An Investor's Eye View of the
Corporate Income Tax
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!
Used
with permission of Steve Selengut
Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The
Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's
Secret Investment Strategy"