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Solutions, Part I: The Single Profit Statement.

This blog involves analyzing (or, um, bitching about) various aspects of the economy that don’t work, so I thought I’d break things up occasionally by putting forward solutions to the things I’m complaining about. Some will be ones I’ve thought up, others will be other people’s good ideas that need more publicity.

So here’s the first one. It’s possibly the simplest, most obvious, and most urgent reform out there:

Publicly traded corporations should pay taxes on the profits that they declare to their shareholders.

Just explaining the current situation shows how insane it is: Today, a corporation declares its profit to the government, and it announces its profit to its shareholders, and these two numbers do not have to be the same.

  • This means, obviously, that the corporation has a big incentive to lie to the government and underestimate profits. The less profit you make, the less tax you pay, after all.
  • Less obviously, the corporation also has an incentive to lie to shareholders and overestimate profits. Management makes the corporation’s decisions, and big profits (on paper) mean that managers keep their cushy jobs and make big bonuses. (Enron’s profit statements to its shareholders were lies, and woe to those who believed them.)

Making companies report a single number both to the shareholders and the taxman would go a long way toward solving both problems. Companies would think twice before overestimating their profits (it would mean more tax) and would hesitate to underestimate them (shareholders would start to ask where the profit is).

There would have to be a transition period—say, five years—for companies to bring their two sets of books into line. Of course, that would mean either restating their profits upward to the government or downward to their shareholders. They don’t want to do that, and big corporations more or less choose how they’re regulated, so I don’t see this happening any time soon.

But so what? There’s something to be said for keeping our eyes on real solutions, even if we can’t push them through Congress this week or this year.

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