newjerseynewsroom.com

BY ROY NERSESIAN

STRAIGHT TALK

Recently GE made the news when it was revealed that the company earned over $14 billon in profits in 2010 of which $5 billion was in the U.S. and the remainder overseas. On the $5 billion in U.S. profits, ner’y a dime for taxes. Your contractor who fixed the leak in the basement paid more in taxes than GE that made $5 billion. Doesn’t that make any small businessman feel like a jerk?

GE was very assiduous to point out that they did nothing illegal and that they had a huge tax loss carry forward from losses in GE Credit when the credit balloon burst. Of course receiving truckloads of cash from the government (that’s us, by the way) to save them from corporate oblivion did not mean that they should pay taxes as an act of gratitude (GE has repaid all advanced taxpayer funds).

There are a few observations that are in order with regard to corporate taxes. Corporations don’t pay them – we do. Businesses survive on positive cash flows which mean that all expenses, including taxes, are ultimately borne by the consumer. Think about this – it is a very important point.

There are gobs of people advocating stiffer taxes on businesses – they like to pick on the ugly, mean oil companies making unconscionable profits as a case in point. A hefty corporate tax is an act of revenge on companies who dare to make a profit at the consumers’ expense. Yet these revenge oriented advocates of killing the golden goose cannot bring themselves to realize that whatever taxes an oil company pays is embedded in the price of gasoline. The European price of motor vehicle fuels is twice ours precisely because the government taxes the devil out of oil. The high taxation is merely passed through the oil companies to the consumer. Can it be any other way?

Small domestic companies operating within the United States pay the full blunt of a 35% tax on profits, second highest in the world. But big companies like GE hire a legion of tax accountants, tax attorneys, and lobbyists whose job is to jiggle a phrase or two in the 80,000 pages of tax code setting up a condition that if satisfied, reduces the tax liability for one unnamed and presumably unknown company. And Congressional members are eager to please in order to be able to raise multi-tens of millions of campaign funds for a job paying 1% of what is needed to get elected. Studies have shown that big companies donating money to opposing candidates (thus it doesn’t matter who gets elected) win big payoffs by insertion of just a few words of unintelligible legalese into 80,000 pages of tax code that no one understands or legalese into other legislation that gives them some sort of competitive advantage. GE is right when it says that everything is done strictly to the letter of the law since they are writing the law!

I advocate a zero tax on corporate incomes. Taxes are only paid when funds flow out of corporations in the form of salaries, bonuses, dividends and other like payments. Let’s first take a domestic company earning $1 million and paying $350,000 in taxes. Suppose that this company wants to invest $1 million in new plant capacity, but it can’t because it’s short $350,000. Wouldn’t we be better off job-wise if the company made the investment? One can argue that the company could borrow the difference – but this is just a means of transforming government debt into corporate debt. The company borrows what the government does not have to borrow by this transfer of funds. Think about it.

Any money lent by bankers to corporations is based on net cash flow – cash left over when all expenses are paid. Corporate capacity to borrow to support expansion is curtailed by virtue of the fact that they are paying a hefty portion of their profits to the government. Thus high corporate taxes make it difficult to make new investments necessary to create jobs.

One of the enticements for GE, or any global company, to organize a foreign subsidiary and open a factory is a low corporate tax environment of the order of 15%. One can see immediately why a high corporate tax in America has contributed to the growth of offshore activities. Once a company has offshore profits, they cannot be repatriated to the U.S. parent company without paying U.S. corporate taxes. So corporations, doing what each of us would do, leave the money offshore to avoid double taxation. Now what do you do with offshore funds? Invest them of course to make even more money. GE and other global companies start building more factories overseas to earn a return on their overseas profits. If these factories are making the same products as American factories, then there is an incentive to close the American factories and shift production overseas paying less in taxes and labor and operating in an environment relatively free of burdensome regulation.

It doesn’t take a genius to figure out that one big reason for loss of American jobs is a high U.S. corporate tax. Taxing the repatriation of overseas profits provides an even greater incentive to close down American operations in favor of overseas operations. We couldn’t have designed a more pernicious system that works against American worker interests if we intended to do so. Indeed this is what is happening with GE. According to ABC, GE laid off 21,000 American workers and closed 20 factories between 2007 and 2009. GE’s overseas workers now outnumber American workers.

In previous articles, I mentioned the fact that fluorescent bulbs are required by law to replace incandescent light bulbs. Thus the government has guaranteed a market for fluorescent bulbs. Bulbs are made by machine, not by hand. There is no reason for these bulbs to be made in China and shipped halfway around the world because there are virtually no labor costs. Moreover their high price blows to smithereens the myth that making products in China guarantees a low price.