How Taxes Kill Business
I’ve got government on the brain since my corporate taxes are due January 15th. And, once again, Uncle Sam is digging deep into my pockets to take all he can get.
It’s actually more like grabbing me by the ankles and shaking out every last nickel he possibly can, leaving me dizzy, disoriented, and questioning my decision to ever become an entrepreneur.
Why did I sign up for this annual shakedown anyway?
As I’ve said many times before, if U.S. citizens had to actually write checks to the government every quarter or every year, there would probably be a revolution overnight.
The federal government knows this. So the tax system is designed to keep your average citizen in the dark.
The U.S. Tax System: An Exercise in Deception
The U.S. tax system is designed to manipulate the majority of tax payers into thinking that the income tax is a good thing.
Employees hardly think about taxes because they’re paid through automatic payroll deductions. If you’re an employee, you couldn’t give to God first if you tried (unless your god is government, of course).
What’s more, the tax system is set up to make the average citizen feel a false emotional “high” every April 15. That’s because most people get tax refunds even if they’ve claimed the right number of deductions on their W-4 wage withholding form.
Never mind that your refund is your money anyway, or that the government has been keeping it all year; you still feel good getting a chunk of money every spring.
For an employee, taxes are easy. You work, you get paid, your employer remits your taxes for you. Once a year, you file your tax return and usually get money back. Occasionally you have to pay a little bit.
For an entrepreneur, taxes are far more complicated.
You have to track all your income and expenses yourself. You have to track business miles driven. You have to do all your own accounting or pay to have it done for you.
You then have to remit quarterly returns to various state and federal agencies (including the unemployment office, a government unto itself, and one of the worst-run bureaucratic agencies in the history of man).
And, if you’re making any kind of profit whatsoever, you are probably paying thousands of dollars in taxes every quarter, tens of thousands if you pay your taxes annually.
How’s that for a disincentive to start and run a profitable business?
How Taxes Killed a Business Before It Even Got Started
A few days ago, my wife mentioned to me that she wanted to start selling her handmade jewelry on Etsy. I strongly suggested she not do that.
At first she was puzzled. So I explained.
“Okay, so you’ve made a little bit of money from selling jewelry to family and friends — small cash sales that haven’t been reported to the government. As soon as you start running your hobby like a business, you’re going to have to give Uncle Sam his share.”
I could see she was not happy. I continued.
“You’ll have to set up separate business bank accounts for all income and expenses from your jewelry business. You’ll have to do quarterly accounting.
“And probably worst of all, you’ll have to do annual inventory on all the little beads and trinkets you still have on hand at the end of the year. After paying an accountant, you’ll probably be losing money on every necklace, bracelet, and set of earrings you sell.
“Let me put it in perspective. If you turn this into a business, you’ll probably have to make jewelry for the government for at least 3 months straight. The rest of the year you can then keep what you make, if you’re lucky.”
At this point, my wife was visibly angry. “But how can they do that? How can they just take my money? I already pay sales tax every time I buy something.”
“I know. It’s just the way it is. They get you on sales tax, income tax, real estate tax, car registration tax. There’s no end to it.”
My wife walked off, angry and frustrated at the government for placing such a formidable roadblock in front of her plans to run a small jewelry-making business.
Needless to say, she did not open an account on Etsy. And she has no plans to sell her jewelry outside of her friends and family because she has absolutely zero interest in accounting, doing inventory, meeting with a CPA, or filling out forms and sending a third of her earnings to the government.
(Not to mention, making handmade jewelry is low-profit and not scalable in the least — unless you’re hiring an army of Chinese people to do it for you.)
Funny how when it comes to taxes, ignorance truly is bliss — and being informed is borderline rage. It’s unfortunate so few people are informed.
Giving to Caesar What Is Caesar’s
Of course, as angering as taxes are for entrepreneurs and business owners, I much prefer working for myself to the alternative.
And so I labor on, giving the IRS whatever it demands so I can continue writing from home.
My only hope is that some day things will change and the federal government will loosen its grip on my productivity — and my pocket book.
-Ryan M. Healy
P.S. Here’s a good quick read on what happens when there’s too much government intervention: What We Can Learn from Argentina