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Holding My Breath . . . Nope!

Suppose you have a first cousin living in California and another one living in Texas.  You trust and respect them equally.  Both of them have an investment proposal for you.  You like each proposal equally.  Incredibly, each proposal projects the same revenue as the other.

However, one of the proposals shows higher expenses, which means lower profits for that proposal.  Do you really care if the higher expenses are due to rent, labor, or taxes?  No, you are focused on the bottom line, i.e., the profits.

But, wait . . . one of those expenses is taxes!

My point is that corporate tax is just another corporate expense.  Increasing that expense reduces profit and the value of the investment.

Yesterday, the President proposed decreasing the top marginal tax rate for corporations from 35% to 28%, which sounds great.  At 35%, our country has one of the highest stated corporate tax rates in the world.  However, the actual rate is only 12.1%.  This huge difference is due to the many, many tax breaks allocated to certain industries, but not all.  It is a Christmas tree of loopholes for businesses with the best lobbyists.

President Obama wants to reduce the top rate and eliminate most of the loopholes.  The end result will be that American businesses will actually pay more in taxes.  Therefore, his proposal is dead-on-arrival.

There is a perception that business does not pay its “fair share” of taxes.  My belief is that business should pay nothing in income taxes.  Businesses are neither good nor evil.  They may occasionally do something evil or bad, but that is because management is bad.  A tax on business is just an indirect tax on investors.  If you want to tax investors, then tax them directly.  Why tax an artificial entity that simply passes through income, like corporations?

So, which cousin do you invest with?  The one with the lower taxes, of course!  Capital or money flows where it is treated best, whether it is California, Texas, or Israel or China or wherever.  Taxes are just another cost of doing business.

After much thought, I’ve decided not to hold my breath until corporate tax expenses are eliminated . . .