Business is responsible for most tax collection

Many nations use business as the principal means of tax collection. Two reasons exist for this.

First, the effect of most taxation does not depend on who collects it. In economic terms, incidence refers to the impact of taxes on a segment of the economy. Split into “formal” and “effective,” the study of incidence seeks to determine who actually pays for taxes. What economists have discovered is that, while the party formally responsible for tax may differ, the effective responsibility rests upon the same economic segment. In the case of income tax, the formal incidence belongs to the employee, but the party who actually calculates and submits the employee’s income tax is typically the employee’s place of work. This is because, whether the employee or the place of work submits the tax, the effective incidence of that tax always rests upon the employee.

Second, the cost to collect taxes reduces the government’s net gain. Governments therefore seek to make the process of tax collection efficient. If effective incidence is unaffected by the collector, then the collector may be based on efficiency rather than responsibility. Business, with its financial and organizational resources, makes the most efficient source of collection in an economy.

Individual contributors spend little thought or energy calculating and paying taxes. Is there a sales tax on your grocery purchases? Only a close review of your receipt gives you any indication of the impact on your purchase. If you choose not to throw away your receipt, you take no risk that your tax contribution will be incorrect. Are your wages taxed? Tax reporting season is simplified by a W-2 with all the income tax calculations predetermined by your employer. Transition from individual contributor to business owner; however, and your experience of the tax system flips. Now you’re the one responsible for calculating sales tax and income tax for every business purchase and on the income of all your employees. An entrepreneur may be blindsided by the cost of tax collection and reporting activities if they enter into business with the mindset of an individual contributor.

Entrepreneurs who incorporate their own businesses enter into a new world of tax responsibility. While it may be exciting to be one’s own master, the price is greater responsibility to tabulate all taxes incurred by the corporation and its employees. Whether I go into business myself or assist another entrepreneur to launch their business, walking into the challenge knowing that taxes are collected primarily from business and understanding why that is will help make the arduous, painstaking process of accurate tax collection more bearable.

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