Stuck in the Middle with You

by Kevin Fahy

 

Well, here we are again, stuck in the middle of a presidential election year. It’s the ninth (and likely the last) that I will experience as a small-business owner.

From that perspective, the election process has always been a frustrating experience for me. On one hand, I always want the candidates to talk about business issues, especially the problems affecting small businesses. On the other hand, when a debate moderator asks a question related to business, the answer is usually so idiotic that I have to restrain myself from throwing something at the television.

During the last cycle, for example, one candidate was asked what he would do to help small businesses prosper, and he answered that he would cut corporate income taxes. That would be a terrific idea, except for the fact that most small businesses don’t pay corporate income taxes. If he had known anything at all about owning a small business, he would have known that.

Most of the people who run for president are career politicians, whose understanding of business extends only so far as the campaign contributions that corporations make (and what those corporations are looking for in return). There is nothing small about that equation.

There have been a few candidates with business experience, but that experience has rarely been anything remotely related to the issues that most of us deal with every day. I don’t know about you, but I doubt that I have much in
common with people who run giant technology companies or hotel and casino empires.

They do know something about corporate income taxes, and the idea of reducing corporate income-tax rates does make sense when it comes to major American companies that do business worldwide. Those companies have left hundreds of billions of dollars of profits sitting overseas, because they would have to pay a 39-percent tax rate on that money if they bring it home.

The former businesspeople, and others, make a good argument for lowering the tax rate to, say, 20 percent, which would be more in line with other nations and would encourage multinational companies to return profits to American shareholders. Personally, I would go a step further and eliminate corporate taxes altogether.

Other than a brief period during the Civil War, the first income tax on individuals in this country was passed by Congress under president Grover Cleveland in 1894. The Supreme Court ruled the tax unconstitutional, and the idea was dead for another 15 years.

When William Howard Taft became president in 1909, he was under a great deal of pressure to find a way to tax the rich. (Sound familiar?) He proposed a constitutional amendment to establish a personal income tax, but since that process takes several years to complete, he implemented a corporate income tax that would fill the void in the interim. At that time corporations were basically owned by the wealthy, so the tax would hit the intended target.

The corporate tax was supposed to expire when a personal tax was established (you’re getting ahead of me here), but when the 16th amendment was ratified in 1913, the corporate tax continued on unchanged. Ever since then we have had two separate income tax systems, as if the money made by corporations does not end up going to people one way or another.

This dual tax system is responsible for one of the popular myths that has been advanced by more than one presidential candidate, namely that Warren Buffett’s secretary pays a higher percentage of income tax than Buffett himself pays. Although the whole notion started with an opinion piece written by Buffett in 2011, it does not take into account the fact that most of his income has already been taxed as corporate profit before it goes to him.

Speaking of executive compensation, you may also hear that topic come up in the race, as a part of the whole “income inequality” issue. In 1965, the average CEO of a Fortune 500 company made about 20 times as much money as the average employee in that company. Today the ratio is more like 300-to-1.

That’s a problem all right, but whose problem is it? Politicians who raise the issue seem to think that government should control salaries or punish executives with taxes, but after all it’s the shareholders’ money that’s being thrown around, not the taxpayers’. The real solution would be changes in corporate governance to give shareholders more direct control of executive compensation, but don’t hold your breath. So long as corporations are financing political campaigns, we are not about to shake up their boardrooms.

On the other end of the scale, we will surely hear a lot more about raising the minimum wage before this thing is over. It’s an easy applause line, in spite of the fact that it would likely do more harm than good. The same crowd that cheers for a higher minimum wage will also cheer the candidate who talks about bringing manufacturing jobs back to the U.S., even though the two ideas are antithetical.

Those jobs left because wages were so much lower in China and other emerging economies. They may well leave China, but not to come back here.

Another sure crowd-pleaser is any sort of rebuke directed at Wall Street banks or bailouts. I have no special affinity for investment firms, and certainly no fondness for government subsidy of private businesses, but let’s stop kidding ourselves. The banks did not cause the financial crisis by themselves, nor did they receive the bulk of the bailout money.

More than 60 percent of the so-called TARP (Troubled Asset Relief Program) funds went to Fannie and Freddie, the insurance giant AIG, two automobile manufacturers, and a variety of other nonbanks. Overall, by the way, the feds laid out $618 billion and have thus far received $683 billion in return, resulting in a rare windfall for the U.S. Treasury.

Okay, so you get the point. There are a lot of things I would rather not hear politicians say about business. You may be wondering if there is anything they could say that would make me happy.

Perhaps this is small-ball, but I can think of one way that government could make life a little better for small-business owners. I often hear candidates suggesting that we should provide additional benefits, such as healthcare, child care, paternity leave, or whatever, but whenever I look into new benefits for my employees, it seems as though they are not permitted for the owners themselves.

How about lifting those restrictions?

If that’s too much to ask, perhaps politicians could just leave us alone.


You can e-mail Kevin at kfahy@fwpi.com.

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