Whom should profit from profit?

By John F. Mahon, Special to the BDN
Posted July 29, 2011, at 8:43 p.m.

The stagnating national and state economies have focused our attention on jobs, deficits and taxation. These are all closely related — as the economy slows down, tax revenues decline but transfer payments increase (unemployment, welfare, e.g.) and other social programs continue (health, welfare, social security) which places increasing burden on all levels of government. No individual, family, business or government can operate in perpetuity with falling revenues and increasing expenditures.

Table 1 provides data for the last 10 years for Maine, New Hampshire and Vermont (all data from publicly available sources). Maine saw the biggest percentage decrease in overall employment (5.6 times that of NH) and Vermont saw a small increase. All three states saw major losses in manufacturing. These losses are particularly troublesome as manufacturing wages tend to be significantly higher than those found in other sectors of the economy. As our economy bleeds jobs, we see reductions in state revenue (personal income taxes, sales taxes, corporate taxes) and increased transfer payments, as noted previously.

However look at employment in the government (federal, state and local) sector for the same period — all three states saw growth here. This growth in government employment was at least partially a response to the overall job losses elsewhere, but this growth contributes to the overall cost of government in a time of overall declining employment and sluggish economic performance. As a consequence, the squeeze on state (and national) revenues is exacerbated.

This cannot continue.

This would seem to suggest that federal and state governments need to increase taxes and-or reduce costs. The reduction of costs has proven to be a political third rail, as politicians are extremely wary of reducing entitlements and social program expenditures. Much of the debate and discussion thus far, including the Presidential National Commission on Fiscal Responsibility and Reform, has centered on proposals that impact individuals (elimination of itemized deductions, changes in mortgage interest and charitable deductions, e.g.) and the closing of tax loopholes. Perhaps we should look elsewhere for revenues. One possibility would be to look at large businesses and our taxation approach to them.

In the suggestions that follow, my colleagues will consider me a heretic. In 2009, General Electric had profits of $10.8 billion; Bank of America had profits of $6.3 billion — yet neither paid a single dollar of federal income taxes. These are not the only corporations to pay little or no taxes in any given year. Table 2 provides some data (revenues, income taxes and net income) for four large firms in different sectors of our economy. Taxes paid vary from 1.8 percent to 15.8 percent of revenues and show profits (net income) from 3.5 percent to 48.9 percent. Shouldn’t this be of some concern to us? Does Apple or Microsoft really need to make 30 percent-plus profits?

Would our economy collapse if Microsoft made only 40 percent and surrendered the other 9 percent to taxes or other socially responsible programs? Even though Exxon achieved a net income of “only” 8 percent, that amounted to $30.5 billion.

My colleagues at the Maine Business School, Profs. Patti Miles and Terry Porter, are engaged in a fascinating study of 242 firms over a 10-year period (2000 – 2009). One aspect of their work is particularly relevant here. They summed the revenue for each individual firm for this 10-year period and obtained a total average revenue of $199.3 billion and they then calculated the taxes (sum of cash taxes paid for each year for the 10-year period divided by the total revenue for the same period).

This worked out to be 2.6 percent of revenues. For the same period, profitability averaged 9.14 percent (or 3.5 times the tax figure). Do corporations have a broader obligation to society than the creation of goods and services, employment and payment of dividends to shareholders?

In fairness, my accounting colleagues go crazy with these calculations. They argue that the tax rate should be calculated on the basis of net revenue minus cost of goods sold, minus operating and nonoperating expenses plus nonrevenue income less allowable deductions (that is revenue where all expenses and tax credits and other perfectly legal deductions are taken). This is the standard method by which corporate tax rates are currently calculated — but what if we pursued an alternative method of corporate taxation? For example, use a simple fixed percentage of gross revenues. The actual percentage could be determined by thoughtful consideration of past revenues and incomes and could, as with individuals, be tiered for different levels of gross revenues. I am sure there are other alternatives that could be developed and pursued.

The point is simple: No level of society can function in perpetuity by continuing to expend funds in excess of what it raises. We are faced with crucial choices — increase revenues or decrease expenditures. This is the tyranny of the “or” choice — why not do both, or better yet, increase both revenues and expenditures? We should look at sharing the burden not just across individuals (whether rich or poor) but include corporations in that mix and continue to provide the necessary services to all in our society. That is what makes this nation so fundamentally different and attractive to the rest of the world.

John F. Mahon holds the John M. Murphy Chair in International Business Policy and Strategy and is a professor of management at the Maine Business School, University of Maine. He has served as dean of the College of Business, Public Policy and Health and as provost, ad interim, at UMaine.

http://bangordailynews.com/2011/07/29/business/whom-should-profit-from-profit/ printed on August 2, 2014