Let's Tax The Corporations! Or Should We?

From time to time it becomes necessary to think "outside of the box" and with the fiscal issues faced by our nation, well now is a good time! We face a growing $16.6 trillion debt; an anemic economy; deficits as far as the eye can see; and a national malaise setting in as people are increasingly fearful of a possible economic firestorm created by the debt. The solution to this dilemma hinges partly (or mostly) on rebuilding a strong economic engine that is growing at 4% or more; the question of course is how to do that? The Corporate income tax is an interesting issue to understand as we look to answer that question! Let's start at the beginning, what is a "corporation"? Simply it is an artificial creation designed to allow one or more individuals to operate in a venture separate from their own individual interests. The corporation files its own financial reports, tax reports and other documents that are necessary to maintain it in "good standing" as a stand-alone enterprise. Under the American tax system, the Corporation pays income tax as if it were a person. The income tax is calculated by taking revenue minus businesses expenses (operating profit) and then applying a percentage just like you do on your personal return. Presently, the corporate income tax begins at 15% and rapidly increases to 35%; although there are two "bumps" that take some up as high as 39%. Conventional wisdom holds that corporate taxes are just like individual taxes and increases need to be explored if government is going to close its enormous budget deficit. But is this conventional wisdom right? The fact that a corporation is not an individual is relevant here. Assume you run a business that sells coffee and after you buy the coffee beans, buy the cups and lids, and pay the people to operate that coffee making business, you determine that you can sell coffee for $2.00 for a 16oz cup. With that price, you expect to earn $.20 profit (10%) per cup. So the income tax man comes to your shop and says one day, you have to pay tax on that $.20 income you made and assigns a 35% rate to it, or $.07 giving you a NET profit of $.14 from that $2.00 cup of coffee. Now, you have two choices, you can either "eat" that tax bill and see your profit reduced, or you can raise your price to $2.10 giving you a $.30 operating profit which generates a $.10 tax leaving you with $.20. On a micro level a single business might choose to eat the tax so that magic $2.00 price is maintained. However, on a macro level, at the margin, business operators tend to raise the price thereby satisfying their owners and investors by keeping their profit the same. So who really pays the tax in that case? The reality is that company taxes are not paid by the company because it is not a real person! The taxes it shows on paper are either assigned to consumers (higher prices) or to employees (lower costs) or to the owners and investors in the business. Business must earn a profit to stay in business so the revenues and expenses are their only options to change in response to the tax imposed on them. But no matter how they deal with it, the corporation itself pays nothing but passes its costs onto consumers, employees or owners (dividends). In addition to this myth that corporations pay any tax to begin with is an issue that also needs to be understood. As businesses deal with taxation and the only options are to increase prices or reduce cost to accommodate the tax, competitiveness slips relative to companies who don't bear that tax burden. The fact that the United States today imposes the highest marginal corporate income tax rate in the world is one of the reasons our economy is so anemic. A U.S. corporation has to deal with a 35% add-on to its costs by raising prices, reducing costs, or reducing the attractiveness of investment by charging shareholders and thus is less attractive than overseas companies who are not saddled with the additional costs. Increasing costs like this only serves to make U.S. products more expensive, which in turn reduces demand which reduces the labor that makes the product or service. So higher taxes lead to a slower economy, and isn't that the opposite of what we're striving for? In addition to hindering overall economic growth, the burden of the corporate income tax falls on small business much harder than it does big business. When the local pipe manufacturer, car deal, marketing company, or whatever company is making $500,000 the owner is clearly one of our "well off citizens". But that owner is going to pay 39% of that $500,000 to the government. The problem is that right down the street, the large company making $500,000,000 is NOT going to pay 39%, there are instead going to pay dozens of lobbyists and tax lawyers to have rules written and interpreted so that they do not pay the tax. Thus, they have an enormous competitive edge of the small local firm who cannot afford lobbyists and tax consultants. Anyone who doesn't believe this happens need only look to Illinois where when the state raised income taxes by 40%, the politicians offered exemptions to the largest Corporations who had threatened to move if the tax were applied to them. There is a third issue as if slowing down the economy and stifling small business weren't enough; because Corporations must return money to shareholders (the owners) who are taxed as individuals, dividends are declared and paid. These dividends are the return of the "profit" and "accumulated earnings" of the company. So I'm retired and decide to invest a portion of my savings into dividend paying companies, it's important to note that those dividends are taxed at a whopping maximum rate of 74%! The reason is that the company "pays" 35% on its earnings and then when it distributes its earnings, the owners pay their income tax now topping out at 39%. If you happen to live in a high tax state, that 74% can rise to over 80%. So, ask yourself this question, if you're retired and need to invest your money to earn an income and decide therefore to purchase stock in dividend paying companies, is that 39% corporate income tax being paid by the Company or by YOU in the form of reduced dividends? The answer of course is that YOU pay the tax, not the Company because it is not a human. The reality is that in order to get the United States back to a 4% or more economic growth rate, we must reduce or eliminate the corporate income tax all together. This may not be politically popular as the politicians have managed to demonize business in the eyes of many voters, but political shenanigans and lies aside, if people want job security, income security, medical security and education, it must be paid for and a growing economy with productive people are the only real way to get there.

Restoring America By Educating Our Next Generation!

What could possibly be more important than preserving our nation and our freedom for the next generation? If you agree with that statement than you agree with The Society that educating our young people in finance & economics is an absolutely critical item that needs to be accomplished in order to promote prosperity for the next decades. The questions of course that we must ask are what do we do and how do we do it; otherwise we're no more than the talking heads who complain, but provide no solution, and far be that from The Society. In America today young people are treated as if they incapable of learning the critical issues related to money, investing and economics. Nothing could be farther from the truth! By 6th or 7th grade, most kids are actively engaged in our economy spending money, so why shouldn't they be taught how to be a positive participant in our free (capitalistic) economic system. Why should these Junior High School aged kids not be taught what a bank is; what an insurance is; what business is; where government gets its money, etc. The Society believes that all young American's should be taught the critical life-skills they need beginning at the earliest possible age. So with the question of "who should be educated" answered, the question of "how should they be educated" comes to mind. The Society does not believe in "dumbing down" a curriculum to live down to the standards in many cases being pushed upon our kids, but rather believes in bringing kids up through a combination of audio, video and printed materials. We know that people have different methods of learning; some are visual, some are audio and some are written so we need to incorporate all three methods. Furthermore, the lessons that need to be taught to the nations next generation must be broad based and foundation in that it teaches economics & finance in English from the bottom up. The current curriculum offered vis-à-vis the Path to Prosperity Audio Library and Print Edition offer a comprehensive curriculum of 23 important lessons. These lessons begin with the fundamentals of banking and increase in complexity into lessons on day-trading and global investing. These lessons are provided in audio and print form. To supplement this, The Society has produced dozens of live Webinars and Video's and will continue to create more in the future. Our position quite simply is that education never ends and it is an incumbent responsibility to The Society to create better and better content on a continual basis. According to a recent Harris poll, 2 out of five American's rated themselves at a C, D or F in financial literacy. This is a dangerous if not fatal statistics because the American Republic requires an informed and educated population. If individuals don't understand basic financial and economic concepts, how then can we expect them to vote, or to raise children capable of making wise decisions for our nation's future? The danger here is real. First, financially ignorant people are incapable of participating fully in a marketplace; for example a recent study by the Atlanta Fed found that 36% of people believed they had fixed rate mortgages when in fact they had adjustable mortgages. The second issue is that the consumer problem will lead to a government solution which will make the matter worse, not better. Rather than fighting the problem where it is, that is at the individuals own educational level, government will regulate providers of financial services holding them accountable for bad decisions made by individuals. This will dramatically raise the cost of doing business and will force smaller providers to close shop thus reducing the supply of services. A corollary to this issue arises as government relieves the individuals from the responsibility of making good choices, this leads to more and more making poor choices because they will come to believe it is someone else's responsibility. In the end, a government solution will create less supply and less willingness to truly fix the problem. We must all become part of the solution to this major dilemma. Far too many people sit around the kitchen table at night and simply complain about the state of affairs in the United States. Far too often do people simply throw up their hands because they believe the problems faced personally and by our nation are simply too big to tackle. Far too often do people simply give up, and turn themselves and their children over to the state for caretaking. The Society believes this is unsustainable as a model as eventually, should too many people buy into this, there will be no more producers left to pay the bills and thus The Society believes we must solve this problem by providing people a clear message that their future is in their own hands, and we must couple this with the tools they need to build and sustain the type of prosperous life they desire. Steve Beaman is the Founding Member of The Society for the Advancement of Financial Education - S.A.F.E. He is the author of over 400 articles on better living; a 2 volume 12 CD Audio library and "The American Dream Under Fire".

Where to Find Hundreds, If Not Thousands In Your Normal Budget

I am asked all the time the question, "if people don't have a savings account or anything else, where should they start building a positive financial future?" My answer is always, start at the beginning and what I mean by that is that folks who do not have any money to start must start by saving small amounts first and growing into larger amounts. OK but where do those small amounts come from? A recent study concluded that 69.2% of Americans had NO savings account and shockingly around 12% had no bank accounts. That statistic should shock everyone into asking what can be done. Our nation does not have the resources publicly to take care of 69.2% of the population because they've failed to build their own nest-egg. Two issues must be addressed then; a) how does this happen in the wealthiest country in the history of the world and b) how can it be changed? In terms of how it happens, let's recognize that the average American family of four earns around $60,000 per year. After tax, they bring home around $43,000 or $3,600 per month. The average home when you include all related costs of taxes, insurance, heating, etc is around $1,400 per month so they're now left with $2,200. Cars and transportation on average take $500 per month when maintenance and all costs are considered which now leaves $1,700. Food for four people if you're living frugally runs about $300 per week which now leaves our average family around $500 for clothing, activities, & emergencies. That's not a lot so what happens simply is the average family borrows to accommodate the balance of their spending desires. So saving money, eh... never happens. OK if the issue is that taxes and living take out the lions share so what can you do? There are some basic things. First, cut up your credit cards... period, no exceptions, no arguments. Utilize a debit card that allows you ONLY to spend that which you make. Second, NEVER use your bank to provide short term liquidity by writing checks for which there are no funds. The average bank charge for returned check is more than $25 per hit and it's shocking how much American's use their banks to float money only to pay enormous charges. Third, to the extent you have debt payments, or service for water, gas, electric, cable, etc, make sure you do everything possible to avoid late charges and over limit fees. The average late charge or over-limit fee is another $25 so these begin to add up quickly to several hundred, if not thousands of dollars per year. Fourth stop squandering the pennies. Yes it does matter if you spend $4.00 for a gourmet cup of coffee rather than $1.00 for a basic of coffee. And while at it, yes it does cost more to go out and eat instead of grocery shopping and further, it costs more to grocery shop at a major chain than a discount grocer like Sam's Club or Costco. Fifth, don't hesitate to visit dollar-stores or places like Big-Lots for basic needs too. You'll be shocked how much you can save by paying a little less for basic household items. It's not easy to build discipline into your life. I know, I've been there in my life too. But the way out is paved with discipline and you must discipline yourself to begin saving 5% or 10% each month. Just start... Open a savings account and make it a habit to put that money away. This is a poor analogy perhaps but when people start exercising, it's typically painful, but after they've done it long enough, their endorphins begin to flow and they feel good about it to the point of not wanting to miss a workout. Saving is sort of like that. It's painful to start, but when you see your money growing you become enamored by it and actually can get the emotional high from building your savings, rather than spending your money! As the old adage says "take care of the pennies and let the dollars take care of themselves!"