Saturday, April 25, 2009

Did You Hear that Corporate Profits Are Down 85% This Year?

“America's 500 biggest companies earned $98.9 billion in 2008, down 85 percent from $645.2 billion in profits the previous year.

And 128 companies on the list had losses, totaling $519.3 billion. The previous year, just 57 Fortune 500 companies lost money, for a total of $116.7 billion.”[1]

If there ever was a time in our history to abolish corporate income taxes, this is the time.

When corporate profits are down that much, that can only translate into lower corporate taxes paid to the U.S. Treasury. Without the engine of a healthy, growing, risk-taking economy led by business people and entrepreneurs, not the government, there would be no corporate income taxes to be paid. If corporate taxes are down 85%, that can only mean that corporate income taxes paid to the federal treasury will be down 85% or possibly as low as $55 billion instead of the projected $370+ billion expected a year ago.

That’s not a lot of tax revenue to lose in one year, not when you are running $1.8 trillion annual deficits anyway.

The stock market and entrepreneurs are forward-thinking organisms. Sure, it has been a terrible economic time recently. However, every stock analyst and competent business person looks to evaluate future opportunities and weigh them against possible risk and profits. To do that, they utilize a discounted cash flow model for money they think will come in from a future investment, before taxes and depreciation, to determine what price makes sense to make an investment now.

If the corporate income tax were abolished, let’s say, today by Congress and the Obama Administration, the extra cash in the future could be retained by the company instead of going to the government in the form of taxes. The current net present value of that additional cash before depreciation (since there would be no corporate income tax to pay anymore under this proposal) would have an immediate impact on the stock values of virtually every stock traded on any market as well as the intrinsic value of all privately-held businesses. All of the additional cash retained by the company in the absence of corporate income taxes being paid would be discounted by the rate of inflation over the next five years to a much higher current value.

The main reason to abolish all corporate income taxes would be to ignite an investment and business expansion boom that should rival or exceed any in recent recorded history. Without the up to 38% corporate income tax in place, American businesses could take advantage of this opportunity to invest in new plant and equipment and hire new workers to be ready for the economic expansion that will occur once this recession is over.

The corporate income tax is just a double taxation mechanism that hits income once before it gets hit again at the personal income level when paid out in the form of dividends. That means in dividends paid to the mutual funds you own and any direct ownership in stocks that close to 60% of the American public now owns.

You are being short-changed by the corporate income tax; not the corporations themselves.

One odd example of how the corporate tax knife cuts through different classes of income was brought to mind this week when someone mentioned that a significant proportion of the funds now flowing to for-profit hospitals and doctor groups comes from the federal government in the form of Medicare and Medicaid reimbursement for services rendered.

So, let’s get this straight….there are billions of federal dollars that have already been taxed a couple of times through the food chain before being recycled through the Medicare and Medicaid health care financing system to for-profit hospitals and doctors who are serving our senior citizens and poor people, usually at a significant discount to the real value of their services. And then we tax those ‘profits’ (even though most hospitals take a loss on such services) of these for-profit health entities again at rates up to 38%.

No wonder the poor greenback is getting hammered on international exchanges! It is being laundered so many times through the US tax system that it is beginning to wilt like a piece of old lettuce.

Let’s just abolish the corporate income tax completely now when the revenue loss is minimal and release the free enterprise system, what is left of it anyways, back to doing what it should do best: evaluate risk and market opportunities, make investments, hire people, and make profits again.

All without the crushing hammer of pending corporate taxes in the equation. Let the free market once again decide what makes sense as new investments, not the tax code or any of the loopholes stuck in it to gain advantage for one industry over another.

[1] By Aaron Smith, staff writer, April 21, 2009

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