Management of Money Flow via Distributive Corporate Tax

[kmarinas86]

http://home.sailormoon.com/kmarinas86/ManagementofMoneyFlowviaDistributiveCorporateTax.doc

Management of Money Flow via Distributive Corporate Tax

KEVIN MARINAS
University of Houston

Abstract

A system of management of money flow via a ”distributive corporate tax” is proposed. Concepts such as inflation, recession, and quick redistribution of wealth are incorporated into the design of this proposal. An equation has been formulated that when implemented into the corporate tax code, trains companies to minimize idle money. Tax rates for each and every company are calculated on the basis of the expenses-to-sales ratio, whereby a higher expenses-to-sales ratio results in a lower tax rate (as an alternative to subsidies).

 

[loseyourname]

I haven't read this, Kevin, but just looking at the abstract, I get the impression that you're proposing to give a tax break (lower rate) to companies that are less efficiently run. Doesn't that encourage corporate mediocrity?

 

[Amp1]

What LYN said and how would the proposal benefit indivdual taxpayers and lower and middle income earners?

What sort of incentive would corporations have to innovate, hire and in the case of the chemical industry - not pollute?

 

[BobG]

In general, I don't like corporate taxes. You should tax individual shareholders via income tax or other taxes.

In essence, corporate taxes are a sales tax since the taxes are just passed to the consumer as higher prices. Additionally, any reduction or increase to respond to international markets just results in foreign competition adjusting their tax rates lower than the US in a counter-move, so tax breaks or increases have no long term impact. No corporate tax at all eliminates the ability of foreign countries to undercut US tax rates.

The only advantage of corporate taxes is that it allows the government to control corporate behavior to a certain extent. Businesses that implement desirable programs can get a tax break that non-compliant competitors might not get.

 

[Art]

In general, I don't like corporate taxes. You should tax individual shareholders via income tax or other taxes.

In essence, corporate taxes are a sales tax since the taxes are just passed to the consumer as higher prices. Additionally, any reduction or increase to respond to international markets just results in foreign competition adjusting their tax rates lower than the US in a counter-move, so tax breaks or increases have no long term impact. No corporate tax at all eliminates the ability of foreign countries to undercut US tax rates.

The only advantage of corporate taxes is that it allows the government to control corporate behavior to a certain extent. Businesses that implement desirable programs can get a tax break that non-compliant competitors might not get.

One problem with only taxing the shareholders is that they are already taxed on capital gains and dividends and so further taxation would reduce investment as money would be channelled to other investment instruments with a higher rate of return.

It also means that in many cases highly profitable companies would never have their profit taxed at any point as many never pay dividends. Dell for example have been highly profitable for many years but have never paid a cent in dividends.

 

[Pengwuino]

One problem with only taxing the shareholders is that they are already taxed on capital gains and dividends and so further taxation would reduce investment as money would be channelled to other investment instruments with a higher rate of return.

It also means that in many cases highly profitable companies would never have their profit taxed at any point as many never pay dividends. Dell for example have been highly profitable for many years but have never paid a cent in dividends.

The problem there, in the case of dell, is that if that money is not going into dividends, it's being used to expand. Companies don't normally hold tremendous amounts of cash on hand except for the likes of Microsoft until they have an iron grip on an industry. Thus, companies like Microsoft do pay dividend since they have a reason to. (ok I am not really sure what point i was trying to make...)

I also do not like the argument presented for taxing individual shareholders income. Any taxes, corporate or not, will find its way into the publics pocketbook. I suspect it would also mean a lot less money is taken in by the government.

 

[Art]

The problem there, in the case of dell, is that if that money is not going into dividends, it's being used to expand. Companies don't normally hold tremendous amounts of cash on hand except for the likes of Microsoft until they have an iron grip on an industry. Thus, companies like Microsoft do pay dividend since they have a reason to. (ok I am not really sure what point i was trying to make...)

Dell's profit for the past 12 months alone is $3.23 Billion. That alone would finance some growth! but in actual fact a large proportion of companies such as Dell use their profits to finance companies stock option plans so the poor shareholders gets nought! and so have no income to tax.

 

[Pengwuino]

I'll go check out their cashflow

 

[Pengwuino]

Wow they had an awesome year! I can understand why they aren't giving a dividend though. Their net income isn't very stable.

 

[Art]

Wow they had an awesome year! I can understand why they aren't giving a dividend though. Their net income isn't very stable.

It's been stable at ~6% of annual revenues for many years. Point is if you tote up their profit for the last 5 years it's around $15 billion but this isn't in their balance sheet because as I said a lot of the profit is used to finance their stock option program.

I'm not saying whether that is good or bad by the way I am just stating it as a fact and pointing out that accordingly there are no dividends to tax.

 

[Pengwuino]

Well shouldn't the key be if they have a stable literal profits? Dividends are given out on a somewhat consistent basis so it seems like if you wanted to give a $.10 dividend on 2 billion shares or whatever, you'd want to have a consistent $200M and not a percentage of revenue available for dividends.

 

[Art]

Well shouldn't the key be if they have a stable literal profits? Dividends are given out on a somewhat consistent basis so it seems like if you wanted to give a $.10 dividend on 2 billion shares or whatever, you'd want to have a consistent $200M and not a percentage of revenue available for dividends.

Damn they'd better tell their salesmen to slacken off a bit. This continuous growth in revenue is preventing them paying dividends.

FY (01/06) FY (01/05) FY (01/04)
1st Qtr 13,386.0 11,540.0 9,532.0
2nd Qtr 13,428.0 11,706.0 9,778.0
3rd Qtr 13,911.0 12,502.0 10,622.0
4th Qtr NA 13,457.0 11,512.0
Total 40,725.0 49,205.0 41,444.0

 

[Pengwuino]

Thanks for answering my question

 

[Art]

Thanks for answering my question

It's an interesting point. One wonders what the value of a company's shares should be given that they have no intention of ever paying a dividend?

If folk decided why bother investing in such a company then stocks would fall and so even the capital gains element of the tax take would fall.

At least by taxing the profits the general population gets some benefit from the huge earnings otherwise it would all go to the company executives.

 

[Pengwuino]

Well at some point, there just won't be any room to expand. If they start stockpiling money, then oh well. Once they reach a point where there's no room to expand, then growth halts and it no longer becomes an attractive stock to invest in. THEN people might start selling! So i guess that's the last straw for people... when they can't grow, don't up their stock, and don't pay dividends, people start selling.

 

[Pengwuino]

For example, yah, GE. GE is huuuuuuuuuuuuuuuuuuuuuuuge. I personally look at their stock and think "pffff this stock isn't going anywhere!". But then BOOM, dividend, sweet! Bank of America, oh buddy! 4.5% dividend yield! Who doesn't want to have sweet money sex with that?

 

[sanchecl]

It's an interesting point. One wonders what the value of a company's shares should be given that they have no intention of ever paying a dividend?

If folk decided why bother investing in such a company then stocks would fall and so even the capital gains element of the tax take would fall.

At least by taxing the profits the general population gets some benefit from the huge earnings otherwise it would all go to the company executives.

Art:

I'm not sure if you can say they don't intend to pay a dividend but at some point they will. Microsoft was founded in 1976 and didn't begin paying a dividend until 2003. It will come once the company is considered "mature".

If you bothered to invest in Dell when they began trading on a public exchange, one dollar invested is now worth over $2000. Not to bad! Concerning capital gains taxes, rarely are tax implications the driving force behind an investment decision.

While we are on the subject of taxes, Dell paid $1.402B in taxes in their most recent fiscal year (yes...thats billion). Micorsoft paid $4.374B in their most recent fiscal year. Ouch! While a lot of money, remember where their moeny comes from: us...the consumer! An argument could be made that corporations should pay no taxes at all. That money would not go to company executives as you suggest it might but would be used in an attempt to gain a competitive advantage which would actually drive down prices for all of us regular folks.

Oh, corporate executives are well compensated but I have found that there is usually a pretty good reason for that. The few I have had occasion to meet are pretty smart folks!

 

[Pengwuino]

I think Art was talking about if a company hypothetically had no intention of paying dividends. Of course, it all depends on growth rate.

 

[sanchecl]

In general, I don't like corporate taxes. You should tax individual shareholders via income tax or other taxes.

In essence, corporate taxes are a sales tax since the taxes are just passed to the consumer as higher prices. Additionally, any reduction or increase to respond to international markets just results in foreign competition adjusting their tax rates lower than the US in a counter-move, so tax breaks or increases have no long term impact. No corporate tax at all eliminates the ability of foreign countries to undercut US tax rates.

The only advantage of corporate taxes is that it allows the government to control corporate behavior to a certain extent. Businesses that implement desirable programs can get a tax break that non-compliant competitors might not get.

Interesting thoughts. I did not read your remarks until after I posted and said that an argument can be made for eliminating corporate taxes. I like the international twist you mention!

 

[sanchecl]

I think Art was talking about if a company hypothetically had no intention of paying dividends. Of course, it all depends on growth rate.

Dividends are one way to recognize vlaue from an investment but by no means the only way. Depends on the investment strategy I suppose.

cs

 

[TheStatutoryApe]

That money would not go to company executives as you suggest it might but would be used in an attempt to gain a competitive advantage which would actually drive down prices for all of us regular folks.

I'm not so sure about that. More than likely prices would stay about the same. Most markets take advantage of consumers being used to paying higher prices and when the costs go down the prices stay relatively the same because people will pay it. The only way I could see it bringing prices down drasticly is in an extremely competitive market.
I do agree with you and Bob though that those taxs are really coming out of the consumer's pockets and not any rich bigwigs'.

 

[sanchecl]

I'm not so sure about that. More than likely prices would stay about the same. Most markets take advantage of consumers being used to paying higher prices and when the costs go down the prices stay relatively the same because people will pay it. The only way I could see it bringing prices down drasticly is in an extremely competitive market.
I do agree with you and Bob though that those taxs are really coming out of the consumer's pockets and not any rich bigwigs'.

If there is money to be made and the barriers to entry into a market are not too great, competition will follow driving down prices. That is the nature of capitalism. Just look at how quickly the prices of plasma televisions have dropped. A lack of competition is what keeps prices artificially high (and profits).

 

[TheStatutoryApe]

If there is money to be made and the barriers to entry into a market are not too great, competition will follow driving down prices. That is the nature of capitalism. Just look at how quickly the prices of plasma televisions have dropped. A lack of competition is what keeps prices artificially high (and profits).

Electronics are one of the most competetive markets too.

 

[Art]

Well at some point, there just won't be any room to expand. If they start stockpiling money, then oh well. Once they reach a point where there's no room to expand, then growth halts and it no longer becomes an attractive stock to invest in. THEN people might start selling! So i guess that's the last straw for people... when they can't grow, don't up their stock, and don't pay dividends, people start selling.

They're not stockpiling the money they are spending it on employee remunerations.

The theoretical value of a share is the sum of all future dividends so my point is that if a company never pays a dividend and instead distributes it's profits to it's employees how much are that company's shares really worth??

 

[kmarinas86]

I haven't read this, Kevin, but just looking at the abstract, I get the impression that you're proposing to give a tax break (lower rate) to companies that are less efficiently run. Doesn't that encourage corporate mediocrity?

Well, one thing it does is make it more easy to balance the budget (in theory) since the tax rate would go down in this system as the Expenses-to-Sales ratio approaches 1. A company with a high E-to-S ratio is not necessarily inefficient. A lot of sales could be generated while most of the money is being spent buying capital for expansion. But if only 50% of sales are being spent, it is clear that the company is not using the money to the best of its ability. The argument I've heard is that profits drive the business. What really drives the business is not the money earned that isn't being spent, but it's the earnings that are being used to pay for services, employees, etc, that run the business. So the idea is to provide companies an incentive to utilize a higher fraction of their sales in an efficient manner while also making is safer for them to do so. It will also put companies in a better position to innovate (including companies with better profits) with incentive to spend more, which results in a lower corporate tax rate for them. In the current system, to the best of my knowledge, while profits are in the millions, only the tax amount changes, not the tax rate. In the Distributive Corporate Tax system, any increase in the Expenses-to-Sales ratio results in a tax break. This would create a more level playing field for industries such as the automobile sector. GM and Ford (which have, in general, a higher expenses-to-sales ratio) for example would benefit from this whereas Toyota, who is in a position to innovate, will have to improve even more if it wants to stay on the top. The Distributive Corporate Tax would prevent American job loss and some percentage of outsourcing. It would put American workers at a better position. Companies such as GM layoff employees due to straining costs which are reflected by going beyond a high-expenses-to-sales ratio where they lose money instead of gaining it.

 

[kmarinas86]

The tax rate under the proposed Distributive Corporate Tax system is determined by the following equation:

$Corporate Tax Rate = \sqrt{\frac{Profit}{Sales+Expenses}}$

$Corporate Tax Rate = \sqrt{\frac{Sales-Expenses}{Sales+Expenses}}$

$Corporate Tax Rate = \sqrt{\frac{1-\frac{Expenses}{Sales}}{1+\frac{Expenses}{Sales}}}$

Expenses/Sales	Tax Rate	"Profit after Tax"/Sales
100.00%		0.00%		0.00%
95.00%		16.01%		4.20%
90.00%		22.94%		7.71%     Typical: Banking, Supermarket, Automobile, and Energy Companies - Lower corporate taxes means less strain on prices and possible increase in wages (at company's choosing)
85.00%		28.47%		10.73%
80.00%		33.33%		13.33%    Typical: Technology and Bio tech - As usual: Increase supply of highly distributable products and services. Increase international demand for these services and spend more money and/or lower prices to do so.
75.00%		37.80%		15.55%
70.00%		42.01%		17.40%    Typical: Drug Companies - Higher Tax Rate.  The proper response: Lower drug prices or spend more money for research more quickly and efficently than before.  Minimize idle money.  This will lower the costs of the medical system and help social security and thus reduce the costs of government (which consists of a large porition of the federal budget).
65.00%		46.06%		18.88%
60.00%		50.00%		20.00%
55.00%		53.88%		20.75%
50.00%		57.74%		21.13%
45.00%		61.59%		21.13%
40.00%		65.47%		20.72%
35.00%		69.39%		19.90%
30.00%		73.38%		18.63%
25.00%		77.46%		16.91%
20.00%		81.65%		14.68%
15.00%		85.97%		11.92%
10.00%		90.45%		8.59%
5.00%		95.12%		4.64%
0.00%		100.00%		0.00%

The Distributive Corporate Tax prevents inflation and recession and supports a strong dollar all simultaneously by doing the following:
* Lowering the risk in reducing prices (prevents inflation and supports a strong dollar)
* Minimizing idle money in business to increase the velocity of money which increases the value of money in a given year (supports strong dollar)
* Making more money available where there is more of a need (prevents recession)

A stronger dollar will reduce the dollar costs of welfare and thus reduce the dollar costs of government.
Also, companies may increase production, increase employment, increase the wealth of their employees, or pay for debts in order to lower its tax rate and thus makes such actions more desirable. This would prevent the government from having to do these tasks.

Money is like food. If a corporation doesn't have enough in a given period of time, it dies, and everyone else has to pay for it. If another corporation has a lot of money but is not using it fast enough, the unused money becomes "useless", and everyone else would lose wealth because of it. The essential goal of distributive corporation tax is to distribute wealth in a way that prevents failure of the economy.