Taxing Corporations
by Dr. Doug Cardell
Corporations are a way for a group of people to share in the ownership of a company. They do this directly by buying shares of stock or bonds. Also, indirectly by purchasing mutual funds, insurance, putting money in a bank account or saving in an IRA or other retirement plan. If you do any of these things, you are investing in corporations. That is, you are sharing in the corporations' profits, directly or indirectly.
Unlike the family farm and the corner shop, large undertakings, like an automobile or drug company, require vast amounts of money to get started and to fund new growth. Risking that capital is the justification for the profit investors like you receive in dividends and appreciation. No one will take the inherent risk without the hope of reward. If no one takes that risk, most of the benefits that provide us with the goods we want will disappear.
The 'greedy capitalists' people complain about are people just like you that make money from investments. Corporations use all that money invested directly or indirectly by shareholders like you as capital in creating new products and services. The investors, the capitalists, are rewarded with profit. In the case of stockholders, the child who received one share of IBM stock as a Christmas present earns the same percentage of profit as the largest shareholder. That child is one of the capitalists that own IBM.
The largest holder of IBM stock is the Vanguard Group. This mutual fund company has more than twenty million investors in 170 countries. Anyone can buy shares in a Vanguard fund for $1000 and, through this fund, own stock in IBM and hundreds of other companies.
You might ask what all of this has to do with corporate taxes. Corporations are managed by a board of directors who hire an executive officer (CEO) to oversee the day-to-day operations on behalf of the stockholders. The directors and the CEO are bound by what is usually called the business judgment rule.
The Business Judgment Rule is a legal doctrine that helps protect a corporation's board of directors and CEO from frivolous legal allegations about how it conducts business. The rule says that corporate managers are presumed to act in "good faith" within the standards of loyalty, prudence, and care directors owe to stakeholders like you. Therefore, absent evidence that the board has blatantly violated some rules of conduct, the courts will not review or question its decisions. This protection applies while the board and CEO follow fiduciary standards.
Fiduciary standards include "the duty of care" and "the duty of loyalty." The first is an obligation to act after due diligence to allow acting in an informed manner. The second requires directors to put the interests of the shareholders before their interests or those of others. This rule prevents corporate officers from doing things that do not directly or indirectly benefit the stockholders. For example, they can donate to charities in reasonable amounts to obtain goodwill that may ultimately benefit the stockholders. In addition, they can contribute to political campaigns to influence public policy to benefit the stockholders. However, the contributions must be limited and justifiable.
The result of all this is that when the government taxes a corporation, the corporation cannot reduce the profits of stockholders like you unless there is no other choice. However, there is another choice; passing the cost of the tax onto the consumer, that is, raising prices. This price increase, in turn, has two effects. First, it essentially taxes the consumers, and it does so as a "flat tax," that is, it taxes all consumers the same percentage. Second, it places American companies at a disadvantage compared to foreign companies that are not taxed. So foreign companies can charge less for the same product, which forces American corporate downsizing in the form of layoffs and wage reductions for American workers.
As you can see, taxing a corporation is impossible; it is only possible to levy a hidden tax on consumers. As a result, the stockholders end up harmed in two ways. First, since they are also consumers, everything they buy from American corporations costs more. Second, they are likely to have lower dividends and lower appreciation of their stock.
The government and the media also press the idea of taxing corporations by misrepresenting corporate earnings. The most common way they do this is by reporting the change in profits rather than actual profit. For example, imagine a company making a one percent profit in a year. Now imagine that the corporation increases its profit to two percent in the next year. The profit rising from one percent to two percent is an increase of 100 percent. But two percent is far too little profit to attract investors in a market where seven percent is average. Reporting the 100 percent increase in profit rather than the meager two percent actual profit is misleading. It is a device that allows the government to continue scamming the public into believing taxing corporations benefits them. It does not.
Since you are likely both a stockholder and a consumer, you are paying the tax. It is the duty of those who understand this travesty to help educate those who don't understand. It is long past time to end this. As citizens, consumers and investors, we must urge the government to eliminate all corporate taxes and tax us directly rather than hiding them by funneling them through the corporations. It would also lower overall taxes by eliminating the corporate expense of the record keeping and legal work that these taxes require. Furthermore, those in lower income brackets would benefit the most since a flat tax increases their burden. If we correct this injustice, only self-serving politicians would have cause to regret it.
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So true!
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