Investor Politics - Corporate Income Tax Reform

The investor's eye view of politics is a simplistic, practical, dot-connecting
approach to sorting things out so that win/win change can be considered. Real
world politics is not concerned with such things, and that is one of the most
serious problems facing investors today. There are at least ten issues that
require government action if we are to maintain our competitive position in the
world economy. Most of these are interrelated and need to be acted upon
simultaneously--- thus causing a major political dilemma.

Politicians are much more interested in talking about change than they are in
actually legislating it; they prefer to champion just one specific issue at a
time so as not to appear too independent; and they can't keep themselves from
back sliding into the now archaic distinction between investors and poor people.
Rich or poor, most Americans have investments. For the small investor to become
wealthier his or her efforts must be encouraged by the tax code-- the wealthy
will become wealthier in spite of the tax code. And, believe it or don't, the
vast majority of the wealthy (even corporate executives) are good, productive,
caring-about-the-environment, people.

At the root of the problem is the tremendous investment the major parties have
in nurturing divisiveness, jealousy, and misunderstanding in the electorate. The
Republicans or Democrats in power are always ruining the country and, of course,
the guys who are seeking power, will undoubtedly do the same. Perhaps the most
obvious example of misguided political handiwork is the negative attitude of
most individuals toward corporations, big business, and international economic
collaboration.

As non-voting but taxable entities, corporations are easy to blame for all that
is wrong in society, easy to sue frivolously with no remorse or control, and
popular to tax--- by both parties. The sad thing is that most people don't take
the time to appreciate just how important business success and profitability are
to their own financial interests, short and long term. Mutual funds, for
example, perform better when businesses, large and small, prosper. Profitable
businesses produce jobs, provide higher salaries, and (once all the extra fees,
mandates, taxes, and handouts are eliminated) lower prices.

Politicians have never been shy about dictating proper behavior to individuals
or hesitant in shamelessly picking the pockets of businesses to fund their
projects. Self-employed business owners, for example, pay a minimum 35% Federal
Income Tax, state and local taxes of various kinds, and the usual Workers
Compensation, Medicare, and double Social Security Taxes. It adds up to better
than 50% quickly, and, at every level, all taxes, fees, subsidies, assessments,
withholdings, compliance costs, etc. are:

(1) Added to the price of goods and services, (2) considered in hiring decisions
at all levels in all business entities, and (3) factored into decisions
regarding new plant locations and service function outsourcing. Businesses will
only produce jobs in an environment that recognizes the importance of the
contributions they make. Meaningful tax reform needs to begin where the jobs
begin. Reforms to the Individual Tax Code and the Social Security/Retirement
System can then be integrated into the business framework.

Just as Congress picks corporate pockets, corporations pick those of their
shareholders. The compensation of corporate officers is a clear example of how
this has gone totally out of control, even if it is understandable under
existing tax codes--- both corporate and individual. Multi-million dollar
salaries, bonuses, deferred compensation and option packages are all designed to
avoid and/or to defer taxes while, at the same time, they are deductible on a
dollar for dollar basis from business taxes.

Changes on the personal side could clean this up quickly but, for now,
politicians need to focus more on protecting shareholders from these creative,
and excessive, compensation schemes. Eliminating the Corporate Income Tax, and
all tax deferral/option/bonus mechanisms that are not available to all employees
at all levels, would be an excellent start. Then cap total compensation packages
at a specific number--- any excess being paid only in the form of dividends to
all shareholders.

The Corporate Income Tax is a non-productive weight on business decision makers,
causing expenditures that would not be considered were they not tax deductible.
Ironically, jobs are not created to reduce the tax bite because every dollar of
salary brings with it an additional 40% or so in overhead. All the actual costs
of doing business (and all the perceived risks associated with doing business)
wind up in the price of goods and services. The fact that governments can raise
corporate costs so much more easily than they can raise individual's taxes is
perhaps the biggest shell game threatening our economic well being today.

If instead of taxing them into leaving the country, Congress would cultivate the
profitability of corporations, while focusing regulatory efforts on the economic
abuses of shareholders, employees, and consumers, a whole new era of economic
expansion and productivity growth would ensue--- and we're just getting started.
Investors need to impress upon candidates that they expect meaningful change
throughout the tax code, and that a second term just won't happen without it.

After the Corporate Tax environment changes, politicians will be able to devote
their energies to defining "proper corporate and non-corporate business
behavior", and monitoring compliance with a whole new set of rules and
regulations. Converting the United States into a Free Trade Zone, by eliminating
all nuisance assessments from all levels of government, would: increase
employment, reduce prices, and multiply distributable dividends. Making it
happen should not be that difficult, particularly with the growing outrage
concerning the obscene compensation of high level corporate executives, and
considering how successful the FTZs have been on the local level.

Managers will make these changes work because the incentives are where they
belong--- on the bottom line instead of the tax return. Small businesses would
benefit from the reduction in taxation, and fees, and would be less constrained
in their efforts to grow. If they don't do the right thing, they will become
less competitive in the marketplace, and that is the way capitalism is supposed
to work. But, don't be naive. Publicly held companies will need direction,
guidance, and policing--- an excellent new career for displaced accountants and
lobbyists.


Steve Selengut
http://www.sancoservices.com
http://www.kiawahgolfinvestmentseminars.com/
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street
Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"



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