Trump Wants Tax Plan to Cut Corporate Rate to 15%
wsj.com
wsj.com
At the start of 2014, Finland lowered its corporate tax rate to 20% (from a previous 24.5%). The lost tax revenue amounted to $800M EUR, but the government claimed that half of that would be recouped thanks to positive dynamic effects the tax cut would create in the national economy.
Two years later, they were forced to admit [1] that none of those dynamic effects materialized.
Cutting corporate tax may still be a good thing, but it's most likely nothing close to revenue-neutral anywhere in the developed world. So this plan would expand the US budget deficit (which Republicans seem to hate only when they're not the ones expanding it with tax cuts).
[1] http://yle.fi/uutiset/3-7773569 (in Finnish)
Therefore the big firms that everyone villianizes for paying little taxes are already paying low taxes. This would lower the taxes for those who can't afford the team of accountants. Ideally they should also dramatically simplify the tax code to eliminate all of the loopholes so everyone pays the expected rates and there are no reinforcing cyclical benefits for market incumbents crippling innovation and continually enriching a small subset of the population.
Greed is defined as:
> intense and selfish desire for something, especially wealth, power, or food.
I've never met a person who wasn't greedy, seriously even a pastor has the intense desire for followers.
Further, it's literally only possible for a company to exist if it is greedy. How else will they pay their employees, investors, etc?
Now, we can argue some companies are "excessively greedy". However, I think that's still probably not the correct way to describe companies that shaft their employees for the bottom line. By definition being "greedy" implies "intense" or "excessive", I think a better term would be "short sighted".
A company which harms it's employees, customers, etc. and tries to get the most value is "greedy" (just as all companies are), but what makes it "bad" is the poor management.
I think the whole point of this new proposed system (aka 15% tax), is that it tips the pro's vs con's list of companies keeping money here to "pro". That's how economies work.
A lower rate won't stop this; a closing of the loophole will.
Apple US buys iPods for $10 from China and sells in USA for $100. $90 profit, taxable, right? Wrong. Apple US licenses the Apple name from Apple Ireland for $89/iPod. Final tax sheet looks like:
Revenue: $100 cash from Apple store in San Francisco Expenses: $10 Apple China, $89 Apple Ireland
Taxable profit in USA: $1 (minus labor and such, of course)
Taxes paid to US government: minimal.
The profits from firms that do lots of business in the USA are being paperwork-shifted outside the country to evade taxes.
This has been covered extensively in numerous in-depth articles about major corporations and their tax schemes.
This is how Apple ends up with 250 Billion (or whatever it is now) overseas that it doesn't want to Repatriate and pay US taxes on. That money wasn't earned by selling iPods in the US, it was earned by selling iPods everywhere else.
The first is the US government not doing enough to prevent shell IP licensing from being used to eliminate US profits (while the companies are benefiting from US stability and legal protections).
The second is the issue with US companies repatriating (or not) profits earned in foreign subsidiaries.
Better to just tax it once and call it even.
For example, if you can create a structure in which all of your consulting income + capital-asset income goes into a C-corp, and you pay most of your own expenses through the C-corp (e.g., Trump tower home office), then you can keep most of your income taxed at only 15%. The C-corp holds it forever, and pays your expenses, and pays you a small salary for non-expensable items. The C-corp can purchase things like corporate cars, boats, airplanes, and real-estate, and pay for trips as well.
Obviously, there is administrative overhead in setting these things up; you can't be earning 150k and trying to pull this off.
There cannot be a gap between C-corp taxation and individual taxation rates if you want to avoid creating more loopholes for wealthier people---especially those who earn mostly from their capital assets.
The AMT is essentially a 2nd tax code for individual income taxes were fewer deductions but also lower rates. Individuals compute their personal taxes both ways and pay the higher of the two systems.
It's kind of a crazy system.
In what way are we talking about different things?
So if the IRS is smart but this still happens a lot, there must be something else at work, no?
All theoretical interest on my part, so who knows. Government estimates on lost revenue from this range wildly (order 1billion to 100billion) from what I've seen, but they are at least convinced it happens in significant amounts.
(which enjoy a low rate but are not really sophisticated financial engineering)
Start with oil.
This is (as was said elsewhere in this thread) one of the biggest reasons to get rid of the corporate tax code completely and just tax people where things are much simpler and much less susceptible to these sorts of problems.
Corporate tax rates are for C-Corps.
> Right now, freelancers, sole proprietors, unincorporated small businesses and pass-through entities are taxed at the high personal income tax rates. [...] The Trump plan addresses this challenge head on with a new business income tax rate within the personal income tax code that matches the 15% corporate tax rate
> Right now, freelancers, sole proprietors, unincorporated small businesses and pass-through entities are taxed at the high personal income tax rates. [...] The Trump plan addresses this challenge head on with a new business income tax rate within the personal income tax code that matches the 15% corporate tax rate
Under these new rules, if a C-corp gets taxed at 15%, there is a strong incentive to pass all income through this C-corp, even after double-taxation.
I certainly agree that the double taxation issue is a problem and it would be even better if both situations were taxed the same way but I'm not sure what this has to do with tax evasion.
Currently, pass-through taxation applies to shareholders even if they don't take a distribution. So, rather than have shareholders pay taxes out of pocket, the company pays the dividend just to cover taxes. That's essentially a ~30% tax on the company.
If I switch to a C-corp at 15% then I can minimize dividends while in growth mode to minimize double-taxation. I then pay the much lower 15% corporate rate, leaving me with ~15% more to reinvest.
And, it's nearly impossible to zero out your net by reinvesting it all before some contrived deadline. Even if you could, it is very unlikely that allowing this artificial timeline to drive your investment also happens to represent the best timing or the most efficient allocation of capital.
> Right now, freelancers, sole proprietors, unincorporated small businesses and pass-through entities are taxed at the high personal income tax rates. [...] The Trump plan addresses this challenge head on with a new business income tax rate within the personal income tax code that matches the 15% corporate tax rate
They want to change it so S-corp income gets taxed at 15%, rather than at personal income tax rates. Which is completely crazy, since every CEO in the US will be forming an S-corp and passing all income through it to get a flat 15% "income tax" rate.
This part of the Trump plan I actually do think is completely bonkers so I assume that it won't get anywhere.
Salaries for C-corp employees, including top officers that happen to be major shareholders, are a deductible business expense (well, there may be some issues if they are over $1 million annually, but...), so you only get double taxed on dividends.
If it's a "legitimate" expense it gets deducted from profits, so the tax rate is zero, even under today's rules.
If it's not a "legitimate" expense, e.g. a vacation paid by the company, the beneficiary gets taxed as if he got this much money in salary.
The part of your list that will be taxed differently under new rules is assets - jets, boats, etc. Even so, usage of the boat for leisure should get taxed to the beneficiary at customary boat rental rates.
There is room for creating accounting, as always. But it doesn't look like this is the key change here.
A bigger deal is the double-taxed income. If your C Corp earns $1m, it then pays taxes at ~ 35%, with $650k left in the coffers. Then you pay yourself a dividend of $650k and you get taxed at the dividend tax rate which is also 20%, so now you have $520k left, for a combined effective tax rate of 48%. If the corp rate is cut from 35% to to 15% then your have 680k left, for a combined effective tax rate of 32%.
Going from 48% to 32% is the real prize here.
2. In very high income categories, many activities can be classified as "legitimate expenses" since deals hinge on reputation, entertaining, etc.
If my company pays for some of my personal expenditure that money becomes part of my remuneration as an employee/director and therefore my personal income tax rate applies.
For others here is a nice essay on why this is a good idea:
https://www.theatlantic.com/business/archive/2010/10/why-we-...
Hmmmm, this sounds familiar....
EDIT: typo
Here's one that's close, although it focuses on repatriated profits http://www.igmchicago.org/surveys/repatriated-profits
> Question B: Permanently lowering the effective marginal tax rate on US corporations’ repatriated profits, such as by moving to a territorial-based tax system, would boost US capital investment significantly.
The economists' answers were very mixed and half of them answered "uncertain" or "no opinion". :-/ muh cognitive bias!
mmanfrin points at that tax havens are the problem, here's a NYTimes opinion piece advocating for 0% corporate tax rates as a way to encourage companies to repatriate their profits: https://www.nytimes.com/2014/01/06/opinion/abolish-the-corpo...
Apple is sitting on almost 2250 Billion and they won't bring a penny of it back to the U.S. because they don't want to pay some tax.
The rich people who are making the congressmen and senators rich are making sure that the rich and the corporations are flush with money while 20% of all children in the U.S are living in poverty.
Reagan was right it is trickle down, it flowed down at one time, now it trickles, soon to drip.
http://piketty.pse.ens.fr/files/Clausing2012.pdf
"At the end of the searching, I find some evidence that suggests that corporate taxation may lower wages, but the preponderance of evidence does not suggest any wage effects from corporate taxation."
http://piketty.pse.ens.fr/files/Desaietal2007.pdf
"between and 45 and 75 percent of the burden of corporate taxes is borne by labor with the balance borne by capital. "
https://www.kansascityfed.org/Publicat/RegionalRWP/RRWP07-01...
"Using cross-country data I estimate that a ten percentage point increase in the corporate tax rate of high-income countries reduces mean annual gross wages by seven percent."
https://www.treasury.gov/resource-center/tax-policy/tax-anal...
"While further research is necessary to draw definitive conclusions, these studies suggest that labor may bear a substantial burden from the corporate income tax. Overall, the recent empirical evidence, the open economy computable general equilibrium models of tax incidence, and the sensitivity of the amount of capital investment within a country suggest reconsidering the assumption that the corporate income tax falls on the owners of capital; labor may bear a substantial portion of the burden from the corporate income tax."
Other economists, including the authors of the surveys cited above (Jane Gravelle, Jennifer Gravelle and Thomas Hungerford), are persuaded by the available empirical evidence on the five factors I note that the burden of the corporate tax ultimately rests mainly on the owners of capital. That also appears to be the operative assumption of the Congressional Budget Office, the Treasury and other agencies when they analyze the distributional impact of various forms of taxation."
Source: https://economix.blogs.nytimes.com/2010/07/23/who-ultimately...
Additionally it boost earnings which will likely increase most people's retirement accounts and stock portfolios.
Typical that I'm getting downvoted without any rebuttal.
I'm sure you've seen lots of instances of failed innovation in big companies. This is a way to avoid it, and put money where it'll have better odds.
Most US public companies do not pay dividends to shareholders. An "investment" in this scenario is not an investment but speculation. You are speculating that you can convince others to pay more for my shares than I paid for them.
(Non-American shareholders could similarly reinvest these payouts in things which improve the global economy and, by extension, the livelihoods of Americans.)
This worldview that Bernie Sanders esque people hold, where every business person is a rich multi millionaire, ignores the reality of business... where the vast majority are small and medium sized businesses.
The critique of George Bush's temporary tax credit was that it was used as bonuses rather than stimulating the economy. But a long term tax reduction is something you can actually plan for with expenditures like R&D. I've seen many people comparing the two disingenuously like they are the same. They aren't, that's not how business finance works.
There have also been a number of examples in history where reducing the tax rate has actually increased tax revenue as companies are much more productive and more capital is available to invest in industry.
The more revenue companies generate the more taxable income there is both from the company revenue and the incomes of employees they hire.
Neither of which would hurt your precious small businesses.
They would hurt the corporate overlords though.
Steve Mnuchin talked about closing these by simplifying the tax code during his senate hearing. This was Ted Cruz primary pitch for his tax plan... and in general on of the staples of tax reform people on both sides of the party.
Bernie Sanders also said he would be comfortable with a 90% top tax bracket too, which completely failed when the socialist party tried to do it in France.
Regardless, the goal should be increasing tax revenue, not tax rates. And the US government already takes in a massive amount of money.
There's probably a million ways for it to be better spent and still dramatically improve the social safety nets and offer public healthcare. Yet whenever these goals are discussed it's always in the context of adding more and more spending.
And re: closing loopholes, the usual result of these efforts such as Obama's various attempts, were to add even more complexity to the tax code. There are many ways to reach a goal. Just because you want lower taxes and a dramatically simplified tax code doesn't mean I'm against social policies.
I'm going to assume sarcasm so: http://archive.fortune.com/2008/06/30/news/companies/ge_phil...
https://www.google.com/search?q=general+electric+charitable+...
But they donated millions and that's a lot right?
http://www.taxjusticeblog.org/archive/2016/04/just_plain_wro...
The idea that companies hire linearly with revenue growth should be dying by now no? Is this not hacker news? We think that will continue for the foreseeable future?
Corporate revenue follows a power law distribution, and the top companies are not growing by hiring as many people as they can.
Apple earns about $1M/US employee in profit. Federal tax rate (~30%) on that number is say $300k. Payroll tax is 12.5% of salary (~100k) or $12.5k. So Apple would need to hire 12x the employees overnight to make up the tax shortfall if we suddenly halved their tax liability to $150k. That's if they actually paid the nominal tax rate (they dont).
This is all besides the fact that an inverse correlation between tax rates and economic growth is purely theoretical.
The idea is that there are a lot of secondary effects of changing the tax rate, and not that payroll/income taxes would be recovered directly by one company, but that it would be recovered by the set of all companies who all are both: Receiving more money because they have a lower tax rate and receiving more money because other companies have more money to spend on them. This is also a compounding effect-- a lower tax rate might not give a benefit the first year, but as the economy benefits from compound growth, it should give a benefit in the future.
At some point the benefits of this would level out-- if it's hard to find useful ways to investment new money. Or at some point we just say "yeah, we know we could grow the economy more, but we simply need money to run the government with".
So, have we already reached the point where the benefit has leveled out? Maybe. But like, you can't deny this trend, it's just basic economics.
I also wasn't trying to argue against you, I just wanted to re-state his argument, since your previous response was just a tangent. The concept of economic growth and ideal tax rates is a different argument than how we spend our taxes, and I think that our advocacy of lower taxes as a way to increase tax income was perceived as a slight against your values.
Why did you remove "snowflakes" from your post?
The best way to improve the economy is put more money into the hands of normal people so that they will buy more stuff which in turn helps those businesses. Lowering or eliminating income taxes for non-rich people would help far more than a tax break for the rich which includes companies.
Here is the problem, without corporations and small/medium businesses this entire world that we live in ceases to exist. Jobs are what make this all possible.
The idea that a "job" isn't mutually beneficial is such a preposterous talking point. America!
What is one way to increase demand? Increase the number of people who can afford the goods and services which can be accomplished far more effectively by reducing tax on the middle class and poor. If you do that businesses will have no choice but to create jobs in order to meet demand.
Where you lose me is all the trickle down voodoo economics ideas about how slashing taxes on big corporations and he wealthy is going to help me.
If anything it would have the opposite affect since the R&D and the salary of new employees would be tax deductible.
Businesses are going to fail no matter what. Sometimes it's the tax rate, sometimes it's the market, the location, the product, the employees, the manager, the owner etc etc etc.
"Therefore, when a corporation is forced to pay high amounts of income tax, the company may not be able to grow and offer employment to new employees. In fact, one of the most common ways that corporations respond to large corporate tax hikes or new types of corporate taxes is to begin to lay off workers or employees in order to cut costs and maintain profit margins."
http://www.finweb.com/taxes/how-does-a-corporate-income-tax-...
Let's say company ABC makes lawn mowers. Corporate tax rate is 20%. They sell their lawn mowers for $200 each and cost to manufacture each unit is $150 for a $50 profit. They sell 100,000 units in a year, making $5M in profit for the year. At 20% tax, they get to keep $4 million of that. If the tax rate is suddenly bumped to 40%, then they only keep $3 million. But I don't see how that impacts any of their business decisions related to building and selling lawn mowers. Their goal is to maximize profit by building the lawn mowers as efficiently as possible and then selling as many of them at they can at some price point. Expenses and wages to do all of that are all tax deductible. The tax rate does not figure into any of these decisions. That only comes into effect at the end of the year after they've made as much profit as possible from their sales. If they respond by laying off employees, then they should have done so before the tax break, and are probably just using the tax break as an easy excuse to get rid of people they don't want working there anymore. What part of this do I have wrong?