reports now indicate that WorldCom’s overstatement of its profits in the
last few years may exceed the $3.8 billion initially reported, perhaps by
as much as an additional $3.3 billion, maybe even more. But whatever the
ultimate figure may be—$7.1 billion or even $10 billion—it pales into
insignificance in comparison with the overstatement of profits regularly
engineered by the U.S. government.
WorldCom overstated its own profits, and presumably incurred liability for the payment of corresponding additional taxes,
the U.S. government is responsible for the overstatement of the profits of
other people, namely, all the taxpayers—both individuals
and business firms—who are domiciled within the United States and who
earn profits. While WorldCom, quite stupidly one would have to say,
increased its own tax liability, the U.S. government, quite cleverly one
is tempted to say, regularly and systematically increases the tax
liabilities of all who are subject to its laws and who earn profits—and
thereby, of course, helps to fill its tax coffers.
takes the amount of overstatement that it engineers as a mere 10 percent
of reported profits in the United States in the year 2001, the figure
would come to more than $140 billion, just for that year.
The resulting increase in its tax revenues would be the appropriate tax
rates times that $140 billion. In years of more rapid inflation, such as
characterized the 1970s, the proportion of profits manufactured by the
government could well be on the order of 50 percent, or more.
following example explains how the government’s profit-tax racket works.
Imagine a company that buys a machine for $1 million, and assume that the
machine will last 10 years. The company will depreciate this machine at
the rate of $100,000 for each of 10 years. That will be the amount of cost
that will enter into its income statement on account of the machine in
each of the years.
company is reasonably well run, it will recover all of its costs and earn
a profit besides. We can assume that in each year it will have sales
revenues of $1 million and incur operating costs—i.e., costs on account
of such things as labor, materials, and fuel, and light, heat, and
advertising—of, say, $850,000 per year. These assumptions imply that in
each year the company earns a gross profit—i.e., profit prior to
depreciation expense—of $150,000, and a net profit of $50,000.
that there is no inflation and thus nothing to make the purchase price of
a replacement machine 10 years later higher than the $1 million price of
the original machine, the company can afford to use up its entire $50,000
of profit each year and still be able to continue its operations. Thus,
for example, if the tax rate on profits were, say, 50 percent, the company
would pay $25,000 per year in taxes each year and have $25,000 per year
remaining over. It could use those $25,000 to pay a dividend to its
stockholders of $10,000, say, and the remaining $15,000 for expanding or
improving its equipment or other assets.
afford to do these things because, in this scenario, its depreciation
allowances would be sufficient to enable it to replace its machine at the
end of 10 years. The saving up of the $100,000 per year of recovered
depreciation expense would amount to $1 million at the end of 10 years and
that would be sufficient to buy a replacement machine at a price of $1
the government with its inflation of the money supply. The new and
additional money created by the government travels from hand to hand in
repeated rounds of expenditure, raising business sales revenues and prices
and wages in the process. It doesn’t take an uncommonly great amount of
inflation to succeed in doubling the sales revenues and operating costs of
our hypothetical firm before 10 years have elapsed since its original
purchase of its machine.
that this has occurred. In this case, our firm will now have sales
revenues of $2 million per year and operating costs of $1.7 million per
year. This, of course, means that our firm’s gross profit too will have
doubled—from $150,000 to $300,000.
will have happened to its net profit? It will have quadrupled—going from
$50,000 to $200,000! The reason, of course, is that so long as the
original machine is still in service within the 10 year period, the
depreciation expense remains unchanged at $100,000. Thus our firm’s
total costs will be only $1.8 million while its sales revenues are $2
million, leaving a net profit of $200,000.
now appears to be so very rosy. Pretax profits, as we’ve just seen, have
quadrupled. Of course, taxes too, at the unchanged 50-percent tax rate,
have also quadrupled. The government and its puppets in the media would
like us to believe that this last is all perfectly natural and of no
consequence, that all that the government is doing is merely taking its
accustomed cut. After all, the firm will now have a net profit after taxes
of $100,000, and that too, of course, is a quadrupling of the $25,000
after-tax net profit that it used to have.
only one problem. Along with the general rise in prices, the
replacement price of our firm’s machine has doubled. It now costs $2
million instead of just $1 million. The firm’s accumulated depreciation
allowances, which will not reach more than $1 million, will therefore not
be sufficient to make possible the purchase of a replacement machine. In
order to make adequate provision for replacement of its machine, our firm
would have to double its annual set-aside for replacement from $100,000 to
$100,000 per year after-tax profit is required to make this possible.
Nothing is left either for a dividend payment or for any kind of
expansion. Any dividend payment or attempt at expansion is at the expense
of our firm’s ability to replace its machine. Thus, the firm and its
stockholders are actually much worse off in this situation than they were
when their after-tax profit was only $25,000 per year. Because that profit
represented funds available after full allowance for the machine’s
replacement had been made. None of the current $100,000 of after-tax
profit is so available.
government has accomplished by means of its profit inflation is a
substantial increase in its tax revenues. It has accomplished this by
means of a sharp increase in the effective rate at which profits in the
sense of actual gains are taxed. Indeed, in the present example, without
benefit of any legislative change in the 50-percent rate of tax on
profits, the government has effectively increased the rate of taxation on
profits to 100 percent. This conclusion follows from the fact that after
making adequate allowance for replacement, there is no real gain to the
firm at all. It has no “profit” left. It has barely broken even. What
the government has done in this case is apply the unchanged 50-percent tax
rate to an amount of profit that is overstated by a factor of 2.
firm should have been able to do was take an extra charge of $100,000 per
year against sales revenues, in the form of a supplementary depreciation
allowance, geared to the rise in the replacement cost of its machine. Had
it been able to do this, its pretax net profit would been reduced from
$200,000 to $100,000. It would have paid the 50-percent tax rate on just
$100,000 instead of $200,000. It then might have been able to accumulate a
sufficient replacement fund, and, after payment of taxes, still have had
$50,000 left over. Of course, in the face of a doubling of prices, $50,000
would buy no more than $25,000 previously bought. But at least the firm
would not be worse off.
things stand at present, inflation enables the government to tax funds
that are required for replacement. The situation is the same as if,
without inflation, the government taxed not only profits but also
this, the government is really not so clever after all. It destroys the
capital base of the economy of its own country and thus the underpinnings
of its own power. This policy almost certainly played a major role in the
creation of the so-called rust belt in the 1970s, when across the
industrial heartland of the United States one once-great factory after
another was turned into a rotting shell, for lack of the means to maintain
and replace it. The funds required had been siphoned off to pay for the
government programs inaugurated under “The Great Society” and “The
War on Poverty.”
certainly not the policy of statesmen, but it is very much the policy of
voracious looters, mindlessly lusting after the wealth of others,
without the slightest regard for the consequences.
difficult to resist the thought that if only there were a free press in
the United States, how easy it would be to bring the looters to account.
But then one quickly recalls that there still is a substantially
free press. The problem is that the press—the media—is intellectually
corrupt, to the point that instead of calling the looters to account, it
much prefers to fan the overstated profits created by the looters into
hatred of the looters’ victims, whom it regularly depicts as the cause
of economic hardship, especially that associated with rising prices. Its
relentless message to the masses is: You are suffering. The businessmen
and capitalists are growing rich. Their ill-will and evil is the cause of
your suffering. Vote for more looters and give the looters more powers.
(It is a real credit to the American people that despite all the
inflammatory propaganda of the media, there have as yet been no organized
physical attacks—no pogroms—against businessmen or capitalists in the
the Internet now makes possible an alternative to the conventional media.
Web sites such as this one now exist, which are different. They tell the
truth. Perhaps they will succeed in reaching a sufficient number of
American citizens to make a difference and call the looters to account
Can it be
assumed that all of this liability will now be promptly canceled, and,
indeed, taxes refunded to WorldCom to whatever extent it may actually
have paid them on its nonexistent profits? Frankly, I doubt this will