self-evident fact, but it's equally true that the consumer pays all taxes for everyone who produces or supplies anything to the retail market. If this weren't so, the bankruptcy courts would consume the business community.

Consider the loaf of French Bread. It costs about $3.00 in California. The State doesn't tax food sales. If we assume a 33% State & Federal Tax Rate with a 15% pretax profit, how much of the consumer's $3.00 went to pay the producers' taxes? Our assumptions give us an effective 5% VAT tax at each level of production. This is certainly better than the European 15% VAT tax. However, it's costing the consumer about $0.75 in taxes. The farmer grows the wheat. The mill turns it into flour. The baker turns the flour into bread. The wholesaler sells the bread to the retailer. And the consumer buys the bread from the retailer.

If you have a loaf of bread, you'll need a jug of wine. We'll assume you buy a $10.00 bottle of wine. You will pay California sales tax of about $0.85. You are also paying a 20% Federal Excise Tax. The Federal Excise Tax was enacted in 1942. It was to end in 1946. Needless to say, hidden taxes rarely end. So your taxes are $2.85 on your jug of wine. The retailer gets $7.15 to pay his taxes and the taxes of those who were involved in the production of your bottle of wine. Again assuming that 5% of the cost of the wine at each stage of production goes to paying the producers taxes, you are paying $1.07 in cumulative taxes. The total tax bite out of your $10 bill is about $3.92. The vineyard grows the grapes and makes the wine and sells it to the wholesaler. The wholesaler sells the wine to the retailer. You buy the bottle of wine. Without all those hidden and cumulative taxes, your bottle of wine would have cost you $6.08.

There are two morals from the tale of the loaf of bread and the jug of wine.

1. Calling for higher business taxes means that the consumer will be paying more for everything. After all, each business will pass on their tax load to their buyers and the final buyer, you the consumer, will be paying all those taxes. As with the Federal Excise Tax, cumulative taxes are hidden.

2. The more you produce yourself, the less taxes you must pay and thus you can live better on your current income. Old lifestyle books, like "Five Acres to Freedom" have a moral worth considering for the over-taxed consumer. It's make more and buy less of those things you need.

My advice to GVIC [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/] members is know your family's inflation rate. Know what percentage of your income actually goes to paying your taxes. Consider the cumulative taxes you are paying for goods and services and try to lower those taxes by choosing your purchases carefully. The path to permanent prosperity starts with knowing your cost of living and then managing it. The flip side to this control costs advice is to invest in positive number opportunities and avoid the minefield that most investors never cross successfully.

All governments are like Black Holes. They consume everything in sight. In due time, like Black Holes, they destroy the system that feeds them.

About the Author

He is the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/]. He's the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/] He's a Venture Capital & Equity Finance Consultant [http://home.earthlink.net/~beowulfinvestments/williamcateventurecapitalampequityfinanceconsultant/]