By Dr. Tim Nerenz
Special Guest Perspective for the MacIver Institute
Moment of Clarity, reposted with permission of the author
The headlines making the rounds in the blogosphere this week certainly sound damning: "Corporate profits set 50-year record while unemployment tops 8%."
It is a fact that the S&P 500 reported a combined $1.6 trillion in profits in 2011, the highest profits in 50 years, adjusted for inflation. It is also a fact that unemployment remains above 8%. Advocates for higher taxes add these two facts together to refute the notion that lower taxes stimulate job creation.
But there are a couple of other facts to consider when evaluating the implications of those first two - first, there are 2.5 million corporations in the United States, and those 50-year record profits are what was reported by 500 of them for a single year. A record amount of profit posted by .02% of our corporations does not tell us anything meaningful about the profitability of the other 99.98%.
Next, only 21 million Americans work for a Fortune 500 firm, out of the 130 million or so who work. With something like 15 million Americans unemployed or underemployed, the Fortune 500 companies would have to collectively increase their workforce by 71% to put everyone back to work. Not gonna happen.
And finally, perhaps most importantly, 52% of the profits of the Fortune 500 in 2011 were earned overseas. When overseas profits are removed from corporate earnings reports, 2011 was a quite ordinary year in comparison to the previous 49.
Jobs are being added by the Fortune 500; they are being added overseas. Corporate taxes are being reduced abroad, profits are being earned abroad and jobs are being created abroad; taken in their entirely, the facts contained in earnings reports of the Fortune 500 do not refute the supply-side theory of the tax-hawks, they support it.
The rationale for taxing corporate income (profit) is that the exchanges which generate profit for the stockholders are facilitated by the infrastructure - physical and legal - that allow businesses to flourish. No argument there; businesses need a playing field that is both even and mowed and a safe investment environment costs money to maintain.
But when Apple builds an iPhone in China and sells it in Thailand, what is the legitimate claim of the U.S. Government on the profit of that transaction? What American infrastructure was depleted? Why should Apple pay taxes in China, pay taxes in Thailand, and then pay still more taxes here in the U.S. where nothing was built and nothing was sold?
Apple, Google, Cisco, IBM, HP, Oracle - many of our largest and most profitable companies are virtual, defying any definition of physical place. As the rest of the world enters the information age, the growth in revenue and profits for these firms will occur mostly outside of our borders.
Looking at corporate financial data as if it were still 1962 is not useful in understanding 21st century economics in 2012. Comparing profits earned in 190 countries to employment in one of them is not particularly enlightening.
It is hard to even say what is and is not an American company anymore - the stockholders of the Fortune 500 reside in every country in the world. We could go by which stock exchange a company's stock is listed, but nowadays that is a choice driven by a wide range of factors, none of which is geography.
Of course, we could force the Fortune 500 to hire unemployed Americans. What would you like to do at Walmart? What could you do for IBM? What would they even let you do at Lockheed? Or we could tax all their overseas profits and give the proceeds to our unemployed; how many minutes do you think it would take tax-savvy GE to re-list on the Australian exchange once we busted that move on them.
President Obama has promised to make tax fairness a central point of his campaign for re-election this year. I hope that he will do so by endorsing the FairTax, a single national sales tax that replaces all other federal taxes, voids the 3.8 million word tax code, and abolishes the IRS.
Taxing consumption broadens the tax base, lowers the tax rate, and levels the playing field. Taxes will be fairly paid in proportion to consumption and paid on all goods consumed - including those produced overseas that are currently untaxed.
Enacting the FairTax eliminates the thousands of loopholes that exist today and removes tax barriers to new entrants in the marketplace, including the double taxation that awaits foreign companies thinking about building factories here and hiring American workers.
It is those new entrants, not the Fortune 500, that are the key to solving our problem of high chronic unemployment. In a market economy, high profits are a good thing; they attract new competitors willing to accept lower profits for better goods. That is why prices drop and quality rises in free markets where choice and competition are left to work their magic.
It was the high profits of IBM in the 1970's that invited insurgent start-ups like Apple and Microsoft. Henry Ford did not walk to Detroit dreaming of high taxes and low profits; it was the other way around, just as it is for every other entrepreneur whose dreams of today will provide the jobs of tomorrow. Nobody gets in it for the taxes.
The economics of taxation is not difficult to understand, it is only difficult to accept; in the end, there is no corporate tax - it is all paid for by consumers, every penny of it. FairTax eliminates the middlemen and the myth, making a necessary evil far less evil. Libertarian Presidential candidate Gary Johnson is a FairTax advocate, and the bill to enact FairTax has 62 Congressional sponsors.
Higher taxes on "record" profits might sound appealing, but emotion and economics are two very different standards by which to judge ideas. Raising corporate tax rates means higher prices for consumers and job cuts to offset the government's larger rake - ask the people of Illinois if it has solved any of their problems.
Next year, a $500 billion tax increase awaits Americans if Congress does not act this year to extend current tax rates, including the infamous "Bush tax cuts" from the last decade. 70% of this will fall on middle and low-income families with an average increased tax burden of $3,800 per family, according to Heritage Foundation.
That is not just a 50-year record, it is the largest tax increase in the history of the world.
"Moment Of Clarity" is a weekly commentary by Libertarian writer and speaker Tim Nerenz, Ph.D. that appears at Tim's website www.timnerenz.com to find your moment and order Tim's new book, "BRING IT!