As I wrote a few months ago, I was a bit underwhelmed by the tax reform legislation passed last year. On the personal income tax side of the law, while I liked the expansion of the standard deduction, the retention of seven progressive income brackets seems absurd. I would have liked the income tax code to become flatter and simplified and these items certainly weren’t achieved.
My view on the corporate tax reform side of the equation was a bit more favorable. While the reform certainly didn’t simplify the corporate tax code, it did substantially reduce and flatten corporate tax rates. It was because of this I also wrote that I felt most American families would primarily benefit from the tax reform in their capacity as investors. As the corporations that benefited from the tax reform became healthier and more profitable because of it, I expected stock prices to rise along with 401(k) balances and investment portfolios, and right now, it's so far so good on this front.
As it turns out, however, it looks like I underappreciated the opportunity that could emerge by enabling corporations to pay less money to the government through taxes. I think this is because the word “corporation” itself is a bit emotionally charged in its own right. It's easy to view this term in the context of a faceless, greedy, entity lacking in moral compass.
I know I tend to think of the word corporation as something unfamiliar, something not to trusted. For those corporations that I actually know, or even own, I think in the terms of “company” or “business.” The truth is, nearly all businesses are included in the word corporation, and all businesses exist for one purpose: to create value for others and to get compensated financially for creating that value.
Of course, all businesses, or corporations, have multiple stakeholders. The four that come to mind primarily are customers, employees, management, and shareholders. And as we are already starting to see, when a company is enabled to be financially stronger due to tax savings it is likely to spread the benefits of this improvement to each of these categories.
On the customer front, the business may invest in systems to improve services or reduce prices. On the employee front, we’ve already publicly seen many businesses providing raises or bonuses to employees, essentially spreading these tax savings throughout the organization. We all kind of assume management will take care of itself, and the shareholders of public companies are for the most part all of us, through our stocks, mutual funds, pensions and 401(k)s. In this arena, it's hard to argue with last year’s performance and results, which I believe was at least partly attributable to the anticipation of corporate tax reform.
Somehow in this nation, the political class has convinced us that the government, particularly the federal government, is a direct proxy for our society in general. It isn’t. The government, especially in its bloated current form, is primarily a provider of services, and unlike most businesses, the government is a service provider that requires us to pay for its services without the benefit of choice.
I’ve often heard those in the government or media talk as if citizens and businesses can only benefit society through taxation. This argument is also false. All of us as employees, customers, shareholders and, yes, corporations are the true fabric of society.
Through tax reform, our great American businesses now have a greater opportunity to spread more of the value they create around to all of us. I for one am excited about the possibilities.