Archive for April, 2011

Corporate Profits

April 26, 2011

Corporations shouldn’t make a profit.

I know what your are thinking, “What kind of ultra left-wing garbage is this?”, but hear me out. Corporations should definitely generate revenue, but profit is only one outcome of corporate revenue generation, and we have to look at the others to understand where I am coming from. Corporations, like individuals, are taxed on profit, not on revenue. It’s the mistake that “Joe the Plumber” made during the 2008 elections. He thought because his gross revenue was over $250,000, he would be taxed at the rate of the wealthy. Since he has expenses, his taxable income would be considerably less, and that’s the first place that corporate revenue goes – expenses. They have to pay for all of the things that enable the business to run – from paper clips to the corporate jet.

The second place where a big chunk of money goes is salaries. That includes the compensation packages of the executive team all the way to paying the guy who empties your trash can long after you have gone home.

The third place where revenues can be spent is through dividends. The idea of a corporation is straightforward. People become part owner of the corporation by virtue of buying shares of stock. If the company does well, then then the Board of Directories can elect to distribute some of that success to the owners of the corporation – the shareholders – through dividend payments. You don’t hear as much about dividends as you used to, because fewer corporations feel the need to share the wealth with the shareholders.

So when a corporation pays all of its expenses, including salaries big and small, and still has money left, they can distribute the wealth to their owners – the shareholders – in the form of dividends, but most don’t. What is left is profit. When it is carried over to the next taxable year, that profit is called “retained earnings.” What do companies do with retained earnings, if it isn’t expenses, salaries or dividends?

Imagine a corporate tax structure that didn’t allow corporations to retain earnings across a tax year. What if they were required to distribute excess revenues to its employees and shareholders? Heresy, you say! Socialism! Government over-reach! In fact, not only does such a corporate structure exist, it is the most common form of incorporation for new and/or small businesses. It is the S-Corporation often wrapped in an LLC.  Most big corporations, like GE, Exxon, Google, and a few small ones like mine are C-Corporations.  I couldn’t find any statistics, but I would suspect that a substantial majority of American corporations are S-Corps simply because the majority are small corporations.

When you hear of tax rates on corporations, it is not the same as taxation on your personal income. They have a choice to distribute their success to shareholders as dividends. They have a choice to pay their executives or other employees more. Therefore, the amount of tax a corporation pays is always a choice.

Now I don’t really believe that corporations shouldn’t be able to make a profit. I just said that to get your attention. There are reasons for retained earnings. There may be a stockpiling of money for an acquisition or for a large, long-term capital expenditure such as a new factory. The tax structure should encourage such capital investment. I don’t think the current corporate tax structure is oriented this way, however.

I will ask the question again. So what are corporations doing with their retained earnings? I know what I did with retained earnings from my corporation. Hint. It wasn’t job growth or investment in America.

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Critical Thinking Revisited

April 22, 2011

For those of us who care about politics, there is an element of emotion that accompanies our perspectives on where the country is and where we think it should be going. I am often reminded that it is important to always keep our critical thinking skills at the forefront and not just listen to what reinforces our preconceived notions. Perhaps it is more important when those messages are coming from those we see as holding similar views.

In a politically polarized environment, there are those who try to manipulate with emotion. Both sides are guilty of such. In fact, I just opt-ed out of e-mails from TrueMajority.org because the e-mail I received from them was just a lie – plain and simple. A conservative friend of mine posted a link from Fox Business that reinforced his feelings on where the country is. It provided me an opportunity to do some critical analysis on the story, snippets of which I posted back on Facebook. Here is the link:

http://www.foxbusiness.com/markets/2011/04/20/government-cash-handouts-exceed-tax-revenues/

Especially if you are of a conservative mindset, read the story and see how many factually incorrect or manipulative things you can find in the story.

The title of the article is “Government Cash Handouts Now Top Tax Revenues”, but that’s only true if you accept a very broad definition of what a cash handout is. According to the story it includes “stimulus spending, among other things.” I wonder what the “other things” they included to make the numbers fit the premise, but certainly stimulus spending doesn’t belong there. According to Glenn Beck[1] (hey, a fella’s got to have a sense of humor), a third of the stimulus money is in tax breaks. The Washington Post – that bastion of liberal media – reports that 22% of the stimulus money is in tax breaks[2]. Pick your number, but if conservatives started considering tax breaks as “cash handouts,” the political discourse would change radically. It should also be noted that as of September 2010, only 70% of the allocated money had been spent. I suspect Fox’s number included the entire appropriation.

The report states that 59% of Americans get at least one federal benefit. Again, we have to look at what is included. The story included veteran’s benefits in that. It’s a benefit, of course, but including that in the category of a “cash handout” strikes me as odd.

The bigger problem with this assertion is the math. If you total the number of people in the stated categories – Medicare, Medicaid, food stamps, etc. , you get 183.2 million Americans. If you divide that by the population of 308.7 million, you get 59% of the American population, so the math works, right? Wrong. There is considerable overlap in the people getting those various benefits, so they counted people multiple times. This story clearly has no credibility – and I am only at paragraph five.

Standing on the lilliputian shoulders of contrived premises and her failure at ninth grade math, Fox Business reporter, Elizabeth MacDonald has all of the ammunition she needs to assert that the government is responsible for wealth growth and that capitalism is doomed.

Of course, I picked low-hanging fruit, Fox News, to show how critical thinking can change the conclusions we reach from biased op-ed organizations. Material from other organizations is harder to critique, but we should do so, regardless of whether we are reading MoveOn.org, an article in the New Yorker or a report from the Heritage Foundation.

There are serious fiscal problems in the country that require changes in the entitlement programs and changes in the tax laws and the rate structure. It can’t happen without political will and the political will won’t coalesce until we, the electorate, get out of our echo chambers and start to critically think about the problems that face us and the solutions are are available to us.

[1] http://www.glennbeck.com/content/articles/article/198/20639/

[2] http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/01/GR2009020100154.html

The Deficit

April 13, 2011

It has been interesting to watch the budget debate unfold. I was raised to be fiscally conservative in my personal finances, so it should not come as a surprise that I think our government should be run in a fiscally-conservative manner. Clearly, the present budgetary situation is disturbing to me.

It is disturbing on so many levels. First, the budgetary haggling that almost shut the government down wasn’t over the real budgetary problems. About two-thirds of the Federal budget goes toward Medicare, Medicaid, Social Security and the military budget. That wasn’t the issue for the Republicans, of course. The haggling was over funding for NPR and Planned Parenthood. It is demagoguery to their base at at time when we need a serious discussion about a serious issue.

The Democrats, including President Obama seemed to be missing in action once again.

There is someone serious about deficit reduction, though. Paul Ryan is serious in his intent. He shows the only admirable characteristic remaining in the GOP – the courage of his convictions – and I have respect for that. At least he has to courage to declare where he stands and let the electorate decide whether that is the America they want. The problem is that his assertions aren’t based on serious analysis. They are based on Ayn Rand-inspired ideology.

Once again, Ryan and the GOP advocates tax cuts that will “pay for themselves” based on pretend math from The Heritage Foundation. When George W. Bush took office, he inherited a budget surplus from Bill Clinton. Eight years later, Barack Obama inherited a deficit of $641 billion dollars[1] from the Bush Administration. Those tax cuts sure as hell did not pay for themselves. A study of Ryan’s proposal by the nonpartisan Congressional Budget Office finds that a large part of the savings from Ryan’s spending cuts would pay for tax cuts, not reduce the deficit[2], and that the deficit would actually increase. I guess Paul Ryan is just serious-sounding.

But again, where are the Democrats?

I have had a few exchanges with a conservative friend of mine, usually in short Facebook posts. It’s always a good exchange of ideas and we typically don’t find much common ground. There is one thing we agree on, though. There is no serious discussion of deficit reduction without including defense spending as part of the discussion.

Half of the military spending from all countries in the world is spent by the United States. That is unsustainable. I did contract work for the Department of Defense and it was common knowledge that there was still a plethora of cold war projects still being funded. A true political leader would have the courage to admit that and start a serious discussion of where we can reduce military spending in a way that doesn’t hurt national security.

It was late in coming, but President Obama finally said the words that I have been waiting to hear. There are no sacred cows in the budget discussion. He specifically mentioned cutting defense spending – something I never thought I would hear a modern President say. He also said that some programs near and dear to his heart are going to be reduced. I was also glad to hear him say that the Bush tax cuts would be allowed to expire. I found his excuse for not letting them to expire at the end of 2010 to be weak, but he gets a chance to redeem himself this time around.

Take the time to listen to the speech with an open mind. I am not exactly sure of all of his math, and I suspect I would dispute some of it, but certainly the approach is right on target. He framed the discussion as an adult discussion. The commentary was frank and exceptionally close to my thinking on the topic. Let’s just hope there are enough adults in Congress to try and solve what is a serious problem.

It can work if there is a general consensus that we all have to share in the burden.

[1] http://www.cbo.gov/budget/budget.cfm
[2] http://tiny.cc/j2c02