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
So, Is The Minimum Corporate Tax Even Fair?
On the surface it sure seems fair. We pay our taxes. Why shouldn’t a corporation not pay taxes as well? Yes. They should also pay taxes.
But keep in mind that companies employ the people of a country. Well managed, successful companies provide growth and stability for the population of a country. Yes, there should be rules that a company follows that protect the population and environment of a country. But strong, steady, and successful companies are very much needed for the success of a country. Loosely speaking, a strong corporate climate should mean a strong successful and proud population.
High taxes drive away companies. If companies go away, so do jobs, pride, and the overall well-being of a population. It would be a mistake to think that a government can replace what companies offer.
So, no. It is not fair.
But should companies get away with not paying taxes at all? Shouldn’t they pay some tax? I pay tax. Most of the people that I know pay tax. Why should companies be any different?
Let’s say this, clearly, companies should pay tax.
The question is how much?
The new Inflation Reduction Act says fifteen percent. That seems reasonable. It’s not twenty, thirty or even fifty percent. Again, companies should pay tax. But even just fifteen percent is too high.
Why A 15% Corporate Flat Tax Is Too High
The tax will be charged on profits. Do you know what else a company pays out in profits? Dividends. Corporations pay dividends to their shareholders. For those that don’t know, dividends are a percentage of the profits that the company pays out to the shareholders, or owners of the company.
Do you know what the average percentage of profits most companies pay out each year is?
Here’s a hint, it is much, much lower than fifteen percent.
Dividends are a share of the profits paid out to the shareholders of a company. If you are shareholder, this means that you gave some of your money to the company by purchasing stocks, shares, in the company. It is then the company’s responsibility to take all of the money they get from selling shares, or ownership in the company, and using it productively with whatever it is the company does to make a profit.
The company must make good choices with what to do with the money. They take a risk in what they choose to do with the money. And you as an investor take on that risk as well. Dividends are the payment back to you for taking the chance with the company and sharing in the risk.
So how much do investors get for taking on the risk with a company? The average rate of return for the S&P 500, from 1871 is 4.31%. Since the year 2000, the average has only been a whopping 1.87%.
Yes! You read that right. Dividends have returned less than 2.00% over the last 21 years.
https://www.multpl.com/s-p-500-dividend-yield/table/by-year
Again. In the last twenty-one years, the people that took the risk and invested in American companies were paid back less than a 2.00% share of the profits for their trouble.
And now, the US government wants to get a guaranteed 15%?
Wow! Sign me up! I want a guaranteed rate of return like that too!
It seems that the US government wants to be partners with successful companies. I don’t blame them. But without investing a dime themselves?
And they cry, “Capitalism doesn’t work”. The irony. The hypocrisy.
Companies and investors take the risks. The companies produce goods and services that should be of benefit to the population. What does the government do? The government holds out their hand. Or truer to the point, governments tell companies to put their hands up.
So no. It is not fair. Should companies pay tax? Yes. 15% worth? No. No way. No how.
Don’t Feel Too Bad For The Government.
One last thing to mention is that the government also collects tax on the dividends that are paid to the investors. Oh yes! The government comes for your piece of the pie too! That’s right. You will also pay a dividend tax on after the tax money that a company pays out. They collect from the company and from you.
It should be noted that if an investor holds their stocks in tax sheltered investments, then the tax collection is deferred. But, make no mistake about it, sooner or later, Uncle Sam will get his slice of the pie.
How much you ask? Assuming nontax sheltered investments, for Qualified Dividends, in 2021 for a single person earning more than US$40,400 will pay, guess how much? You guessed it! Fifteen percent!
If you are in the higher earning bracket of over US$445,851, you will pay 20%
For jointly filing married couples, the income level starts at US$80,801 for 15% and US$501,600 for the 20% rate.
For Non-Qualified Dividend tax rates, the incomes levels are lower, and the tax rates are higher.
https://smartasset.com/taxes/dividend-tax-rate
Please speak with your tax accountant, investment advisor or other financial professional for how tax rates affect your income.
For those of you that are paying attention, yes, the government taxes the same money twice. Once as earned profits to the company and then again, to you, when you receive your dividend allotment from the company. Basically, the same pool of money is taxed twice. This is called Double Taxation. The same dollar of profits is taxed two times.
https://www.investopedia.com/ask/answers/03/102203.asp
It’s good to be the government!
Conclusion
The new Inflation Reduction Act, with regards to the minimum corporate tax of 15% will probably not work. At least, not to the amounts that the Democrats have estimated.
Companies will find ways to avoid or lessen the amount of tax that they would have to pay. It is part of their job to maximize the dollars they earn and spend or invest. Giving more of their funds to the government is not a good way for them to do any of that. When they need to be, companies can be quite creative with their financial practices. You can be sure that they will come up with solutions to avoid paying more tax.
And if the truth be told, I do not blame them. Governments do not seem to feel the need for fiscal responsibility. Especially these days. “We want to do more!”, they say. So, they print more money or tax more. Either way, it is not a beneficial solution for the people. One way or the other, The Piper will be paid and probably not by corporations.
As well, it is not as fair of a tax as they claim it to be. It is not fair to the companies. And it is not fair to the people. The government wants a partnership with companies, and to some extent, also to the investors without investing a dime of their own. If your neighbor suddenly decided to claim 15% of your property without giving you anything in return, would you stand for it?
Should companies pay tax? Yes. But a percentage that is closer to the average dividend rate might be “fairer”.
So, when they say, “I’m from the government and I am here to help you.”, think twice and be skeptical.
End of Part 3 and the article.
Take care of yourself and your money.
BAM!!! Be A Man! Do The Right Thing.
Be the DtRTy Guy!