Reply #101: It discourages the businesses from generating profits (which is a good thing) [View All]

[Oregone]

Yes, this sounds counter-intuitive, but that is because "Trickle-Down" philosophy has re-written the logic of economics as we know it.

Corporations' main function is to generate wealth for their shareholders. Their primary method of doing so *now* is to create profits (earnings that are not utilized for business function). With such profits, they distribute to their shareholders via dividends and repurchase outstanding shares (thus raising the price of the remaining shares). For example, 57% of earnings in 2007 for Exxon were used for dividends and repurchase (this is from profits), whereas only 6% or so was utilized for research and infrastructure development (which is not profit, but rather, business investment which is not taxed).

When the corporate tax rate is low, businesses have less incentive to invest internally into their own business, because private shareholder wealth can be generated most easily by sending earnings directly to shareholders. By raising price points, cutting labor, creating inferior products, and other cost-cutting methods, shareholders stand to gain a lot of wealth in the short term from corporations they have a stake in, as long as those measure create short-term profits.

But, if a corporate tax rate suggests that $9 out of $10 dollars go to the government, it becomes almost pointless to generate a profit. Instead, a business can spend all these earnings to hire and pay workers more, invest in better health-care/retirement, develop better products, strengthen infrastructure, advertise/brand, attain other assets/subsidiaries, research and improve efficiency, etc. So, if Exxon spent that 57% of the earnings as additional business investment (instead of boosting private wealth), they would have strengthened their business, and hence, naturally raised share prices. In fact, being that they only spent 6% of the earnings on research/infrastructure, it could be asserted that 63% of earnings on such would have created a hyper state of growth, and shares would of split countless times for the shareholders. And the bright lining at the end of the tunnel is that when shareholders sell, they only get hit with a tiny capital gains tax of 15% (so in the long term, it is infinitely better for the shareholders for earnings to be invested into their business than taxed and then put into their bank accounts each year).

Further, being that they have such outrageous amounts of profits, we can definitely tell it is because they are price gouging and manipulating the market. But, if the corporate tax rate discouraged profits, then this activity would be all but useless (prices would be based on sound models related to the cost of development and marketing, as well as capital needed for future expansion). Therefore, the economy wouldn't sputter and fall in the face of massive and unwarranted inflationary forces.

"Trickle-Down" economics has suggested that if the tax rate on these corporations is low, then when their earnings are sent to the private sector, those magnanimous individuals will reinvest in and create jobs and wealth galore. Sometimes this does certainly happen, but often it does not. The rich are rich for a reason, and if there is anything they are good at, it is saving the precious money they got when their daddies died. But, it is a theoretical *belief*, based not on sound reasoning, that company earnings are best used by private individuals (which may not even be used at all, or to benefit the company directly that earns them).

A high corporate tax rate combats this *belief*. Instead, it *forces* corporations to invest internally into workers, research, advertising, and development. It forces them because if they do not spend it, the government gets it. But because of such spending, it can create a state of hyper-growth among the corporations, as well as inject earnings back into the economy that would normally be stored in private coffers (but this raises share prices for the shareholders naturally!). In the end, it would drastically reduce the government's revenue from this source, but it would create a robust economy of well-paid workers and innovated/updated companies that continually generate wealth for everyone. This is what America used to be, and what it needs to become again.