Friday, April 1, 2011

Corporate Profits Are NOT Evil

This may come as a shock to some politicians, but it is not evil for a corporation to turn a profit. In fact, horror of horrors, the goal of a corporation is to make a profit. What are profits? Profits are what is left over after a company pays its operating costs. Profits are used for many things - few, if any, are evil. They can be used to expand the company (which creates jobs), for research and development, as donations to charities, or they can be handed over to evil stockholders. Whoops. Stockholders are not evil either - you probably are one yourself. Do you have a pension or a 401(k)? Then you are a stockholder and I'm sure you are not evil.

A company that fails to maximize its profits will soon find that they can no longer compete in the global marketplace and may have to layoff workers or go out of business. A company that fails to maximize profits will fail to obtain capital from investors, thus limiting their ability to expand. If a company intentionally or negligently fails to maximize profits, they may even be subject to shareholder suits.

That brings up taxes and costs of hiring. The United States has the highest corporate taxes in the developed world. If taxes and hiring costs are too high in one country and lower in another - companies are going to move operations to the lower cost country in order to maximize their profit. That is not evil, it is a necessity. If they did not, they would not be able to compete.

This phenomenon can even happen within the United States, as well as globally. For instance, in Massachusetts recently Fidelity announced they were moving jobs right across the border to New Hampshire. They are trying to lower their costs so they can effectively compete and maximize their profits.

Countries and states compete for companies to come so that their people will be employed and to expand their tax base. It used to be that America had the resources and the educated population needed by companies so they were willing to pay any extra costs required to operate here. That is not the case anymore. The U.S. is lagging behind in education despite the fact that we are paying more per student than most if other developed nations. Other countries are now able to provide educated employees and resources needed as well as offering lower costs of hiring and taxes.

What can be done?

First of all, the U.S. needs to lower the costs of doing business here. Not only does the U.S. have the highest corporate tax rate, corporate profits can actually be taxed twice! They are taxed at the corporate level and they are taxed again at the stockholder level when the corporation distributes its profits to its stockholders. Government mandates on benefits and payroll taxes have also made hiring new employees prohibitive.

Secondly, we need to start educating our future employees. We need to recognize that throwing more money at the problem is not working. Schools need to be held accountable when they fail to produce educated students. Expectations of student performance need to raised.

Thirdly, we need to reduce the size and scope of government regulations. Companies face a huge amount of costs from trying to comply with an overwhelming amount of regulations - often redundant at the federal, state and local level.

Fourth, the size of government debt needs to be significantly reduced. The government is competing with companies for capital to fund its overwhelming debt. Guess who always wins that competition? Capital that goes to the government cannot be used by companies for job creation.

Finally, politicians can stop bad-mouthing corporate profits for political gain. One would think those in favor of more revenues for the government would want to expand the tax base. Expanding the tax base necessarily involves increased profits. Higher profits mean more revenue from corporations and more revenue from the people those corporations hire. It is in the government's best interest for a company to maximize its profits because government revenue goes up as a result.

So, next time you hear a politician bad-mouth corporate profits, know that they are actually bad-mouthing increased job creation, research and development, charitable contributions, returns on investment for your 401(k) and government revenue.

1 comment:

  1. The profit motive, capitalism, and freedom have combined to give us the highest standard of living of any country in the world. We should be celebrating that success and supporting politicians who will celebrate with us and limit government's role.