By Lee Schuh
My wife and I recently overheard a boisterous group of 20-something women bemoan the evils of profit while we ate an early dinner at our favorite restaurant. They blamed their poor-paying jobs on those who get the profits. They complained that these profit-takers are the only ones benefiting in this society. The sooner profits are eliminated, they reasoned, the sooner the economy will turn around.
I was tempted to turn around and correct them but my wife pointed out that those under 30 still don’t trust those over 30, so I decided not to waste my time.
I am baffled by how few people really know what profits are and how they are used. Profits are simply the difference between sales, or income, and expenses. Whereas most Americans believe profits are used to make the rich richer, that is not their true purpose. Profit is restricted as to its applications. Profits can be reinvested (invested for the future) and used to pay taxes (approximately 11 percent of total federal income tax) and dividends.
The concept of profits can be applied to individuals as well. As I explain to clients in my pro-bono work, people need to set aside part of their earned income for the future, whether to buy a house, pay off credit cards, save for retirement and children’s education, or care for elderly parents.
Looking at each of the three areas where business profits can be used explains why profits are needed.
Reinvesting in the company is something even governments and nonprofit organizations do as it generates the future economic life of the entity. Research, development, expansion and diversification make up the preponderance of profit usage.
Income tax paid by corporations is very controversial. Many experts argue the tax just adds to the prices charged to consumers. At the other side of the spectrum are those who believe corporations are not paying their fair share of taxes. Even nonprofits conducting for-profit activities may be required to pay income tax.
Dividends are the biggest lightening rod for those who decry profits. For the most part, a corporation does not benefit from issuing dividends. Dividends are primarily paid out to affect the value of the stock and to attract those investors who need to obtain dividends, such as retirees. Thus, some industries, such as utilities, pay relatively high dividends as a public service for those who are investing for the income.
It could easily be argued that paying out dividends could be eliminated as it is inefficient and does not result in value added for the corporation. It could also be argued that the dividends shouldn’t be issued, as the government historically has taxed the individuals receiving dividends higher than those earning wages. Not that many years ago, there was a federal tax of dividends of 60 percent plus a state tax. As of this writing, the average investor still is paying about 20 percent in federal taxes plus the state income tax and the Obamacare investment tax. The average wage-earning taxpayer pays around 17 percent income and employment taxes.
Profits shouldn’t be considered politically incorrect. They are necessary, even for government and nonprofits. What should be politically incorrect are some of the costs incurred by companies. Salaries, fringe benefits, deferred income of company executives and outrageous, excessive executive fringe benefits such as private planes, townhouses and zero-interest forgivable loans are where the real misdistribution is occurring. Many executives are being paid millions of dollars a year due to the submissive nature of boards of directors realistically picked by the executives. However, few discuss this. For some reason, people continue to blame profits, which are basically investments for the future.
I encourage you to support profits and ask your politicians to examine how we compensate officers of corporations.
• Lee Schuh is a lecturer in the California Lutheran University School of Management.