Corporate Tax Rates – Let's Make Them 0%!

Hope everyone enjoyed the Communist-inspired, Union-organized, Democrat-passed, federal prostration to a movement which long ago passed from combating management thuggery to perpetrating employee thuggery. 

It was recently reported that Warren Buffet's Berkshire-Hathaway owes the USA around $1 billion in back taxes (back to 2002, that is!). This staunch supporter of the current administration's policy to tax the hell out of everyone seems to assume that the rules don't apply to him. Well, suppose these rules didn't apply to anyone.

According to Wikipedia.com (an adequate source for this discussion), US corporate taxes vary from 15% to 35% on "total gross income (gross receipts and other income less cost of goods sold) less tax deductions." That is, companies mostly pay taxes on profits. Okay, a "corporation" is a legal fiction that has most of the rights and obligations of a person; the root word "corpus" is Latin for "body." Taxes are part of the obligation of every person – they pay for the services rendered by government. Well, there's a lot of talk these days about lowering corporate tax rates, but let us wander through another possibility altogether: 

Conservatives have proposed eliminating inheritance, capital gains and other taxes. What would happen if corporate taxes were eliminated? 

It means that the 15% to 35% would stay in corporate coffers. The corporation management then gets to decide what to do with that money. They have several options I will divide into four major classes: (1) Distribute it to stockholders as dividends; (2) Increase employee compensation (salary, benefits, retirement contributions, etc.); (3) re-invest it in the company by expanding product research & development, increasing employee training, increasing marketing, etc.; (4) Increasing "corporate citizenship" through community & charitable donations. Basically, the money the government doesn't take at gunpoint would go to the owners, the employees, the future or it would go voluntarily to the community. Let us briefly consider each possibility in turn:

The Stockholders
First, who are these nameless faceless persons? One might assume, from the mainstream media, that there is a cabal of rich, powerful, evil men who want nothing more than to amass enough wealth that they begin to resemble Smaug, the dragon from JRR Tolkein's The Hobbit, whose bed was a Fort-Knox-sized pile of gold.

The truth is somewhat different (okay, liberal accusations and the truth reside on different planets). Take, for example, Overstock.com, a Utah-based company and former employer of mine. One of their major stockholders is TIAA-CREF Financial Services, which "was founded in 1918 to provide retirement security to university faculty. Today...we serve 3.7 million individuals and more than 15,000 institutions in the academic, medical, governmental, research and cultural fields." Let's try another, 3M (with whom I have no relationship, except using many of their products). One of their stockholders is State Farm Insurance Company. As you are aware, insurance companies take your premiums and invest part, so that money grows and can cover your policy if it ever has to be paid off. One more, for fun, WinCo, a discount grocery store notable for its recent return to the Utah market (and great prices on the fruit juice I love). The majority of their stock is owned by WinCo Foods Employee Stock Ownership Trust, that is, their employee pension plan.

Yes, lots of very rich people own lots of stock in lots of companies. However, many, many, many stockholders are "the small investor." Every penny that goes toward taxes also goes away from retirement plans, pension plans, and other investments owned by "Main Street" Americans – you and me. 

The Employees 

I was with Overstock.com from February 2007 to September 2009. In 2008, I got a very respectable pay raise and bonus because the company was doing well. In 2009, I got nothing extra – when the economic downturn hit, the company decided to forgo pay raises and bonuses (as well as other expansion plans) as a way to avoid lay-offs. This was one among a million possible examples of corporate belt tightening across the US. It worked, O.co (as they are now called) didn't lay anyone off, in fact, I believe we expanded the workforce by a few percent that year.

I don't know what O.co's taxable income was for 2009. Let's randomly pick $11,000,000 as an example. If O.co earned a taxable income of $11M, their tax bill would have been $3,750,000. Imagine the pay raises, bonuses, the IRA contributions, training programs and other benefits that could have gone to O.co's 1,500 or so employees – even after increasing the stockholder dividend!

Yes, some corporate employees (CEOs, directors, presidents, etc.) are very wealthy. These people are, of course, a small percentage of the total number of employees. Every penny that goes toward taxes also goes away from the paychecks of "Main Street" Americans – you and me.

 The Company 

I mentioned 3M Company, originally known as Minnesota Mining and Manufacturing Company. In their corporate infancy, they imported some garnet to make sandpaper. Unfortunately, the stones were contaminated by olive oil. They couldn't afford to dump the stones, so they boiled them to get rid of the oil – it was the company's first R&D effort, one might say. Later innovations included waterproof sandpaper, masking tape and cellophane tape ("Scotch tape") and hundreds of other products we use every day. Who paid for that product research and development? 3M paid for it. They did it for one reason – more products means more sales, more income, more profit.

Oh, by the way, it can also mean corporate survival: 3M was one of the big suppliers of magnetic tape used in computer memory; 8-track, cassette and video tapes and so on. Computers no longer use magnetic tape and the only place you'll find taped entertainment is in a museum. If 3M had decided to become exclusively a magnetic tape manufacturer, they would be as extinct as the dodo bird. Innovation kept 3M alive and allowed them to grow into a $26 billion (2010 total revenue) company employing over 80,000 people.

Every penny that goes toward taxes also goes away from the research & development that enhances the lives of "Main Street" Americans – you and me.

The Community 

About 5 months ago, I posted a blog entitled, "To the Rich – A Well-deserved Thank You." In it, I stated, "Despite the recession, Americans still gave to charitable causes and, despite the recession, they gave more, to the tune of over $10 billion." Private citizens (most of whom we would not classify as "rich") contribute to their communities. Corporate citizens do the same. The reasons for business largess vary – tax breaks, of course, but also because the stockholders feel the same duty to improve the community that other "legal persons" feel and authorize corporate officers or managers to make donations.

As an example, I take the Utah Symphony, a magnificent collection of musical artists and support professionals who contribute more than I can describe to the Utah landscape. In addition to the individual and foundation sponsors are OC Tanner (a jewelry company), Questar (an energy company), Zions Bank (financial services company) and other corporations from small, local businesses to major multi-national interests. Without all of them, I cannot imagine how Utah could support the world class talent that we have. The same holds true for every other non-profit organization.

Every penny that goes toward taxes also goes away from the art, culture, educational and other non-profit community organizations, without which, there would be a lot of people not in the audience – "Main Street" Americans – you and me.

The Point 

Money – who uses it more wisely, the government or the private citizen? Arguably the dumbest question in American politics. Private citizens always spend their money more wisely that the federal government. (And that is saying a lot when you consider how foolishly some Americans spend their money!) Private investment and the money Americans spend on goods and services builds companies and creates jobs. Government stimuli don't – at least, they haven't yet and, after something like $3 trillion in stimuli, bailouts, quantitative easements and the like, I think we can safely say the verdict is in. 

The United States of America should eliminate all corporate income taxes, as well as capital gains taxes, inheritance taxes and every other tax that does not support a specific, verifiable, constitutional government function. 

If we do, the recession would be over almost immediately.

Thanks for listening, tune in next week for another rant.