Why the Corporate Tax Rate Should Be Zero

If you are a liberal reading this blog, you’ve already discarded to the trash bin. That is, after you’ve dropped a few F-Bombs and yelled at your device that the rich never pay their fair share. That claim will never go away. However, what if that rich person isn’t a person at all, but an entity? Yes, every Corporation will write a check to the U.S. Treasury. But they don’t actually “pay” them, and I’ll explain why.

Corporations have always been prime targets for the big government spenders. It’s easy to tap into voter emotions that these behemoths have become “too big to fail” and aren’t paying their fair share. And why not? Recently, a news report stated that Amazon didn’t pay any federal income tax at all. Of course to the people who aren’t low information voters know that Amazon, and corporate giants like them, pay millions in payroll taxes and employ thousands of employees who pay income tax. Somehow, that is left out of the soundbite. Don’t get me wrong. Big corporations have their flaws, like suppressing competition, but that is a debate for another day. We aren’t here to defend big companies or attack big brother. We are here to show you how corporations work and how they can affect your pocketbook.

Corporations start out like any other business: with an idea. The difference is how that idea is put into production, and if that idea is big enough to draw a pool of money. If it can draw large amounts of capital, it makes sense for the owners to add the “corp” next to their name.

Have they become too big? Maybe. But it isn’t the responsibility of the IRS to determine that. Its job is to collect the revenue to fund the government’s budget. That’s our focus. Does raising the corporate tax rate have any impact on tax revenue, other than making for a nice slogan during election season?

The case for Zero Corporate Tax Rate

Not only should corporate tax rates not be raised, they should be dropped to zero. Most people (voters) have never looked at a financial statement. Politicians sure haven’t, or else they wouldn’t be bellowing how corporations aren’t paying their fair share. If you’re part of the many who have never looked at a financial statement, don’t fret. I’ll give the basics here. In another post, I’ll go into them in more detail.

Let’s look at a hypothetical company, Stop Taxing Me. There are several financial statements, the main being the balance sheet, income (P&L) statement, and statement of cash flows. We are interested in the income statement.

• Revenue: Always at the top. This all the money the company has earned in a given year.

• Operating Expenses: These are the normal expenses a business incurs in the production of products and services. Examples are costs of goods sold, wages, supplies, overhead. We subtract these from revenue to get Operating Profit.

• Unusual or Non-recurring expenses: These are expenses that don’t occur every period, like costs associated with a merger, an accounting change, or a write-off of a failed unit. Subtract this from operating profit to get gross profit.

• Taxes: These include all taxes paid, including federal, state, & local income taxes, property taxes, payroll taxes. Subtract this from gross profit to get net profit.

We then divide net profit by shares outstanding to get perhaps the most important financial ratio, EPS (earnings per share). This is the number that is reported to Wall Street. It’s also the number that Wall Street judges companies by. CEO’s know this. They also know what Wall Street expects every company to report. They’ll do everything in their power to meet that number (to some that includes financial shenanigans). Ever wonder why a company’s stock price drops 10% when it misses projections by just a single penny? Now you know.

With this in mind, what do you think a company will do when EPS drops because of an increased tax bill? Just eat it and say thank you very much so some politician can buy some votes? I don’t think so. They will do exactly what you and I would do, make an adjustment. They will find a way to offset this additional expense.

So how will they do this? By adjusting one of the other aforementioned buckets. The easiest would be to raise their prices, which of course is bad for you and me, the consumer. What happens if the consumer balks and buys less stuff? The company could end up worse off than before. A more likely action is to reduce expenses. Which expense bucket is a prime candidate? You guessed it, payroll. Companies with either reduce wages (bad for workers), cut benefits (still bad for workers), move jobs offshore (even worse for workers) or lay them off entirely (catastrophic for workers). What if this isn’t enough? Companies will reduce marketing, and research & development. Without marketing, companies can’t promote their products. If they can’t sell their products, then they don’t need as many workers. Most company growth comes from research and development. This is where companies turn ideas into production. If they aren’t developing new products, or improvements on existing ones, then there is no need for workers. In addition, without new product lines, it is very difficult for workers to advance with new opportunities.

While the government may see an increase in immediate revenues from corporations, they will see fewer revenues from a reduced workforce. Plus, they will be paying more in unemployment compensation due to the layoffs. Every scenario is bad for you and me, which of course never gets mentioned with a tax increase. A rich person is not going to just let some bureaucrat from the government take their stuff. You wouldn’t. I wouldn’t. And neither would those same politicians going around saying the wealthy aren’t paying their fair share.

If that tax bucket was zero, companies will have more to invest, pay their employees, and issue dividends to investors. This will more than offset the reduction in revenues because the tax base will increase. Of course, there is another option to offset the loss in revenues: SPEND LESS. Of course, you never hear that. Or, totally revamp the way the government collects taxes by eliminating the income tax and replacing with the Transaction Tax on Deposits.

So, now you are equipped to cast an informed vote, at least on how taxes impact corporations, which of course, impacts you.

Cast an intelligent vote on election day, or none at all!