Friday, May 13, 2011

Corporate tax musings

This is a response to the following:

Corporate person-hood and its relationship to taxation...
The deal isn't that of course money is taxed multiple times, it's that the same bit of revenue is taxed multiple times for the same people. First, it is taxed proportionally across t...he pool of owners via corporate taxes, and then whatever portion is distributed to the owners via dividends is taxed again.

The gist of the person-hood is that corporations have some of the rights of natural persons because they are freely entered into associations of natural persons, and as such limiting what the association is allowed to do is limiting what the people are allowed to do. That such limits must not violate the members' rights has long been upheld for precisely that reasoning. Mikehudack apparently looks at these same facts but misses the point of them. Corporations are NOT people, they are associations of people.

Use of the tax code to achieve policy ends...
There are two things to consider here. The first ties directly back to the realization that corporations are associations of natural persons. The idea that the government has an enormous interest in what corporations do with their money is predicated on the assumption that the corporation has lots of money. If corporations had very little money "in the bank" you would not see this. Think about the volume of discussion regarding the savings of S corps (charitable organizations) that you've seen. Effectively, this argument boils down to either envy or justice. The envy is that its essentially the same as the desire to level punitive taxes on the rich. In the US, the poor generally don't favor punitive taxes on the wealthy. I suspect that's largely from the sense that envy is just wrong. Anyway, there's also the notion of justice going on. Not taxing corporations provides the owners of the corporation a means of increasing their wealth without being taxed on the increase (until such time as they are actually receive the increase and it is available to them). That makes being a member of a corporation a bit like owning an IRA.

Secondly, using the tax code for ANYTHING other than raising revenue is inevitable tyranny. Period. In the past, I've written about the use of the tax code as a means to "level the playing field". I think what I've written about that is worth reading. It addresses the inherent dishonesty of this approach:

The fourth argument is actually a pretty good one. The owners of a corporation derive a benefit to their association from the infrastructure in the city, county, state, nation that they are operating in. Deferment of taxes on the corporation until profits are distributed to the owners allows the owners' association to use the infrastructure for "free" (sort of, they still pay for it via its embedded costs in their vendor's prices and the cost of labor which includes taxes for that infrastructure). So, while they indirectly pay for the use of this infrastructure, I'm much more in favor of direct and obvious payment than indirect hidden ones (a notion that is quite consistent with the above link).

The fifth argument is essentially no different than the second one, tax corporations because they have the money. On the surface, that seems pretty obvious. Let its proponents talk just a few more sentences and the deeper reason comes out: tax corporations because they are rich. Envy. I want what you have and you don't deserve it anyway. Years ago, back when I thought I was going to become a lawyer, a co-worker joked that I needed the law degree to "defend corporate polluters." So, in that vein... Exxon Mobile. "Big oil" always, always comes up as the poster child for we need to tax corporations more. Lets look at that.

Exxon Mobile has a market cap of $397 billion today. Revenue is running about $364 billion. And that's as far as every single "tax the corporations" argument looks. Ever. Given that profitability information is ON THE SAME page, it's very difficult to not conclude that the proponents of this argument are not stupid or envious (both is always an option). So, what is Exxon Mobil's profit margin? 9.56%. That's pretty crappy. Seriously. The value of this organization is roughly $400 billion, and it's only able to make 9.5% profit for the owners? Let's look at some other companies so that we can look at this data in some actual perspective. Apple: 22% profit margin on a ~ $300 billion organization. Adobe: 22% on a ~ $17 billion organization. ADP: 12% on ~ $25 billion. Verizon: 3% on ~ $152 billion. Boeing: 5% on ~ $62 billion. Chipotle: 9.7% on ~ $8 billion. Johnson & Johnson: 19.8% on ~ $171 billion.

Since 1980 the average profit margin for the S&P 500 has been 8.4%. "Big oil" has averaged about 9.5% over that same period. But think about the HUGE volume of cash the owners of these companies have had to pool in order to pull that off -- especially relative to those companies that have had much higher profit margins on smaller pools of capital.

If the advocates for corporate taxes actually talked about the corporations that had high profit margins, it would be much easier to believe that their concern was motivated by other than envy -- because I can absolutely see the justice argument and would be willing to make it. However, that's not what we see because that isn't the argument they make. The problem with that is that the very people that would make good allies (those that are willing to look at data and make the JUSTICE argument) don't want them as allies. What rational person joins with a partner that seems to clearly be operating out of envy? What rational person wants an ally that is either drastically ignorant or blatantly dishonest in their use of data? Not me. No thanks.

If you want to win the corporate taxes argument, talk about corporate profit margins. Essentially, be honest, and don't be ignorant.

Links for profit margin data:

1 comment:

Kenny Wyland said...

"In the US, the poor generally don't favor punitive taxes on the wealthy."

I couldn't pass this statement because it underscores the false debate happening in our politics at the moment. A small marginal percentage increase in taxes on those in the highest tax bracket is NOT punitive but the discussion surrounding tax revenue always seems to head there. Any increase in taxes on the wealthy will come out of their excess, discretionary spending. They don't have to sacrifice to handle the change like a poor person would. I know plenty of people who have to make tangible changes in their life for the next week if they unexpectedly had to pay for a restaurant meal. Those in the top brackets don't have to make these decisions. They can support an extra payment and still go out for dinner and see that movie and buy that new piece of clothing for their date... And never notice the difference.

So we have to get away from this idea that a 3% marginal increase on your adjusted gross income is somehow slavery or punishment or even a serious burden.