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Business Taxation

Governments have to levy taxes in some way and that firms have to contribute. As a small business owner struggling to make a profit, of the three major forms of taxation available to government, described by Robert Daniels, income tax, payroll tax, and sales tax (Daniels, 2000), my preferences, ranked least favorable to most favorable would be payroll, sales and income taxes.

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Payroll taxes inhibit the ability of the small business owner to acquire labor. They make labor more expensive when the burden is placed on the business owner and put less in the hands of the employee for their work, making labor potentially scarcer as a result. Further, when different taxation rates between industries exist, I could lose labor on this basis. My prevailing wage fully taxed may not be as attractive to a worker who could generate tip income that may not be taxed as heavily, for example.

Sales tax makes products more expensive. As a business owner this could impact demand for my product. As prices rise, demand falls.  Inequities in sales tax between states could drive my customers across state lines to purchase product which would cost me money as a business owner. If untaxed substitutes for my product exist, I could lose business there as well. Sales tax could serve to inhibit my profitability by inhibiting demand for my product.

Income tax to a struggling business owner is the most equitable. After paying all expenses associated with revenue, if I have a small profit, tax based on a ratio of my profit would also be small. With income tax a business owner is not faced with curbs in demands for his product through taxation, or inhibited in acquiring labor. This makes income tax the most equitable form of taxation as it does not inhibit my ability to generate a profit: income tax reflects my contribution based on profitability, without placing barriers to profitability.

Reference

Daniels, R. (2000). Types of Taxes. Retrieved December 18, 2008, from http://online.sfsu.edu/~rdaniels/508_Outline/types_of_taxes/types_of_taxes.html

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