Why Tax Success?

By Marshall Loeb

Quick, now, who is the chairman of Exxon? Or U.S. Steel? Probably not even their shareholders know for sure. But the stockholders of Citizens Utilities Co., of Stamford, Conn., certainly know Richard Rosenthal. They constitute a Rosenthal fan club. By the hundreds, they write him letters that can only be called adoring. The chairman--who at 64 is wiry, bouncy and still strawberry blond--collects the mash notes between burgundy leather covers, answers them all, and elaborates in philosophical, ego-massaging (his own and the shareholders') messages in annual and interim reports, which he writes himself. Very largely, he writes about capital.

Rosenthal never tires of saying that his aim is not to give service to customers, wages to workers, or taxes to governments, though all of that is necessary. "The objective," he intones, "is to reward those who make the business possible by investing their capital in it: the shareholders." That view might seem outrageous, were it not that customers give generally high marks to Citizens' service. Remarkable in the unglamorous utilities business, Citizens last year earned a walloping 19% after taxes on revenues of $108 million from sales of electricity, water, gas, telephone, and sewage services to some 500 communities in ten states, from Hawaii to Vermont. The company is helped significantly because Rosenthal persuaded the IRS in 1955 to allow it to pay dividends in tax-free Citizens stock instead of cash (only when they sell the stock do the owners pay capital gains taxes). This unique benefit--the IRS soon after forbade it to other firms--allowed Citizens to raise capital without going to market often and paying heavy interest.

Capital has worried Rosenthal ever since a family shortage of it back in Brooklyn during the Depression blocked him from entering Pennsylvania's Wharton School. He had to settle for N.Y.U., because his father, an up-and-down entrepreneur from Winnipeg, ran out of money. Rosenthal graduated summa, made an early splash on Wall Street, joined a group that took over a then bedraggled Citizens, and became its chief at 30. In the 34 years since then, the company has raised its profits and dividends every year.

Now Rosenthal wants to see capital grow throughout the economy by radically changing the source of much that is wrong in the U.S.: its tax system. In his view, the system fosters too many tax shelters, expense-account freeloaders and assorted cheaters. It penalizes achievement because it taxes salaries at rates up to 50% and capital (in the form of dividends and interest) up to 70%.

Rosenthal's remedy would be a new producers tax. Manufacturers would pay it on almost all goods they make, and pass the costs on to consumers. So many items are produced that the tax on each usually would be fairly small. But the size would vary in order to provide social incentives and disincentives. Says Rosenthal: "For example, GM might have to pay ten times as much on a Cadillac as on one of its new X cars. There might be no tax at all on some fuel-efficient cars, because making them would be socially advantageous." To help poorer people, taxes would be highest on costly luxury goods, lowest on cheap products and nonexistent on necessities, such as bread and milk. Since the tax would be collected only once--from the manufacturer--it would be much simpler than the multi-layered value-added tax that Congress is flirting with.

The benefits, Rosenthal believes, would be huge. He figures that a producers tax would generate so much revenue that the maximum tax on corporate profits, personal income, dividends and interest could be cut to 20%. And people earning less than $12,000 or so would pay no income tax at all. Income taxes would be so modest and simple that cheating and the cost of collection would diminish. Consumption would be discouraged, while savings and investment would be encouraged. Capital would build up and be invested because people no longer would pay such a heavy tax penalty on their income from salary and savings. In sum, says Rosenthal, "the tax on success would be much lower."

Critics may quibble over Rosenthal's numbers, but they cannot question that he knows how to raise capital and put it to work. At a time when Congress is intrigued with the idea of raising taxes on consumption in order to lower taxes on income and capital, Rosenthal's notion would seem to merit a close look.--Marshall Loeb

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