Econ 101 for Dummies

The Wall Street Journal has uncovered yet more madness in the President’s tardy budget plan:

Mr. Obama is proposing to raise the dividend tax rate to the higher personal income tax rate of 39.6% that will kick in next year. Add in the planned phase-out of deductions and exemptions, and the rate hits 41%. Then add the 3.8% investment tax surcharge in ObamaCare, and the new dividend tax rate in 2013 would be 44.8%—nearly three times today’s 15% rate.

Keep in mind that dividends are paid to shareholders only after the corporation pays taxes on its profits. So assuming a maximum 35% corporate tax rate and a 44.8% dividend tax, the total tax on corporate earnings passed through as dividends would be 64.1%.

That’s nearly two-thirds going straight into Uncle Sam’s pocket, just for sitting there and promising to maybe “go easy on you” next year. Nice work if you can get it. Way to sock it to those mean old corporations, too, Mr. President. And to which I’d like to add: Herp-derp-derp.

The problem is, corporations don’t pay taxes. Not one red cent. They never have and they never will, even if you jack up the corporate rate to infinity-percent-plus-one.

I got this fantastic notion this morning, when I remembered an Econ 101 lecture given by Prof. Walter Johnson at Mizzou twenty-mumble years ago. He was an institution at the university, and punctuated his lectures with, “Money, money, money — I love it!” in his gravelly voice. See, Johnson was something of a Kennedy Democrat, back when Democrats still honestly cared about a growing economy.

During one class he told us the story of the Columbia, Missouri city council getting the idea that there were all these students in town — and those lazy good-for-nothings weren’t paying any property taxes. Why, true and sturdy full-time residents pay property taxes on their homes, but these meddling kids are here most of the year, and all they do is rent. We’ve got to make them pay!

So Johnson gave the council a good talking to. He told them — and I think this is an exact quote — that, “just because someone doesn’t have a receipt, doesn’t mean they aren’t paying taxes.” And then he gave the council his proof.

Student A rents an apartment from Landlord B. Landlord B pays the property taxes to Council C on his rental unit every year like a good, full-time, property-owning resident of Columbia, MO. Now, let’s say Council C decides to raise property taxes on Landlord B. Does

Landlord B simply eat the increase, or does he pass the cost along to Student A? Well, in higher rent or fewer services, yes, Landlord B will find a way to make Student A pay for the taxes imposed by Council C.

Student A does pay property taxes, even if Council C never issued them a receipt for it.

Similarly, just because someone does have a receipt for taxes paid, doesn’t mean they’re the ones who paid the taxes.

Assume a perfect world — one with no taxes. When you’re done laughing and/or crying, please follow along.

Let’s say Corporation D is smart and lucky enough to show a profit — and in our perfect world, it doesn’t need to form any shelters to dodge any taxes. What does Corp D do with the money? It has several choices, including:

• Hire more workers

• Pay dividends

• Increase pay and/or benefits
• Deposit a rainy day fund
• Invest in expanded production or merger

That’s not a complete list, but you get the idea.
Now, perfect worlds never last, so let’s say some smart laddie gets himself elected President, sees all that money Corporation D made, and says, “Those greedy corporations need to pay their fair share!” And Congress goes along and imposes a 25% tax on profits. What happens next? That tax gets paid, all right.

It gets paid by the new workers who weren’t hired, by the retirees and mutual funds who got smaller dividend checks, by the employees who didn’t get a pay raise, by the banks who got smaller deposits to loan out, by the entrepreneur who couldn’t get a loan, and it’s paid by each and every one of us, in the form of reduced investment and lower economic growth.

Yes, Corporation D holds the receipt for taxes paid. But the money came out of our hides, not “theirs.”

We have met the greedy corporation, and he is us.