Without going further into the reasons, the fact is the extraordinary NUMBER of TAXES in most of the so-called developed countries of the world. And this fact led to the establishment, back in the 19th century, of a separate DISCIPLINE OF SCIENCE, first called the Treasury, and nowadays – PUBLIC FINANCE, which is a conglomerate of some aspects of law, politics and economics. And this science is practicing SOME IDEOLOGY, assigning various newly introduced taxes to the various functions they supposedly serve. I write about ideology, because indeed, taxes are always primarily about increasing budget revenues, i.e. their FISCAL FUNCTION. The other functions, although they also have other effects, sometimes completely unexpected (such as the famous window tax, the effects of which can be seen, among other things, on the tenements at the Main Square in Krakow), are at best a way to “cover” the primary one.
Ideology aside, public finance has a lot to deal with, since everything can be taxed; income, property and its changes, real estate, legal transactions, marital status, economic turnover, number of windows, size of roof slopes, fences, profits, dividends, interest on deposits, to name a few examples. In addition to taxes sensu stricto, there are also customs duties, stamp duties, climate taxation, adiacence fees, excise taxes and whatnot. So there is much to describe and classify. In turn, the final result is that publications of tax law in some countries require SOME PAGES OF PRINT. In order to be able to navigate in all this, it is often necessary to use the services of specialized law firms. And it happens that ambiguities and disputed issues of interpretation require court decisions, which are often made after lawsuits that drag on for years.
Everyone who files their annual PIT knows how personal income tax works. This is because the income earned in a given year, the advance payments made for income tax and any deductions paid, as well as the tax due, are listed there. So everyone then knows how much they have already paid to the tax office in the form of advance payments and how much they still have to pay extra or how much they have to reimburse the tax office.
Simple and understandable are also those taxes and fees that are charged directly to the taxpayer’s income. Such include property taxes, such as cadastral tax, inheritance and gift tax, etc., as well as taxes and fees paid on an ad hoc basis on the occasion of various legal actions. Their ad hoc nature, however, means that usually few people remember how much tax they have paid in total from these titles, well, except perhaps for the cadastral tax. For this one is more burdensome, as it is calculated on the value of the property or on the value of the income generated by the property. If it were also introduced in Poland – as some people are whispering – at a level of 1% of the market value of the property, it would be more likely to be remembered by every owner of an apartment or house, not to mention owners of commercial real estate.
Equally simple, though no longer so obvious to many, is VAT (Value Added Tax). Formally, this tax is paid by entrepreneurs, the so-called VAT payers, but its COSTS are TOTALLY INCURRED BY EVERY CONSUMER who buys any goods (good or service) to satisfy his personal needs. This tax is always INCLUDED IN THE PRICE of the goods purchased. The basic VAT rate added at each stage of economic turnover is 23% of the VALUE ADDED at that stage (hence the name “value-added tax”), and reduced rates are 8% and 5%. This means that, depending on the type of goods and the associated VAT rate, the price of the goods includes an amount of this tax representing 18.7%, 7.41% or 4.76% of that price, respectively. Many people who buy goods usually don’t think about the fact that they pay such tax, and certainly don’t know how much they paid in total when leaving the store with their purchases (although the amount is listed on the receipt). Thus, no one is able to count how much he or she has paid this tax over the course of a year, making daily purchases.
On the other hand, I have no doubt that not many people know that ALL TAXES paid by businesses and institutions ARE ALL TRANSFERRED TO CONSUMERS. This applies both to taxes that are legally deductible for these taxpayers and those that are not.
In the first case, the matter is obvious, since all costs of a company, and therefore the taxes included in them, are included in the price of its goods or services. These taxes are therefore legally PRICE-CREATIVE. Such character is primarily the nature of DUTIES AND EXCISE TAXES as well as the PROPERTY TAXES paid by enterprises.
In the second case, the mechanism is somewhat different. Depending on the so-called market power of a given enterprise, the COST OF TAX IS TRANSFERRED in whole or in part to its suppliers and/or customers. And this is done not directly, as in the case of costs, but in the process of calculating the projected net profit, i.e. profit after corporate income tax, CIT (in Poland it is currently 19% of gross profit).
The matter is actually simple, although rather few people have a clue about it. Well, IN GOOD MANAGED enterprises, especially in larger corporations, financial management consists in MANAGING COSTS AND REVENUE in such a way that the most important profitability indicator for shareholders, which is the RETURN OF EQUITY RATIO of the corporation (ROE=net profit/equity), reaches a level typical in the long term for the industry (the so-called expected ROE). To this end, both costs and revenues are controlled on an ongoing basis in such a way that, where possible, costs are reduced, and where this is impossible or not advisable, revenues are increased.
In the first case, one speaks of TAX TRANSFER TO SUPPLIERS, i.e., backwards. This is achieved by negotiating the lowest possible purchase prices for supply goods and services. In the second, on the other hand, we are dealing with the flipping of the tax onto the CONSUMERS, i.e. forward, adding it to the selling prices. Let’s demonstrate this with a simple example.
If the EXPECTED RETURN OF EQUITY RATIO for an industry is, for example, 10%, and the equity of such a corporation is, for example, CU 1,000. (currency units), that is, you need to achieve a GROSS PROFIT of such an amount that after paying CIT (19% of gross profit) you will be left with a NET PROFIT of CU100. Thus, it is not difficult to determine that the EXPECTED GROSS PROFIT should be NO LESS than CU 123.46 under these conditions. (100/(1-0,19)). Knowing this amount, a SINGLE Gross Profit Margin is set for each product with a certain allowance so that, after taking into account any fluctuations in demand, the main goal, i.e. the EXPECTED GROSS PROFIT, will be achieved. When this is done, the rest of the goods not yet sold are allocated to so-called PROMOTIONS, i.e. sales at reduced prices. Every currency unit from such a sale increases the gross profit ABOVE the EXPECTED AMOUNT. As a result, the REAL ROE can be higher than planned. And the WHOLE CORPORATION’S INCOME TAX IS PAID BY THE PURCHASERS of its goods and/or their SUPPLIERS.
So there is nothing to be pleased about when the government introduces or increases tax for large transnational corporations or larger and smaller domestic manufacturing, trade and service companies. Whether it is a tax on income, revenue, profits, on property (e.g., a cadastral tax), whether it is a duty, an excise tax or any other, EVERYTHING is ultimately included in the PRICE OF THE FINAL GOOD OR SERVICE FOR THE CONSUMER. And if we take into account what I have been proving in previous posts, the NON OBVIOUS TRUTH ABOUT TAXES announced in the title of this post reads as follows:
ALL TAXES, INCLUDING THOSE FORMALLY LEVIED ON COMPANIES AND INSTITUTIONS, ARE BORNE EXCLUSIVELY BY THE INCOMES OF PEOPLE OPERATING IN THE PRODUCTION AND EXCHANGE OF PRIVATE GOODS AND SERVICES.
The incomes of the others, even when they formally pay taxes, come only from the taxes paid by the former. The tax paid by the latter thus returns to the source from which it flowed in the price paid or in the benefit paid to the beneficiary from budgetary funds.
A typical example of such a mechanism is pensions paid by a public sector entity such as Social Security, whose source of funding is, of course, taxes, formally known as contributions. On this income, pensioners pay, among other things, income tax at the local tax office, property tax – at the municipality, VAT, customs duties, excises, etc. – in the price of goods, etc. As a result, the individual amounts of taxes paid by pensioners go to various units of the public sector, constituting a source of their income, but this sector AS A WHOLE does not increase its income because of this.
The same applies to the income of public sector employees and entrepreneurs who provide public goods. When buying goods and services from them, the public sector finances these expenses with the taxes it receives. Thus, the income tax of state or local government officials, or, for example, the tax on the profits of armaments companies, goes back to the source from which the taxable income of these taxpayers is derived. IN THIS SENSE, these flows do not increase the income of the public sector AS A WHOLE, nor do they reduce the tax burden for those operating in the production and exchange of private goods and services.
Despite this idleness, however, such a solution is very convenient for public authorities for at least two reasons. The first is practical considerations. After all, with such a number of different taxes it would be very difficult, if possible at all, to find a tax system other than one based on universality. Secondly, such universality implies that the costs of maintaining the public sector are distributed in some proportion to all citizens of a country. Thus, such a complicated tax system effectively makes it more difficult to arrive at that TRUTH ABOUT TAXES, which has already been reiterated here several times.
The point, of course, is the truth that the WHOLE COSTS OF THE EXISTENCE AND OPERATION OF THE PUBLIC SECTOR AND ALL ITS BENEFICIARIES, AND THE COSTS OF THE OPERATION OF SUPPLIERS OF PUBLIC GOODS AND SERVICES, ARE BURIED BY PERSONS ACTING IN THE PRODUCTION AND EXCHANGE OF PRIVATE GOODS AND SERVICES.
The others participate in these costs only insofar as, instead of getting from the public sector for their goods and services their monetary equivalent, i.e. NET PRICE, they get a gross amount, which includes the amount of tax they must then pay. The same applies to the beneficiaries of so-called public transfers (pensions, annuities, etc.), on which taxes must be paid. Neither does the public sector as a whole INCREASE its income in this way, nor does the cost burden on the sector decrease for the rest of the people who – aside from paying taxes – have nothing to do with it. The only effect is, as already mentioned, REDISTRIBUTION between the various units of the public finance sector.
Finally, it is worth summarizing the consideration of taxes with information that, I believe, rarely reaches the consciousness of so-called ordinary people. Namely, it is about the TOTAL COSTS OF TAXATION of people’s incomes. This is referred to by the so-called TAX FREEDOM DAY. This is the day of the year from which the AVERAGE CITIZEN of a country stops working for the state and starts earning only for his own needs. According to estimates by the Adam Smith Center, the tax freedom day in 2024 in Poland fell on JUNE 28. This means that last year the average Pole worked 180 DAYS FOR THE STATE, 8 days longer than in 2023.
And here such a reflection comes to mind. I don’t know what it is like today, but in my school I was taught about how serf peasants were oppressed in feudal times. Namely, they had to do their serfdom for TWO DAYS a week and, in addition, give TITHES to the Church. So in total, for these TWO public donations, the average serf peasant had to work about 140 days a year. And what does it look like today in the best of systems? For the upkeep of the STATE ALONE, for the time being, only 180 days! And it will certainly be more.
As a consolation: they have it worse in France (tax freedom day on July 4), Austria (July 24) or Greece (July 29), among others.
Until the next entry.