Why are business expenses deductible from income, but someone’s basic living expenses aren’t deductible from personal income?

Question

Why are business expenses deductible from income, but someone’s basic living expenses aren’t deductible from personal income?

In: Economics

Answer 1

The biggest reason that you don’t tax business expenses is because if you do, you create a huge incentive for vertical integration.

Imagine two companies selling the same thing and both have revenue of a million dollars. Company A is vertically integrated, meaning it does everything from mining raw materials to production to selling to consumers, so it pays 200,000 in taxes. Company B is not vertically integrated, it pays 200,000 in taxes, it’s supplier pays 100,000 on its 500,000 in revenue, and it’s supplier pays 50,000 in taxes on 250,000 in revenue. So both companies with otherwise identical supply chains both different levels of integration produce wildly different taxes. Company A patys 200,000, and Company B and it’s suppliers pay 350,000 in taxes, on the same 1,000,000 in total revenue. Company A actually produces a profit and Company B and it’s suppliers loose money and go out of business. The more suppliers in your supply chain, the more expensive your production is purely because of taxes.

Now the barrier to entry to produce a competitive business goes through the roof, so only large, vertically integrated and likely inefficient business are able to survive, purely from government policy.