The Grassroots Corner July 28th, 2025

ARE LOCAL GOVERNMENTS FORECASTERS OF HOW THE FAIRTAX WOULD WORK ON FOR-PROFIT CORPORATIONS?

        Are local governments forecasters of how for-profit corporations would behave if we had the FAIRtax? Consider this fact. Under today’s tax code, for-profit corporations can deduct borrowing costs as “ordinary and necessary” expenses. Thus, the IRS rewards for-profit corporations for borrowing. The IRS penalizes corporations for saving because the IRS takes a 21% haircut out of their earnings through the corporate income tax.

        Predictably, corporations borrow liberally to fund growth. Nineteen selected S&P 500 corporations have a median debt of $78.3 billion, according to Stockanalysis.com. That debt level represents over 35% of their median market capitalization and nearly 64% of annual revenue.

        What would happen if there were no tax on earnings? We may have an indicator with local governments, which pay no tax on their income. They have no tax reason to borrow. They raise and disburse funds without considering the tax consequences.

        One local government in New Jersey has taken advantage of its zero-income tax status. The Township of Hanover has zero debt. Township Treasurer Silvio Esposito says that the Township has been debt-free for over twenty years, since before his time in office. When the Township needs to buy a dump truck or pave a road, it reaches into its "cigar box," the New Jersey Cash Management Fund.

        Hanover Township may be an exception. Many municipalities borrow for non-tax reasons that do not apply to for-profit corporations. First, state law restricts investments that counties and municipalities may make. County and local governments may invest only in state and federal government bonds, which tend to pay low interest rates. The New Jersey Cash Management Fund, currently yielding 4.24%, is an attractive exception. About 6% of its portfolio is invested in commercial paper, which tends to pay higher interest because its holders must pay income tax.

        The second non-tax reason municipalities borrow is that local politicians prefer to shift capital costs to future residents. Borrowing is the perfect way to move those costs. For-profit corporations do not consider who repays corporate debt.

        How would for-profit corporations respond if the FAIRtax were the law? Many would behave more like Hanover Township. The FAIRtax stops taxing income, encouraging corporations to put money into a "cigar box." Corporations could take advantage of the highest-paying investments available in the market. Moreover, there would be no reason to "deduct" interest expense and borrowing costs. Without a corporate income tax, there would be nothing from which to deduct them.

        With the FAIRtax, borrowing becomes less attractive. Corporations would still borrow to finance expansion, but the tax advantage would no longer exist. For-profit corporations would borrow uniquely for business reasons.

        I would love to hear from you about how your local government handles debt.
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🇺🇸   Call For Pictures & WriteUps - We need more of you to send in pictures and news. If you have something to share, please send your material to me, Jim.Bennett@FAIRtax.org, (908) 578-4975, or fax (908) 598-2888. When others see your activity, they are inspired, and the process snowballs. When the process snowballs, Congress Members, Senators, and even the President start to listen.