Don't Lower Corporate Taxes, Abolish Them
bloomberg.com
bloomberg.com
> It may look unfair to tax consumers to compensate for a major business tax holiday -- but then such a move would give businesses a strong incentive to keep prices lower to avoid a drop in demand.
A drop in demand? People are going to eat less food because taxes are now lower? Need less healthcare? Will move to a cheaper home? Just not use internet? Drive the car less to work and sit more at home?
Supply/demand is crooked. It doesn't work for the majority of the goods the majority of the people purchase. Demand is fairly fixed and based on population, and supply is provided by the only bidder in your area.
> Besides, liberated from corporate taxes, they'd have more freedom to increase wages.
Does anyone still believe this 'trickle-down' hogwash?
I really wonder when America will have its wake up call during its third part-time job to pay the rent that maybe change is needed, and that your government has no intention of making it.
If you want to go to jail, try shoplifting.
For the record: I'm Dutch. I have free healthcare, good infrastructure, fast and cheap internet, sensible employment law, no police abuse, etc. All for ~40% tax (http://www.expatax.nl/tax-rates-2016.php).
Why? Because our government actually works. Why? I don't really know. It's a compound of hundreds of little effects.
The solution isn't 'less government', it's 'a working government'. Every time I learn something new about how the U.S. government is structured I shake my head a little. First-past-the-post voting of a single president that holds way too much power. A congress with life time based assignment that interpret a 200 year old document to their wishes to structure law. Case based law with uninformed juries, where the selection of the jury is optimized for maximum disinformation. It goes on.
On top of that there are financial taboos with origins that as a 199x er I do not understand: 'socialism', 'communism', 'higher taxes'. These ideologies (just like a free market) do not work on their own. Both ideologies have good ideas, and you need to take the best of both to make it work. But the American public is brainwashed.
I'm rambling a bit. There is no easy solution from what I can see. The U.S. government is structurally flawed and only massive changes can fix that. On top of that the public is misinformed and does not have its own best interests in mind.
Moreover, I'm not convinced our current problems are purely local. Trump followed on the heels of Brexit, and right-wing nationalist/populist movements are on the rise across Europe. The world is going through some weird changes right now, an angry reaction to future shock, and recent US politics are just a symptom.
Drafting random collaborators for a rewrite could be one approach, but they would still be prone to getting influenced by the establishment. Maybe dozens of randomized committees working in parallel, with all but one draft discarded at random, to make sure that writing happens out of the spotlight, and with little incentive for self-serving elements?
If you mean for companies... I don't exactly know. But I do know that we aren't exactly clean in the global playing field for tax havens, and I wish we would change that.
The Netherlands is one of the countries significantly facilitating tax avoidance, and this is (obviously) by design. Hundreds of billions in royalty payments flow through the country every year to tax havens.
Regardless I've been screwed over by plenty of folks that look just like me, so what you say comes across as an excuse for the state of affairs rather than owning the issues and seeking to improve it.
For that matter, I think that Americans had a lot more trust in their government before the last couple of decades.
[1] https://en.wikipedia.org/wiki/List_of_active_separatist_move...
So spreading a social safety net across a large and diverse population strikes me as utterly obvious.
How do you see diversity and scale as being a negative?
Locally, welfare can be egoistically motivated. Just about everybody would be willing to pay serious taxes to raise that one beggar off his doorstep - if only to keep him out of sight. We like to think of that as altruism, but it hardly is. Now ask those same people to pay serious taxes for the benefit of poor people thousands of miles away and you get a completely different picture.
Enter mobility: If you raise "your" beggar, someone else might just hope that theirs will go to a place where they will be raised (your doorstep). Clearly, egoism won't work as a motivator anymore because you don't want to be the new charity central. Therefore, welfare has to happen on the same organizational level as freedom of movement and that's where the relative unwillingness to help those thousands of miles away comes in again. Even basic income suggestions quickly lose their pie in the sky utopia feel when it comes to the question of access/citizenship/migration.
The US was literally built on mobility as a substitute of welfare, but once the original anti-welfare "stay poor or go west" was exhausted, the inherent antagonism between mobility and welfare continued to stay obscured behind other ideological concepts, "temporarily embarrassed millionaires" and all that. The EU is learning the hard way, but it is impossible to separate valid concerns and solution-finding from all the noise of and about stupid racism.
There are problems with American government, but these are really not them. The only thing here that might hold water is the President having too much authority, and that's been a relatively recent trend.
That would be impossible unless the law itself changes from the way it is currently interpreted:
From what I can find, Dodge v. Ford isn't considered "garbage", but it is often misrepresented.
Directors have a primary responsibility to work for the benefit of the shareholders, but they also have virtually total discretion in how to achieve that. In the absence of clear evidence of the intention to shirk the responsibility - such as, in Dodge v. Ford, telling the shareholders you're putting public interests ahead of their profits - the onus is on the shareholders to prove that the directors aren't fulfilling their fiduciary duty.
Yes. But you see, if the state did that to you there would be no unpleasant consequences, whereas doing that to a big corporation will bring on a wold of pain.
Really this is just like any other situation where the government due to structural weaknesses can't set/enforce policy effectively. Just like in the Prohibition or the War on Drugs, neither of which the government was equipped to make happen, the solution is to remove the problematic policies and take a more realistic approach.
If you want to see riots in the streets because people literally can't afford food and healthcare, yeah, sure, go for it.
Which healthcare subsidy would result in riots in the streets?
Also keep in mind that the US has been without the 16th amendment longer than it has been with it, so anything based off of an income tax must not be intrinsically important enough to automatically result in street riots. Though of course an irresponsible and sudden withdrawal could certainly cause problems.
Off the top of my head, Medicare and veteran's health benefits. I don't know that ceasing flexible spending accounts (money put in an account, pre-tax, just for medical/health expenses) and the tax deduction for medical expenses above a certain amount would be riot-worthy.
One item in consumer's favor is that food items are usually exempt or treated at a lower sales tax rate.
The price of labour is now artificially cheap because the price of food is not taken into account due to subsidies and foodstamp programs, as well as the huge labor/population supply that such policies have created. There is no way the market could peacefully absorb such a massive distortion and so if we were to ever attempt it, no doubt there would be countless individuals chanting "see, we told you the market isn't the solution". These things need to be phased out over generations so as to avoid massive starvation and riots by the poor.
Evade, or avoid? It's a big difference--as I'm sure has been said, tax evasion is illegal. Tax avoidance is not.
Can someone explain this to me? I was under the impression that wages were expenses and non-taxable. So if they paid higher wages so they ended up with no profits they would have to pay no tax.
If a company today is returning 10% to its shareholders per annum (and is paying, say 30% tax), then reducing the tax rate to 15% frees up additional cash to reinvest in the business that wouldn't have been available / would've otherwise gone to taxes. Or that money could flow back to shareholders, who could then reinvest it in other businesses.
Now the workers are the share holders and reinvesting in other businesses is called consuming.
God I'm good at this.
- Abolish corporate taxes
- Increase minimum wage (including an automatic inflation adjustment)
- Increase estate taxes and private corporate transfer taxes (intergenerational)
- Heavily tax (90%) all corporate spending in politics, using revenues to fund educational news sources
Everybody gets something that they want.
for some one who is now dead and thus very very unlikely to give a shit.
From experience, passing substantial unconditional wealth to my children (above and beyond education) seems far more likely to turn them into assholes than decent citizens.
Whatever I achieve in this life is not my own, it is the culmination of the efforts of all the generations that put me in position to do what I do, and a legacy to leave to all the future generations of my family.
As their wealth is typically preserved via real estate and land ownership, there's a politicial motive to decrease the cost of that, so economies also suffer from high barriers to entry and need to inflate taxes on something else to pay for the government services.
Repealing estate tax would work when combined with higher property tax rates or land value tax, but is rarely politically doable, as well-connected political families and large landowners tend to be the same families.
The value lies in long term thinking, sustainability. A farmer can either maintain the soil, carefully rotating crops so that it will be able to feed future generations as good or better than his predecessors, or he can go for the agricultural equivalent of strip mining and move on to the next plot when the previous one is depleted.
But when you replace the soil with fungible assets, all that long term thinking benefit goes out the window. Sticking to the farming example, repeated slash and burn farming will only encourage more of the same, as long as there is something left to burn. Larger operators will grow faster than smaller ones, and after a few generations, when there is nothing left to burn, the descendants of those who burnt the most will employ the losers to tend the desert.
So, 'too late' basically. That world is long gone now.
Even if other corporate taxes were reduced or eliminated, payroll taxes would need to continue.
I believe you mean that the revenue currently generated by payroll taxes would need to continue.
You mean, if you went abroad, produced trillions of income, left said income there and came back to your country?
Two exemptions I can think of are health/dental insurance (exempted by law) and free food at Silicon Valley campuses (highly contestable benefit as far as IRS is concerned, the jury is still out on treatment of that).
How can one hide virtually their entire income while still being able to enjoy most of the benefits?
A large group of people (plumbers, electricians, landscapers, solo real estate agents) are actually incorporated and self-employed under this model, and yet are not massively wealthier in comparison to the rest of the population.
You don't even need much money in your personal account, just use the corporation as your personal tax free piggy bank.
I am not sure how "make investments from your company" is just an overwhelmingly better option than "make investments from your personal account". Not only the corporation doesn't get a variety of tax advantages, such as 401(k), IRAs and Roth IRAs, there's an added burden of an additional K-1 for the investment vehicle.
Have you ever actually attempted any of the "obvious" optimizations you provide here? Has anyone ever used your advice for their tax planning?
Contrary to popular disbelief, folks at the IRS weren't quite born yesterday.
Various non-profits, university endownments, churches and pension funds, charitable trusts and charitable foundations have far higher concentrations of cash (and by your definition, power) that avoids the tax man entirely. States and municipalities also pay zero federal taxes on profits if they happen to end up with budgets in black. If you think the (somewhat easily fungible) corporate earnings are under-taxed, what's your take on non-profits and municipals?
I am quite accepting of churches, as long as they keep their beliefs to themselves and fulfill their role as keepers of cultural heritage. Better keep them running than artificially converting churches into living history museums after they died. I would consider it a great cultural loss if, say, St Peter's would be just another ruin owned by the Italian government.
University endowments, at the scale they apparently exist, are weird indeed. Do they grow because giving money to add to the pool gives (temporary) influence over the application of the pool? That would be a surprisingly nasty scheme. A donations race like that is how the Roman bishopric originally became a political force in late antiquity/early middle ages, slowly displacing secular authorities.
Indeed they don't need roads, rails, fire departments, police departments, etc. Corporations don't exist in a vacuum.
Let's have a deal: we abolish the taxes if they don't use any these.
You might say: but citizens already pay for this! True. However, if you abolish taxes for companies then citizens will have to pay more for public services. You might say: but we will increase their wages. I say ok then, let's make it part of the deal: a decent minimal wage.
works fine until automation gets rid of most of the jobs
Only domestic companies' corporate earnings get hit to pay for this.
It seems only reasonable that they pay for this, as it costs society every time a company breaks the law and the directors wring their hands but change nothing.
Which is it?
Here's what I honestly don't understand about HN:
Climate change has near unanimous support from climatologists. Most (rightly, imho) point that as a reason why it should be accepted by the general public. And those doubting the experts are considered ridiculous.
Here, however, we have an issue to drop corporate taxes which has near unanimous support from economists (across the political spectrum). Yet we call the experts ridiculous.
Why the flip? Why should the general public accept the expert advice in one field, but then turn around & call it ridiculous in another?
Even if you put all methodological issues (and citations from Richard Feynman) aside or even whether corporate taxes work or not, lots of social science findings would seem dubious simply because they deal with human behavior, which is something which is almost impossible to not have an opinion on, specially because it attempts to describe our own behavior.
The problem is that, if I were to understand reality through my own behavior, it would be through an unwarranted generalization of my own conditions to the population as a whole. It's like that joke of "why don't they just buy themselves some money?".
That's one of the issues, at least.
But I am calling the arguments that they use in the article ridiculous, and in particular the parts that I've quoted in my post above.
Absolutely not. Corporation will choke employees and consumers alike if they are allowed to have their way. This quarter my company decided to cut the quarterly bonuses to zero because Y-oY growth targets were not met. Although profits were higher then last year. Now it looks ridiculous to me to expect an fixed pefcentshe growth forever and then punishment employees who didn't even knew that increasing Y-oY growth is part of their responsibility. If at all anybody should have been punished, it should have been the top management. But since they make the rules, there is no downside.
http://www.npr.org/sections/money/2016/10/26/499490275/episo...
Their other plans include things like abolishing housing and medical subsidies, which they claim just leads to price inflation in the longer term, but which are obvious political suicides to propose.
A text summary of the podcast is available at: http://www.npr.org/sections/money/2012/07/19/157047211/six-p...
They did a follow-up episode where they hired an actor to play a politician advocating these policies, and tried to convince focus groups of voters:
http://www.npr.org/sections/money/2016/11/02/500413695/episo...
The point of these episodes was not to try to present some absolute truth about economic policies, but rather to demonstrate that while there are certain things experts universally or near-universally agree on, convincing voters of these policies can be a hard sell.
E.g. they argue that eliminating mortgage tax deduction would have the counter-intuitive long-term benefit of making houses more affordable. But when you try to explain that to people you've lost most of them once they realize that in the shorter term their existing mortgage would go up.
I seriously doubt the unanimous approval from the far the far left to the far right.
Needless to say, you'll find other economists all across the political spectrum that think it's a jaw-droppingly awful policy prescription, rivalled only by the idea of replacing all income taxes with a consumption tax, which was also favoured by the five economists on the panel.
AFAIK, corporate tax is optional anyhow. Any company could organize as unlimited partnership and not pay corporate taxes. But most companies chose not to, and I think that extra tax is a perfectly reasonable way of paying for extra protection (that of a limited company).
BLUMBERG: But fortunately, as you know, plank three I think is something that people can get around - a massive tax cut.
SMITH: OK.
BLUMBERG: Are you ready?
SMITH: Yeah.
BLUMBERG: A tax cut that's an insidious tax. It's felt everywhere in the American economy. It destroys jobs, stops innovation.
SMITH: I am all for it. OK. Who gets this tax cut?
BLUMBERG: Not who - what.
BAKER: If I'm being blue sky here, I would say the corporate tax is totally a waste.
FRANK: The corporate income tax makes no sense whatsoever.
SMITH: You are killing the voters here. So far we've got raised taxes on the middle class and eliminate taxes on corporations?
BLUMBERG: Yeah. And those were the two most liberal members of our panel, Dean Baker and Robert Frank. And here's the reason that they and pretty much all our panelists hate the corporate income tax, which by the way is one of the highest in the world here in the United States at 35 percent.
BAKER: It doesn't make sense really to tax the corporation as such. What we want to do is - I'm going to sound like a Mitt Romney here. What we care about is if the corporation is reinvesting the money. What's wrong with that? Why do we want them to prevent - why do we want to prevent the corporation from reinvesting the money?
What we might want to prevent is giving the money to wealthy shareholders or them buying a second, a third, fourth home, getting a new Mercedes every six months, whatever it might be. That's where we want to have the taxes. We don't want to prevent Microsoft or General Motors or whoever it might be from investing more in improving their product line. That's a good thing in my view.
BLUMBERG: So a lot of people, you know, when they think the corporate tax, they want to keep the corporate tax in place because they want rich people to pay more taxes.
SMITH: And rich people own corporations.
BLUMBERG: Right. But our panel agreed. If you want to tax rich people - and not all of our panelists agreed, by the way, that you should tax rich people more than others - but if you did, if that's what you wanted to do, just tax rich people - do that. Don't tax the corporation.
tldr: Taxing corporations prevents them from reinvesting the money and doing such things as advancing technology and hiring workers. It is a terribly destructive tax, discouraging exactly the sort of activity that drives the economy. It's the people who own the corporation that you're trying to tax, so tax them when they get the money.
A tax accountant might try to hide that, but if you get caught that's lying on your taxes and not looked kindly on.
These areas are likely why the rich, like Trump, are often under audit. Because there are so many ways they can play the system to avoid taxes. Hmm, maybe I just made your point.
This is because consumption today is always more valuable than consumption in the future (the discount rate).
If consumption today is more valuable than consumption in the future, why would you want to favor doing something else today, e.g. investment?
If the discount rate is 10% (not bank interest, just how much I personally value time) then unless you offer me more than $ 110, I'd rather spend the money now.
For people to invest, discounted_expected_return[1] - capital_gains should be higher than the money in their wallets.
You can play around in excel to understand this better, with a 5% return, a 20% tax on both income and capital gains and a 10% discount rate, $ 100 in income is either $ 80 today or $ 76 in a year.
[1] Discounted for Time, Expected for Risk.
For all intents and purposes, there's no tax associated with owning a yacht, either at personal or corporate level, so it's not like there's a massive loss of federal revenue here either way.
tax shields are so valuable to that they can actually be bought and sold as an asset separate to the corporation (in a not uncomplicated structure and set of circumstances iirc). typically this is done for shareholder benefit rather than for some coherent investment strategy (the benefit is not only capital but power and influence as well).
Sounds like a use tax would be more beneficial?
I have no formal economics training and would love to hear from the more educated.
I think it gets a little trickier then the interview goes, though.
What's to prevent say, Bank of America, from buying its execs (and employees for that matter) second homes and cars and vacations with un-taxed money instead of paying them money directly in salary or in dividends?
IMO it is payment for special privileges. Limited-liability corporations are a way for owners (stockholders) to ask the government to give them a special exemption to avoid responsibility for certain mistakes or unprovable maliciousness.
Imagine a Deepwater-Horizon situation. If the corporation is bankrupt and the still-solvent investors are allowed to walk away and ignore the mess... Who fixes things, and whose money gets used?
This is taxed at personal income tax levels, and is also not deductible as an expense by the payer.
https://www.irs.gov/businesses/small-businesses-self-employe...
Also mentioned on the podcast is abolishing all deductibles, including mortgage interest.
Which is dumb because the tax incidence of corporate tax already lands on shareholders and corporations aren't reinvesting profits because of anemic demand.
'Profit' is primarily a signalling mechanism to indicate to the market as a whole, and potential investors in particular, that a company is 'successful'; it has so much revenue and such low costs that it can't find a way to spend the money . But it's basically a waste as that money could be achieving something for the company or its staff. Thus Governments punish companies by taking a slice of that profit as a way of saying 'if you don't use the money productively, we will'.
Which is a very generous form of taxation compared that to personal income taxation, which comes out of gross revenue before the costs of being-a-person have been met.
I agree.
Sounds like a use tax would be more beneficial?
The taxable income computations and standard deductions seem to be a complicated way to what a use tax could solve efficiently.
The possible downside is that a use tax could bring in a recession (people stop spending to stop paying tax)
I have no formal economics training and would love to hear from the more educated.
This is basically Gary Johnson's "Fair Tax" proposal, and it ultimately hurts the poor and allows the millionaires to pay less.
- Be a domestic corporation
- Have only allowable shareholders
- May be individuals, certain trusts, and estates and
- May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e. certain financial institutions,
insurance companies, and domestic international sales corporations).
[1] - http://www.economicshelp.org/wp-content/uploads/2014/12/nomi...
The shift in wealth from people who do things to people who own things has been palpable.
* economists who were completely blindsided by the largest financial crisis of our time.
In the UK there was near unanimous 'expert' support for the idea that Brexit would immediately trigger a level of uncertainty pre-article 50 that would crater the economy and employment.
Growth and employment are now ever so slightly up.
>experts universally or near-universally agree on, convincing voters of these policies can be a hard sell.
Because voters are suspicious about the supposed expertise of elite economists and they have pretty good reason. They've been sold on a lot of policies over the last 30 years that have fucked them.
The policies of the "elite" economists have lead to economic growth that Britain as a whole has benefited from. What did hurt people, though, is that in the last 30 years, UK governments haven't shared this growth fairly, nor have they sufficiently invested in public services, policies which the EU had no control over and will only get worse if Britain leaves.
...and so why didn't the experts foresee this if it was so obvious? Why did they predict a cataclysmic decline in employment instead?
>wasn't so good for the people of Britain.
Depends whether you're concerned more about reviving jobs in depressed industrial areas or the value of your stock portfolio/holidaying in the riviera.
Anyway, whether or not you think Brexit was good or not (I think personally probably not), there's no doubt that "project fear" was an apt description of the remain side's "expert" arguments.
Interested to hear if there is a reason people couldn't do this, or why it doesn't matter.
During an audit, if you did something funny like repeatedly pay for dinners between you and your wife claiming it was a business meeting between corp x & y then I suspect the auditor will come down hard on that as an obvious abuse
I would be interested to hear their thoughts on a universal healthcare system. It seems like the benefits outweigh the drawbacks in countries such as Canada and New Zealand. But maybe there is an economic reason why it wouldn't work in the US.
We tried this with Reagan and everyone is still waiting for their increased wages.
US corporate tax rates were once 52%, and it was in that context as well as very high income tax rates on top earners (i.e., the business elite) that this argument appeared to have generally been made.
Why not do the same for companies ?
If you want to do business in the US, you pay US taxes. Not on what you sell in the US, but everything, all your earnings worldwide. You get to deduct local taxes as a cost, but other than that, there is no accomodation. If the rule is good enough for people, it is good enough for business.
And if your criticism is that businesses will go overseas, that's the exact same argument for people. People drop their US citizenship just to avoid US taxes for crying out loud.
You do have to report worldwide income to figure out your rate. Also, many countries have different tax systems, so does a fee count as tax paid or as a deduction to operating income? If a country organizes its burden purely as fees, then are you getting screwed on income?
For countries with tax rates less than the US, an expat can still get screwed by higher fees and cost of living to go with that. So much so that the usa introduced an overseas housing deduction just for people who work in Singapore, Hong Kong, Switzerland. Complicated, because most tax systems are not very comparable.
The US grants an exemption of something like $60K/year for income earned entirely outside the US. It has to be paid by a non US entity in local currency. And, IIRC, there were a few other requirements.
They will also credit you with any income tax you may have paid in your country of residence.
You are correct that you're pretty well screwed in a high cost-of-living country as the base exemption won't go far. But then, you're pretty well screwed by the IRS sticking its nose into the bank accounts of US citizens looking for transactions of $10,001.
A major source - maybe the major source - of massive unfairness in the US tax code is the capital gains tax. Tax on capital gains is about half the tax on wage income. This is justified by the "double taxation" of corporate income tax. So abolish the corporate income tax, with its myriad loopholes and ineffectiveness, but treat capital gains as ordinary income.
Wealthy individuals who make most of their income on capital gains rather than wages would then pay the same as the rest of us. I remember during the 2012 presidential election, when Mitt Romney finally released his tax returns, he paid less than 50% of my family's tax rate, on 100 times our income. How does that make any sense? If capital gains were taxed as ordinary income, his taxes would have been roughly the same as ours.
It's not an entirely accurate/honest picture. Romney's tax rate is lower because the income from his capital gains has already been taxed as corporate profits (well, assuming no tax evasion). I.e. the double taxation you mentioned affects him too, but it's not contained in his tax rate.
And even if they did, what's wrong with my solution? It would be fair, and visibly fair, without the whiff of "Oh, you're just ignorant" to the naysayers.
Absolutely nothing is wrong with your solution, it's fair and probably increases tax income for the country. It would only work if corporate taxes were abolished, though.
Alas, the left will react with revulsion at killing corporate income tax, and the right will react with revulsion at raising capital gains. Sigh.
Moreover, you need to consider the risk/return/liquidity triangle. This is sort of Investing 101, but it's often lost on people making pronouncements about how we need to cut taxes - mostly people who don't have substantial real capital investment, who rely on wage-driven cash flow. There are three elements to any investment - risk, return, and liquidity. Risk is the likelihood that the investment might lose rather than gain. Return is the amount of growth over time. Liquidity - the forgotten factor - is how easily the investment can be divested and turned into something else. If you can give up substantial liquidity, you can get into much more lucrative investment.
Real estate is the classic low-liquidity example. Buying and selling real estate is slow and painful, and it ties up a lot of capital. But it should return well over time. But liquifying real estate against needs other than profit can be very, very costly.
Angel investing and venture capital are extreme examples. You wind up with capital completely locked, almost totally illiquid (hence "liquidity event"), at very high risk. But the rewards can be stupendous. And they should be.
At any rate, cutting taxes to pour more capital into a system that already has too much capital is dumb. It made sense 35 years, when the economy was cash-starved and at risk of runaway inflation. But decades later, all the growth concentrates at the top, the poor and middle class have stagnated for people's entire adult lives, and we're facing borderline revolutionary attitudes on both the right and the left. "Cutting taxes to stimulate investment" is putting us on the brink of both economic collapse and political radicalism, and given how it's worked, deservedly so.
Lol. You do realize that the avg real estate price is up ~6x since 1975, while the S&P is up ~21x, right...? And before you talk about capital gains tax advantages, look into the absurd subsidies we provide to mortgages. Interest is a write-off, and if you're at all smart about it the appreciation in the property is close to tax-free (except at the extreme high end, but that's not where the gains are).
Now, on to your main point. There's a ton of liquidity (aside: just because there's a lot, is that inherently too much?) in a very specific sector of the market: fintech esp, and the tech sector in general. There is remarkably tight control on other areas of the market (go look at biotech, for instance). The actual problem is that tech startups are the lottery of investment. The ability to hit on one unicorn and make the GDP of a third world country in one year is pretty enticing. Because of this fact, investment in less-sexy sectors of the market is being depressed in favor of lottery tickets. Your proposal addresses this not at all.
There is a grain of truth to that, but for various American-specific reasons, it is difficult to apply a ceiling income level beyond which all capital gains income is treated as plain income. I believe one pernicious issue that must be addressed is treating corporations as people: lots of legal and tax accounting maneuvers absolutely depend upon this treatment, and a lot of tax-shielded income falls apart without it. Another pernicious issue is actual versus legal control of organizations: again, lots of legal and tax accounting maneuvers depend upon legally on paper showing no or minority control (especially fiscal disbursement) over an organization, yet actual control resides with real-world fiscal beneficiaries. It is highly unlikely these will ever be addressed in the foreseeable future, as many retirement structures among many other kinds of organizations are built around these issues.
1. Enforcement is undermined by international competition and tax optimization
...which is like calling for the abolishment of the criminal code in the face of a rise in crime.
There have actually been major advances in corporate taxation in the last decade or so. Switzerland is basically gone, so are Panama, Luxembourg, possibly Ireland and the Caymans as well. If the EU and US managed to cooperate, they could easily make the rules watertight.
2. liberated from corporate taxes, they'd have more freedom to increase wages
...which is complete BS because (a) it's never happened, and (b) only earnings (after costs such as wages) are taxed. If anything, the money could be better spend to lower associated costs of employment, such as health insurance. Or, you know, basically anything else: education, infrastructure, a decent life even for the less fortunate.
His best argument is actually the counterargument he cites: you don't want corporations (...are people...) to sit on endless amounts of cash. It creates a power imbalance equal to that of billonaire dynasties.
The "author" reaches new hights of asininity with his proposal to increase VAT instead, fully knowing that it is the most regressive possible taxation. You'd need VAT increases to 30%, which means a 30% tax on the lower third to half of society that lives paycheck-to-paycheck, but results in a 5% tax rate for the guy earning so much he can invest 3/4th of his income – no VAT on financial transactions etc.
Before you think of moving to Belgium: US citizens can't escape the IRS, no matter where they live, and so do pay capital gains tax.
Apple, for example, is always extremely focused. Their products fit on one table.
Google's moonshots could get very expensive, especially if they venture farther into healthcare.
$20 billion R&D budgets can't be too hard to achieve. http://fortune.com/2014/11/17/top-10-research-development/
Edit: Looks like you're referring to 2015 rather than present.
Supply-side made a lot of sense in the Reagan era, when we had near-runaway inflation and a massive cash crunch, so there was no capital to invest. Now we need things to invest the excess capital in. We need demand. That comes from wages, and no individual company is motivated to raise wages. Tragedy of the commons, in a sense.
There's certainly an argument to made that corporate taxes should be abolished, and personal taxes increased instead (income and capital gains), where we can ensure that the equivalent amount of taxation is applied progressively, through higher tax rates on the rich.
Because the key thing to remember is, corporations don't exist on their own -- they have human owners. So if you tax the rich owners directly, instead of taxing the corporation, you can get the same money but with finer-grained control -- you can progressively tax the rich owners more, and grandma's pension less.
(Of course, if you don't believe in progressive taxation, then corporate tax, sales tax, property tax, etc. are all just fine.)
Every single tax. Every last one.
The problem is that rich people cheat "legally". They control the companies as well. What companies did in the years of those very high company and personal taxes is to have "executive perks". Now those exist today (and to some extent are defensible, e.g. I understand why the CEO of IBM needs some security). The costs for those were then costs of the company.
So companies would lure shareholders in those days by making sure a 1% stake in the company would guarantee a director-level position in the company, which came with free use of a company yacht, plane, very low rent on company-owned housing, ...
A progressive tax means you pay a greater % of taxes, the more money you have -- like income tax in the US. That's just the definition.
Also corporations have a lot of discretion in when they distribute profits. A zero tax rate would effectively create the equivalent of an unlimited 401K/IRA. The corporate tax rates the US has today are in many ways the result of the high personal tax rates in the 70's that resulted in a lot of people creating what the IRS called "personal holding corporations" to defer taxes.
Does it make sense that a guy working for a $150K wage would be limited to deferring $16K in income while a consultant working for the same amount could defer taxes on any amount over what he chose to spend?
As for deferrals, it's the same as with capital gains -- if you have a $1 stock that grows to $1,000, your taxes are deferred until you sell it. A greater harmonization of tax deferral period is a good idea. Either everybody should get to do it, or nobody. But this is a separate issue, that should be totally divorced from corporate tax.
Assume that you have a business that generates $500,000 dollars in profits and you'd like to defer taxes. In the US under section 179 you can defer those taxes by investing in depreciating capital equipment such as computers, trucks or medical equipment. Obviously investing in depreciating capital equipment only allows you to defer taxes if it in the future allows you to expand your business and generate at least the same amount of income. In addition to being capped, and phasing out, the rules are very specific to prevent the system from being gamed. For example, you can't use those deductions to invest in real-estate.
To effectively defer taxes for 10-20 years would require that over that time you were able to find profitable ways to invest those profits to expand your business.
Trust me that finding profitable investments over a 10-20 year horizon is an extremely difficult thing to do and requires significant talent that is in limited supply. Allowing those people to defer taxes and re-invest profits is a win-win-win for the owner, the government and citizens.
Compare that to corporations that could accumulate profits tax free. Essentially unlimited amounts of funds could be accumulated in the corporation tax free with no personal obligation to find effective ways to deploy those funds. Those funds can be held and grow tax free until needed in retirement where they can be meted out at favorable tax rates or left for heirs.
They would even more favorable than traditional IRA and 401Ks because they wouldn't have required distributions.
While its true that corporate taxes in the US are out-of-line with other developed economies which has distorted the economy in some ways dramatically lowering corporate tax rates without implementing rules requiring distribution of corporate profits and implementing taxes on a foreign holders creates a tax loophole so large that you could drive a truck through it.
Of course you'll hear the Wall Street Journal talk about how this is 'good' for the US economy because it will allow corporation to 'reinvest' which will lead to all sorts of good things for everybody but the corporate owners. Oddly enough there is never talk about expanding limits on 401K's and IRAs and allowing the middle class to defer taxes.
You can assume anything you like but in reality, grandma doesn't own the majority of US stocks, the 1% does and the tax incidence doesn't land on consumers it lands almost entirely on shareholders.
Sales tax is an example of a tax incidence that lands mostly just on consumers.
And it's completely irrelevant what percentage of corporations are owned by savers in the 99% vs the 1% -- corporate taxes lower the value of those shares for all of them equally. They hit grandma just as hard.
Why do you think the planet's largest companies are still the planet's largest companies? Because they've gotten in bed with government. That's why there's no income tax, because of regulatory capture. Of course Bloomberg wants to just give up the fight. Sure, corporate tax right now doesn't contribute much, but there's no reason why it can't. Yes, it's hard to enforce laws on entities with ginormous amounts of resources, but that doesn't mean we shouldn't at least try.
The audacity of these people...
Every Eurocent of my taxes goes back to better education of society, better infrastructure, more investment in innovative technologies.
Sure, I don’t get more money directly from it, but a very educated, modern society, with perfectly maintained infrastructure can save a lot of costs in many places, and increase your income even more.
But you can buy government bonds, which currently have a negative interest rate (you lose money).
You pay taxes because if you dont, the police deprives you of your freedom. Not because you want to, and the argument that taxes are the best ROI is financially insane, otherwise you would just donate all your money to government institutions and you would become wealthier.
In a perfect futuristing plentiful society, taxes would not exist: the goal is to make taxes as low as possible, not as high as possible!
These taxes are inefficient: They're difficult to collect. They disadvantage small companies that can't afford costly tax minimization strategies. They encourage big companies to spend money on non-productive activities (offshoring, shell games, etc.) The point of taxes is to raise money for the treasury, not stick it to the man. Moral indignation doesn't put bread on the table, so if we can collect by easier means, we should.
Corporate income taxes are a big part of the rationale for the tax treatment of capital gains. The money has been taxed once, so taxing it at standard rates amounts to double taxation. There's an argument to be made for abolishing corporate income taxes and treating capital gains as ordinary income. Since the returns on capital outpace the returns on labor, in the long run wealth accumulates with capital and reinforces inequality.
Also, capital-derived income scales far more than labor-derived income, with far lower overhead. This isn't just in the physical domain, but also the time domain. This presents interesting tax and industrial policy questions on whether or not to treat large-scale capital-intensive organizations the same as labor-intensive organizations.
Maybe it's time to transform myself into a corporation. No more taxes, limited liabilities, easy bankruptcy (student loans), can't go to jail even if I make a real mess (financial crisis of 2007, Wells Fargo, BP), welcome at exotic tax havens, tax breaks to move to another region... The ultimate lifehack: forget cloning yourself, just corporize!
One is legal and the other is not.
I live and run my company in a tax haven. I had to move here in order to be competitive internationally with other low tax jurisdictions. My only other option was to go out of business.
In addition to not having to pay any income taxes I also don't have to report anything to the government or worry about the government, bank, isp, phone company etc spying on me. No need to worry about going to jail over a misinterpretation of the tax code. I don't have to worry about immigration issues. Healthcare is completely private and very affordable.
Politics is a lot more boring when the parties are not fighting over who's in control over massive amounts of spending. Helps keep corruption down.
Leaving SF and moving to a tax haven was the best decision I've ever made in my life.
I'm culturally American, but I'm not a citizen. If the US were to adopt similar policies I'd love to move back. I'd bring money and jobs with me. But unless Texas succeeds I'm unlikely to see a western (anglosphere) country doing this in my lifetime.
Are corporations desperately brainstorming to find ways to pay their employees more, only to be foiled by freedom-impinging corporate taxes?
> The populist governments...need to deliver economic growth and benefits to the disenchanted workers who have brought them to power. One way to do it in a way everyone would understand would be to abolish the corporate tax
The article posits replacing corporate tax with a 25% VAT. These disenchanted lower-income workers would see their cost of living increase substantially, but presumably they could dip into their newfound corporate tax savings to cover the difference.
We've already played the trickle-down economics game. I don't recall it being all that successful.
> They would have the freedom to increase wages, but without any incentive to do so they won't.
Workers would go to the company with higher wages. And the company would be able to sustain higher wages as the tax is abolished.
Yes, you are correct, but only academically. In practice the 99% benefit very little from the stock market while the 1% makes most of their money from it.
Many people indirectly purchase stocks through investments. For example, I might invest in a mutual fund which buys stock.
Also, bonds and other instruments are linked to stock prices. So if stock prices go up, interest rates of bonds and debts go up too.
Even if the 99% are not investing in stocks currently, they can in the future; so they can profit from corporate tax abolition.
If tomorrow investments doubled money in a year, then people would work far less.
What would you do if investments doubled your money in a year?
I do not see why rich people gaining disproportionately is a problem.
You are free to have that opinion, but I think that the majority of the people affected by these economic policies (who by definition cannot be rich) will disagree with you.
I think that the debate of policy would be greatly improved if proposals started with a statement of fundamental axioms like these, from which the supposed merits of policies are derived.
Didn't you just say that rich people benefit? So the policy affects rich people positively.
So, if wages are not increased, company will make more profit after taxes and thus shareholders will make more money.
Of course they fail to point that out, because there is a strong counterfactual in the way many rich companies let cash sit in bank accounts for an indefinite amount of time.
Apple is investing the cash pile in securities. (http://www.marketwatch.com/story/apple-isnt-really-sitting-o...)
If corporate tax is abolished, Apple's cash pile would enlargen and thus Apple's investments would increase which would increase other company's stock prices or bond yields.
It doesn't make a very compelling case. Consumption taxes slow spending, and private wealth can also evade taxation.
EDIT: corrected, thanks rectang
The ultimate irony, the criminal paying the bail with parts of the bank robberys spoil.
The article notably does not make the case for a wealth tax. It proposes making up revenue with income and consumption taxes. The result would be a transfer of wealth towards the ultrarich.
Really? Wages are a business expense, taxes are paid on profit. Hence wages have nothing to do with corporate tax.
Reasons a and b seem to conflict. If corps already aren't paying tax, they have the cash ready to raise wages.
Reason c ignores that there are similar loopholes to safety and environmental regulations too.
Taxing corps is an answer to the problem that companies cost the government money (i.e. trucking companies use roads) while benefitting the state (employing people who consume and pay income tax). Maybe it's a good idea for the government to directly recoup the benefit of a company using state resources.
With regards to the statement about being a "tax paying entity" or not to have a voice, that is an extremely dangerous road to go down. See "poll taxes".
Not at all. Every person has the potential to pay taxes, whether they do or not. We have wisely decided that people who make below some vague amount don't have to pay taxes. But they'd be eligible to pay if they made more money. As opposed to a theoretically non tax paying corporation.
As for corporations "speaking", the people controlling the corporation are using the productivity of their workers to speak for those workers (if money is speech, that money came from the employees' productivity), whether their employees want the to or not. They're unjustly gaining extra speech, beyond their individual speech, which everyone already has a right to.
EDIT: taxes and speech, I probably wasn't clear. Any person can vote, whether they pay taxes or not. They have skin in the game, because they're people. Their population determines congressional districts at every census, and corporations do not. I'm not saying you can't vote until you make enough to pay.
The article would be more interesting it explored replacing corporate taxes with a wealth tax rather than an income tax.
Source: the last fifty years. At the very least.
Note that "regressive" is technically an accurate description of the suggested policy.
> The money could go into a pot of course but it's used in the same ways ultimately.
It is not necessarily used in the same way. One reason why progressive taxation is both socially and economically beneficial is that poor people spend a larger proportion of their income, and thus generate demand. The same money, given to the rich, will largely end up as savings.
It wouldn't have been something I even considered before that episode, but one economist argued that people really find corporate taxes appealing because they're suspicious of concentrated wealth. But if we're trying to transfer wealth from the rich to the poor, we could just transfer wealth from the rich to the poor through more progressive income taxes.
While I think they made a good prima facie case, there's one counterargument that I haven't seen explored. Cheating is positively correlated with tax rates. So if you have a variety of kinds of taxes, you can have lower rates than if you just have one source of revenue. You can reduce the incentive to cheat while collecting the same revenue.
The "sweetheart deals" mentioned here are definitely aggravating though, they seem deeply unfair, and zero sum when states compete for the business.[2]
I'd like more countries and states to adopt a "most favored company" rule, where any company can claim the same terms as the most favored company in that territory. Similar to how the WTO ensures fairness. If a state wants to eliminate corporate taxes, fine, whatever, but you can't just do it for one company whose execs took you out to a few ball games.
[0] http://www.npr.org/sections/money/2012/10/18/163106924/a-tax...
[1] Planet Money had another episode on that a few years back, on the state level.
http://www.npr.org/sections/money/2016/05/04/476799218/episo...
Taxes are necessary. But in the case of corporations I think the problem is not about what the right corporate tax rate should be but instead what does a company do when they effectively have so much cash they can not find good options to invest that money in.
If one of these companies suddenly reports a significant drop in cash due to aggressive investments in something that is failing (say, perhaps building an autonomous car) their stock will be punished, a very negative incentive.
The real question: is a company investing this cash the right thing to do? IMO it is, we want that money at work, building something. I don’t believe taxes can solve this. Instead can we need to find a way for companies to be able to invest this money in new ideas but not be so punitive via the markets when they try things that fail.
You start on Day 1 with $100 and sweat equity and grow your business. Year one you have $100k of revenue and $90k of expenses. You need that $10k in the bank as its now your monthly burn.
Year 2 you grow to $400k and have $40k of net income. You need that $40k in the bank because it's now your monthly burn.
Year 3 you grow to $1.2m and have $200k of net income. You need that $200k in the bank because... Ok, you get it.
If you're funded you can burn those funds in the beginning and carry forward the losses as your capital requirements are growing.
Otherwise you are stuck paying at least 40%, but can be much more depending on the states you do business in, not to mention the CPA cost is substantial just to make all the filings.
It's really hard to bootstrap from $0 when every dollar you need to keep in the bank just to have 3 months expenses on hand, actually costs you $2.
It's also really hard to get a line of credit that early in the business lifecycle, so it's quite a trap for bootstrapping companies.
It would be really great if there was a way to defer the taxes on that early profit that is staying as working capital.
Almost like the money shouldn't be taxed at the corporate level as long as the company is not holding more than X months of expenses.
I've read there are taxes for holding "too much" money at the corporate level and not paying dividends, but apparently it's not really applied in practice? Or, again, only targeting smaller businesses who can't afford to play the necessary games.
You could financially incentivise companies to reward their workers, a big business giving its staff generous salaries could then pay almost no tax.. Then you go after the individual's tax instead.
I'm sure there's flaws in this but I think the premise of financially incentivising companies to pay better wages could make the lower corporation tax idea more credible than just expecting it'll magically happen.
As a Marxist I'm actually for the abolition of corporate taxes. I think they're an ineffective and counter-producitve means of raising revenue and simply make the state more dependent on corporate profits and power.
But in return for the lowering of corporate taxes, I'm for socialization (which is not necessarily nationalization) of a whole bunch of key assets, legal and state support for worker-owned business and cooperatives, and broadly the transfer of power of much of what is now in corporate hands into the hands of the population as a whole.
The US has low (substantially below average within the OECD) actual corporate taxes, though it has a high nominal rate of corporate taxation. (Various tax deductions, credits, etc. make the actual ultimate tax rate low.)
I had no idea that economists are almost unanimously in favor of this idea. (I listened to the NPR podcast mentioned here: https://news.ycombinator.com/item?id=13043744).
So now I'm not sure why the majority of these comments are so opposed. Do people here not trust experts in the field of economics, in the same way that many people don't trust the scientists who warn about climate change?
We Americans manufactured and believe in a host of fables to explain the prosperity of the last 70 years...
The rule is this: all proposals for changes to government spending must be revenue-neutral. That is, if you propose a tax cut somewhere, you must propose a tax hike somewhere else to explain how the cut would be paid for. Or if you don't want to propose another tax hike, you must specify what service will get cut as a consequence. Conversely, if you wish to propose a service, you must specify how you will raise the funds to pay for it.
Anything else is wishful thinking, and is storing up trouble for the future.
The UK is still servicing debt on perpetual bonds from the 17th or 18th century. They carry a low interest rate, so it's cheaper to make payments rather than paying off the debt.
The obvious retort is that if all spending were deficit spending, people would stop lending us money. Rather than attaching unnecessary ideological baggage to tax policy, we should do the math. When deficit spending is cheap, we should exercise it. When it's expensive, taxes are wiser.
1. lowering taxes will benefit consumers because corporations will lower prices (and definitely not maximize shareholder value)
2. taxes have loopholes and sweetheart deals, so we should level the playing field by rewarding their talents (or deep pockets) by eliminating everything
3. Only 10% of Federal tax revenue, despite the whales' best efforts at tax avoidance
I think #1 is the most offensive. The idea of companies putting excess profit from tax removal into hands of consumers is the most laughable argument for removing corporate taxes I've ever heard.
These days I have trouble reconciling the notion that in the near future we're going to need guaranteed minimum incomes for everyone as more and more jobs are automated. With fewer people working traditional jobs there will be even more incentive to shift the tax base toward the corporation and away from the individual.
tldr: how does abolishing corporate tax jive with universal basic income?
yeah right .. we all know thats exactly what's going to happen!
That statement basically means "fuck the poor".
Should profit be accruing unchecked in corporations? Certainly there should be some pay back to society as society bears some external costs. Not only that but there may be better places capital could be deployed. These can be different at different times - management doing reinvestment, shareholders moving capital elsewhere, employees spending and taxman spending. A robust scheme would employ a balanced approach. At any time one may be preferable and some will argue for extremes. But things are changing - always - until this time it will be different - only to return shortly later violently to mean.
Discussion of corporate profits requires to also be looking at income tax and the treatment of dividends and capital gains is always being simplistic. But the essay is not trying to propose a solution. It is simply pointing out that there is a systemic escalating credibility problem:
> It could be argued that the existence of a tax that countries cannot properly enforce is one of the factors undermining trust in governments and feeding populist movements.
Bloomberg is not known for its social attitude and one may argue that they are advancing here a very liberalist agenda by talking up a fake problem. I give some leeway this time due the next paragraph:
> There are other ways governments can keep corporations in check -- for example, through environmental, safety and labor regulations, which U.S. Republicans and Brexiters dislike but which ultimately benefit consumers in a way the corporate tax doesn't. There are also other ways governments can get the revenue -- for example, by paying more attention to private income from corporate dividends and pass-through entities, or the European way -- by placing an additional burden on consumption through a value-added tax. In the U.K., VAT contributes 10.7 percent of GDP to the budget. To compensate for the absence of a corporate tax, it would need to go up from 20 percent to 25 percent -- the level that currently exists in Sweden and Croatia, for example.
Finding ways to tax that can not be escaped is critical. Also important is to find ways to tax that don't burden labor too much. However this approach needs to take into account that shifting (or acknowledging the fiat-accompli) of collecting tax from less sophisticated and mobile citizens and workers is putting pressure on well paid full time employment. Tariff free zones may not be so compatible with that approach.
Last but not least - hoarding profits (most extreme in case of Apple) as it going on at the moment is a recent phenomena. There used to be a tax on that called inflation. Any balancing would need to look at where and with volume new money is entering the system and going nowhere.
advantages of zero corporate taxes:
* lots of advantages for small business, too much to list.
* big business don't need to shuttle cash offshore.
* big business have more cash to worth with, if that is their intention...
* less government money wasted on trying to collect those taxes.
And probably several other advantages... but at least US have a major problem:
stock ownership is counted as part of someone assets, but the value of those are only taxes if the person sells it or get dividends, with zero corporate taxes, it would be an incentive for CEOs, founders, etc... to just accumulate stock, never pay dividends, don't pay high salaries to themselves, but still throw their weigth around using their total assets as a hammer, for example by having their corporation buy stuff they want, or by taking loans to use the cash with the stock as collateral.
This would effectively allow the richest to accumulate untold wealth while paying no taxes at all.
The only way I can see zero corporate taxes working, is if you patch up some other areas first.
Now, something I think is quite brilliant in US that already exists, is that US tends to tax only profits, for example lots of people upset with Trump not paying taxes when he had losses (at least when he said he had losses...)
In Brazil you pay tax over your income, doesn't matter if you had profits with it, this leads to extreme price inflation, specially when production chains get longer, as people will charge for their stuff more and more to get over the taxes.
For example, once I talked with a guy that made YoYos (the round toys on a string). The toys are simple, and cheap to make, but on the store where I met the guy, they wanted about 5 USD for a simple YoYo, and a better YoYo suitable for amateur competition was about 30 USD.
The factory owner, told me that the 5 USD YoYo manufacturing cost was about 80 cents, but all the taxes summed when the factory sold to the distributor were in total about 40% of the INCOME, not the PROFIT, thus the factory sold to the distributor the YoYo for 3 USD, with 1.2 USD being paid in taxes, 80 cents covering the manufacturing costs, and 40 cents being their raw profits (ie: before paying employees, transport, dividends, marketing, whatnot).
The storeowner, also aimed to have about 50 cents in profit, but his taxes were about 30% of the income (not profit). If it was in US, he could charge 3.5 USD, get 50 cents in profit, and tell the buyer he had to pay an extra 1 USD in taxes, but instead he had to charge 5 USD, he would pay 3 USD to the factory, earn 50 cents in profit, and pay 1.5 USD in taxes.