For most of my 36 years in the
investment and insurance business it was my practice to send out little desk
top calendars to my clients during the holiday season. As my financial planning
practice grew the number of calendars increased to the point where I was
sending out more than 500. The calendars were practically my only form of
advertising.
Before the advent of the internet and
cell phones, the calendars were a way to keep my name and contact information
before my clients throughout the upcoming year. I suppose some clients just
tossed them but many seemed to love them and even claimed they anxiously
awaited the arrival of their calendars each year. Some even wanted more than
one.
I was a self-employed financial advisor
who had to pay for the calendars and the ever increasing postage out of my own
pocket. However, the cost of the calendars and the postage was considered a
legitimate business expense that could be deducted from my business income
before taxes. Actually, the cost was lumped together with other business
expenses like office rent, staffing costs, travel costs, and utility bills and
then subtracted from my total income for income tax purposes.
So, if the calendars cost $1000 and I
was in a 35% tax bracket, they would reduce my income tax bill by $350. If I
was only in a 15% bracket, the calendars would only have reduced my tax bill by
$150. From another perspective we could say that the calendars cost me $650 and
that the rest was paid by the Federal government. Of course, the government
never actually pays anything. Taxpayers actually subsidized my advertising.
This little example should give some
insight into the potential impact that tax reform might have on the incredible
amount of advertising that we are subjected to in the world of the media. It is
impossible to open your computer or look at your phone without being subject to
a barrage of ads. Every so-called “news” headline is just a come-on to view an
ad and increase ad revenues. Even though we pay a subscription fee to watch TV
on cable, a large percentage of what we see will be commercials.
The ultimate is reached every year
during professional football’s annual Super Bowl when advertisers will spend
millions for a half-minute commercial. In last year’s game a 30 second
commercial cost $5 Million dollars just for ad time. That expense does not
include what must have been the incredible cost of making the commercial.
However, just like my calendars, the
cost of these ads is a legitimate business expense. If a car or beer company
wants to pay $5 Million for a Super Bowl ad, it can deduct that cost from its
corporate income before paying corporate income taxes. If a corporation is in a
35% tax bracket, it will save $1.75 Million in taxes, a huge subsidy from
taxpayers. Not only do we have to watch these ads as they pop up on our
screens, we have to pay part of the cost.
Tax reform that reduces the corporate
tax rate to 20% will actually reduce the subsidy paid by taxpayers for
advertising and other business expenses. Former GE CEO Jeff Immelt always took
an extra corporate jet with him on his travels just in case. I suspect that the
expenses of both jets were considered legitimate business expenses by GE
accountants.
Most large corporations have huge
accounting and tax planning staffs that work hard to find expenses to offset
income. Reducing the corporate income tax will not only make American
businesses more competitive with the rest of the world, but it will also make
them warier of foolish spending practices that are designed to just provide tax
write-offs.
I don’t like to make predictions, but I
will predict that if the corporate tax rate is reduced to 20%, there will be a
major shake-up in the world of advertising, especially in the case of ad giants
like Goggle and Facebook.
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