Profit Tax: Horrendous or Terrific?

I'm mulling over a idea to tax huge profits in large corporations (Think income tax for buisness). Small buisness need not apply.


One side of my head says "Worst. Idea. Ever.". But another says "YEAH!!!, THAT'S EXACTLY WHAT WE NEED!!"

Here's what each side is saying:


Horrendous says:

"Sure Hope, tax the very thing buisness are around to exist for. After all, if I'm a buisness owner, why should I turn a profit if I'm only gonna get slammed? This will drain capital like the hole in the Titanic. Plus, because people are greedy little mosters, I'll just cut more jobs simply to cover the gap. Nice work"


Terrific says:


"Wal-Mart slahses jobs everyday. This tax will take their piggish profits and do a world of good. Universal health care, College grants, new subways and buses, more cops and firefighters, More SS to go around....TAKE THAT WAL-MART! Besides, you can give them breaks if they employ more people in the US. Besides, it's not like the Mom and pop store is going to be affected, only profits over a certain, high, amount."

It's one thing if a business just is very efficient and makes a lot of money legitimately because its executives are just that good at what they do and the workers put their hearts and souls into their work and it is just one big happy productive family.

Then you have cases where with oil there is this nasty oligopoly that exists that has the power, though not legally, to manipulate prices and gouge consumers. If extreme profits are gotten in this fashion, then something must be done.

So the system is in place already.

all net profit, that profit that existed over and above the cost of doing business, was taxed. Then corporations got the bright idea to tell the saps out there that lower taxes would mean lower prices, and the saps bought it.

I read somewhere (Harper's, I think) that if business had been taxed at the 1954 rate during Daddy Bush's reign, he'd have had a balanced budget.

First, an example. I work at at cooperative that is entirely worker owned and operated. We don't actually like to see a huge amount of profit on our bottom line. If the cooperative (as a corporation) makes a huge profit, then we have to pay a bunch of extra taxes on it. We have to pay taxes on it again (as individuals) when and if we take that money out as a cooperative dividend (cooperative law requires a certain amount of any profit be returned to the members).

So instead, we try to pay all of the members/employees (all employees are members) more so that we don't make so much profit. We have also learned, over the decades, to reinvest enough of that profit to sustain our business into the future. Not reinvesting in tricky blue-sky financial instruments, but in the capital needs of the cooperative, such as equipment, facilities, etc... We try to make JUST enough profit to keep the banks we owe loans to happy enough to keep loaning us money if we need it (usually for capital expenses, etc...).

If we were a traditional corporation, we would probably run things a different way. Typically, we'd pay all the employees as little as possible, skimp on capital investments, and try to make that profit number as big as possible to keep the board and shareholders happy. That is what leads to big CEO bonuses (and what ELSE is a corporate CEO going to care about?).

The way WE run our business, all that money that would be profit is spread around -- to our employees, to local businesses and contractors, etc... The way a corporate CEO runs a business, all the money is siphoned out of the business, at the expense of the employees, and the businesses' own future (since they skimp on investments for the future).

So as far as taxing profits more, I'm not sure it would make a huge difference. There is a systemic problem -- namely how the Chicago Graduate School of Business is teaching it's executives to loot corporations.

Don't really know how to fix it, either. I don't know how to create a 'change of philosophy' in the business world. I just know I don't want any part of it, so I (we) found another way.

Do CEO bonuses count as profit?

Work on your idea. I think it's worth developing and refining. -JJ

Some profits (income above costs) is legitimately earned: the first mover in a viable market will certainly enjoy profits before his competitors develop.

But, for the most part, 'profits' are actually what Adam Smith termed 'Rents' - as in Rent-Seeking, whereby government influence is used to generate income.

An example would be the income that accrues to the holder of a liquor license in a town that is loathe to approve liquor licenses. Note that not all of his income would be Rent - if he actively managed his establishment, some of his income would be wages for labor; if he owns the building and the stock, some of his income would be interest for use of capital.

Other examples would be the profit made by a Public Utility; the profit made by the holder of a FCC license; the profit made by the owner of a Taxi Medallion; the profit made by a polluting power plant (when other, newer plants must comply with stricter laws); the profit made by banks who can charge interest on money they don't have. In general, if you accrue wealth or income due to some piece of paper issued by the government, it's Rent. One way to tell is when a government license can be sold on the open market: how much do liquor license go for? How much to taxi medallions go for? How much does broadcast bandwidth go for?

While a corporate tax would theoretically catch all of these profits, the fact is that special interests have filled the tax codes with beneficial loopholes. What is income? Hard to define. While no system is proof against tampering, most Rents can be directly assessed; alternatively, many of these government licenses lend themselves readily to periodic auction.

Of course the lion's share of government created value is in Real Estate, in the form of land titles. And here is the crux, a whole lot of people are property speculators, and accrue wealth through the ownership of their own lot. Unfortunately, these people tend to rabidly defend their lots from taxation - much to the benefit of the tiny fraction of the country that owns the majority of land value.

Hopefully, since property taxes are generally the purview of states and localities, more jurisdictions will adopt such a form of taxation. Currently, several municipalities in Pennsylvania do this to a tiny extent, and have seen economic improvement. The Netherlands used to raise most of their public money this way.

This seems to be a fairly popular argument against progressive taxation, used by the GOP. I've always thought it was transparently bullshit. For instance: I've never, ever turned down a raise, even though getting a raise usually puts me in a higher tax bracket. And I don't know anybody who's ever turned down a raise for that reason, either. Not even a republican :-)

For another instance: progressive income tax rates used to be far, far higher than they are now for the highest brackets. I've read that it was as high as 90% until the modern GOP started in on their tax-cutting fetish back in the 70s. I note with interest that there were still plenty of very very rich people back then, even though they must have been in this highest of tax brackets. Somehow, they were still motivated to become rich, and I also note that they stayed rich, even in the presence of this awful, pernicious 90% tax bracket.