Untaxing-I (Introduction) ch 4: The Reason For Not Taxing Corporate Profits
The effect of taxing not company profits but capital gains only, yields much higher total tax revenue. As a result, there will be no need to tax individual wages and salaries. With more people becoming shareholders in public companies, the increase in tax revenue from short and long-term capital gains becomes significant.
Let’s examine some mathematical proof from Tables 3a and 3b below, based on a public company with $100 million of annual revenue and $75 million of expenses. The average earnings for 2,000 of the top US public companies is 16% of their revenue. In these tables, Earnings After Taxes is $16.25 million (or $25 million with a $0 corporate tax).
To explain what the Capital Gains Tax is based on, we first apply the 2.62% dividend yield to the Earnings After Taxes giving us a Market Value of $620,229,008 (= $16.25 million ÷ 0.0262). Then we apply the 35% capital gains tax rate to 10% of the Market Value for the shares sold to get a Capital Gains Tax of $21,708,015 (= $620,229,008 * 0.1 * 0.35). Net Tax Revenue is the sum of Corporate Tax and Capital Gains Tax. Note the 10% increase in Net Tax Revenue (from $30,458,015 to $33,396,946) when Corporate Tax is $0.
The Capital Gains Tax collected is higher in Table 3b than Table 3a because 50% of shares are sold instead of 10% of shares sold. Both Tables 3a and 3b show that Net Tax Revenue is greater when the direct Corporate Tax is $0.
When 10% of shares are sold and corporate tax is $0, Net Tax Revenue increases by 10%. When 50% of shares are sold and corporate tax is $0, Net Tax Revenue increases by 42%. These statements are proved in Tables 3a and 3b. If another Table is prepared for a scenario where 90% of shares are sold, the Net Tax Revenue would increase by 47% with no corporate tax.
When the profits of 20,000 or so US public companies are taxed, their total market value (or market capitalization) is $17.14 trillion. The US Gross Domestic Product (GDP) is $14.66 trillion.
But when the company profits are not taxed, the new numbers for total market capitalization and US GDP become $54.63 trillion and $40.15 trillion respectively.
The proof tables (Tables 3a, 3b and 4) present, for the first time, the effects of no direct taxes on company profits. The increase in tax revenue is significant enough that there is no need for individual taxes. Thus everyone in the US benefits when there are no direct taxes on company profits. Furthermore, this data suggests access for everyone to participate in pure capitalism, as explained later in this white paper.