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Do Corporations Pay Income Taxes?

Sigma Investment Counselors

August 4, 2014

The whole issue of corporate tax rates has boiled to the surface, in conjunction with a recent uptick in relocations overseas. Known as inversions, some U.S. firms employ these in an effort to reduce their overall tax liability.  The entire issue of corporate taxes, tax rates and the appropriate treatment of foreign income are properly grist for the political mill.

The issues for investors are costs and competition.  Taxes are simply another cost, no different than labor, raw materials, energy and all of the other offsets to revenue.

The only source of corporate income is revenue.  Revenues come from the sale of products and services to customers.  Customers purchase products and services based on a price to value calculation, subject to the availability of a better value from a competitor.

Over time, the purchase price has to cover all costs.  Thus, in effect, the customer pays all of the cost of providing a product or service, including taxes.

Corporations price their products and services to reflect costs, with due consideration to the competition.  Corporations that are at a cost disadvantage, whether due to higher energy costs, labor costs, higher taxes, or a higher cost of capital amongst other factors, are likely to lose market share and eventually fail.

Investors should carefully consider market share, pricing power and cost structures in evaluating potential investment opportunities.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®

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