Why It Will Probably Not Work As Advertised.
An opinion piece by Bernard J. Polster
- The Minimum Corporate Tax Rate And The Inflation Reduction Act (2022). Part 1 of 3
- The Minimum Corporate Tax Rate And The Inflation Reduction Act (2022). Part 2 of 3
- The Minimum Corporate Tax Rate And The Inflation Reduction Act (2022). Part 3 of 3
Proposed Minimum Corporate Tax
By now most of us have heard about the new minimum corporate tax on US companies making over one billion dollars of book income averaged over a three-year period.
From the Whitehouse website:
15%: the minimum tax on corporate profits the Inflation Reduction Act imposes on the largest, most profitable corporations.
This “new, fair tax” is expected to generate $223 billion of tax income to the US government, over the next ten years, if enacted.
But will it?
And is it fair?
I would speculate that the answer is no, on both accounts. In this essay I share some facts and ideas about what I think about the tax.
What Companies Are Supposed to Do
No business starts with the intention to lose money. Whether it be a sole proprietorship, a small, incorporated company, or a global corporation, the goal, always, is to make money and more importantly, to make profits.
How does a company make profits? Basically, using the resources that a company has, usually money and the assets that have been purchased with money, the company engages in an activity so that the activity will, by selling the goods or services created by the activity, generate sales (revenue) so that the revenue generated is greater than the cost of the activity itself. If income is greater than the expenses, the company makes a profit.
This is the goal of the company. This is what a company is supposed to do: Generate income so that the revenue is greater than the expenses. In other words, as already sated above, a company is supposed to make a profit.
Then, another point to consider, being somewhat analytical about making money, the profits should be higher than profits that could be earned by doing something different (opportunity cost). This means that if there are two possibilities that a company can choose between to use their capital, a company should choose the activity that generates the highest return on their investment, or ROI.
A higher ROI should lead to higher profits.
There are many factors that affect the ROI for a company. But it comes down to, on one hand, the amount of revenue generated by their activity, and on the other hand, the costs involved to create their product or service that they offer for sale.
There are many costs that a company must consider when trying to evaluate their ROI. The higher the costs, or expenses, for a given amount of sales income, the lower the ROI, due to the lower profits.
Income = Revenue – Expenses.
Generally speaking, the revenue that a mature company can make is fixed, or there is, at least, a ceiling or limit. To this date, there is not any company that can have infinite sales. From the income equation above, a company, on some level, can only control the costs or expenses that it must incur to produce what it does.
And so, the other half of what a company is supposed to do is to keep expenses, the costs of doing business, as low as it can.
Guess what taxes are? You guessed it! Taxes are an expense, a cost to the business. And so, the goal of any fiscally responsible company is to legally pay as little taxes that it can.
But before you demonize companies for their desire to pay as little tax as possible, what about you? If we are completely honest with ourselves, we too, also want to pay as little tax as possible. No one, anywhere, at any time in history, has probably ever said, “You know what? Yes, my dear government, please, take more from me. I insist!”.
Sure, if paying more taxes means that we are earning more income, then yes, let our worst problem ever be that we pay more taxes. Allow me to earn the millions and I will pay the taxes. But, even then, if we are smart, and if we did win the lottery, we will all try to find ways to pay less taxes. Another way to look at it is that we will all find ways to keep more of our money as opposed to giving it away to the government. You would be foolish not to.
What A Government Is Supposed To Do
This is a big and open question subject to many schools of thought and opinion. Many of the opinions being opposed to each other. Can we all agree on a basic purpose of a government? Let’s try.
At the very least, a government should ensure that the rights and responsibilities of its citizens are being managed, if not met. What this actually means to the citizens is often the source of many political arguments over the course of our history. This is not something that will be tackled here.
Another purpose of government is to ensure that there is an infrastructure in place that allows the needs and health and safety of the people to be met. Infrastructure can include transportation, energy, education, health, law, and law enforcement among many other things. All of these things cost money. There are no free lunches. And a government is not a business. So how does the government get money to pay for all of the infrastructure needed to keep things going? Simple: Taxes.
Yes, there are other ways that a government can raise money for their expenditures. Selling government issued bonds is another main example. But on the surface, taxes do seem to be a fair way for a government to get money. Afterall, a citizen of a country, in theory, should benefit from the infrastructure that the government puts in place. Why shouldn’t the citizens not pay for that? So, yes taxes can be considered as a necessary ‘evil’ of modern living.
But there is a problem with this. Governments are run by people. And people have agendas that they wish to follow. Even if the persons running the government were elected by the people, one of their main goals is to continue to be the elected official. These are politicians. A big part of a politician’s agenda is to win again in the next election. Sometimes, in order to do win again, a politician will do things to buy our votes. They cannot help it. And, honestly, we cannot blame them for this.
With buying our vote, by definition, this means that there is a cost.
In order for a promised policy or program to be put into place, money is needed to pay for them.
Government promises kept are not free.
We can say that governments are in the business of keeping promises made to their constituents, the voters. So, since a government’s main goal is to maximize it’s promises. And since kept promises cost money, a government’s goal, very unlike a company’s goal, is to maximize their expenses.
A government wants to spend money, not to make a profit. This is why so many governments budgets run in a deficit, or minus. To a government, spending more meets their agenda, and is good. In theory governments should run at a zero balance, and maybe even a surplus, but, more often than not, they do not.
From our point of view, this seems to be the huge problem for modern day governments’. There is no cap or limit on their spending. They appear to keep making promises that they cannot pay for. But we the people, must.
Again, how does a government get the money that it needs to keep it’s promises? Taxes. A government inherently wants to charge as much taxes that it can get away with. We, the people, and our companies, want to pay as little in taxes that we can get away with.
Governments want to maximize their revenue and we want to minimize our expenses.
And so, the expenses or costs of doing business, for a corporation, is the governments’ revenue.
Corporations and We The People are in an opposing battle for what to do with our money.
End of Part 1.
BAM!!! Be A Man! Do The Right Thing.
Be the DtRTy Guy!