Taxing Corporations and Dividends is Not Double Taxation

Mitt Romney argues that the 14% tax rate he pays is fair, even though most of the rest of the citizens of this country pay a much higher percentage of our income.  Mitt says that his 14% is fair because his income is dividend income, and the Corporation has already paid Corporate taxes, so he is in effect being taxed twice.

Leaving aside the fact the Corporate Income Tax is so chock full of loopholes many Corporations pay little or no tax, Mr. Romney's argument is even more fundamentally false.

Corporations are not real.  They are a fiction created by the law in order to encourage people to make big, risky investments.  A Corporation allows the owners to make big investments, if they do well they get the profits, if it really goes bad, they get to dump calamitous losses on society, instead of absorbing it themselves.

Examples?  

Think of the financial collapse we went through a few years ago.  The Bankers and Brokers that made tons of money on the stupid business ideas that caused the crash are all still sitting on most of the money, because they operated within Corporations.  Their corporations may now be bankrupt, or defunct, but the people who owned and ran the Corporation still have all the money they made.  Who bore the risk of loss?  The homeowners who lost their homes.  The investors that lost much of their wealth.  The workers out of a job.

Think of the thousands of plots of land all over this country that are so contaminated with hazardous chemicals they have to be fenced off from public access until someone spends millions to clean up the mess.  Generally the mess was made by Corporations that made people very wealthy.  The Corporations may be gone, the owners are probably still very wealthy, but it is often government who ends up cleaning up the mess.

That is why Corporations pay Corporate taxes.  To compensate society for the risk society is taking that other people will end up paying the price for Corporate folly.  Corporate taxes are not a substitute for every citizens obligation to pay their fair share of taxes for running government, they are a cost of doing business as a Corporation.

It is very easy for anyone to avoid Corporate taxes, you just dump the corporation and do business as a partnership.  But rich folks don't do that, because if they do, they might actually have to pay for the messes they create.  

Mitt should know this.  The self proclaimed great businessman who understands how business works has undoubtedly had lots of discussions in his life about whether a business should incorporate or operate as a partnership.  But I guess he calculates a lot of regular folk don't, so he can make the argument and get some votes.

The Spooky October Stock Market

Weird things are happening in the Stock Market.  Normally stocks go down in the summer and up in the winter.  

This last summer, starting about July, stocks started broadly increasing in price despite the fact not many people were trading.  The increase has continued into the fall.

What raises this fact to the level of being weird is that each month for the last few months has seen headlines in the financial press about the billions of dollars being pulled out of stock mutual funds by retail investors.  

So stock prices keep trending up even though huge chunks of retail investors are abandoning the stock market.

What is going on?

Is it that the money being pulled out by retail investors is being replaced by Corporations - flush with cash but afraid to invest - buying back their own shares?  This would have a multiple short term benefit for corporate management, it keeps remaining investors happy that the stock price is up, it qualifies management for bigger bonuses to the extent the bonus is dependant on stock price, and it also boosts up the value of stock management already holds.

But how long can Corporations prop up stock prices when retail investors are bailing?  The retail bail-out is not unexpected, people traditionally move out of stocks as they near retirement for the safety of bonds, and big chunks of the baby boomer generation are at or near retirement.  What happens to the Corporations when they can no longer prop up their stock price and their market value plummets?

Is the bail out of stocks going to be like a dam breaking instead of a trickle over the top of the dam?  Are we about to see an October market freak out like October of 1929, or October of 1987?

Stocks do better when Democrats run the show

(Comments sparked by Economist Article of Oct. 6, 2012, p.84 discussing a study by Barclay's capital)

Many would probably assume that periods when we have a Republican President would be good for the Stock Market.  But, interestingly, since 1929 the average price change on stocks, adjusted for inflation, during the 40 years we have had Republican President's is....slightly less than zero per year.  The 44 years where we have had Democratic Presidents, on the other hand, average about 7% increase.

Even if you look only at the years where a Repubilican President's party controlled both houses of Congress, the real average return on stocks is negative.

Predictably, given that bonds do well when investor's retreat from equities when the economy is weak, bond prices when we had Republican President's averaged a gain in bond values of 1.9% while Democrats saw a loss of just under 1%.   

The inflation rate has been slightly higher under Democratic Presidents than Republican Presidents (3.5% to 3%), but far from enough to explain away the Republicans poor record.  

The advantage to Democratic Presidents goes beyond prices to income.  The article cites calculations * that the top 20% of earners, between 1952 and 2004, did better under Democratic President's than Republican Presidents (1.37% to 0.92%).  So did the poor (bottom 20%) who gained 1.56% a year under Democrats, and lost 0.32% under Republicans.

A big part of the Republicans problem is that somehow they just seem to be running the show when calamitous collapses in stock prices occur.  In 1929 Herbert Hoover was President, in 1973-74 it was Richard Nixon, in 1987 Ronald Reagan and in 2001 and again in 2008 it was George Bush.  Democratic Presidents seldom see stock market crashes, Roosevelt in 1935-36 is the only one even beginning to rise to the level of the classic Republican collapses.  But that still hardly explains the underlying huge gap over the years.

So why are the facts so hard on Republicans?  The simple answer suggested by the facts is that Republicans are incompetent at managing the economy.  Business Republicans love money, so they try too hard to cultivate it.  Perhaps Republicans are like one of those people we all know who love plants but kill everything they try to grow because they over water and overfeed.    

*  "Unequal Democracy:  The Political Economy of the New Gilded Age" (Larry Bartel's)