I recently overheard someone asking how much money “the government was sending” their company as a result of corporate tax reform. That quick encounter followed weeks of watching politicized reporting on the subject using nebulous terms such as “greed” and “fair share.” “Why isn’t anyone just showing the real math?” I wondered to myself. It’s not confusing, and there is nothing to hide or conceal. Our own company, Hancock Lumber, was going to pay millions of dollars in taxes before and after reform. The rhetoric and lack of data concerned me.
With this in mind, we decided that transparency was important. We wanted everyone at Hancock Lumber to have real data on corporate tax reform and some perspective on how it would affect their company. What follows is a summary of that communication. Our company is a C-corporation, so that is the basis for our examples.
The federal government is not sending us any money. Corporate income taxes always flow from a company to the government.
We are taxed on our profit, which we earn only by working together to first create value for someone else. No one has to buy our products or services, and if we don’t provide them efficiently and accurately, there is no profit at all. If we do a great job, we will earn pennies of profit for every dollar of sales.
Beginning in 2018, we are going to be able to keep a slightly higher percentage of the profit that we create together.
In 2017 (before reform), our effective tax rate was approximately 38 percent, which meant that government (state and federal combined) received 38 cents from each dollar earned while we retained 62 cents. In 2018 (after reform) we estimate that our effective tax rate will be 28 percent, allowing us to keep 72 percent of each dollar of profit created. One extra dime per dollar earned is staying at Hancock Lumber as a result.
In 2017, government would have redeployed that dime. In 2018, Hancock Lumber will redeploy that dime. It hasn’t disappeared. Someone always has it and always does something with it.
This tax reform definitely makes Hancock Lumber a little bit stronger because we can keep and use more of the money we have earned. Well over 90 percent of our annual after-tax profits are reinvested back into our company, our people and the Maine economy. Any profit distributed to owners or employees in the form of dividends or bonuses is taxed again, this time as personal income.
The new 28 percent rate is only our income tax payment. We also contribute payroll taxes, Social Security taxes, property taxes, sales taxes, gasoline taxes, excise taxes and more. Our total tax payments in 2018 will be a very large number. We are proud of the tax contribution that we make.
Here is a recent example: At Christmas, we paid a bonus netting each employee $150. Paying $73,000 in bonuses actually cost Hancock Lumber $126,000, including taxes. Employees got 53 percent of that total payout and government got 42 percent.
I don’t know when tax policy morphed into a debate about who “cares” more about the world around them. Everyone cares about others. That’s what it means to be human.
I personally think government (in normal times) should not set tax rates based on what it would like to spend, but rather on what is reasonable to collect. I also think humanity is irresistibly progressing toward smaller, central bureaucracies as more and more people actualize the power to lead that lives within us all. Thoughtfully shrinking the center of organizations (companies and governments alike) actually deepens human engagement, accelerates creative diversity and expands opportunities for personal growth. But this represents a big change in thinking for governments that have always only aspired to grow bigger and expand their influence.
Businesses are not selfish for believing in their social value. I watched a bit of “A Christmas Carol” over the holidays and wondered if Scrooge, that 19th-century curmudgeonly portrait of free enterprise, still held any sway in the public eye. Corporate America is not some abstract entity, nor is it Wall Street or the Netflix series “Billions.” It’s Main Street; it’s actual people you know and companies you engage regularly.
Money retained and reinvested locally is good, and a 28 percent cumulative corporate tax rate is a big number (still above the global average). Government is important, but so too is free enterprise. Everyone cares about the world around them.
Kevin Hancock is CEO of Hancock Lumber.
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