Economic Comentary

Congratulations to Barack Obama. I just can’t wait to see what kind of “change” he is talking about. I can only hope that he can be a moderate president and not the radical left politician that he has appeared to be. Now onto a simple economic lesson on what Obama’s tax plan will do.

Corporations are the backbone of this nation’s economy. Many people don’t even know how corporate taxation works, so I’ll give you a basic example so you can understand the intricacies of corporate taxation.

What many people don’t know is that corporations are subject to double taxation. This means that corporate earnings are taxed at the corporate level and then taxed again at the individual level. I’m going to use an example to demonstrate this.

Corporation X earns $100 million of net income after it takes the appropriate tax deductions for its expenses. Currently, the highest marginal tax rate for a corporation is 35%. Since we have a tax bracket system, a corporation’s first $50,000 earned is taxed at 15%, earnings $50,000-$75,000 are taxed at 25%, so on and so forth, and then you work up to earnings over $300,000. Once you hit the $300,000 mark, your taxes will be roughly 35%. Currently, all earnings over $18.33 million are taxed at a rate of 35%. For reference, the highest corporate tax rate in the United Kingdom is 28%, which means our rate is already pretty high.

President Obama is seeking to raise the highest marginal tax rate to the levels they were before the Bush tax cuts. This would mean the highest corporate tax rate would be 39.6%. That’s less than a 5% increase, so it doesn’t seem all that bad, but that’s still extremely high compared to the rest of the world, and this is without taking into consideration the taxation of dividends — distributions to shareholders of a corporation.

As I mentioned before, corporations have a “dual layer” of tax. For the purposes of demonstration, a corporation that earns $100 million of net income after deductions will pay $35 million in tax. The corporation would have $65 million left. They could reinvest this amount into the company in order to hire new employees, advertise, or invest in research and development. They could also distribute this to their shareholders. If there are 100 million shares, the corporation could say, of this $65 million, we want to give $50 million back to our shareholders and we’ll reinvest the remaining $15 million back into the company. The company would then declare a $0.50 dividend, so if you own 1,000 shares, you would get $500 just for owning stock.

Under the current tax structure, dividends are taxed at 15% so of this $500 distribution, $75 would be tax to the federal government. Therefore, the total $50 million distribution will result in another $7.5 million in tax revenue in addition to the $35 million that was already collected by the IRS. Thus, as you can see, the government already gets $42.5 million of that $100 million earned in this example under the “low” Bush tax cuts.

Obama could raise the dividends tax upward to 40%, although he’s stated at other times that he will just raise the dividends tax from 15% to 20%. If corporate earnings are taxed at a rate of 39.6% and then dividends are taxed a second time at 40% after those earnings have already been taxed a first time at 39.6%, it would have a crushing effect on the market. Who would want to invest in an already volatile market during a recession when the return on their investment is taxed at these utterly insane rates? And that’s all without taking the capital gains tax into consideration, which Obama wants to raise from 15% to 28%.

In our example, under Obama’s tax plan, the $100 million that Corporation X earned, $39.6 million would be taxed at the corporate level and $10 million would be taxed at the individual level with a 20% dividends tax rate, thus resulting in $49.6 million in taxes. At a 40% dividends tax, $59.6 million of the $100 million would be taxed. If you think corporations will continue to produce when they’re making 40 cents on the dollar, you are sadly mistaken. Under the “low” Bush tax structure, corporations are still only making 57.5 cents on the dollar.

To put things in perspective, if this corporation were located in the United Kingdom, where the corporate tax rate is 28% and dividends tax is 10%, this corporation would be taxed only $33 million instead of the $49.6-59.6 million that Obama is proposing. Does anyone else think we’ll see corporations flock overseas under Obama’s tax plan? I do.

Obama, please do not raise taxes at ridiculous levels if you want this economy to survive. I can only hope that you surround yourself with good advisers.

Or this just about sums it all up in a 1:00 minute YouTube video.