VIA SBINSIDER INSIDER ECONOMICS GURU Doug Cardell Ph.D.| September 20th, 2023
Almost every day, someone asks me about taxing corporations. The majority are in favor of higher corporate taxes. Sadly, most don’t understand what it means to tax corporations. Taxing corporations is impossible. Corporations have no money that can be taxed. Corporations make profits, sure, but those profits belong to the stockholders, not the corporation.
Corporations are managed by a board of directors who hire an executive officer (CEO) to oversee the day-to-day operations on behalf of the stockholders. The directors and the CEO are bound by what is usually called the business judgment rule. The rule says that corporate managers are presumed to act in “good faith” within the standards of loyalty, prudence, and care directors owe to stockholders. Therefore, absent evidence that the board has blatantly violated some rules of conduct; the courts will not review or question its decisions. This protection applies while the board and CEO follow fiduciary standards.
Fiduciary standards include “the duty of care” and “the duty of loyalty.” The first is an obligation to act after due diligence to allow acting in an informed manner. The second requires directors to put the interests of the shareholders before their interests or those of others. This rule prevents corporate officers from doing things that do not directly or indirectly benefit the stockholders. For example, they can donate to charities in reasonable amounts to obtain goodwill that may ultimately benefit the stockholders. In addition, they can contribute to political campaigns to influence public policy to benefit the stockholders. However, the contributions must be limited and justifiable.
The result of all this is that when the government taxes a corporation, the corporation cannot reduce stockholders’ profits unless there is no other choice. However, there is another choice: passing the tax cost onto the consumer, that is, raising prices. This price increase, in turn, has two effects. First, it essentially taxes the consumers and does so as a “flat tax,” that is, it taxes all consumers the same percentage. As a result, those with lower incomes are hit the hardest. Unlike other flat taxes, like sales taxes, there are no provisions to exempt food or medicine. The tax applies to everyone and everything.
Second, it places American companies at a disadvantage compared to foreign companies that are not taxed. So foreign companies can charge less for the same product, which forces American corporate downsizing through layoffs and wage reductions for American workers.
As you can see, taxing a corporation is impossible; it is only possible to levy a hidden tax on consumers. As a result, the stockholders end up harmed in two ways. First, since they are also consumers, everything they buy from American corporations costs more. Second, they will likely have lower dividends and lower stock appreciation.
Since you are likely both a stockholder and a consumer, you see your profits reduced and pay the tax. It is the duty of those who understand this travesty to help educate those who don’t understand. It is long past time to end this. As citizens, consumers, and investors, we must urge the government to eliminate all corporate taxes and tax us directly rather than hiding taxes by funneling them through the corporations. The direct tax would cost us less since it would lower consumer prices by eliminating the corporate expense of the record-keeping and legal work these taxes require. If we correct this injustice, only those politicians and talking heads that would like you to believe there is a way to get something for nothing would have cause to regret it; everyone else would benefit.