Taxes are the next big factor hurting Entrepreneurship

“If corporate profits are at an all-time high, why are corporate taxes near a 60-year low?”
The Atlantic, Derek Thompson, May, 2013

Right now, if you start a business here in Maryland, a small business, like a gas station, you will pay your lease payments to Exxon, must buy your gas from them, and must comply with a long list of regulations and taxes. You will pay out nearly 30% of total profit back to the government in combined taxes, whether you go the C, LLC, or subchapter S route.

“The 35 percent rate, for instance, could easily be dropped to the mid 20’s, or lower, without any loss to the Treasury, simply by closing loopholes.”
USA Editorial Board
May 23, 2013

The USA editorial board made that statement because they know the Treasury only collects 20% right now. In other words, if they lowered the top rate, giving some small and medium size businesses a break, they could maintain the 20% collected rate, simply be closing the loopholes giving big corporations the much more enjoyable 0% (and even negative) rate.

The small, new, and medium size businesses are not getting these loophole breaks that have created a 15 point gap between the advertised top rate of 35% and what the Treasury collects. Do the math. If small, and medium size businesses are paying 30% on average, and the collected total is 20%, which means the big corporations must be paying a lot less than 20%. Ouch.

It’s doubly painful because that huge corporation that holds your lease, and sells you that fuel, and controls the distribution and advertising market, pays nothing in Federal income taxes, like you do. Nothing. You aren’t just competing with these better financed, larger, and already functioning businesses, when you venture out as a small service station or other small business owner, you are doing it on a very uneven playing field.

Most large corporations in the U.S. do not pay their fair share of taxes and the difference is made up by the small and medium size businesses that don’t have the wherewithal, the knowledge or expertise to lobby for tax breaks, tax shelters, tax refunds for employing people, even no taxes at all for setting up in special (no) taxing districts.

All in all $500 billion a year of tax money, for 30 straight years, that should have gone to support our government and it’s priorities — has been sucked back out of the Treasury by the large corporations, leaving the small and medium size businesses, (the new ones) to pay the full rate and carry not just their burden, but the big companies burden as well. Think I’m exaggerating?

“G.E.’s strategies let it avoid taxes altogether. The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. It’s American tax bill? None. In fact, G.E. claimed a tax credit of $3.2 billion. It’s extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate it’s profits offshore.”
The New York Times
David Kocieniewski, May 24, 2013

That excellent article by the way, is all about GE, and that companies many decade long effort to avoid paying taxes to the same U.S. government that generously supports their GE research, and buys billions of dollars worth of GE products. The same U.S. government that is really composed of the American people, including the 330 million that don’t work at GE and live near the golf course.

Avoiding taxes is one thing, but their shameful polluting of the Hudson River and their anemic effort subsequently to clean up the mess is an example of how extreme this can get. GE employees are among the best paid in the world, not just the U.S. They all get stock buying, profit sharing options along the way; in one form or another if they last. The shareholders benefit from their many decade records of higher and higher profits. The best, and the investors who backed them, got rich, right?

According to a study done by Citizens for Tax Justice on Fortune 500 companies; a quarter of the F500 companies paid an effective tax rate of less than 10 percent and 30 huge corporations – including General Electric, DuPont, Verizon, Boeing and Wells Fargo – paid nothing, or less, (credits for future years) over the entire three years covered by the study. This is important because these big companies are such a huge piece of the economy.

This trend has robbed our national treasury for two dollars out of every ten dollars, or a total of twenty percent of our total tax revenue — each and every year for decades on end now. That’s money the Federal Treasury should have collected if we had simply maintained the status quo and continued to tax our corporations at the rates we did prior to the 1980’s.

The only real economic measure of something – anything — is to look at in comparison to GDP – and as you can see, more clearly than I can describe, is that corporate profits, as a percentage of GDP, have held steady since the end of WWII, in the 8 to 12 percent range, of total GDP (Today they are at the very high end of that range, in the 12 percent area to be exact), while corporate income taxes have taken a long, slow, gradual descent from 6 percent of GDP, to less than 2 percent, where they bottomed in the early 1980’s. In other words, corporate profits are up by a third and the taxes they are paying have declined by two-thirds.

This is an easily provable fact. Independently look up (Google) what percentage of the U.S. Federal Revenue collected each year comes from corporate taxes. It used to be 6% of the nations GDP, 30 year ago. It has gradually declined decade after decade and today, it’s only 2%.

In other words, for the last 30 years, while taxes have been rising on the small, new, and medium size business, they have been simultaneously falling for the big corporations. That 4% works out to be $500 Billion a year, or enough to fix a lot of structural problems in the economy, our countries debt structure and our physical infrastructure.

Incidentally, it’s worse than the numbers say, “big’ corporate profits have actually been much higher, since so much of their profit is (overseas) not counted, shielded, literally hidden behind a screen of accounting and tax practices so complex and exhaustive, GE employs nearly 1,000 people in their tax avoidance division (not the real name).

“While G.E.’s declining tax rates have bolstered profits and helped the company continue paying dividends to shareholders during the economic downturn, some tax experts question what taxpayers are getting in return. Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment. In that time, G.E.’s accumulated offshore profits have risen to $92 billion from $15 billion.”
— The New York Times

Our existing corporate tax structure is counter-intuitive and that fact is hurting everybody. Ronald Reagan knew it. Bill Clinton knew it. Both of these men were very intelligent and love(d) this country, both of them, against the pressure of longtime friendships and influence, both in terms of power and money, went against the grain and tried to fix this problem.

But they’re futile efforts have taught us a valuable lesson. Just increasing and/or decreasing the nominal or ostensible corporate rate won’t bring in more revenue, because the big corporations have so many loopholes set up, they don’t pay anywhere near the nominal or ostensible rate in the first place.

Entrepreneurs don’t mind competition, it drives them, and they’re fighters. But, this isn’t competition. This is a rigged game, where the government pays certain businesses to succeed, against the ones too small; too inexperienced, too naïve, or too principled to drink out of the government trough.

New York State is touting its recent creation of enterprise zones to stimulate the entrepreneurial atmosphere there and create new businesses, Sounds good right? A solution to the problem just described. But that’s a gross deception. It’s a government solution to a problem — they created by their unfair tax, regulation and economic policy practices in the first place. Every company that locates in these new zones will pay lower taxes, and some will receive outright government support.

I predict the government (sponsors of the zone) announces great success. Why wouldn’t they? If entrepreneurs in Colorado, build a new business in New York’s new enterprise zone and get tax breaks and employ incentives, who will be left to tally up the lost taxes Colorado would have gotten, if they hadn’t been outbid by New York? Or Illinois, or Maryland? Maryland legislators, led by our grunge band-playing Governor even gave the TV show House of Cards (vital employment) a tax break.

In truth, these special zones are a sophomoric solution (most government solutions are), indicative of how little the politicians really understand economics. Unfortunately their ignorance of these principles has the potential to destroy the rest of the economy.

About karlspain

20 year Newspaperman. Lifelong Inventor. Wrote 2 books so far, working on more. The Revelation, 1st book, about your brain & the universe, and math. Hooked together! God I trust, America I love, 2nd book, is the biography of Aris Mardirossian, a great man. Also owned a software company, an IT integration company, a gas station and a fuzzy logic software title along the way.
This entry was posted in Corporate Tax Reform, Economics and tagged , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s