In most countries, the state earns more money per sale than the merchant. In a scenario where the economy and currency are stable, taxes can be a burden for entrepreneurs and businesses. However in a situation of high inflation and devaluation, taxes become a problem for most small and medium-sized businesses.
In this latter case, whether we like it or not, tax evasion becomes the norm. It's like that expression of Bolívar: "When tyranny becomes law, rebellion is a right."
Social equilibrium is an implicit contract in societies. One of these contracts is the state and taxes; we accept its existence and pay them because, in theory, they should benefit everyone. Therefore, it's not a problem that taxes are high when we have quality and accessible public services, a stable economy, and an adequate standard of living. When these conditions are lacking, taxes feel like theft disguised as law.
Even if you don't want to, in high-inflation scenarios, if you're a small or medium-sized business owner, you may have no other option than to evade taxes. The thing is, there's a limit to how high you can raise prices, and that's the price that people whose wages aren't keeping pace with inflation are willing to pay.
In this case, you'll be decreasing your profit margin even if you're raising the price. But what happens when you have to pay a sales tax of 10% or more?
Let's say the maximum price people are willing to pay for a product is 320 pesos. As long as your acquisition cost doesn't exceed 280 pesos, it makes sense for you to sell it, even if you only earn 2.5%* per product. Once it exceeds that threshold, you'll have to choose:
Stop selling that product.
Raise the price and lose many sales.
Don't raise the price and evade taxes.
*2.5% profit after paying sales tax, but before paying other business expenses and social security or income taxes.
Of course, it's very easy to feel morally superior and make this decision without being in a situation where you depend on your business sales to survive. However, being in that situation, the decision might seem even easier.
This leads me to present the following triangle of impossibility. However, if you live in a country with low or no sales, profit, or income taxes, you fall into the exception to this rule.
Small businesses and merchants in a country with high inflation and high taxes can meet two requirements, but never all three. It's that simple.
Low prices and a good profit margin? You're evading taxes.
Good profit margin and you pay taxes? Your prices aren't low.
Low prices and you pay taxes? The profit margin doesn't justify running a business.
Taxes are a very important thing to consider when starting a business. At the same time, this triangle can help you decide if start a business it's good idea or it's just better find a high pay job. And if you already have a business can help you identify where is the problem that prevent you progress or at least know when is the moment to pivot or take risky choices.
Image and text © Enrique Yecier
