Taxes, Inversion, Avarice, Degree, JFK
The United States government is totally dependent on fees and tax revenue. Taxes and fees are made possible by income. Income is made possible by profit. Profit is derived through capitalism. The primary goal of a capitalist is maximizing profit. In an effort to maximize profit, their job, capitalist charge the highest price possible. The maximum price is usually determined by competitive pressure or government regulation.
Highly successful capitalist are occasionally accused of avarice. Consumer choice is the deciding factor of the existence of avarice. If the consumer has a choice in the market then the supplier is honestly facing the forces of a free market. Wal-Mart is the most profitable retailer in the world and they have occasionally been accused of predatory pricing and avarice. The test here is if anyone has ever been forced to shop at Wal-Mart and if products sold at Wal-Mart are available elsewhere. You get the point. If a local hardware store goes out of business after a Wal-Mart comes to town, it’s because shoppers have voluntarily migrated to Wal-Mart. Wal-Mart is just one example.
One of the organizations I support is Independent We Stand http://www.independentwestand.org/. Visit the website and see how to support locally owned business. The best way to keep locally owned businesses in business is to shop there—vote with dollars.
While the market generally determines the selling price, it’s the acumen of the business owner that ultimately determines the profit. And profit is the metric that determines the fate of a business, whether it be Wal-Mart, a local hardware store, bank, hospital, or just about any provider of goods and services. So, the seller essentially has little control over the selling price and must focus on cost.
Once the attention is turned to cost, the focus must first be in the areas that play the most significant role and those in which there are choices. Procurement of goods to sell is first. It’s often said that profit is determined on the buying end. And there are numerous ways that retailers can drive to the best price and maximize their gross profit.
Once a sale is made and a hopefully a gross profit is achieved, the rest of the costs must be accounted for on the way to the proverbial bottom line—and there are many. Human resources are generally the next biggest single line item, followed by occupancy, which includes rent and utilities. Eventually the bottom line, or net profit, is determined. But wait, there’s more. Taxes.
Taxes are inevitable, must be paid, and are a cost of doing business. After doing business in Texas for over twenty five years I’ve learned that one’s aversion to taxes depends largely on to whom the taxes are paid. Texas boasts no state income tax but it’s my guess that business owners and residents of Texas pay as much or more taxes than those in states with an income tax. The difference is that taxes paid in Texas are assessed at the local level in the form of sales taxes, property taxes, fees, and a long list of other creative ways to fund government services. In my opinion, Texas taxes are more palatable because, via local elections, everyone feels they have a voice in how the tax revenue is spent. And taxpayers can see the result of their tax dollars when a new school or fire department is built, or a road is improved.
Federal taxes are a different animal. I don’t know anyone who doesn’t agree that the US Government spending is, at best, out of control, and at worst, steeped in corruption. And many feel trapped, without choice, frustrated. Let’s circle back to avarice.
One of the results of the Affordable Healthcare Act is the increase in the creation of self-insured healthcare plans. Remember that a capitalist or business owner’s primary duty is to maximize profit. Profit is that which remains when all of the costs, including taxes, have been accounted for. An insurance company can be housed anywhere…anywhere. Most other countries have a lower corporate tax rate than the US—Ireland’s is 12.5%. So, when a business owner sets up their own insurance company to which healthcare premiums will be paid, and taxes paid on those premiums, and given a choice of paying over 40% in the US (state and federal) or 12.5% in Ireland, where do you think their self-insured healthcare plan will be housed? One of the unintended consequences of higher taxes in the US and now the Affordable Healthcare Act, which was declared a tax by the Supreme Court, is tax revenue being paid abroad rather than here. Higher taxes have clearly resulted in lower tax revenues.
What about the avarice? Thanks for reminding me. Most companies have a profit share. Profit shared with employees is based on, well, profit. By maximizing profit, an employer can maximize the profit share, and most do. Prudent cost containment, including income tax management, increases profit, which benefits the owner and the employer. And in the case of the small hardware store competing with Wal-Mart, creative and legal tax management can make the difference between staying in business or putting up the all too ubiquitous “Going Out of Business” banner in the window facing main street. See the avarice yet?
Tax Inversion is the term used to describe the process of setting up an off shore account primarily to reduce one’s tax burden. The act of doing so is seen by some as un-Patriotic and greedy. Others think it boils down to the degree to which the tax burden is shifted. Take Garmin for example. Garmin is a company that was founded in 1989 in Kansas, just outside of Kansas City. They probably chose Kansas over Missouri for tax reasons. Garmin is now domiciled in Switzerland. The US Government is a primary customer for Garmin. Garmin pays taxes in Switzerland. Garmin’s after-tax profits benefit their employees and owners, primarily American stock holders, who then spend their Garmin profits, made larger by prudent tax planning.
See the avarice yet? Me neither.
President Kennedy is famously quoted as saying, “It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”
Tax Inversion will soon to be heard over and over. It will be used to vilify business owners who are simply trying to maximize profit.
Tax inversion is a clear case for how high taxes can result in lower tax revenues. JFK recognized the paradox in 1962– wish Congress and the Whitehouse could see it now.