The Tax Code Is Upside-Down

The capital gain rate of 15% is BAD for the long term strategy of America. Here’s why: a Wall Street financial investment concern can buy a company and hold it for a year and then sell it one year later and only pay 15% in taxes. I’m going to paint with a wide brush, but here goes: typically these financial concerns will not plan on investments that require a long term vision.  Most will strip down companies and boost up the EBITA of the company so that they can look for an “exit strategy”, which means that they are looking for a quick way to cash out.  They are looking for ways to “bundle it up and package it” for resell. Like they did with all the junk real estate packages and derivatives that got us into this economic mess.

To continue painting, these companies do not care about the long term infrastructure of the company and do not care about the USA’s manufacturing basis. All they care about is a return on their investment–the proverbial: ROI–and a way out. Don’t get me wrong, I’m not a non-profit type of guy. I believe whole heartedly in profits. But not at the expense of future of America: not with the incentive to destroy an industry like Wall Street did to the building industry.

The tax rate structure is exactly opposite of that which it should be. Companies in the USA should be paying 15% taxes on income and the Capital Gain rate should be 35%. That would put the emphasis on growth and investment. If companies paid a 15% income tax, then capital could be rolled back into America’s manufacturing base at an accelerated pace. Maybe we could actually be making TV’s in America, Maybe we could be manufacturing our toys and furniture here. Just maybe.

When a company sells to another, they are saying I’m done and I want to retire and start consuming the wealth that I have created. There’s nothing wrong with that, that is the American way. I hope to do that some day. The problem is that the tax system pounds the entrepreneur with high taxes while they are in the trenches building a company and then ease up at the time when they want to sell. This type of tax structure comes out of the lobbying efforts of Wall Street.

The financial types from Wall Street never built the company, never were in the trenches. They bypass the trenches–to use Monopoly lingo: they receive a “get-out-of-jail-free” card, collect $200, get to go to “GO”–and only pay 15%–on billions of profits on a single transaction. Then they roll a percentage of those profits into lobbying the legislative process to get the tax code to benefit them. They have done a great job of selling the low capital gains rate to the average American. And of course the big corporations have enough dough to lobby for special tax provisions from which only they can benefit. The rest of the small business brethren, the ones that actually do create the most employment, are the ones that carry the greatest tax burden. Go figure. Wall Street has done it by convincing the American’s not to consider a graduated capital gains rate and to shift the tax burden on small businesses.

I do not believe for one minute that a low capital gains rate and a high corporate tax rate promotes growth. This is contrary to conventional thought, but it is common sense. The ironic thing is that it is entirely possible for us to get our-cake-and-eat-it-too. With a lower corporate tax rate on America’s manufacturing, the economic basis could increase and when they do decide to sell out, then the US Treasury might just benefit as result of a larger basis from which to glean taxes and fund necessary social programs. Maybe the demand for social programs could be less because people are working. Just maybe.

Why not have a graduated capital gains rate. That way the middle class American can benefit by investing in the stock market. Keep the capital gains rate at 15% on gains less then, say, one million dollars and then graduate it up to the top rate of 35% which is the current top rate for corporations. (gee-sh, please don’t beat the drum about a million dollar gain and “what is middle class”. It’s only a thought experiment.) Even Warren Buffet will publicly admit that a 15% capital gains rate for the billionaires on Wall Street is ridiculous. (Of course privately he’s probably lobbying like crazy to keep status quo, but that’s total conjecture.) This way we are actually taxing on consumption and not taxing companies who are trying to build wealth. The incentive to build wealth also creates employment. And that is what we need in the United States right now.

I know what the Wall Street defense will be: capital will just flow overseas. To which my reply is: tax those unpatriotic umpty-umpts for expatriation of the funds that we need: and for being as unpatriotic as that comment. Maybe they could figure out a financial strategy to fund small business, which they don’t do…and have never done… Maybe with a lower corporate tax rate, foreign capital would actually flow into the United States manufacturing arena because of rational tax law…Just maybe.

I think the way to do this is to create a Sub-chapter G corporation. “G” is for growth. That way old fogies like me won’t be penalized for a tax policy change. We can continue under the old rules. Or we could opt for the new type of corporation if we wanted to invest in the company for another ten years. That’s the horizon we should target our resources–ten years: not a one year horizon. In order for a seed to grow, you have to water the plant when it germinates. High corporate taxes take away that metaphorical water. But I guess that’s just common sense. I’d be better off looking for a-buck under my pillow from the Tooth Fairy.

That’s my 2 cents, of course, after taxes, it’s only 1.3 cents!

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4 Responses to The Tax Code Is Upside-Down

  1. Brenda Payne says:

    Abe, this makes too much sense but I wonder if you have shared this with any elected officials? Do you mind if I do? Brenda

  2. abe says:

    Brenda, I don’t mind if you decide to send my post to elected officials at all. I wish everyone would read it and comment on it to make constructive additions.

  3. Charles says:

    I personally did not know the tax structure of business, or corporate taxes. I though, can see your point clearly. With paying 35% taxes a year and only 15% when you sell, you can re-invest more for the future if the taxes were to be reversed.

    I do own stock in a corporation, which at time would give out special dividends on years they done very well. One year i received $50,000 special dividend. So did everyone else who owned as much stock as I did. Well If they were able to reinvest all the money into the corporation, we would have a larger corporation now that is paying out larger regular dividends.

    So, our new CEO/President of the corporation that took over like 8 years ago decided that is what she wanted. Thinking about it also is when I die, and I give my daughter 50% of the shares and my son 50% of the shares, I would hope by then, that they would both be getting as much as I am getting now on my regular quarterly dividend.

    I am very much for being able to reinvest for the future now, and not gain when it’s all over.

    • abe says:

      I think that the Capital gains rate could be a graduated scale, just like the personal tax rate scale. In your example you received a $50,000 special dividend. Why not have dividends less then a certain threshold be taxed at the same 15%. As the absolute value of the dividend goes up, then up the tax rate. I think this is reasonable. This way if you get a windfall you can sock it away for your child’s education, your retirement, or pay off your home.

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