Sunday, February 27, 2005

Swamppundit offers up what I believe was intended as a serious cry for reforming corporate tax policy...

A few points on which to disagree, and in no particular order:

Swamppundit claims corporations are not people but merely society-created 'its'. While Swamppundit is correct that corporations are not people, one can't, and shouldn't, overlook the fact that another way of looking at a corporation is as a really big partnership. There are two differences between corporations and partnerships - taxation and liability are borne at the corporate level, not the partner level - but for the most part, the corporation acts a very large partnership. Those who have the biggest stakes get the most control. Profits are for the most part shared in accordance with one's share of the equity. The common sense reason why corporations pay taxes is that it would be very hard to collect against the millions of people who own stock in any given Fortune 500 corporation. The common sense reason why corporations incur legal liability at the corporate - and not the individual - level is that it would be very, very impractical for a plaintiff to sue ALL of the individual owners of stock (although talk about a way to cut down on lawsuits!). The common sense reason corporations can enter into contracts is because it would be very impractical for the other party to a contract to go about the country collecting signatures of all the individual owners of the stock.

Because corporations are merely 'its', Swamppundit argues that they can be taxed as much as one desires. But the standard for taxation should not be whether the subject of taxation is an 'it' (although politically, it is impossible not to take that into account), but the activity in which it is engaged. Swamppundit argues that the level of profitability among corporations should not dictate tax levels, but, following that thinking, why should the form that a business takes determine the level at which it is taxed? Why, for example, should a corporate automaker be taxed at one rate and according to one standard, while an individual or partnership who builds cars is taxed at a completely different rate or standard?

Swamppundit also argues that since corporations are not people, they do not suffer in the same way from having lots of their money taken in taxes. This argument demonstrates a real lack of knowledge how things work in real life. Corporate taxes are viewed by the corporation as a cost of doing business. However, while some costs of doing business can be viewed as investments in the business (plant and equipment, marketing, training, etc.), taxes are viewed as nothing less than a non-productive drain of resources. Every dollar paid in taxes is a dollar that can not be spent by the people who manage the corporation in some other way. For example, would Wal-Mart object so much to unions if Wal-Mart wasn't paying billions of dollars in taxes? Perhaps they would, heck, they likely would. But my point is the same: were corporations not obligated to pay so much in taxes, those corporations would be able to put those dollars to use elsewhere: as dividends to shareholders (real people, last I checked), as raises to employees (real people, last I checked) and so on.

Swamppundit argues that corporate taxes ought to be paid on gross receipts less cost of good sold. But in theory (as distinctive from GAAP and tax law), ALL the expenses of a corporation factor into the cost of the good sold. Rent, depreciation, marketing expenses all factor into the costs of the goods being sold. For example, if I sell a product for $20 that I paid a supplier $18 for, but it's costing me $4 for the office space to keep track of purchasing and delivering that product, I have spent more on that good than I have made. It's interesting that Swamppundit decries the complexity of the tax code - but what do you think basing taxes on the artificial construct of 'cost of goods sold' would do for things? Make it simpler? Nah. Instead of corporations playing games to get expenditures treated as deductible business expenses, they'll merely shift their efforts to getting those expenditures defined as a cost of good sold. The tax-bill writers in Congress will be just as popular as they are now.

Swamppundit also makes the argument that 'ability' to pay shouldn't affect the rate at which corporations pay. This is just plain silly. How do you assess a 5% tax on a company that has less than a 5% profit margin? Take for example, grocery stores with their 1% or so profit margins. Does Swamppundit suggest they pay a 5% tax on their gross revenues? How in the world would they do that? By charging higher prices? Aside from the fact that the store would have to charge an even higher amount to compensate for the taxes paid on the higher revenue, is forcing the public to pay more money for their food a particularly good idea? Or does Swamppundit suggest paying food suppliers less in order for the grocery chains to increase their margins by the amount necessary to pay this tax?

And why should corporations be subject to pay regardless of whether they make a profit? Swamppundit argues because "corporations consume the benefits of government" that they should pay lots of taxes. Well, the public as a whole consumes the benefits of government as well, and I don't see Swamppundit arguing for poor people to pay taxes for what they consume. As I argued above, it also makes no sense to tax a person who conducts business as an individual at one rate and one standard and a person who conducts business as a corporation at a different rate and standard. If users of services are supposed to pay for those services, why distinguish (again, unless the answer is because) between corporate users of services and individual users of services?

Finally (at least for this post), Swamppundit reveals his(?) thinking and biases with his parting comment that "this essay is about the Exxons of the world". It's oh so easy to take the simple view that the world is full of big bad corporations that just screw us right and left - and that the world would be just that much nicer were we to smack an Exxon around every now and then. But real life is not a Greenpeace/ANSWER/DU caricature.