Friday Rant: Happiness — Creating and Growing your Business

This rant is brought to you by Spend Matters' lead analyst, Thomas Kase.

Procurement 101 is focused on lowering purchase prices -- holding down the expense side. More sophisticated supply chains have managed to make a difference on the top line, driving sales and growing business through better quality, faster delivery, and greater customer satisfaction around various KPIs that rely on choosing the right vendor.

Many of us use, or are at least familiar with "EBITDA" (Earnings Before Interest, Taxes, Depreciation & Amortization) as a way to measure how well our businesses are doing. This concept is actually not a standard accounting (GAAP) measure, it only came about after the stagflation years of the 70's as a way to see if a company could handle debt, and gained popularity among capital equipment firms (whose results greatly depended on amortization schedules and amounts). It was eventually being used by even high-tech firms (even though EBITDA strictly speaking doesn't really make sense in those industries).

What is not talked about as often (perhaps because it is viewed as out of anyone's control?) are the Interest, Taxes, Depreciation & Amortization components. How large these are determines actual hard profits. Of course, any good finance department will shop for better interest rates, and tax accountants will come up with improved depreciation and amortization schedules, but we can't do much about taxes -- or can we?

This being an election year, you'd hope to see politicians eager to make it more attractive for American entrepreneurs and foreign firms to set up shop in the US, and for US firms to remain headquartered here, right? Other countries have definitely realized the value of this. Next month, my previous country of residence, Japan, is set to lower their corporate tax rate to 35% (currently 40% with local taxes included). Even my ever-so-tax-happy country of birth, Sweden, saw fit to drop their corporate tax rate to 26.3% in 2009 -- in 1989 it was 52%, so that was an improvement of Reaganesque proportions! The main reason was to remain competitive (as a nation) with the other European countries. That said, with individual tax rates at 57% and an additional 25% in sales tax on most things you buy, Sweden is still no picnic.

Here in the US there is a far larger number of fiscal authorities with grubby little paws eager to rummage through the corporate treasure chest. The IRS, 47 states and the District of Columbia all levy corporate taxes (some exceptions around S-Corp etc.). To make it worse, US-headquartered companies are taxed on their world-wide income. Ouch! Where's the incentive to remain in the US?

To bring us out of our current economic doldrums, having a tax structure that encourages business to stay and grow in the US seems obvious. You'd think, anyway. Unfortunately, unless our dear politicians do something, we are on course to take the #1 spot among developed countries in an area where we don't want to lead: having the highest corporate taxes in the world!

Yes, you read that right. When Japan lowers their taxes next month, we will have the highest corporate taxation in the developed world here in the US. Generally speaking, our combined federal and state rates hover around 40%. By contrast, the average rate among developed countries (OECD) is around 25%, with our major trading partners (Canada, France, Japan, Germany, Mexico, and the UK) all below us.

Jobs are created when companies grow. And the more you bleed companies, the fewer you will have -- it really is as simple as that. Instead, let us completely do away with corporate taxes (they only made up 9% of federal revenues in 2010) since any monies paid out by companies will either be in the form of added payroll or higher dividends, and either case will feed the federal coffers from personal income and capital gains taxes. This would also do away with the double taxation problem with our current system.

Getting back to the opening header about happiness -- let's end with arguably the world's most famous quote:

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."

It should be self-evident that corporate taxes only keep our companies from being the best they can be, even forcing them to relocate outside the USA -- let's change that and make the US the place to be to create Happiness again.

- Thomas Kase

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