Hacker News Reader

Can you summarize why economists support abolishing corporate tax?

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).

From the linked transcript:

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.

So, eliminate corporate tax but at the same time increase capital gains tax, i.e. stop taxing it differently (less) than earned income? My concern with that is people shifting their wealth to be held by a private corporation instead of personally held; "it's not my yacht, it belongs to Extra88 Inc." I think additional changes would need to be made to the nature of corporations to avoid abuse.

It is a risk yes, but that kind of argument wouldn't make it past an IRS auditor. There is a reason many C-level staff today aren't compensated with benefits like housing and transport.

Your example of the yacht is already handled by the tax code (at least in Canada, likely everywhere else too). That is, if you take the yacht for weekend excursions that is a personal benefit and you should be paying tax on that.

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.

You tax capital gains differently than earned income to incentivise investment over consumption.

This is because consumption today is always more valuable than consumption in the future (the discount rate).

Can you explain that? How does does the source of the money affect what I do with it (dividends & interest vs. pay from the sweat of my brow & intellectual output)?

If consumption today is more valuable than consumption in the future, why would you want to favor doing something else today, e.g. investment?

You'd always prefer $100 today vs $100 in a year. In order to convince someone to invest you need to offer them more than that in the future.

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.

I just want to emphasize something you hinted at: "expected return" usually involves an additional discounting factor which relates to risk and risk tolerance. An investment with a fixed return of 5% (a predictable $76 equivalent in a year) is very different from an investment with an expected return of 5% but a standard deviation of +-10% (anywhere from about $68 to $84). A lot of investors would treat that as worth a little bit less, because if it happens to go down, that is felt more keenly than if it goes up.

No, capital gains taxed less than wages incentivises investment over working. Which IMO is the wrong thing, because it's fundamentally regressive - young, poor but intelligent and educated people can only work, not invest, so we should encourage them by taxing them fairly.

And you think if you remove the incentive to invest, thus reducing the capital available to corporations, the same number of jobs will exist for those young poor people to work in?

I'm pretty confident that we do tax the poor fairly - in fact, thanks to credits, the poorest get a negative tax rate that nets them sizable "refunds".

This already exists, if you're buying an expensive item such as a yacht or an airplane, it actually makes accounting sense to structure it into a corporate ownership. When you need to resell a pricey item, you might not find a quick buyer for a $50 mln item, but you might find 10 fractional buyers willing to pay $5 mln each.

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.

but corporations can already reinvest in themselves tax free, and on top of that capitalizable expenses get to be spread across tax periods for tax sheltering purposes.

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).

> 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.

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 thought profits are taxed - so re-investing should happen before the taxation, no?

I've always wondered exactly this. Corporations aren't people. Why are we taxing them?

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?

Well since providing benefits to employees without their paying tax on those benefits illegal, hopefully what prevents it is tax auditors.

> Corporations aren't people. Why are we taxing them?

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?

> buying its execs (and employees for that matter) second homes and cars and vacations with un-taxed money

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...

I listened to that episode and if I recall correctly, economists agreed that corporation taxes should be abolished because they want corporations to reinvest profits and prefer to shift the taxes to shareholders/income.

Also mentioned on the podcast is abolishing all deductibles, including mortgage interest.

>they want corporations to reinvest profits and prefer to shift the taxes to shareholders/income

Which is dumb because the tax incidence of corporate tax already lands on shareholders and corporations aren't reinvesting profits because of anemic demand.

But they can reinvest 'profits' today, for free, by running internal R&D programs, acquisitions, sponsoring a charity and investing in its staff, all of which are deducted from revenue as costs of running-a-company before calculation of taxable profit. Look at Amazon as a famous example which grew enormously year-on-year by reinvesting and thus generating zero profit.

'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.

> 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.

A use tax is basically sales tax, and the problem with them is they are regressive by nature (people with less income spend proportionally more of it on taxable goods).

This is basically Gary Johnson's "Fair Tax" proposal, and it ultimately hurts the poor and allows the millionaires to pay less.

No, most companies cannot organize as partnerships, because corporate structure also governs the way equity is distributed.

S-Corps are the closest alternative to a company that faces double taxation, but they have many restrictions.

  - 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).

https://www.irs.gov/businesses/small-businesses-self-employe...

>unanimous approval of economists*

* 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.

I don't think that growth and employment being "ever so slightly up" gives the full picture here. The value of Stirling hit a 31-year low after the vote, which obviously made the UK an attractive market for overseas buyers (such as Japan's SoftBank buying ARM) but wasn't so good for the people of Britain. This is before Article 50 has even been invoked, and any optimism in the market may reflect the belief that Britain might have second thoughts about leaving.

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.

>The value of Stirling hit a 31-year low after the vote, which obviously made the UK an attractive market for overseas buyers

...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.

If we were to abolish corporate taxes, would this make it trivial to avoid paying taxes on any money above what you need for consumption by routing all your pay through a shell company where you keep it until you need it? Seems like it would be essentially the equivalent of removing contribution caps on 401ks.

Interested to hear if there is a reason people couldn't do this, or why it doesn't matter.

Wouldn't this be the same as simply not taking money out of the corporation in the first place? I'd be more concerned about losing tax income from personal consumption complexly disguised as corporate spending.

The moment the money is spent on something seen as personal benefit then tax is owed.

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

This isn't what I meant. I meant using the corporation as an uncapped 401k which essentially lets you defer tax until years where you have less income, therefore paying less income tax.

That's not what he's saying. He's saying you can just basically hoard your income there and pay yourself a smaller salary. You could invest tax-free until you take it out.

The UK got rid of mortgage interest tax deduction in 2000 without any problem.

They picked a good time, right as the bubble was beginning[1].

[1] - http://www.economicshelp.org/wp-content/uploads/2014/12/nomi...

For sure. Buy to let landlords are definitely enjoying the 500% increase in house prices and skyrocketing rents that came after that.

The shift in wealth from people who do things to people who own things has been palpable.

Why would that be the result? I'd think that removing the deduction would depress prices, for single-family dwellings at least.

Thanks, that was very informative! They explained their reasoning very clearly, and it's sad that these policies will never see the light of day.

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.

> which includes changes to the tax codes that have a unanimous approval of economists across the political spectrum

I seriously doubt the unanimous approval from the far the far left to the far right.

it was unanimous approval of a panel of just five people...

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.

A progressive consumption tax is less distortive (favours productivity over consumption) than a progressive income tax, its just harder to implement.

No-brainer in the sense that it doesn't work and no one should support abolishing corporate taxes.

Good thing we got an expert to chime in and set those economists straight.

Ironically this entire podcast series is about how it's impossible for politicians to have an educated conversation with the public about certain policies, due to the prevalence of knee-jerk comments like yours.