Business Class

This entry continues the series exploring improvements to the federal tax system.

Taxing business is a tricky issue. In our quasi-capitalist economy, businesses look at taxes the way they look at any other expense. What this means is that the cost of taxes is passed along to consumers in the form of higher prices and passed along to employees in the form of lower wages. So before issuing taxes on business, it is important for government to consider the goal of the taxes. If generating more tax revenue is the goal, then taxing business can often result in simply passing a larger tax burden onto the citizens.

There are other goals, however, that do justify taxing businesses. While payroll taxes are a bad idea--they just decrease wages for workers--other types of taxation can be used to encourage businesses to behave responsibly.

In a market economy, it is vital for large businesses to achieve results. Turning a profit increases the price of shares for a company, and this leads to more growth. Success begets success. For this reason, it is essential that businesses keep their expenses as low as possible, whatever those expenses may be.

A small tax of 8% on a company's cash flow would be the basis of the "Incentive Tax." The goal of this levy would be to encourage businesses to behave more responsibly.

It is important to note that this tax is on a company's cash flow, and not its net profit. Many businesses maintain positive cash flow and report a loss to the IRS. The incentive tax could not be side-stepped this way.

The incentive tax would decrease for every benchmark a business met. For example, an environmentally responsible business might see a 3% drop in the incentive tax rate. A business that stayed out of the court system (which is a big expense for taxpayers) could receive a 2% reduction, and so on.

The effect of this tax would be to push CEOs, CFOs, and boards of directors to meet these standards and avoid paying the tax. The outcome would be an immediate profit increase, leading to a rise in share prices. The market would demand that incentives were met.

One of the most important guidelines in an incentive tax would be the "Fair Pay" benchmark. A huge problem we face in our country today is the rise in household income for the top 20% of earners and relatively stagnant income growth for everyone else. The widening gap between the rich and the poor not only threatens productivity and long-term growth, it is also wiping out the middle class.

What is causing the problem? The overvaluing of executives has driven compensation packages for top-tier employees through the roof. While the market is dictating these astoundingly high pay increases, it is ignoring the overall effect on the work force and the future of our economy.

Let me offer an example. A friend of mine works in sales for a large energy broker. Recently he was working on a huge project, and partnered with an independent consultant. After two years of research, negotiation, and hard work, they closed a deal worth almost $7 million that would turn an enormous profit. The consultant--who did no more or less than my friend--received a check for well over $700,000. What was the reward for my friend? A $500 gift certificate to the local country club. One man receives a check that could fund his retirement, while the other gets a few rounds of golf.

It is hard to blame the decision-makers for these unbalanced policies--our short-sighted market economy dictates that businesses are required to produce higher profits now, not in five years. But because this attitude has taken hold in corporate America, the average worker has been short-changed. Productivity is dropping while hours increase. The incentive for the average worker to excel is decreasing. While inflation continues to rise as CEOs spend their bloated paychecks, the workforce becomes less and less inspired to succeed.

This must stop. Promotion from within must increase, and workers need to be rewarded for exceptional service to a company. Since the market is failing to establish this itself, the Incentive Tax would force a board of directors to choose between hiring a big-name CEO (to make a splash in the market), resulting in an immediate reduction in cash flow from the Incentive Tax, or promoting from within to improve worker morale and save 3% annually. An incentive that promoted higher pay for better performance at all levels of a company would work wonders for America and would help restore a middle class.

The bulk of the revenue generated by the incentive tax would be used for government to maintain standards of honesty and integrity in business. Corporations choosing to side-step ethics and walk the thin line of the law would face constant government oversight, while companies committed to honest practices that benefit everyone (not just the board of directors) would pay less in taxes and operate more freely.

White collar crime penalties would increase. More prison time and higher fines would result from dishonest business practices. A focus on punishing the individual, rather than the company, would be the backbone of the policy. Capitalism cannot excel without honesty.

Good behavior needs to be rewarded. Bad behavior needs to be discouraged. America needs to get back to building stronger, smarter, more loyal, long-term thinking corporations. Taxes on business should encourage this, instead of just passing higher costs along to consumers.