Why are business expenses deductible from income, but someone’s basic living expenses aren’t deductible from personal income?
In: Economics
Because businesses pay lobbyists to get Congress to lower their taxes. We don’t have lobbyists.
Mortgage payments, tuition payments, money paid toward certain healthcare expenses, certain retirement savings and a ton of other things are deductible from your taxable income. Even if you don’t have the time to substantiate any of these things you can just claim a standard deduction.
That is why the first x amount per year (depending on where you live) is usually tax free income.
Otherwise everytime you would buy anything you would have to get a bill to prove that you had these expenses and that would be a lot of work for both you and the tax authorities so its just easier with a fixed amount.
The problem is the fixed amount hasnt realy kept up with basic living expenses. But poor people dont have enough political influence to make either rich people or businesses pay more to make up for it.
The “standard deduction” is basically this.
You can itemize, but for most people the standard deduction is more.
Generally, expenses made to generate income are deductible. The concept is that if businesses are encouraged to grow they will expand employment and thus increase personal income.
Business expenses are the cost of earning income, so they mean you actually have less income than your gross revenue. If you had to spend $100 on office supplies to start your business, your first $100 sale only goes to pay for that, it’s not taxed because you haven’t made any money yet. You needed to spend that money or you wouldn’t be able to get any income at all.
When you take your income from your business and spend it on food, rent, hookers, crack, whatever, that’s not related to your income earning activities. That’s a personal consumption decision that you make once the income generating portion of your life is completed, so it’s not relevant to your income situation.
There’s a different logic behind the two taxation forms.
A business is necessary for the economy. If you kill a business then you basically kill your own economy. A business expense is a necessity for running the business (like, buying a truck or maintaining a website). The assumption is that a business won’t buy golden business cards just so they deduct it from tax, because they have to pay the price of a card either way and it won’t generate more businesses. So the logic is: let’s see what the business produced after removing the necessity costs, and lets assume they will just do rational purchases (in general they tend to do) that’s really necessary to run the business. Then let’s tax the surplus.
It’s also important to notice that a business has the power to build the taxes into their prices, so taxing without deductibles would just cause inflation.
While as a private person, the logic is that you would maintain a luxury life standard if you had enough money , so if you would be allowed to freely claim living costs, you would just move into a bigger house and claim it as necessary. The state could never tax anyone because everyone would play the system in order to avoid tax. One bigger car, one bigger house, one more mortgage. So a private person is taxed in advance and must set the living standards to what’s left.
Because they’re entirely different economic entities that operate in different ways.
You can’t tax a business on revenue — a company like a grocery store or an automaker might take in 10’s of billions of dollars in revenue annually, but ends up with only 1-2% left as profits, after paying out 98% to workers’ salaries and benefits, rent on stores/factories, paying suppliers for goods sold/parts used to build vehicles. Compare that to a software company or law firm where profits might be 50% because a few knowledge workers without much capital expense can generate huge profits. But taxing whatever profits are left at the end, no matter the profit margin of the business, can be done. So it doesn’t matter whether a grocery chain made $20m in profits on $1b in revenue or a software made $20m on $50m in revenue, they both pay profits on that $20m in profit.
Oh, and basic living expenses are deductible — that’s what the standard deduction is for… it allows you to have a basic level of income tax-free before you start getting taxed on higher amounts of income.
Because you are taxed on profit and profit is income minus expenses.
You can deduct work related costs because they are an expense you incur when making your money but your living expenses aren’t a part of that, they’re why you make money not how you make money.
If you sell sandwiches to make money you can deduct the cost of bread. If you just enjoy eating sandwiches you can’t deduct the cost of bread.
Why? Because if you had to pay taxes on costs and not just profits low profit margins couldn’t exist. If your profit margin is 3% and you’re paying 4% overall in taxes on your revenue you’d be losing money overall. Instead you only pay taxes on that 3% and you do so by deductions all the other costs.
The real reason is that businesses are much more effective at lobbying to get tax advantages than individuals. And congress and senate are largely composed of people that benefit from these subsidies.
Everything else on this thread is largely post-hoc justification for “the rich get better treatment”
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