The Biz of Pacelinebiz

Turning things on end to achieve results!

Corporations and Taxes – Part One

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No more taxes - or Taxed Enough Already

Happy Labor Day.  

Please note that this blog will resume alternating between business and non-business topics as the end of summer is now approaching.  I will start  the business topics off this week and next with a two-part series related to Corporations and Taxes which seems to be a hot topic as it relates to reducing our national debt.  I am sure taxes will become increasingly in the forefront of political debate as the Presidential campaign kicks in high gear after Labor Day. 

The past decades of deficit spending and the recent explosive growth of our budget shortfall by our Federal government has the Unites States trillions of dollars in debt.  Today I am not going to dwell directly on why it happened and whose fault it is but I am going to give my opinion of what not to do to solve the deficit.  Speaking as a voice for business owners everywhere, I say do not raise taxes on businesses as the primary way to solve our debt problem.  One side says that we need to raise taxes to pay out a “stimulus” by giving people their money back.  One side says keep taxes as low as possible so the individual can most efficiently allocate their money in the free market.  I ask; why let the government be the middle man?  No one likes the “middle man” and we always try to cut out the “middle man” unless it is the government.  That seems odd to me.

Let me explain why I believe we don’t need to raise taxes by using some examples the effects that taxes have on behavior.  I will also briefly discuss the effects that taxes have on corporate behavior.

Some believe that taxing corporations at a higher rate is the answer to collect more tax revenues.  This may seem intuitively correct but the taxing of profits has a behavioral response; which is to avoid paying taxes.  Let me give an example from my youth.  I grew up in the western Pennsylvania town of Hermitage near the eastern border of Ohio.  As a result of living in proximity to another state, I was able to observe and learn a lesson that I am able to share with you today – people avoid paying taxes.  Ohio had sales tax on clothing and at the back to school shopping season, Ohioans would flock to my lower taxed Pennsylvania community and spend freely on clothing and take those clothes back to Ohio feeling like smart shoppers with more money in their pockets.  (Let’s not talk about the use tax issues they may have had with the state of Ohio)  Another way the taxation issue was played out before my very eyes was the difference in state gasoline taxes.  Back in the 1970’s the difference between Ohio and Pennsylvania gasoline tax was about 5 cents if I recall correctly.  That may not seem like much today but remember that back in the 70’s the price of gas ranged from about 30 cents in 1970 to as much as a dollar per gallon by 1979.  For gasoline that cost 50 cents per gallon, the tax difference was 10% and a tank full might save you nearly a dollar.  I know a dollar doesn’t sound like much but it went a lot farther than it does today.  In fact, a dollar in 1975 is the equivalent of about $5 today due to inflation.  Pennsylvanians in my town would often run their tanks low when they knew they were heading over to Ohio so that they could fill up and save that dollar on gasoline.  Some would even make special trips to fill up on the cheap stuff.   

Many of you would applaud the people who were able to gain an advantage by avoiding the taxes.  If it is acceptable to avoid paying those taxes by individuals, then why are corporations disparaged when the do the very same thing?  To me that does not make sense and those in government should get wise to the fact that our tax rates that we apply to corporations need to be competitive in the global marketplace or they will tend to avoid the higher taxes.  After all, the corporations have an obligation to its stockholders to return the highest amount on their investment.   Those stockholders are you and me.  We may own them in our 401k plan or other retirement vehicle or in a taxable investment account.  Incidentally, our corporate tax rates are the second highest in the world.  Only Japan has higher corporate rates

Another example of taxation which discourages behavior is when a tax is applied to things like cigarettes to get people to stop smoking.  How effective the cigarette tax is remains to be seen but it is generally accepted that taxing a behavior will reduce that behavior.  If the cigarette taxes did not stop smoking it certainly did change behavior by moving smokers down to cheaper generic s, bulk tobacco to “roll their own” or to buy from Indian reservations when possible to avoid the higher prices.    The lesson to be learned here is that higher taxes do not necessarily lead to higher tax revenues in the long run as corporations will do whatever is necessary to pay the lowest amount of tax just like you and I do.

I will continue this discussion next week and explain what corporations do with their after-tax profits and offer an extreme example that may open your eyes.  Have a great week.

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Written by pacelinebiz

September 5, 2011 at 12:30 pm

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