CORPORATIONS AND ALTERNATIVES
by Dr. Lawrence Wilson
© December 2018, L.D. Wilson Consultants, Inc.
This article is a primer on capital, corporations and their alternatives. Let us begin by defining terms. A corporation is a type of business organization chartered by the government and having limited liability as one of its foundational characteristics.
Corporations have a long history and have taken several forms. Among them are the private stock corporation, public corporations which usually include towns, cities and other public entities, several types of cooperative structures and many other variants on these basic forms.
Corporations are important because they are the major method used in all developed nations to accomplish large projects that require large amounts of money and personnel. The ways this is done are discussed in detail below.
Capital is money that is used to build business structures and other things of that nature. Every business enterprise, no matter if it is privately owned or government-owned, profit-making or non-profit, requires capital for construction, operation and other functions. When someone says he or she prefers socialism to capitalism, it really means the person prefers state-controlled capitalism over privately-controlled capitalism. It also means the person prefers tyranny over liberty.
This is important. There is no getting away from the need for capital, no matter who is in charge.
textbooks are written about the history of corporations, and this is not my
area of expertise, so we will only touch on the subject here. Corporations actually began centuries
ago when merchants needed large ships to bring items from Asia, Europe and
other places around the world. The
risks were high, however, so no one wanted to take all the risk by himself.
Early on, a king or queen would sponsor the ship voyage. For example, this was how Christopher Columbus and many other famous voyages were sponsored. If disaster struck, the king was out some money and he also gained all the wealth if the voyage succeeded in bringing back silks from India or gold from other places.
Over time, more people wanted to become merchants. The idea was born to invite investors to buy into the venture. If it went well, there was much money to be made. If it went poorly, the investors lost their money and that was the end of it. In this way, expensive undertaking could be financed privately and if a storm destroyed the ships, one person was not responsible for the entire failure.
A problem arose, however, because no single person was responsible if things went wrong. How was this to be handled? No investor wanted to put money into the voyages if it were possible that he could be sued for problems in amounts much greater than his investment. In other words, the investors were willing to lose all of their investments. However, it was too much to ask them to carry the entire burden for the entire voyage, when they only invested a small amount in it.
The idea evolved to set up a structure that would allow a group of individuals to pool their resources in order to raise enough money for a large project, and to protect those willing to invest and work on the project by limiting their liability. In return for these privileges, the entity, only later called a corporation, would be tightly regulated by a governmental body so that it would hopefully carry out its mission in the best possible way.. This was basically the birth of the corporation.
The Corporation in America. In early America, the founders thought we could do away with corporations because we were basically an agricultural nation dedicated to peace and prosperity. Many were quite idealistic as well, and did not like the selfish practices of the East India Tea Company and other British corporations.
However, Americans soon realized they were wrong about corporations and there were no other structures that handled large construction and development projects anywhere near as well as the corporate structure, which we will discuss next.. Corporations were needed to build roads, factories, schools, hospitals and much more. Once again, no one wanted to have full legal liability for all the possible mishaps that can occur at a school, on a roadway or on a train or ship.
Most of these mishaps had nothing to do with faults in construction or in the product or service. Many were simply accidents due to carelessness on the part of those who used the schools, ships or other items or services. Yet the legal consequences for an individual could be devastating due to an accident, and many talented people refused to work under those circumstances.
As a result, America adopted corporation laws similar to those of Europe and other developed nations. Over the years, the laws evolved, though the principles are the same.
THE ESSENCE OF CORPORATIONS
1. Corporations are private entities owned by stockholders. These stockholders may own as many shares, or as much of the company, as they can afford to buy. There are no limits on this in some cases. The board of directors of a private corporation is generally made up of those who own the most stock, and they make the most vital decisions, such as hiring the officers of the company and making policy decisions.
2. All corporations must make a profit. By this I mean they buy raw materials at one price, add value to them or labor to them and sell them at a higher price. This is how business works, regardless of whether the corporation is set up as a profit-making business or as a non-profit business. The latter has more to do with tax benefits than anything else.
3. Corporations are regulated. This assures that certain practices of accounting, liability, performance standards and so forth are followed for maximum safety and efficacy. Some of these rules are called ‘transparency’. This means that the corporation’s practices must be easily understood and published regularly for all to see. Corporations actually face much more regulation today than ever before, especially now after the sub-prime real estate losses are being falsely blamed on corporations. In fact, government incentives are mainly to blame for this debacle.
Limited Liability. This is a bit complex.
It does not mean that a corporation is not liable for the products or
services it provides. Even the
cars driven by the company employees are subject to full liability if, for
example, they hit a pedestrian or even a dog.
However, the individual people who own stock, who are employed by the company or sit on the board of directors of the corporation cannot be held personally liable for the products or services or other activities of the corporation. There may be exceptions to this rule, but it is the general principle of limited corporate liability.
So the company may be sued for an unlimited amount of money, enough to drive the company out of business. However, a machine operators, a restaurant waitresses, and even the chief executive of the board of directors have immunity from personal lawsuits.
This is critical to the success of all businesses, and important to understand. If it were possible to sue the employees, stockholders, or other people in the company personally, most bright and talented people would simply refuse to serve in companies for fear of lawsuits. Also, no one would be willing to invest their money in the company, even if it did good work, again due to a fear of being sued for some mishap over which no one in the company has control. Some will argue that if one is not willing to be totally responsible for their actions, they ought not take the job. However, it is impossible to control for all possible mishaps. If everyone were totally liable, no one would do many jobs that are vital to our health and wellbeing.
This is exactly what is occurring in some areas of the medical field. There are shortages of obstetricians and other specialists because the fear of lawsuits has gotten so bad. If we want talented people to take on tough jobs that are sometimes risky, they must be protected from too many legal assaults. This attitude does not excuse poor performance, but it is an important consideration. There are other ways to discipline workers and board members besides lawsuits.
5. Special Tax Treatment. Corporations in America and around the world are taxed differently from individuals. This is necessary because their income is of a different nature. The question of how best to tax corporations is discussed in much more detail below.
6. Ownership is permitted by foreigners, distant boards of
directors or even a single human being. In practice, this means
that the ones in charge of the company may live in a different nation, and may
have no loyalty or even interest in the workers, their families or others who
work in the company.
On the positive side, this means that the company can be run by the best minds in the world, regardless of their nationality or where they happen to reside or work.
These are some of the major features of corporation law, though details vary a lot depending on where the corporation is based.
WHEN CORPORATIONS MISBEHAVE
laws that limit the liability of the corporate employees and officers also can
open the way for abuse. Also,
corporations are charged with large projects, such as building skyscrapers,
ships and airplanes. Thus, they
deal in the billions of dollars in many instances. This also opens the way for mishandling of funds. Also, some industries and even certain
companies receive special incentives in the form of tax breaks or immunity from
lawsuits. This also contributes to
fraud and misuse of the people’s trust in a few cases. Any time that incentives are used to
produce things there are tradeoffs.
So the price that we pay at times for limited liability is that a company abuses its limited liability and cannot be held fully responsible for its activities. This is the main dilemma we find ourselves with as a result of corporation status. What can be done about this?
The two basic options are to discontinue all corporations, or to alter the structure and laws and incentives to help make these powerful entities more responsible to society and humanity.
I will not spend time on the first option because it will not happen, and it would not be a good thing, anyway. Allow me to explain.
We owe our standard of living, and in many cases our lives, to millions of corporations that produce our food, shelter, transportation, energy and almost all household products and services we often take for granted.
For example, It was an enlightening experience for me to live in undeveloped areas of Mexico. Services one takes for granted such as mail delivery, hospitals, telephones, auto repair and so much more just were not available in some places where I lived.
Life was much harder, with more unemployment, suffering and death as a result. Therefore, I will never advocate just doing away with corporations, as some suggest. This has been tried in other nations and it does not work. It is a major reason for the failure of the Soviet Union, for example. Let us move on to other options. I will divide these into new forms of cooperative structures, and reforms of existing structures.
OTHER STRUCTURES - COOPERATIVES
An alternative business structure used around the world is the cooperative business, or coop for short. There are many kinds of coops, from producer coops such as farm coops, consumer coops such as food coops, and even socialist cooperatives in Israel, Cuba and other more socialist countries. Cooperatives in socialist countries, especially in communist nations, are really just government enterprises, perhaps with some local worker input. We are not as interested in this type of coop because they are not really cooperatives, except in name only . They are probably not viable alternatives to private American corporations.
First, let us examine the features shared by coops and existing private corporations:
1. Cooperative in America and Europe are privately-owned corporate structures chartered under the
laws of each state. This means
that they are regulated businesses, similar in this way to private
2. Coops must make ends meet, just like corporations. This means they buy materials or services, add labor or other value to them, and then resell them for more money.
3. Coops may be set up to be profit-making or non-profit businesses, just like other corporations. This is more about tax treatment.
4. Like other private businesses, co-ops exist to benefit their owners.
5. Cooperatives are taxed in a similar way to other corporate structures.
6. Cooperatives and corporations share the possibility of having foreign ownership.
7. Cooperatives also are given limited liability of the same nature as other corporate structures. That is, one cannot sue the employees and share holders for problems of the cooperative. One may only sue the coop itself.
Now let us look at how coops differ from other corporations:
1. In some cooperatives, the owners are called members, and are often the same people who patronize the business. This is very different from most private corporations, whose owners are called stockholders and often these people are not even users of the product or service the corporation offers.
2) In all cooperatives, each shareowner or member has an equal voting share in the business. In a traditional company, this is not the case. In a private corporation, one person or group can control as many shares as they can afford to buy. Shares can be bought and sold at will.
IMPLICATIONS OF THE DIFFERENCES IN THESE TWO STRUCTURES
The differences in structure have important implications.
One person or a small number of people can and often do control the activities
of a private company. They simply
have the majority of the stock and so they get the most votes at the board of
director’s meetings. This places
the possibility of tremendous power in the hands of one person or a small group
of stock owners.
By contrast, ownership in a coop is very diverse, with each person owning just one share. This means that a coop cannot be controlled by one person or even a very small group.
2. Coops are much harder to govern. Many more voices must be heard in order to come to a vote. A company can be controlled by one person, in contrast. This can be good or bad. A good owner can do much good. A bad owner can ruin the company single handedly. On the other hand, a good coop management team leads to excellent stability. A poor quality team will make poor decisions and the coop will fail.
Ownership in a coop is usually more stable, since it is not “for sale” in the
general public. This, again, is
both good and bad. Stability is
good if the decisions are excellent.
However, if change is needed, it is much harder in a coop, where many
people own individual shares. Change in a modern corporation can happen literally overnight
if a new owner steps in. Also,
with a smaller group of controlling people, private corporations can make snap
decisions that are sometimes necessary in business.
Coops, which have to gather many more members together for a vote, have a harder time with this. Coops often have management committees to make many decisions and help get around this problem. But important decisions are still an issue, since the members may not want a distant committee to make these decisions for them. For instance, just educating the coop membership about an upcoming decision is often a problem. Many coop members are not businessmen or businesswomen. They often lack expertise and knowledge in these areas of life. So making good decisions can be difficult for them.
In contrast, the board of directors of a private company have all their money riding on their decision and thus they have far more incentive to study the problems that arise carefully in order to make the wisest decisions for the company. They are often ‘full time’ on the job, whereas coop members are generally in other lines of work and not as dedicated to the success of the coop as they are to other things in their lives.
Traditional financing is much harder for cooperatives. Most financing institutions, such as
banks, would much rather handle a few large stockholders than deal with
thousands of members of a coop.
Banks must check the credentials, credit ratings, wealth and other
background information of those to whom they lend money. This is practically impossible for
bankers to do for coops, with their diversified control due to having thousands
of equal shareholders.
However, coops have a financing method that private corporations do not have. They can go directly to the owner/members for cash. This is done usually by assessing each member a certain amount of money, which is usually a loan, but not necessarily. This, of course, will only work for relatively small amounts of money, unless there are hundreds of thousands of coop members, which is rarely the case. Yet it is an effective, cheap and often fast way to raise some capital.
The stockholders of a traditional corporation are not subject to assessments of this type. Instead, money is raised by selling more shares or through bank loans of other methods. Coops, of course, cannot just issue more shares to raise money in most cases. They can have a membership drive, but this is more work in most instances.
an advantage of private corporations today is their ability to raise millions
or even billions of dollars quickly and efficiently to pay for new projects and
to bail out projects that suddenly develop a need for more money. This is part of doing business, as
anyone knows who has run a company of any size at all.
The power involved in raising billions of dollars is one reason that many people are skeptical of corporations in general. This discussion, however, is needed because one must realize that the ability to raise money to save old projects or start new ones is absolutely necessary. To think that this is untrue or that it will change any time soon is simply untrue.
For all these reasons, corporations have become the dominant form of business in America. However, coops can succeed if the problems with them are handled correctly. For example, one can elect a governing board to make all major business decisions. However, since the coop board of directors has no financial stake in the outcome, they still have less incentive to make the wisest decisions. Politics, feelings or other factors may overly influence their decisions. This can, of course, be excellent, but many times it leads to disaster for lack of a practical focus. I have seen this amny times while working in consumer or food coops.
problems with coops are those of politics of dealing with such as diversified
membership. Cliques tend to
develop and everyone often wants to be heard at meetings. This slows down the process of
conducting business. Leadership is
often unclear, another important issue.
In practice, those who control the meetings, for example, are often not the most important members of the coop, so time and energy are often spent on frivolous matters. The wiser or better-informed members become impatient and often abandon the coop for places where their knowledge and expertise will be better appreciated. I also experienced this first hand a number of times in food coops that I joined, hoping for a true community experience. Instead it was a chaotic experience that ended in disappointment and departure.
are often far more involved and in touch with their communities. This is not always true, but tends to
be so. This can be excellent, or
it can hamper the activity of the business.
On the positive side, the coop becomes a clear fixture of the community and supports other community functions while it serves some needs. This is the ideal arrangement to build community in some cases.
The other side of the story, which I also witnessed at times, is that community involvement overtakes business and poor business decisions are made. If things get bad enough, the coop cannot compete and survive and goes away altogether, and no one benefits. Therefore, a delicate balance must be maintained.
Private corporations should be in touch with their community because they employ member of that community. However, many do not care about the local employees, unfortunately. As a result, companies have a reputation for ignoring the community. This has changed somewhat over the years. Also, in fairness, some companies are extremely community oriented, usually the smaller ones but not necessarily.
An enlightened owner, manager or other person in charge can do much to win the support of the community and the company can reap many benefits as a result. Good community relations are quite essential at times for a company’s success, especially if times are touch and the company must make difficult hiring and firing decisions, for example.
So it behooves companies to love their communities, but there is less incentive to do so when ownership of the company is often in the hands of a few, distant people, or worse, another company that is even more distant from its workers. At its worst, the company can be sold “for scrap” at any time, moved overseas or just allowed to die by people who haven’t the slightest notion or care about how such a decision affects those in the community. This is the main reason for the bad reputation of most companies in the entire world.
Once again, in fairness, this works both ways. A distant or foreign owner can destroy a community by moving the company out of town. However, an enlightened foreign owner can save an entire community with one decision, such as to move his factory to that town, or to invest heavily there in some other way.
HISTORY OF COOPERATIVES
The coop is not a new idea. It has quite a long history. However, let us review that history rather briefly. The first coop was formed in Rochdale, England 150 years ago. The movement soon spread to America. The early American cooperative movement was closely allied with Soviet communism, which promised an egalitarian society and sounded wonderful. However, the rise of Stalin and the brutal suppression of business and all freedom in the Soviet Union made American coop leaders realize that coops require a free enterprise business environment in which to operate.
This means that cooperatives in America and Europe, for example, bear little or no resemblance to the state-owned cooperatives that were formed in Russia or Cuba. Those coops are owned by the government, who made all the major decisions about the farm, factory or other business. In contrast, American and European coops are privately owned. This means they decide all their own policies, and they own or lease their own land, buildings and equipment.
state cooperatives in Eastern Europe failed because they did not allow the
members to make important policy decisions. In contrast, privately-owned coops
in America are very much a part of the American tradition of free
enterprise. They would not be
tolerated in a totally socialist country.
Many socialist movements in the United States have been associated with
cooperatives, often forgetting that co-ops require a free or pleuralistic
society in which to operate.
This is a key point. Many politicians lately want to limit the power of companies with government rules and regulations. They forget that their tax policies and other types of laws will also limit all capital formation, even by coops, which need flexibility as does any corporation to do its jobs and conduct business.
Complying with rules and regulations just raises costs, in most cases, and these costs make the business, of whatever type, less competitive in the world. Also, regulatory costs are just passed on to the consumer, even though they may serve no productive purpose except to diffuse public concerns. This is often forgotten by politicians out to get votes, most of whom have never worked in, let alone run a large business of any nature of type.
Truly, everyone in government should be required to work, at least, in a large, competitive business organization for at least a few years before making important decisions affecting all businesses in a town, let alone in the nation or the world. However, the opposite is usually the case. Those who work in government are precisely those who disdain business as too “rough and tumble”, too “competitive”, or other derogatory phrases that are much stronger such as “murderer” and “capitalist pigs”. These terms are used quite often, even on American college campuses.
If only the perpetrators of these words could understand the incredible benefits today of corporate society, they would keep quiet and instead try to make corporations more responsive to the people they serve by means such as education and awareness training for all leaders, business and government, instead of trying to shut them down. Even oil, a area where there is much discussion of the evils of this “dirty” industry, has revolutionized life on earth and is continuing to bring incredible prosperity to millions of people. Are their alternatives that are better? Yes, but that does not reduce the amazing benefits of our autos, trucks, planes and all that we use oil to power.
businesses are set up to serve the needs of their owners. This is important to remember because
there is a move today to force corporations to serve their nation or other
communities. However, the reality
is that a business will ultimately serve those who own it.
However, traditional corporations serve their relatively small number of large shareholders, while cooperative businesses are set up to serve a more diverse membership or ownership.
The stockholders of most traditional corporations do not participate in the day to day activity of the corporation’s business. They primarily wish to make money, although they may have other interests, such as building a reputation or something else. However, profit is often the main consideration and the reason they serve in their positions or buy the stock
Cooperative members usually do participate in the business itself as shoppers, producers or in other day-to-day capacities. They may be more interested in their own community than in the profits or savings they derive from their coop membership.
This has implications for the management of the company and its bottom line. For example, coop members may wish to make available hard-to-find products or serve special needs of members, even if these activities generate less income. A consumer or producer coop is more likely to offer employment to members in return for a discount on their food or other goods. A coop might offer recycling facilities for members, if that is what they wish, or a thrift store, space for classes, a newsletter, pot luck dinners for entertainment, and so forth. As you can see, coops, because they tend to serve a different kind of ownership, often are less interested in pure profit and more interested in their communities, families and social conditions.
ARE COOPS VIABLE BUSINESSES?
the question arises as to whether coops can be viable businesses. The answer is yes. However, they must follow all the rules
of good business. These include
efficient operation, sound accounting and bookkeeping procedures, effective
decision-making and good marketing and public relations to continue attracting
their clientele. This is not an
easy task for any business, and coops have some additional difficulties that
have been elaborated above.
For this reason, few coops survive in America and Europe. There are notable exceptions, but they are few in number. Several consumer coops that I have joined failed. They had poor management, depended on volunteer labor that was not very reliable, and decision-making was slow and tedious. Running coops definitely require all the same skills, and often more, than are required in other kinds of businesses.
TAMING PRIVATE CORPORATIONS
Given the above, what are the alternatives if we are to continue as an industrial powerhouse and need the services of large, powerful corporations? Here are a few thoughts on this topic.
1. Boycotting Corporations. Consumers can often vote with their money. If enough do not like a corporation, they can stop buying their products. This is easy with certain items, and very difficult with others such as gasoline or water or garbage disposal, for example. Boycotts have caused changes in corporate behavior, though most of them do not work well.
Corporations can be sued for negligence, damages to the environment and
many other violations of local, state, federal and even international
laws. The most powerful type of
lawsuit is a class-action lawsuit.
This type involves many people, as opposed to one or two. It reduces the cost for each
participant and greatly enhances the chances of winning the suit. These have been very effective against
certain corporations who polluted or poisoned people, for instance, when they
knew better but were shown to be negligent.
An important consideration for legal action is the importance of private property rights of individuals. In the past hundred years or so, private property rights have been eroded greatly. They have been subordinated to the government in laws that pertain to eminent domain, which is the government’s ability to take personal property for public use.
Environmental regulations have also eroded private property rights. For instance, certain areas that are designated as homes for endangered species, or delicate environments cannot be used for development or even for building a house.
While these changes seem positive in some cases, they have also eroded the individual’s ability to sue town and other corporations for violation of private property rights. This is a subtle area, but one in which corporate power has been increased, and not decreased by well-meaning legislators and even the Supreme Court of the United States, in the case of eminent domain.
4. Reducing Special Corporate Privileges. This is an important
one. Some corporations seek and
are given government protection for their industries. This sounds like a decent idea in some cases, but it often
causes huge abuses. Government
protection means that one cannot sue them for damages because their product or
service is vital for “national security”, “public health”, “public good” or
Examples are the drug companies that make vaccines. Since they are protected from most legal action against them for death and disability due to vaccinations, the abuses in this industry are enormous. Another set of examples are the oil companies and some military contractors, whose services are considered vital for national security.
Another horrible example is the central banking system, the Federal Reserve, which is neither federal nor is there any reserve. It is mainly privately owned and run, something most people do not understand. The Fed, as it is nicknamed, was given a banking monopoly by the US Congress, which can take it away anytime they like. Most people do not know this fact. It occurred in 1913, and has caused untold suffering ever since. Bankers are responsible for many wars, far more than any weapons manufacturers or politicians. Bankers like individuals and nations to be in debt, and have succeeded enormously well in doing this to America, sad to say.
Therefore, we must be extremely careful about giving anyone, individuals or corporations, “special privileges”, which usually means tax breaks, monopolies in their field or immunity from lawsuits.
All corporations are regulated entities and regulations can be altered
to improve the accountability and transparency of corporate activities. This is the main route that has been
taken over the years to reign in the errant behavior of a few
corporations. Most, by the way,
are superb in their activities and have given us nothing but benefits in every
area of our lives.
Not only lawmakers, but the courts of the United States and other nations, continuously re-interpret corporation laws and rules of behavior. It is important to recognize that laws are changing and evolving at all times. While some believe that all corporations, for example, are evil, nothing could be further from the truth. There are many, and in fact most, who want to serve the public in the best way possible.
Some advocate passing regulations to force companies to clean up their messes and leave the environment better or at least as clean as they found it. Other regulations would force companies to contribute a certain percentage of their profits to charities or community services.
These ideas are good, basically. The only danger is when they are overdone or applied unfairly in a way that cripples corporate activities. For example, if a company is not making much money, to demand that they give what little they make to charity will destroy the company. Therefore, such laws must be carefully crafted, with the input of companies and others who have a deep understanding of the hidden consequences of the laws and rules. However, this is an area that is being explored in many areas.
6. Better Tax Incentives. This issue is handled at
the end of this article. Please
read about the National Sales Tax and particularly how to tax the rich with a
This, however, is another aspect of corporate regulation that deserves special mention. There is much talk, especially in election years, about raising taxes on corporations in order to equalize the income of the poor and the wealthy. This is doomed to failure and I will explain why.
Corporations must pass on their taxes in the price of their products and services. A moment’s reflection will show why. The corporation must pay the tax, so they must get the money from somewhere. Their only source of income in the sale of their products, so their only choice is to raise the price of everything they sell.
Few politicians understand that this hurts the poor far more than raising income taxes, for example, because everyone must eat, and live in a house or apartment. Therefore, we must patronize stores and other businesses, that are just charging more for their products and services to pay taxes to the government.
The way to help equalize the rich and the poor are to provide educational opportunities for all, maintain the value of the currency, and only tax those who have the most money. Corporate taxes, however, tend to fall on everyone, not mainly the wealthier people. For instance, up to half the cost of an automobile is taxes the company and its suppliers must pay. So taxing corporations makes little sense other than to make the politicians appear as though they care. If corporations were not taxed at all:
1) Many vital products and services would be much cheaper, up to 50% less.
2) Products would also be much cheaper because the companies would not need hundreds of accountants, tax lawyers and support staff to comply with the tax laws of every state and locality and comply with hundreds or even thousands of tax laws in every area in which they operate.
The cost of doing business and calculating taxes on every phase of the building, operating, servicing, distributing of simple everyday products we depend on is astronomical.
Politicians are rarely aware of this, or do not understand it, and often don’t care, as long as they receive money from taxes. However, it would be far better to tax individuals, not corporations, or even better, tax products at the retail level. This is discussed below.
7. Limit corporate profits. This is a special case of an incentive
that some advocate as a way to limit corporate power. It is actually more reasonable than placing high taxes on
corporations, which just get passed on to consumers.
However, this presents may problems as well, as some nations have discovered who have tried this option. One can, of course, cap profits at several million dollars or place a 100% tax on all profits above a certain amount. However, in doing so one reduces or eliminates important incentives:
a) Companies that are not rewarded for success will stop trying to succeed. This can decrease greatly the benefits these companies provide. In other words, if a company knows it can only make a 10% profit and they know they can do this with their old products, why work hard to bring out new products and services that people want and need?
The question of incentives is the critical one here. Most people need financial incentives to work hard. That is the truth, although some may doubt it. If the profit incentive is taken away, what will replace it? Until someone comes up with a better incentive, the profit motive works across society with most people. This is simply a fact. One can debate its merit, but it undoubtedly works, as evidenced by how people respond to sales, discounts and other profit-related incentives.
b) Who will do research? Innovation requires research, and research is generally extremely expensive. Who will conduct costly research if companies know they cannot recoup the expenses of research by making large profits on their discoveries.
Some say let the government pay for research. This is indeed possible, but is it wise? Let us look at an area in which the government pays for most research – health care. The National Institutes of Health has some 29 separate research institutes with hundreds of laboratories and grant programs for thousands of colleges and universities to do health research.
In spite of massive spending of taxpayere money, health costs are soaring and the lifespan is not increasing. ADHD, autism, cancer, heart disease, diabetes and many other diseases are increasing, not decreasing. What is wrong with this picture?
Here may be what is wrong. First, there is little profit motive for government research. Instead, government jobs are safe and the risk of getting fired for doing poor work is very small. This means the brightest people do not take these jobs, as they don’t mind the risk because they know they are competent. Inferior people tend to work for the government because they prefer secure jobs and good benefits. They are often less interested in finding a cure than they are in perpetuating their lab’s funding.
In other words, take away the profit motive, as occurs with all government jobs, and quality suffers. This is undoubtedly true, as was discovered in the former Soviet Union and other totalitarian nations around the world. People need incentives and the profit motive works. Government jobs are very secure and the incentive is just to get along and don’t rock the boat, as they say.
Also, government is invariably corruptible. This is a true statement, despite what you believe. It is not by accident that most health care research is for drug cures. It is not for natural healing, because there is no natural health lobby urging Congress to support this kind of research. Government is a special interest group, and it is never “unbiased”.
Third, government programs are always wasteful and inefficient. This is well-proven and applies across the board, whether the example used is Medicare, Medicaid, public schools, the IRS, the post office or any other government agency.
Fourth, no one knows which research will prove the most important. When government gets involved, it selects its research projects based on “expert committees”. This is not the best way, however, as time and experience have shown. Thus, for example, the “War on Cancer” is acknowledged, even by the New England Journal of Medicine, to be a failure. Cancer rates are higher than ever, even though taxpayers have shelled out upwards of 30 billion dollars for it.
It is far better to allow people to keep their money and allow them to research privately by forming companies that assume the risk that may research something that is not helpful. But for them to take the risk, they must be given the opportunity to profit from their discoveries or few would continue to take the risks associated with research.
Private individuals or companies often base their research on vague hunches, intuition, or just the ideas of one brilliant man or woman such as Thomas Edison, Nicola Tesla or more recently, Bill Gates, who founded Microsoft in his garage. Hundreds of other cases could be cited that are well known. We owe our current advanced civilization largely to their privately financed efforts. Often these pioneers were completely ignored and ridiculed by the government experts in their fields, but were pressed on, all on their own.
Turning all research over to the government is also totally impractical. In fact, every business does research in marketing, sales, product development and so much more. So government research is not the simple answer it would appear to be. We need private corporations to do research if we want a better nation and a better environment.
THE NATIONAL SALES TAX INSTEAD OF A CORPORATE TAX OR AN INCOME TAX
Advantages of a national sales tax include the following:
It makes tax rates and tax collection far more transparent. With a sales tax, as
compared to corporate taxes that are hidden in the cost of products, everyone
would know how much of your money the government takes each day. If people only knew, they might
revolt! Taxes would come down and
everyone would be better off.
For example, up to half the cost of car, it has been estimated, may be taxes. This means that a ten thousand dollar car would cost only five thousand dollars! It also means many people could buy houses, cars and other things they want than are able to afford them now. This would be a great boon to our economy, and therefore for the entire world.
Knowing the real tax rate also makes the government far more careful about wasting your tax money. The amount of waste in government is shameful, to say the least. I was a member of both the National Taxpayers Union and Citizens Against government Waste, and for years. They would update us on the latest wasteful projects, which are almost unbelievable in some cases. The well-known case of fraud and waste of an ordinary hammer that cost the taxpayers $1000.00 dollars is just the start of it.
Medicare and Medicaid, for example, lose billions of dollars each year to fraud and waste, as anyone knows who has had to fill out all the paperwork required in a medical or even a chiropractic back office. The paperwork is all waste, because it does not produce any service or product. It simply adds cost because the doctor has to hire extra people, spend time on the phone justifying charges and all the rest. It is work and time that is simply required for the program, and it tends to become more and more over time. This is why socialized medicine is always a totally wasteful scheme,. And the waste and fraud are unavoidable because people are just not that honest, in America or elsewhere in the world. They cheat a little here and a little there, and in a large program it adds up to billions or even more. Some estimate that one-fourth of Medicare money is poorly spent. That is approaching one trillion dollars!
Government programs are always terribly wasteful for this reason. There is no way around it. Having a sales tax, if it were the only tax, would go a long way to opening up to the American people just how much waste government is funding and how much fraud there is as well. This could revolutionize America by helping people really know where their money goes.
It is simple to calculate. This is related to the first
advantage. There would be enormous
savings for all of us if we did not have to keep careful records of everything
we make and everything we spend, plus records about the records, to be sure.
Both individuals and corporations spend much time, money and energy supporting the documentation of their taxes. This is all a waste. Please understand this clearly. It is all a total waste, economically. This is because it does not produce any goods or services.
Handling income taxes, for example, employs accountants, lawyers, tax preparers and others, but they are parasites. This is not a personal attack, and I enjoy working with my accountant and lawyer. However, t I know their services would be far less needed if it were not tax matters.
A sales tax only, and that is an important word, would eliminate all this waste, cheating and all the rest that goes on. It would also free up a lot of time for our legislators at every level. They spend weeks or more each year “reforming the tax system”, trying to make it better, fairer, or whatever. In reality, a lot of it is just adjusting it to satisfy whoever gave them the most money the previous election cycle.
Not only this, but our town, city, county, state and federal governments spend millions or perhaps a trillion in total shuffling all the tax returns, estimated payments and much more that they receive.
More billions are spent enforcing the tax code, which is difficult at best and another total waste of money. Paper shuffling, accounting for tax purposes and all enforcement of the code, as it is called, are total wastes because it produces no product or service.
Businessmen usually understand this, but most people do not. They are simply time wasters and very costly for individuals at times, not to mention millions spent by corporations and other entities like foundations just to satisfy the Internal Revenue people. By the way, this is a fake name. It should be called internal waste of time.
The cost of administering the income tax system is far more than the amount of money collected. If they stopped the whole system, the government would get more money with a sales tax or even with no tax, by improving the economic position of most people. The income tax is a total waste in this sense.
All it does is make people shy and fearful about their money and give power to government bureaucrats. It is a communist scheme that is horrible for any economy. However, I do not expect it to change, at least not this year. No candidate has even broached the subject and is not likely to do so. There is simply too much portk, as they call it, that requires the deception and disgust that go with an income tax.
Taxing The Rich. I do believe in taxing the rich, by the
way. A graduated sales tax is the
best way to do this, by far. It is
still simple, and though there would haggling, it is still easy, transparent,
simple to administer and not wasteful as has been described above.
This is how it works. If one is buying staples like food, oil or gas for the car or home supplies like tolietpaper, there would be no tax. However, if one is buying a luxury item, including a car worth more than $10,000 , for instance, the tax would jump up. If the car or another luxury item costs $50,000, the tax would jump higher. In this way, the rich are taxed while the poor are not. Someday I have no doubt this system will be accepted and implemented, but not until people realize how stupid and wasteful income taxes are.
One might argue that without hundreds of taxes levied on corporations, these entities would really make a fortune and would be far more dangerous to humanity as a result. However, as long as there is competition, which is the key principle in the free enterprise system, companies would have to lower their prices if no taxes were charged them, in order to maintain their competitive position. Therefore, the idea that prices would stay the same is ridiculous.
If a company or individual in business tried this ploy, someone else would come up with a new business and would compete successfully with a lower price. This is the beauty of free enterprise, something which, once again, the democratic candidate does not understand, as far as I can tell. He is what is called a socialist, meaning one who only thinks the government should have the power and control, not the people. It is sad how the people flock to these candidates, thinking they will make life better when they will make it far worse.
A Much Higher Spiritual Civilization.
A sales tax system is so much simpler and clearer to
understand, I believe it would almost end poverty overnight. This is somewhat exaggerated, but it
would be a great economic benefit for everyone. People are so discouraged trying to understand the income
tax system, which is confusing and discouraging on purpose. They would be freed from this monster,
to put it bluntly.
It would help individuals and businesses alike and would soon be copied around the world. A state in the United States could try it on their own, but they are so tied into the federal system of taxes it would be most impossible to do it alone.
Most of all would help ordinary people who don’s speak business language and have no desire to learn the jargon by which the government tricks them – and their employers - out of too much money.
have a long history and are structures designed to provide the manpower and
financing for large projects that would be difficult or impossible for one
person to accomplish by himself or herself.
Legally, corporations have evolved in our legal system as entities treated somewhat like individuals, but with certain clear differences. In return for limited liability for their owners, employees and other connected with them, they are regulated by the government and taxed in special ways that have changed over the years.
Another corporate structure is the cooperative business. These, too, have evolved for hundreds of years, mainly in England and America, though they exist in many nations. They operate in similar ways to corporations except that their owners can only control one share of the business apiece, in most cases. This gives them certain advantages and disadvantages that have been discussed above.
For the future, corporations are not going away any time soon, and this is for the best. They are, as a whole, the most important business innovation of Western civilization. Their power and importance, however, has made them a target for many evils of society, from drug and alcohol use to environmental degradation.
The question of how to control and channel corporate energies in positive ways is a great challenge for all developed nations. The best ways today, however, appear to be through targeted legal action, fair and balanced regulation, using care when giving out corporate monopolies and other special tax treatments and privileges such as immunity from lawsuits.
Finally, it is critical to realize that taxing corporations can do far more harm than good, because it is largely a regressive tax, unless it is limited to luxury items. Even then, corporations simply pass on their taxes to their customers, so it is actually a means by which governments hide taxes they levy on their unsuspecting populations.