In theory, interest rates, economic growth and capital taxes are three interconnected variables that are essential for a capital pricing model. Given that corporations tend to use stocks and bonds as currency to buy into new ventures, make acquisitions and expand their business, it is crucial for them to have the highest possible value or price for their capital in order to ease the financial pain of building business, increasing productivity and enhancing wealth.
The corporate and personal tax systems are a big mess because they are inefficient, uncompetitive, incompatible, and unfair. The system of taxation is putting America behind the eight ball. It is now a political issue. It explains why the Democrats and Republicans have laid down their framework for comprehensive business and personal tax reform. This will likely change the political debate away from petty-minded quarrels over stupidities, personalities, contraception and immigrants; and graduate the discussion to the much more needed comprehensive tax reform.
There are two politically acceptable central points which are the elimination of loopholes and subsidies and the reduction of the top corporate tax rate. Nevertheless, a major tax duel between Obama and Romney is certain for there are stark differences in their recipe which will have to be sold to the general populace.
There is little doubt on our part that a simpler, fairer and broader tax code is necessary; but it should not be done at the expense of cheating business of what it needs to grow America. Business wants a currency that has value to make affordable deals. There are plenty of hard numbers, trustworthy anecdotes and studies that clearly show that fairness would be much easier attainable at the personal tax than corporate tax levels.
Obama calls for 1) a reduction in the corporate tax rate to 28%, 2) an elimination of tax breaks, 3) a doing away of loopholes and subsidies, 4) a cut in the depreciation rates, 5) an adjustment to interest deductibility, 6) permanent rewards to manufacturers, renewable energy production and R&D and 7) a minimum tax on foreign earnings.
Romney calls for 1) a reduction in the corporate tax rate to 25%, 2) a correction of failures in the tax code, 3) permanent changes to the tax code to eliminate uncertainties, 4) a broadening of the tax base, 5) the maintenance of the 15% rate on capital gains, interest and dividends and elimination of these taxes on taxpayers with annual income below $200,000, 6) the installation of a world-wide territorial system of taxing foreign profits, 7) an across the board 20% decrease in marginal individual income tax rates and 8) a limitation on deduction and exemptions for personal taxes on top earners.
There are reasons to believe that both men wish fairness but the investment implications are dramatically different. The Romney proposal raises capital values while Obama does the opposite. The reason has to do with the inconsistency of lowering the tax rate on corporate earnings proportionally less than raising the tax on dividend paid and capital gains. This would surely make stocks less valuable.
It should be noted that more than 110 million voting adults own stocks directly or through mutual funds and pension funds. Moreover 75% of dividend payments go to people over the age of 55. It will not be easy to implement a new dividend tax charge even if Obama gets re-elected. I would be much more concerned about a hike in the capital gain tax. Nevertheless, the Obama deal would obstruct the level playing field between dividends paid and share repurchases.