By Jordan Rickards
As our elections have degenerated into something more akin to public auctions, with politicians no longer offering competing ideas, but simply bidding more of other people’s money to give away to voters, new sources of revenue are in demand to meet this promised largess. To some, a corporate wealth tax is especially appealing, because it sounds like a tax on someone else. Nothing could be further from the truth. It is actually a tax on all of us, and it would hit the most vulnerable the hardest.
Corporations would pay for such taxes the way everyone pays for new costs: by scaling back economic activity. That means lower wages, fewer people hired, more laid off or with hours reduced, less money allocated to capital intensive expansions, and lower quality, less available goods and services produced, and sold at a higher price. And it would cause the value of their publicly traded stocks, which comprise the bulk of most retirement plans, to diminish. In other words, this is really a tax on the rest of us, and a terribly regressive one at that.
Advocates of a corporate wealth tax rarely attempt to explain how such a tax would actually improve the economy, choosing instead to content themselves with a moral argument along the lines of “fairness.” But it is not fair to destroy jobs and wages for those who need them, raise prices on those who cannot afford them, and erode the savings of the vulnerable who rely on them.
Oddly, one of the primary arguments in favor of a corporate wealth tax is that companies tend to move profits to low-tax offshore jurisdictions, where such gains cannot be taxed. This is precisely the rationale advanced by professors Jay A. Soled and Dan Palmon in an essay recently published on NJ.com and in The Star-Ledger. They’re right, but they quickly contradict themselves, repeating a refrain common among corporate tax advocates, that the imposition of higher taxes “should have little distortive economic effect on corporate behavior, as there are few plausible scenarios in which a corporate enterprise would purposefully seek to diminish its share price,” as though that is the only kind of corporate response imaginable.
And while, yes, corporations would not want to sabotage their own value, that’s specifically what the professors suggest they do, contradicting themselves again by saying “to meet this tax obligation, such corporations can issue more stock.” But this, of course, would dilute the existing shares, thereby depressing their value across the board, effectively taxing all of our retirement accounts. Thanks!
The proposal has other, equally glaring flaws, such as the tax applying to increases in the value of a corporation’s publicly traded shares. But companies do not make more money as their shares are traded; they only make money during the initial public offering, so rising stock prices do not provide added revenue to pay the taxes. And there are many publicly traded companies that are not even profitable, including many startups which need all the revenue they can get in order to survive. The result of these punitive taxes would be, at a minimum, a reduction in hiring and investment, and at worst, widespread layoffs, and bankruptcies galore, all for the sin of growing the economy.
Further, the professors are silent on what should happen when the shares decline in value. Would the government give money back? And why would companies issue shares on publicly traded markets, if that would result in wealth taxation? They would just float more corporate bonds, thereby adding even further to our corporate debt morass, and sell shares privately to wealthy and institutional investors, excluding the rest of us from the benefits of stock ownership. Either way, they’d still raise less capital than optimal, placing them at a competitive disadvantage.
I do not doubt the good intentions of these professors. But they, and the politicians who regurgitate ideas like theirs, should spend less time in their fantasy worlds, where economic disincentives magically do not produce negative economic outcomes, and more time with people who have to attract investment with the promise of strong returns, and grow businesses that provide jobs, and the affordable goods and services that actually make up our economy.
Jordan B. Rickards is a Milltown attorney, a former assistant prosecutor in Middlesex County and a former Republican nominee for state Senate and Middlesex County Freeholder.
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