With good reason, the Federal debt is becoming the primary focus of the next Presidential election. Obviously the expense side must be addressed but as many have observed, the revenue side also needs to be reviewed. One point of emphasis was the fact that many companies pay little or no Federal income tax with GE being the recent poster boy. I found the uproar somewhat curious particularly among the national sales tax advocates.  Their proposal does away with Federal income tax for businesses and corporations.

The American Income Tax Simplification Plan’s main objective is to spread the pain wide and thin plus ask that everyone who gains benefits from our great economic engine help with that pain. The American Income Tax Simplification Plan does utilize a small national sales tax but also includes a rather revolutionary view on corporate/business tax. We need to recognize that many people who benefit from the business activity of businesses and corporations who do business in the United States do not pay Federal income tax. Business owners, corporate owners, stock owners and mutual funds owners often either are not required or find quasi-legal loopholes that enable them not to pay Federal income tax. This is not small number of people or people with limited resources. Foreign owners who’s companies benefit should not escape from helping support the system from which they derive financial gain.   

The American Income Tax Simplification Plan looks at Federal income tax in a different light. The American economic system goes a long way in helping and supporting companies doing business in the United States. The burden placed upon the system does not decrease based upon the profitability of the company. So why should a company pay taxes based upon profitability? A company doesn’t pay employee taxes, salaries and vendors based upon profitability. The fact is that corporations keep two sets of books, one for taxes and one for the SEC. That is perfectly legal but is a costly endeavor. Frankly it is also unfair to well-run companies and companies who do not wish to employ armies of accountants and currency traders. We hear repeatedly that we have the highest Federal income tax rate for companies in the industrial world. That isn’t exactly true as the effective rate paid is much lower!

So what is the answer? The American Income Tax Simplification Plan basically looks at the same set of books corporations use for the SEC. A tax is assessed against the Gross sales of the company but at a low rate.

There would be two categories of businesses with different tax rates. The distinction is really very simple, if a company purchases a product and passes it on to either a reseller or consumer, they are a Distributor/Retailer otherwise they fit into the other category.

Distributors/Retailers – This would include all businesses which resell or distribute a product where less than 5% of their business involves adding value to a product. It would include all gross sales generated within the United States regardless of the corporate location. It would include all gross sales from a facility in the United States to any location worldwide. The United States has the world’s most efficient process for moving products from the manufacturer to the consumer. This tax rate would minimize any negative impact on their competitive stature and yet require all that benefit to contribute. This rate would be in line with Wal-Mart who currently pays 1.6% of gross sales in Federal Income Tax.

Manufactures/Service/Professional/Other – This would include any business that manufactures a product, adds value to more than 5% of its business or is a professional service where no product is involved. These companies traditionally deal with higher profit margins and often place greater stress on the business infrastructure. This rate would be in the area of 4% of gross sales.

Yes, there will be companies that need two business units such as a new car dealership. The new car sales unit would pay 1.6% while the service department would pay 4%. This would not be a difficult process and far easier that what is faced today. Most companies would simply take their Gross revenue and figure the tax.