Thursday, March 19, 2009

Double the Dow Overnight: Abolish the U.S. Corporate Income Tax Code

Last week, we made an impassioned plea to “abolish the entire U.S. corporate income tax code” as a primary way to jump-start this moribund economy and resuscitate the investment “animal spirits” as Adam Smith noted in 1776.

The banking system has to be fixed first and that is beyond the scope of the mission of Telemachus. We will leave that Herculean task to others more adept at understanding those mammoth problems.

But now we have academic support for the abolition of corporate income taxes from Dr. Alfred Rappaport.(1) Professor Rappoport conducted a study in the late 1990’s as part of his work into the area of merger and acquisitions. For some unknown reason, he decided to run some numbers on what impact a 0% U.S. corporate income tax code would have on the intrinsic value of corporations, both private and publicly-traded on the New York Stock Exchange and elsewhere.

To no one’s surprise, the valuations rose. But the amounts they went up were staggering. He estimated that the value of every corporation would rise by at least 50% overnight. There is no telling what the stock market would do after that. It could double, triple or quadruple in short order, depending on expectations of future inflation risks; price/earnings multiples compression or expansion; surprise terrorist attacks; oil supplies at risk or running out; all valid concerns for any investor.

But all things being equal, as scientists and professors are required to say, there is no downside risk to abolishing the corporate income tax code in America today. In all probability, it would increase the value of everyone’s stock holdings, 401(k) plans, IRAs and pension-related investments.

After losing 50% of the value of your stock portfolio since last year, doesn’t that make you feel better?

Can you imagine the economic swirl of activity such a repeal of the tax code would unleash in America?

* People could start businesses knowing that their hard work and effort would only be taxed one time, at the personal level, instead of once at the corporate level and then later in the form of dividends or distributions.

* Businesses would invest in new plant, technology and equipment, most likely concentrated in a lot of “green technology” to update their older equipment which would help solve some of the global-warming fears out there.

* Companies could hire back the workers they laid off in this crushing economic downturn and probably move plants back from overseas since the tax differential had been removed from the return-on-investment (ROI) calculations.

* It would do far more to make the U.S. more competitive globally and create more jobs here than any trade restrictions or jobs retraining program ever could.

Such a proposal to remove corporate income taxes from the necks of American-based corporations could not have seen the light of day in the 1980’s or the 1990’s or even last year. Why? Because the perception was that we needed the tax dollars to pay for the programs everyone wants.

But things are different now. Abolishing the US corporate income tax code today would actually be a “net saver” in terms of controlling the deficit. It only ‘costs’ the Treasury 1/5th as much as the current stimulus/budget plans proposed by President Obama and the Democrat leadership in Congress.

During the campaign, I saluted the comments by then-candidate Senator Obama and Speaker Nancy Pelosi for their support of the so-called “PAYGO” mechanism to enforce budget discipline.

In a very odd, twisted sort of way, abolishing the U.S. corporate income tax code today would save us over $1.3 TRILLION in a PAYGO comparison to the Obama/Congress proposals in this year alone, 2009.

Probably would save over $1 trillion in new debt in 2010.

Contact your congressional representative and senator today and tell them you want them to consider this option and do something about it. You can send them an email in about 30 seconds if you just click on the links in the right column and the Congressional websites will take you from there.

This idea is not as “nutty” as it seemed in the last century, especially not now in these troubled economic times.

(1) Dr. Rappoport is the Leonard Spacek Professor Emeritus of J. L. Kellogg Graduate School of
Management at Northwestern University, developed the idea for the Shareholder Scoreboard, published annually by The Wall Street Journal. He is co-founder and former Chairman of the Board of The Alcar Group Inc., whose consulting and education practices are now part of The LEK/Alcar Consulting Group, LLC

2 comments:

  1. President Obama has proposed zero taxation on small businesses created to help end this recession. Is that contradictory to his higher taxation on established corporations?

    ReplyDelete
  2. Where could I find information about this study by Dr. Rappaport?

    ReplyDelete