I stayed home one day last week to deal with a few plumbing issues in my house. One involves a leak, and if there’s one thing I’ve learned over the years as a homeowner, it is that water wants to go where water wants to go. The path is not necessarily a direct one.
It seemed to be a good analogy for these “fiscal cliff” debates we’ve been having. You can be sure that whatever new tax and spending rules get put in place will influence business behavior, in ways we can’t always predict.
We are getting a taste right now as corporations, including The Washington Post Co., accelerate dividend payouts that would normally be paid in early 2013, handing them out in this calendar year to avoid the likelihood that capital gains taxes will be going up.
There’s also history in this, as Frederick W. Smith, the founder of FedEx and minority owner of the Washington Redskins, reminded us the other day in remarks to the Economic Club of Washington. He blamed the current state of affairs, in part, on the Tax Reform Act of 1986, passed during the Reagan administration. It evened out the tax rates between individual filers and corporations at about 35 percent, in an attempt to root out tax shelter and real estate abuses.
Guess what? Many small (and not-so-small) business owners decided to pay their taxes as individuals. He suggests now is the time to tax corporations less, creating an incentive for people to leave their money in the business.
“The people that preceded this generation of legislators felt — and I think understood — that those locomotives that were pulling our economic train were the businesses that were investing and innovating and inventing,” Smith said.
The tax act also created a system by which profits made overseas and taxed at lower foreign rates would be taxed the difference when the money is brought into the United States.
That made more sense, Smith argued, when international trade represented 17 percent of our economy. But last year, it reached 32 percent, and companies are keeping vast millions outside our borders so as not to be subject to higher U.S. rates.
Smith proposes the country lower corporate taxes to a level that is more competitive with the rest of the world and adopt a territorial system, like that in place at many other countries, that taxes profits where they are made.
Then, money can go where money wants to go.
This week marks the third year Capital Business has produced the Post 200, our annual guide to the region’s largest companies, banks, law firms and more.
I like to think each year’s list is an improvement on the one before. Let me know what you think about the line-up, especially if you see any glaring omissions.
There are lots of ways to measure “big-ness.” Is it better to rank companies by the revenues they bring in, or the profits? How about the number of people they employ? We have our way. What’s yours? E-mail me at email@example.com.