Sensible Tax Reform--Simple, Just and Effective
E. FAQs: Impact upon Businesses
| BUSINESS TAXES |
| (1) What will business income-tax rates be under the federal consumption tax? |
| (2) Why shouldn’t businesses pay taxes? If they don’t pay, then don’t
individuals have to pay higher taxes? |
| (3) Will businesses pay federal consumption taxes on anything that they buy? Office supplies? Equipment? Components of goods to be sold? Investments? |
| (4) What will be retail firms’ responsibility for collecting and processing the federal consumption tax under Sensible Tax Reform? |
| BUSINESS COSTS |
| (5) What cost savings will businesses realize from Sensible Tax Reform? |
| (6) How will Sensible Tax Reform affect the costs of purchases by businesses? |
| (7) How will Sensible Tax Reform affect labor costs? |
| (8) How will Sensible Tax Reform affect tax-compliance costs for businesses? |
| (9) How will Sensible Tax Reform affect interest costs? |
| (10) How are businesses likely to respond to the sharp decline in their costs resulting from Sensible Tax Reform? |
| (11) How will prices be affected by Sensible Tax Reform? |
| (12) How would the introduction of Sensible Tax Reform affect small businesses? |
| (13) How will Sensible Tax Reform affect the success of American companies against global competition? |
| BUSINESS FINANCING |
| (14) How is Sensible Tax Reform likely to affect a company’s financing decisions? |
| (15) How is Sensible Tax Reform likely to affect the amount of dividends paid by businesses? |
| (16) How is Sensible Tax Reform likely to affect the price of the price of the company’s stock? |
BUSINESS TAXES
(1) What will business income-tax rates be under the federal consumption tax ?
0%--businesses will be un-taxed under Sensible Tax Reform. In 2015, businesses paid $344 billion in income taxes, plus more than $500 billion in Social Security and Medicare taxes and an estimated $160 billion in tax-compliance costs. Under STR, this entire expenditure, $1 trillion of non-productive annual business expenses, will be eliminated.
Businesses will have an unprecedented opportunity to become stronger and more competitive:- reduce prices;
- invest in modern equipment or more research and development;
- expand their operations and hire more workers;
- fund employee retirement plans;
- pay higher dividends;
- pay off debt; or
- increase retained earnings.
(2) Why shouldn’t businesses pay taxes? If they don’t pay,
then don’t individuals have to pay higher taxes?
Most of the federal government’s revenues come from taxes paid by either individuals or businesses. It appears to be logical even self-evident that, if businesses do not pay their “fair share” of taxes, then consumers will have to carry the entire burden. This perception is wrong—very wrong. The fact is that businesses do not actually pay any taxes--even now.
It is true that businesses do remit income, Social Security and Medicare taxes to the federal government. However, where do they get the revenues with which to pay those taxes? They get them from us--in highen prices to customers, lower wages to employees or lower dividends to shareholders. All of a business' costs, and their profits, are embedded in the prices which they charge to their customers.
Under our current federal tax system, businesses are serving as tax collectors for the federal government—very inefficient and costly collection agents. Since businesses now pass their own taxes on to their customers, if we remove the tax-collection burden from them and shift the taxes directly to customers, individuals will not be paying any higher taxes.
As was discussed in Question 1, without federal tax costs, businesses will be unburdened. Their costs will decline sharply. Managers will be free to concentrate upon what they do best—develop new and better products, invest in new equipment and offer better service to their customers. Very importantly, they will be much more competitive in global markets, increasing exports while reducing imports. That will sharply reduce America's international trade deficit and also our need to borrow internationally. All of that will occur without any increase in the tax bunden upon individuals.
Back to Top(3) Will businesses pay federal consumption taxes on anything that they buy? Office supplies? Equipment? Components of goods to be sold? Labor? Investments?
No, businesses will be un-taxed under Sensible Tax Reform. A critical part of this tax-reform program will be to unburden businesses by removing the heavy federal tax expense. The new federal consumption tax will only be a retail tax. Businesses (whether manufacturers, retailers or service companies) will not owe the consumption tax. It would make no sense to “un-tax” businesses from income and Social-Security taxes while simultaneously burdening them with a purchase tax.
Retailers will, of course, be required to collect the tax from their retail customers. However, the retailers themselves will neither have to pay a consumption tax on what they purchase for their businesses nor, of course, any income tax on their profits.
Back to Top(4) What will be retail firms’ responsibility for collecting and processing the federal consumption tax under Sensible Tax Reform?
It will be the responsibility of retailers to collect the federal consumption tax (FCT) from their customers, just as retailers do now with state and local sales taxes. For businesses that collect such taxes now, the addition of a federal consumption tax will simply be an extension of what they already do. For businesses that do not at present collect sales taxes, the FCT will be a new responsibility. Only five states do not impose state sales taxes. Most of those, states exempt certain categories of consumption, especially many varieties of retail services, from sales taxes.
Many businesses may require an additional one-time investment in software and equipment to be able to calculate the new tax. However, compared to the complete elimination of all of their own federal taxes and compliance costs, the required increase in investment and collection costs will be a small price to pay.
Back to TopBUSINESS COSTS
(5) What cost savings will businesses realize from Sensible Tax Reform?
Businesses will enjoy significantly lower costs under STR:
- The elimination of income taxes,
- The elimination of Social Security and Medicare taxes paid by employers on behalf of their employees,
- The elimination of most of their tax-compliance costs,
- Reduced prices for much of what they purchase, and
- Lower interest rates,
All businesses will greatly benefit from STR. For manufacturers and wholesalers, tax-compliance costs will be almost non-existent. For retailers, tax compliance will be limited to collecting and processing the retail consumption tax. The distortions of taxes in planning business investments will be a thing of the past.
Businesses will be free of tax (and IRS) worries. Other important collateral benefits should be a decline in business debt ratios and a rise in stock prices (see questions below). STR will introduce a very dynamic period of innovation and growth for businesses in the United States.
Back to Top(6) How will Sensible Tax Reform affect the costs of purchases by businesses?
Businesses do not currently pay federal consumption taxes on their purchases from suppliers. However, their suppliers do embed their own federal tax costs in the prices that they charge to all of their customers, including wholesale. Under Sensible Tax Reform, the cost of much of what businesses buy may decline because of the removal of embedded taxes. Suppliers will be able to reduce prices, so that the overall cost impact upon businesses will be very favorable.
Back to Top(7) How will Sensible Tax Reform affect labor costs?
With the elimination of the 7.65% of Social Security and Medicare taxes for businesses, labor costs will decline by that amount. [At the same time, of course, employees will also no longer be paying 7.65% on their incomes. Thus, even with the introduction of the federal consumption tax, their real incomes will increase.]
Back to Top(8) How will Sensible Tax Reform affect tax-compliance costs for businesses?
The Tax Foundation estimated some years ago that businesses pay about $160 billion of tax-compliance costs annually. Under STR, those costs will largely disappear. Businesses with no retail sales will not generally even have any filing obligation, since they will neither owe nor collect taxes. Retailers will need to collect the federal consumption tax (FCT) from their retail customers, remit the sales taxes that they have collected to the IRS, and to file annual reports. However, their tax-compliance costs will be much lower than they are today.
Back to Top(9) How will Sensible Tax Reform affect interest costs?
Lenders must now pay taxes on the interest that they earn. Interest rates are higher in order to cover those taxes. Under STR, income taxes on lenders would be completely eliminated. In the intensely competitive lending markets, interest rates will likely fall. Businesses will thus be able to reduce their borrowing costs.
The effect of investors not being subject to taxes on interest earned can be seen even today in the low interest rates that municipal governments pay on their debt, which is exempt from federal taxes. Municipal borrowers sometimes pay lower interest rates than even the U.S. Treasury, since the tax-exempt character of their debit makes them more attractive to investors.
Back to Top(10) How are businesses likely to respond to the sharp decline in their costs resulting from Sensible Tax Reform?
Every business is unique. Even in the same industry, different companies might respond very differently to the opportunities that STR will bring. An alternative proposal for the introduction of a federal consumption tax, the Fair Tax, assumes that all of the gains will be passed through in the form of lower prices. In highly competitive industries, such as mass-market retailing, that may indeed be a primary result. However, for most industries, that is an unrealistic assumption.
There are many ways in which companies might respond to the greater success that STR will offer. In most cases, businesses will be able to choose some combination of the following:
- Reduce prices
- Pay off debt
- Increase investments in machinery, plant & equipment
- Increase investments in research and development
- Increase compensation to employees in the form of higher wages or fringe benefits, such as retirement and medical benefits
- Increase profit margins
- Increase retained earnings
- Increase dividends
All of these are beneficial actions. The companies will benefit. Their customers will benefit. Their employees will benefit. The American economy will benefit.
Back to Top(11) How will prices be affected by Sensible Tax Reform?
Though companies will use some of their savings for purposes such as making investments, paying down debt or paying higher dividends, some of the savings in most industries will be applied to lowering prices. Both wholesale and retail prices will decline. All of those actions will make the companies much more competitive. It will also, of course, greatly benefit their customers.
Back to Top(12) How would the introduction of Sensible Tax Reform affect small businesses?
Tax-compliance costs are a much heavier burden for most small businesses than they are for large firms. Proprietorships, small partnerships and small companies often find that their tax compliance costs can actually exceed the taxes that they owe. That is absurd! Small businesses will clearly be major beneficiaries of the STR tax reform.
Sensible Tax Reform will also have a very favorable and dynamic impact upon business start-ups—especially small businesses. 60% of new businesses fail within four years. The principal reason for that failure is the underestimation of costs and the amount of funds needed to begin and operate a new business. Social Security and Medicare costs can be especially high for small businesses--7.65% of salaries, wages,etc. must be paid for employees and 15.30% for the proprietor or partner.
STR will eliminate not only these taxes but (except for the collection of retail taxes) all of the annual compliance costs and complexity that goes with them. This will greatly reduce the difficulties and costs of start-ups. It will stimulate the creation of new businesses--the principal generator of new ideas and new jobs in the United States. Sensible Tax Reform will be a very major advantage for small businesses. Owners of small businesses should be among the strongest supporters of STR.
Back to Top(13) How will Sensible Tax Reform affect the success of American companies against global competition ?
One of the greatest forms of damage that the current federal tax system imposes upon our economy is the way that it hurts American companies when they confront foreign competition. This hurts both our exports and our imports.
All of the tax costs of both American exporters and importers are embedded in their prices when they sell. In contrast, foreign businesses receive tax rebates from their governments of much of their federal taxes when they export. That places American exporters at a severe disadvantage. Similarly, foreign businesses export to the U.S., where American-made products are burdened with our federal taxes while the imports have been relieved from much of their tax burden. That places American import-competing companies at a severe disadvantage
American tax law is thus a serious cost burden on our companies. It is no wonder that the U.S. often runs an annual trade deficit of $700 billion or more. Furthermore, most of the money to pay for those net imports must be borrowed abroad--at a high annual interest cost.
Sensible Tax Reform will help to level the global playing field for American businesses. Exporters will have the ability to reduce prices, compete much more successfully abroad and thereby greatly increase exports. Also, American producers will be able to lower their domestic prices and compete much more effectively against imports.
Our trade balance will improve. Our need to borrow abroad will decline. American businesses will expand. Millions of jobs will be created. The economy will grow rapidly.
Back to TopBUSINESS FINANCING
(14) How is Sensible Tax Reform likely to affect a company’s financing decisions?
Our current tax system is biased in favor of debt financing versus equity financing. Interest payments are tax deductible, while dividends are not. Dividends are paid out of profits after taxes have been paid. Under Sensible Tax Reform, there will be neither federal business income taxes nor payroll taxes (Social Security and Medicare). Also, interest payments on borrowing will no longer be tax deductible--there will be no income taxes from which to deduct interest. There will be less incentive to borrow. And, businesses will have a greater ability to pay dividends, which will encourage higher stock prices.
Businesses will be likely to finance more with equity (common stock) and less with debt, even though interest rates will be falling. That will reduce their debt ratios and their interest-payment obligations. It will strengthen businesses and give them greater stability during adverse economic conditions, such as during the Great Recession of 2008-2010. Workers will benefit. Stockholders will benefits. The overall economy will benefit.
Back to Top(15) How is Sensible Tax Reform likely to affect the amount of dividends paid by businesses ?
Under current federal tax laws, dividends are paid out of profits--after taxes have been paid. Under STR, there will be no income (or Social Security or Medicare) taxes on businesses. Costs of purchases are also likely to decline. Therefore, profits will rise. Dividends are likely to increase significantly. Investors will be much happier, not only because of the increase in dividends, but also because the dividends that they receive will not be taxed for 99% of Americans.
Back to Top(16) How is Sensible Tax Reform likely to affect the price of the company’s stock?
Federal taxes and tax-related costs will be eliminated for companies. Interest rates will fall. Profits will rise and dividends will be increased. Most investors will not be paying any income taxes on the dividends that they receive. Stocks should perform very well.
Back to Top