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Hey Thomas,

I've been thinking about something philosophically for a while, and you're one of my favorite posters on the site and we agree on a heck of a lot of stuff, but we've got split opinions on taxation. Would it be alright to ask some kind of difficult questions philosophically on the matter? I want to understand what you think. These aren't easy questions:

Would you willingly pay your taxes if you believed the money was going to an illegitimate government that is doing bad and destructive things with it?

There's an easy answer to that that kind of avoids the question, which is, "Regardless of my personal feelings, governments can, will, and should go after people who try not to pay." And okay, sure, that's reality, I'm looking more philosophically.

Going a little bit further, do you think it makes a difference whether the government is a democracy, as opposed to, say, a totalitarian state or a theocracy?

And final question - what if you're in a democracy, but the people have been mis-educated as to what's actually happening by the official government? For instance, imagine North Korea switched to an actual, real, voting democracy tomorrow, no secret police, no Dear Leader any more. But they've still gotten mis-educated and brainwashed for all their formative years. Is their will morally binding on each other for setting state policy? Is it morally binding on you, no matter what, even if you disagree with it?

I guess these are hard questions. I've thought about them. I've got my answers and am happy to share, and happy to answer hard questions in turn if you like. I think this could be a good discussion because you're bright and I respect you a hell of a lot and would like to hear what you think on this - our feelings on the matter seem to be far apart, and I'm kind of curious to figure out where our beliefs start diverging to get to the end conclusions.

-Sebastian

I think the general principal in play here is fairness. I think fairness is orthogonal to the government's use of proceeds.

If my best developer has to pay more taxes than me, simply by nature of not owning a portion of the company large enough to funnel her wages through, that situation seems prima facie unfair. The unfortunate fact is, that same unfairness is usually going to be compounded: my ownership of the company that developer works for probably means I'm not only paying relatively lower taxes, but also making more money. That's regressive. Regressive taxes are evil regardless of whether you think progressive taxes are good.

Finally, I actually don't think the use of proceeds issue makes this a harder call. Forget totalitarian states for a second, and just think about Social Security.

A rationale for not paying taxes is that they'll go to fund a sham Social Security system. But if Social Security is a sham, it's wrong that anybody should have to pay into it. Moreover, as long as most people are on the hook for it, shielding yourself (and the class of people like you) from its obligations is actually counterproductive. The more people (and the more influential the people) affected by FICA, the more pressure there will be to change that system to reflect the will of its stakeholders.

> A rationale for not paying taxes is that they'll go to fund a sham Social Security system. But if Social Security is a sham, it's wrong that anybody should have to pay into it. Moreover, as long as most people are on the hook for it, shielding yourself (and the class of people like you) from its obligations is actually counterproductive. The more people (and the more influential the people) affected by FICA, the more pressure there will be to change that system to reflect the will of its stakeholders.

That's actually a very intelligent argument. For the record, I do pay my taxes and I'm not particularly creative or aggressive about it - but I do it with roughly the same feeling I give my wallet to a mugger if he's got a knife.

The alternative argument is, "If something is bad, less of it is always good." Like, in a place that arrests people for free speech, should every free speaking person turn themselves in? But your position also makes sense as well, seems to be thought out, and part of a coherent worldview. I disagree, but I appreciate you taking the time to respond. Cheers.

If something is bad, less of it is always good.

The problem with this statement is that very few "things" are either all good or all bad.

P.S. You both make good points and it's encouraging to see thoughtful discussions like this on what can be very divisive issues, so thanks.

The big reason people do an S-Corp is to avoid double taxation (and to be a corporation rather than LLC while not having the complex structures of a C-Corp). Better than being a sole proprietor. Keep in mind that S-Corps can only have a certain number of shares and shareholders (100?) in one class of stock, so a startup or large corporation can't be an S-Corp and take advantage of the tax benefits. Also, here in California, all corporations (S and C and even LLC) owe tax even if the company's net income is zero.

Um, I'm not a CPA, and I definitely don't know how California taxes work, but at the federal level, isn't that (taxation at the corporate level) pretty much the opposite of how an S-Corp works?

An S-Corp just avoids double taxation. Salaries paid out are subject to FICA. As for the remaining business income, each shareholder would still owe taxes based on how much of the business they own. This is different than a C-Corp where the business income would be taxed at the corporate level in addition to the owners paying income tax on their salaries. And if the owners of a C-Corp decided to pay themselves huge dividends to avoid normal income taxation, that would raise red flags.

In California, S-Corps pay a 1.5% franchise tax on net income (minimum $800). You pay this even if your net income is zero or negative. You pay this no matter what.

Disclosure: I'm also not a CPA.

Yeah, Alex, I'm just saying: S-Corps don't pay federal corporate taxes, do they? I thought that was the point of an S-Corp. Your comment, before you edited it, said flat-out that they did.

(We file as S, but thankfully I'm not the person here that has to know exactly how this stuff works. See previous comments for evidence that you should not take tax advice from me.)

Right, yeah, looks like S-Corps don't pay federal corporate taxes. I knew it was to avoid double taxation but I had forgotten which taxation S-Corps were exempt from. My bad. Unfortunately, for California, you owe the 1.5% (minimum $800) franchise tax on company income whether you're an LLC or S-Corp or C-Corp. In NYC, you are subject to the full corporate income tax rate, even as an S-Corp.

That explains why I suddenly had to start paying NY taxes, even though I live in Illinois (we started filing differently).

Sure ... but what does that have to do with dodging FICA taxes, which are not the double taxation in question?

And people absolutely do pay themselves ridiculously low wages and take the rest in profit, and choose S-Corps specifically in order to make it possible. The incentive is too big: Pay yourself 100k in salary out of your 100k total? Or 50k and take the other 50k as a distribution, saving 15% on it along the way?

Correct me if I'm wrong, but because the person is not paying into those taxes, they also will lose out on social security benefits when they are older. So it's not a total free lunch.

No, you're right. It's just mostly a free lunch.

> you can't formally be an LLC principal and take W2 wages

That's incorrect. An LLC can file as an S-Corp and the partners can take W2 wages.

That's what we do, but is an exception that somewhat makes my point for me.

So would you be for sales tax on services too?