Why Buy The Cow?

The communist revolutions in the 20th century sought to nationalize the wealth generated by privately held industries back to the "exploited" workers on whose backs the profits were supposedly derived. America has made the rejection of this idea and its support of free market principles the centerpiece of its economic narrative. However, as a result of our current and proposed tax policies towards corporate shareholders, our government collects a portion of industrial output that would inspire envy in even the most rabid Bolshevik.

The purpose of a corporation is to generate profits for owners (all other functions are secondary to this goal). Public corporations distribute these profits through dividends. But as a result of America's system of double taxation, where income is taxed on the corporate level and then again on the personal level, government receives a much bigger share of corporate income than the owners themselves. I also address this topic in my latest video blog.

Suppose a publicly held U.S. corporation made one million dollars in income over the course of a year. Currently its profits would be taxed at a 35% level (for the purpose of this example I will not factor in the lower rate that is applied to its first $100K of profits), meaning that the company would have to pay $350,000 directly to the government (assuming it earned its income without special tax breaks). Of the $650,000 that remained, the typical dividend-paying corporation might distribute 40 percent to shareholders (this is known as the "payout ratio" and the actual average is slightly below 40%). So in this instance the company would pay $260,000 (40% of $650,000) to shareholders. The remaining $390,000 would typically be held as "retained earnings," and would be used to maintain and replace depreciating equipment, make capital investments, fund research and development, and expand operations. If the company did not make such investments it would be impossible for it to survive and its ability to perpetuate profit distributions would be limited.

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