The Logic of a Corporate Tax

Every election cycle seems to bring out the age-old argument about corporate tax rates. Ideologically, the left plays to its base and pushes higher corporate tax rates as a means to raise tax revenues from those who can afford it to help those who cannot, while the right plays to its base and pushes for lower corporate tax rates as a means to make American companies more competitive and create more jobs. When we look below the surface of these contrasting positions, however, we see a basic truth: it is easy to emote to an ideology, but it is often quite another to live out its reality. Some might call this the law of unintended consequences.

A corporation is a fictitious person under the law. Its function is to make a profit for its shareholders, whether a privately held or publically held company. Profits, simply put, are the difference between revenues coming in and expenses going out, with the higher the revenues and the lower the expenses, the better the profits. Expenses are comprised of many things: cost of goods and materials, labor, rent, advertising, utilities, legal and accounting, and other expenditures required to operate the business. One of these required expenditures is the payment of corporate taxes.

If the cost of labor or materials goes up, for example, it costs more to produce the company's products, and the company must raise the price of its products to offset these increased expenses. This means that consumers of all economic levels will pay a higher price for those products. Corporate taxes are also a bottom line expense, just like cost of goods, rent, utilities, etc. When corporate taxes go up, the cost of products also go up. In reality, corporations do not really pay taxes, they merely collect them. Corporate taxes are just another expense that is passed along to all of us. Further, the cost of hiring accountants for tax compliance is also an enormous expense for businesses, whether corporations or otherwise.

There is thus an inherent flaw between the ideology of raising corporate taxes to lessen the burden on the so called middle class and the reality of actually living out the reality of such increases. The law of unintended consequences again rears its ugly head. Every action causes a reaction. Sadly, the resulting reaction is all too often contrary to the very stated purpose of the action.

An economy is a complicated thing. To grow or even maintain an economy takes continued reasoned thought, not ideological sound bites. Since pure math does not take into account the unintended or ignored results of an ideological action, we should look closely at history to see how such actions have fared in the past. To continue doing the same thing and expecting a different result is one description of insanity at its worst, or arrogance at its best. Neither is prudent or desirable when the fate of our nation is at stake.