An Investor's Eye View of the Corporate Income Tax
An Investor's Eye View of the Corporate Income Tax
by Steve Selengut
The Investor's Eye view of politics is a simplistic, practical, "dot-connecting" approach to sorting things out so that positive (win/win) change can be considered. Real World politics is not concerned with such things, and that is one of the most serious problems facing investors today. As outlined in "Investment Politics 2008", there are at least ten issues that require government action if we are to maintain our competitive position in the World Economy. Most of these are interrelated and need to be acted upon simultaneously… thus causing a major political dilemma. Politicians are much more interested in talking about change than they are in actually legislating it; they prefer to champion just one specific issue at a time so as not to appear too independent; and they can't keep themselves from back sliding into the now archaic distinction between investors and poor people. Rich or poor, most Americans have investments. For the small investor to become wealthier, his or her efforts must be encouraged by the tax code… the wealthy will become wealthier in spite of the tax code! And, believe it or don't, the vast majority of the wealthy (even corporate executives) are good, productive, caring-about-the-environment, people.
At the root of the problem is the tremendous investment the major parties have in nurturing divisiveness, jealousy, and misunderstanding in the electorate. The Republicans or Democrats in power are (always) ruining the country and, of course, the guys who are seeking power, will undoubtedly do the same. Perhaps the most obvious example of misguided political handiwork is the negative attitude of most individuals toward corporations, big business, and international economic collaboration. As non-voting but taxable entities, corporations are easy to blame for all that is wrong in society, easy to sue frivolously with no remorse or control, and popular to tax… by both parties! The sad thing is that most people don't take the time to appreciate just how important business success and profitability are to their own financial interests, short and long term. Mutual Funds, for example, perform better when businesses, large and small, prosper. Profitable businesses produce more jobs, provide higher salaries, and (once all the extra fees, mandates, taxes, and handouts are eliminated) lower prices.
Politicians have neither been shy about dictating "proper" behavior to individuals nor hesitant in shamelessly picking the pockets of businesses to fund their projects. Self-employed business owners, for example, pay a minimum 35% Federal Income Tax, State and Local taxes of various kinds, and the usual Workers Compensation, Medicare, and double Social Security Taxes. It adds up to better than 50% quickly, and, at every level, all taxes, fees, subsidies, assessments, withholdings, compliance costs, etc. are: 1) added to the price of goods and services, 2) considered in hiring decisions at all levels in all business entities, and 3) factored into decisions regarding new plant locations and service function outsourcing. Businesses will only produce jobs in an environment that recognizes the importance of the contributions they make. Meaningful Tax Reform needs to begin where the jobs begin. Reforms to the Individual Tax Code and the Social Security/Retirement System can then be integrated into the business framework…
Just as Congress picks corporate pockets, Corporations pick those of their shareholders. The compensation of corporate officers is a clear example of how this has gone totally out of control, even if it is understandable under existing tax codes… both corporate and individual. Million Dollar salaries, bonuses, deferred compensation and option packages are all designed to avoid and/or to defer taxes while, at the same time, they are deductible on a dollar for dollar basis from business taxes. Changes on the personal side could clean this up quickly but, for now, politicians need to focus more on protecting shareholders from these creative, and excessive, compensation schemes. Eliminating the Corporate Income Tax, and all tax deferral/option/bonus mechanisms that are not available to all employees at all levels, would be an excellent start. Then cap total compensation packages at a specific number… any excess being paid only in the form of dividends to all shareholders.
The Corporate Income Tax is a non-productive weight on business decision makers, causing expenditures that would not be considered were they not tax deductible. Ironically, salaries are not increased to reduce the tax bite because every dollar of salary brings with it an additional 40% or so in overhead! All the actual costs of doing business (and all the perceived risks associated with doing business) wind up in the price of goods and services. The fact that governments can raise corporate costs so much more easily than they can raise individual's taxes is perhaps the biggest shell game threatening our economic well being today. If instead, Congress would cultivate the profitability of corporations, while focusing regulatory efforts on the economic abuses of shareholders, employees, and consumers, a whole new era of economic expansion and productivity growth would ensue… and we're just getting started.
Investors need to impress upon candidates that they expect meaningful change throughout the tax code, and that a second term just won't happen without it. After the Corporate Tax environment changes, politicians will be able to devote their energies to defining "proper corporate and non-corporate business behavior", and monitoring compliance with a whole new set of rules and regulations. Converting the United States into a Free Trade Zone, by eliminating all nuisance assessments from all levels of government, would: increase employment, reduce prices, and multiply distributable dividends. Making it happen should not be that difficult, particularly with the growing outrage concerning the obscene compensation of high level corporate executives, and considering how successful the FTZs have been on the local level. Managers will make these changes work because the incentives are where they belong… on the bottom line instead of the tax return. Small businesses would benefit from the reduction in taxation, and fees, and would be less constrained in their efforts to grow. If they don't do the right thing, they will become less competitive in the marketplace, and that is the way capitalism is supposed to work. But, don't be naive. Publicly held companies will need direction, guidance, and policing... an excellent new career for displaced accountants and lobbyists!