Should Corporations be Taxed to Avoid Speculation?

06.30.08 | Taxes | 0 Comments | by Fred Siegmund

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In the last chapter of his new book, The Age of Turbulence, former Federal Reserve Chairman Alan Greenspan says new technology innovations sometimes slow down so much that new machinery and equipment is not worth the investment for corporations.

For example, the fall off in investments after 2000.

"The slow down in innovation is particularly evident in the dramatic swing in corporations' use of their internal cash flow from fixed investment to buybacks of company common stock and cash disbursed to shareholders in the process of implementing mergers and acquisitions."

After citing some investment data, he concludes, "A corporation returns equity capital to shareholders when it cannot find opportunities for prospective risk-adjusted rates of return superior to the rate of return that the corporation returns from existing assets. Large cash disbursements to shareholders are usually a signal of lowered prospective rates of return on fixed investments available to the corporation, the likely result of a slowed pace of profitable new application of innovation."

Wow! Chairman Greenspan tells us corporations sometimes have profits but few capital investment opportunities, so they turn to speculative buying and selling of stocks for implementing mergers and acquisitions. Buying and selling in mergers and acquisitions creates work for lawyers and securities dealers along with speculative opportunities, but it creates nothing new for Americans.

The federal government could sell bonds to finance public projects like the construction of levees for New Orleans and the Mississippi river. Some of the loanable funds that keep going into assorted mergers, acquisitions and other speculations could be redirected to an important public project.

However, public projects mean new taxes to pay interest and principal. Taxes are already high for millions of Americans who oppose new taxes.

If Mr. Greenspan is correct and corporations have profits for speculation while public projects like New Orleans' levees go unfunded, then higher taxes on corporations and lower income and payroll taxes for individuals would decrease America's savings available for speculation and increase America's savings available for public projects.

Notice I did not say it is fair or unfair to change taxes, only that the distribution of income and taxes will change how America saves and invests. Remember savers, the value of your savings depends on the quality of America's investments.

What should we do about taxes? You decide.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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