ETFs vs. Mutual Funds: Which One is Right for You?

Are Businesses Getting Out of Paying Taxes or is it Just a Good Story for the Media and Politicians?

One of the big stories last week was from the Government Accountability Office study that reported that two-thirds of American corporations didn’t pay any taxes in 2005. Of course, a statement like this is sure to create a lot of media coverage, and people who are against business immediately cried fowl.

The first thoughts that come to mind are big evil companies shuffling their money through various tax loopholes in order to avoid paying taxes, but is this fact or fiction? Luckily there some people out there who understand the realities of how businesses operate and can paint a clearer picture of what is really going on.

A Good Business Should be Structured so It Doesn’t Pay Taxes (Or Pay as Little as Possible)

What the layperson doesn’t often understand is why most businesses aren’t taxed. A lot of it comes down to the double taxation of corporate profits. If you recall from Business Entities 101, a corporation is a separate legal and taxable entity. This means that corporate profits are taxed at the corporate level, and when disbursed to business owners or shareholders in the form of dividends, are taxed again at the personal level. Clearly, business owners want to avoid having their profits taxed twice, so they will structure the profits to be paid out in a way that minimizes or eliminates this. One common method of doing this is to shift the corporate profits into salaries as opposed to being paid out in dividends. The money is still being taxed, but just at the personal level.

Steven Malanga from Real Clear Markets discusses this in an article today. He mentions something by Kevin Hassett from Bloomberg:

Kevin Hassett, in a Bloomberg commentary, explained that most small businesses are now organized in such a way that many prefer to take their profits as an owner’s salary and pay taxes on the wages. It’s not that they aren’t paying taxes, as the headline incorrectly says, but rather that the money is not flowing to the government through the corporate levy.

But what about “big” businesses? Obviously they can’t shift all of their income into salaries in order to eliminate corporate income taxes, so how do you explain that? Again, Steven points out that even in a good economic year such as 2005, a lot of businesses weren’t making money, thus had nothing to tax.

Even in good times, there are plenty of losers in a dynamic economy. The BLS’ Business Dynamics Survey, for instance, shows that in 2005 there were 7.3 businesses that were contracting for every 7.6 that were expanding, including 1.3 that were closing their doors for every 1.5 that were starting up. Large businesses were hardly immune to this kind of tumult. For every 5.8 jobs added by firms with more than 500 employees, other firms that big eliminated 4.9 jobs. Among those hit hard in 2005 was General Motors, which despite $193 billion in revenues wracked up a $10.4 billion loss and cut its workforce.

As you can see, even during this time frame, there were almost as many businesses doing poorly as there were businesses doing well. Of course, the sensational headlines you’ve read over the past week make it sound like every corporation was thriving during 2005, so the fact that two-thirds didn’t pay any taxes appeared to be shocking.

Sales Do Not Equal Profits

One of the easiest ways to draw attention to your headline is to throw around millions, billions, or trillions in sales while alluding to the fact that corporations don’t pay any tax. To the average person, they see this as a company making billions of dollars and not paying a single cent in tax. Of course, when you hear about these big numbers, they are almost always talking about gross sales or revenue, not taxable profits.

Just look at the General Motors example above. If you walked up to someone on the street and told them that GM had $193 billion in sales and didn’t pay any taxes, you’d probably have 9 out of 10 people act shocked and disgusted that a big company can get away with it. Even though they had nearly 200 billion dollars in revenue, the media will fail to point out that they also had over $203 billion in expenses which resulted in an over $10 billion loss. Without an actual profit, there isn’t much to be taxed.

From that same article by Steven:

As Michigan Senator Carl Levin, a frequent critic of corporations, said of the study, “Twenty-five percent of the largest U.S. corporations [those with more than $50 million in revenues] had $1.1 trillion in gross sales in 2005 and yet paid no federal income taxes.” That statement suggests that Levin is either trying to mislead us or that he has made it into the world’s most exclusive club, the U.S. Senate, without knowing the difference between earnings and sales.

Again, we heard this $1.1 trillion number thrown around quite a bit last week, but what does it mean? There is no context here. Ok, so larger companies had over a trillion in sales, but what was the actual profit from these companies? Of course, including this information would not be as shocking as just arbitrarily tossing out an unfathomable number like $1.1 trillion.

As I mentioned earlier, most businesses are streamlined to the point that actual profit margins are very small. They may be selling billions of dollars in goods but only seeing a profit margin of a couple percent.

The difference, of course, can be enormous. For one thing, many industries have extremely small profit margins because as soon as it gets too easy to make a buck in a free-market system, you’re sure to get plenty of competitors crowding in, driving down your margins.

Many businesses we regard as successful operate on small profit margins. After paying $5.8 billion in taxes in 2005, Wal-Mart earned $11.7 billion—a nice chunk of change. But those earnings were on revenues of $312 billion, a mere 3.4 percent net profit margin.

A Business Isn’t That Different from You and Me

Take a look at your own tax situation. Do you do things that minimize your income tax bill? Whether it’s putting money into an IRA or 401(k), deducting property taxes, or claiming your children as dependents, you’re obviously going to take advantage of any tax break you can get so that you pay the least amount of taxes as possible. The same thing goes for a business. The owners are already having their salary taxed, so they are going to try and minimize the impact of having their profits taxed yet again.

Of course, it’s always easier to complain about companies that make money, call them evil, and exaggerate facts to fit your agenda. And I’m sure there are a few companies that get a little liberal with their accounting or tax-saving measures, but a lot of individuals do the same thing in an effort to reduce their taxes.

But it’s up to you to believe what you want. If you want to believe everything the media says and chastise businesses because some numbers make it look like businesses are scamming the tax code, go ahead. Everyone is entitled to their opinion, but at least try to make it an informed opinion rather than let the media make it for you.

Are you unhappy at work? BusinessWeek has had a few stories this year that talk about the generational divide that’s occurring in the workplace, and how this is affecting different generations of workers. Generation X is in a unique position right now because many workers are sandwiched between the baby boomers and Gen Y. Many boomers are still holding upper management positions while delaying retirement, and some new Gen Y people are getting hired into entry level positions. So, many Gen Xers are stuck right in the middle of two very different generations.

There was an interesting article and video on BusinessWeek that highlights some of the reasons that there are generational tensions, and also shows some responses from some Gen Xers and how they feel about their part in the workplace. The video mentions that it isn’t so much of a sense of differing values, but more of a difference in skills between the generations. I encourage you to watch the video, it’s only about 4 minutes long, but I also wanted to highlight some of the notable quotes from that page as well.

Some Interesting Quotes

MLM said:

I’m in my late 30s, and I would say that I and all my friends are disgruntled with Corporate America regardless of what industry you work in…I don’t feel loyalty to any company. You work hard and put in many hours only to get handed a pink slip.

Michael said:

I have nothing against Gen Yers or boomers but do feel stuck in the middle. I have an executive management team who are 8 to 12 years older than I am, with no plans for retirement in the near future. This leaves me stuck. I have been searching for business opportunities due to my distrust of Corporate America’s motives.

I can say that many of my Xer friends and acquaintances would rather make less in return for more flexibility with family and for the opportunity to make a difference for people.

KGHC said:

We watched our parents remain loyal to a company/lifestyle/job only to be miserable at the end. Our strategy is to find a position that blends our family/work/life into a cohesive entity that satisfies the monetary bank account and our karmic bank account.

And finally, I just had to include this quote from a Gen Y guy, who obviously doesn’t think too kindly of Generation X. I’m closer to this guy’s age than older Gen Xers, but I don’t share his vies a bit.

A Gen-Y Guy said:

It’s really interesting to hear all you Gen Xers complain about Corporate America. That is probably why the Gen Y people hate working for you. If you’re not happy, go do something else, period.

How do You Feel?

For me personally, I have to admit that I don’t sense much tension, but that primarily comes from my work arrangement. I work remotely and primarily communicate with others within the company via email or phone, so I don’t have a lot of personal time spent with others within my company. In addition, the people I directly report to are Gen Xers, and we get along great and share a lot of similar values. Some of management is in the boomer generation, and there are a few Gen Y employees, but since I don’t work alongside them, I can’t say there has been any reaction one way or the other.

That said, there are a lot of comments above that I can relate with, especially in terms of finding a work-life balance and the loyalty issue with employers. I think this is a similar trait that is shared across this generation, but I could be wrong.

Now, this is where I ask you for your reaction. How do you feel you fit into your workplace? Do you struggle with coping with boomers on one end and Gen Y on the other, or do you find it easy to work together? Is there a certain aspect or trait of another generation that you can’t stand? Let’s hear what you have to say about this.

I honestly don’t know where the time goes. It’s already mid-August and I could swear the 4th of July was just a couple weeks ago. I hate that feeling where time seems to be moving too fast to get everything done. Looking back at some of my goals and timetable for completion, it’s depressing to see some of them fall behind. I guess that just means it’s time to kick things into a higher gear.

In other, more upbeat news, I’d like to announce that Frugal Dad has joined the ranks of The Money Writers. You may have already noticed the link to his site in the sidebar, but it is official. If you haven’t visited Frugal Dad’s site, I encourage you to do so. He has a great blog that is relatively new, yet has already built a huge fan base. His writing style and personality fits very well with the rest of the group, and the focus on being frugal is a refreshing addition to the group.

Finish Each Day and be Done With It - You only have so much time in he day, and you should just do what you can and be done with it. I took this post to heart just last night. I went to bed before 10 p.m., which is unheard of for me. But, as I sat at the computer with a mountain of things to do, I realized that no matter how long I sat there, I wouldn’t get anything meaningful done. So, I came to the realization that I’ve done what I could, and will just start fresh again tomorrow. I got one of the best night’s sleep in a long time.

How to Start Getting Wealthy Right Now - You don’t make enough money. You can’t save any money. You hate your job. These are all great excuses to prevent you from becoming wealthy. You can either drag your feet by thinking of all the reasons you can’t become wealthy, or you can start today towards becoming wealthy. It’s up to you to decide.

5 Inexpensive Ways To Have Fun In College - It’s that time of year again where kids are headed back to, or starting college for the first time, and money is obviously a concern. Luckily, there are a lot of ways that a college student can have fun without breaking the bank. Ben highlights five cheap ways to have some fun.

How to Be a Frugal College Student - And if those five tips weren’t enough, frugal dad takes a shot at highlighting the many other ways you can become a frugal college student. From advice on student loans, credit cards, entertainment, to room and board, there are plenty of ways to save big.

12 Ways the Olympics Can Impact Your Finances - I haven’t watched much of the olympics, but I did catch that amazing swimming relay where the U.S. beat France. I don’t think that had an impact on my finances, but Madison has 12 different ways that the olympics may impact, or teach you something about your finances.

Make Money Blogging: Top Bloggers And How Much They Earn - Unfortunately, my name wasn’t on this list, but that’s okay. I didn’t get into this for the money two years ago anyway, although it is a nice added benefit. But if you’re looking for some inspiration, or even just to be amazed at what some bloggers make, SVB has put together a great list of some of the top bloggers.

Why You Need a Will and The Basics of Estate Planning - I’m a big advocate for estate planning, even for younger families, and a will is the first place you should start. They are easy, inexpensive (or even free), and can be worth more than you could ever know in the event of an untimely death.

25 Frugal Ways To Reuse Everyday Household Items - If trying to save money is your thing, then this post is for you. David has put together a list of 25 ways you can save by money by reusing everyday household items. And not only will you save a few bucks, but you’ll be doing mother nature a favor as well.

Camping For Beginners - I haven’t been camping in about 5 years, but more and more people are turning to camping as an inexpensive alternative to a typical family vacation. Camping can be great, but it can also be miserable if you don’t do it right. Here is a video that will help the camping newbie make the most of their trip.

Doom and gloom continues to be the news surrounding the real estate market, and many places still continue to see steep declines in property values. Even so, some areas have been hit worse than others, and some areas have actually seen increases in value over the past few years. For people who are trying to sell in these areas, they are faced with a harsh reality that the only way to unload the house might be to take a 20-50% loss. This is especially true for people who purchased just a few years ago.

This is actually where we bought in. We bought our house at the end of 2005, which in terms of this real estate bubble, was almost at the very top. The good news is that we’re not trying to sell, but I can only imagine what it would be like for others who are put in a situation where this might be an only option due to a life event.

But what is more surprising is that we seem to be in one of the only areas in the entire state that have real estate values holding up. Looking at the homes for sale in our area, we’re not seeing any steep cuts in price as long as they are priced fairly. But what I found interesting was this map:

To put this in perspective, we’re in the very far southwest corner of Michigan, which has been one of the hardest hit states in recent years due to the decline in the auto industry. But, we seem to be in one of the few bright spots in the whole state as far as real estate is concerned. It still isn’t great, with an annual average increase of 1.75-4.17% in 2007, but I’d be content with almost keeping pace with inflation.

So, what have you seen in your neighborhood? Are prices falling through the floor, hanging in there, or increasing? I think it would be interesting to see what others are experiencing across the country.

 Loading …