What’s the difference between “income” and profit”?

Question

And, more specifically, why are corporations and people taxed differently? Both have money coming in and going out for necessities

Does that make sense?

In: 0

Answer 1

Income is all the money coming in. Expenses are all the money going out for business-related costs. Profit is the money that you have left once you remove all the expenses that need to be paid.

Some taxes (such as corporation tax) are levied just on profit. Other taxes (such as VAT) are levied on your overall income (which is very simplified, as befits an ELI5). In theory, different taxes are supposed to encourage different types of behaviour from businesses, or to discourage different types of behaviours, and that is (again, in theory) why there are so many taxes in play at the same time.

Businesses and individuals are taxed differently because people simply don’t have the earning power that businesses do. You can’t tax people as much as you can tax a business, because then the people won’t have enough money to live, and they all die.

If a business is generating enough income to pay the expenses associated with premises, stock, and paying the wages for some number of people, then that is quite a lot of money – much more than any one of those people can earn by themselves! And if the same business manages to do all of that and also make a profit at the end of the year, then that’s fantastic. A tax on profit then is supposed to encourage that the business should make less profit by spending more money on expenses such as wages for its own workers. (The government doesn’t lose out, because it then collects income tax from individuals, but this way it tries to nudge businesses towards paying better wages.)

If a person doesn’t manage to make any profit at the end of the year, after all living expenses are paid, then that person might go bankrupt or homeless. They may end up needing a financial helping hand from the government, and the government doesn’t want that. Therefore, it is better for the government if people still have money to live at the end of each month, whereas the government wants to tax businesses in such a fashion that businesses feel inclined to pay better wages to their workers.