With the increasing probability that the federal corporate income tax rate is going up, we are seeing the usual, politically based projections, as to who will pay the higher rates. Some are saying that it will be investors and others are saying that it will be labor.
It may well be everyone. All taxes charged to corporations, whether federal income, real estate, excise, and a slew of other state, local and federal levies, are a corporate expense. Companies only have one source of revenue, sales to customers. All costs, whether they are occupancy, raw materials, labor or taxes, to mention a few, are eventually paid by the company out of gross receipts. Corporations do not pay more than they have to for anything they buy, including labor. Any unavoidable price increase, for any purchased item, can only be absorbed through higher prices or lower profits. Over time, the allocation between price increases and reduced earnings, is primarily determined by competition.
To the extent that profits are reduced, investors pay through reduced dividends, lower stock prices and fewer share repurchase programs. If the increase in taxes leads to higher prices, the customer pays.
In any event, investors should recognize that somebody pays. Politicians and voters should recognize that sooner or later, everyone pays.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®