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Let Corporations Pay Some Taxes with Stock
August 16, 2020
by William P. Meyers

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Government ownership of stock would pay dividends

In 2017 the Donald Trump administration passed a massive tax cut programs, with the cuts focussed on wealthy individuals and corporations. Since the U.S. economy had been growing for years before President Trump was elected, the tax cuts did little to spur economic growth. Now Democrats, including their nominee for President Joe Biden, want to reverse the Trump Tax cuts for wealthy individuals and corporations. The problem with that is the economy is now in bad shape. New taxes on corporations, even if they just return to reasonable levels, might slow the economic recovery expected when the Covid-19 pandemic ends.

Public corporations (those whose shares are traded in the stock market) often pay their executives, and sometimes employees, partly in stock. If the government allowed corporations the option of paying some of their taxes due with stock, then the government, taxpayers, and society in general could begin to benefit from stock ownership. This would make it easier for businesses to grow, while benefitting the public.

Prior to the Trump tax cut (Tax Cuts and Jobs Act of 2017) the corporate tax rate was 35% of earnings (profits). That ws lowered to 21%. So if the tax is restored to the prior level, there would be an increase in cash needed to pay the IRS equal to 14% of earnings. That will reduce the cash that a corporation could use for other purposes. Those purposes could be raising pay for employees (or just executives); issuing dividends to stockholders; buying back stock (which raises the value of shares); or reinvestment in the business. Corporations can vary greatly in how they use cash.

When corporations pay with stock they issue new stock, this is caleed dilution, and it can reduce the value of individual shares. If a corporation were allowed to pay in shares, management would want to way the benefits (to management and shareholders) against the negative effects of dilution. It is the opposite of the post 2017 situation where corporate board often diluted with one hand, to issue shares to themselves and executives, and boought back stock from shareholdes, to keep the stock price up and shareholders happy. But on the whole I believe they will want to pay in stock, because it allows them to keep cash for other uses.

Stock held in the U.S. Treasury would begin to counterbalance federal debt. At first its effect would be minor. But if the value of the stock portfolio rose, and a significant portion of the stocks paid dividends, it could become sustantial over time. The dividends would be in the form of cash, which could be used to retire debt. It could be psychologically important too, as it could be argued that every American citizen would own a stake in the nation's businesses.

In itself, that does not solve many problems. Mainly it would make the tax increase easier to pass, while lessening the possible negative impact.

While considerably more thought should be given to this idea, for now I will leave readers with this outline. Feel free to pass it on to friends, or your public representatives, or any economists you know for feedback.

Thanks so much for reading.

William P. Meyers

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