Five Forms of Unearned Corporate Net Income
People are usually unaware about insider looting and unearned corporate profits, which belongs to the public at large rather than being privatized.
April 14, 2019
Rick DiMare

Many if not most people have been so brainwashed that they're not even sure if corporate profits are unearned, which is another way of saying the profits belong to the public at large, and should not be privatized. Also, people aren't aware of the many ways corporate insiders try to loot corporations (and the profits which belong to all).

The fiduciary duty hierarchy of corporations is first to those work for it, second to the state and federal governments which created and protected them, and lastly to shareholders. Contrary to the current prevailing sentiment, the fiduciary duty is absolutely not to shareholders first. Only after the employees are taken care of, and most of the unearned profits returned to government, are stockholders entitled to share in the profits (and sharing profits with stockholders is not mandatory).

(1) Actual Net Income of the Corporation

This straightforward form of net income assumes honest tax accounting and valuations. All of the corporations expenses have been deducted, all wages are reasonable, all capital goods have been accurately depreciated to reasonably reflect their age, and where the corporation depends on research and development, all those costs have been accounted for as well.

Under this form, any net profits which remain are pure unearned income, or what Henry George used to call “economic rent” or unearned “land value.”

(2) Excessive Wages

This form is corporate net income which has been inappropriately taken by one or more upper level employees, and when compared to IRS industry data, is an excessive or unreasonable wage, and the excess must be returned to the corporation, where it will be taxed as actual corporate net income, and the taker is usually penalized.

(3) Cash Dividend

This form is simply a sharing of excess profits with shareholders, after the corporate income tax has been paid, unless the corporation is a “pass through entity” which ignores tax liability at the entity level. This form of corporate net income is taxed according to rules governing dividend income, and the IRS makes some qualifications about whether the dividends are “qualified” or not.

(4) Stock Dividend

Instead of the dividend being paid in cash, the shareholder has been given more stock, and the gain generally won’t be realized unless and until the shareholder sells the shares, in which case the capital gains tax rules will apply, and usually capital gains tax rates are lower than taxes on wages or dividends. Again, with this tax, the IRS makes some qualifications about long-term vs. short-term capital gains.

(5) Gains Derived from Share Buyback Scheme

This form is similar to a stock dividend (#4), but with an added element of stock value manipulation. Some insider shareholders have induced the corporation to buy up shares from non-insiders, which will make insider shares more scarce and valuable, and when the time is right, the insiders will cash-in their shares and pay the lower tax on capital gains.

So, to conclude, the above are all forms of unearned corporate net income but #1 and #2 are taxed “at the entity level” using the Stone Tracy income tax on corporate privilege, #3 is taxed by special rules governing dividend income, and #4 and #5 is taxed by special rules governing capital gain income.

How do they always seem to get away with it? How do they consistently get away with selling us "tax reform" that makes us worse off?

From the Conclusion of Putterman's article:

"The demand for people who can be taken advantage of by the wealthy is more than amply matched by the supply. In economics jargon, the supply of gullible people is highly elastic. According to the Census Bureau, the U.S. has about 4 million births a year, which works out to 11,000 births a day and to 7.6 births a minute. Our current political morass suggests that there may have been more than one sucker born each minute, during the decades before the new millennium. And with our education system further hobbled by the defunding the Christmas tax cuts will require, many more of the gullible-at-birth will reach the age to pull a voting booth lever without the wherewithal to understand how badly they’re being taken advantage of."

An often overlooked reason the monopoly rents of corporations must be heavily taxed is that no human natural life can compete with the privilege of eternal legal life that government gives to corporations.

So, yes, the general population will always be naive and gullible when compared to corporations that can forever hone their contracts and schemes. A human person is always subject to a substantial learning curve, then has a relatively short period during which s/he can work productively.

On the other hand, corporate persons experience an initial “from scratch” learning curve only once, then can work productively for centuries.

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Rick DiMare

Rick is a self employed attorney from Boston, Massachusetts. He graduated from Boston College and studied law at the Massachusetts School of Law at Andover. He also administers the Facebook group called Common Wealth Tax, which seeks to explore the (currently obscure) link between modern income tax laws and the Land Value Tax (LVT) advocated by political economist and “Greenbacker” Henry George (1839-1897).