Netflix Made Record Profits in 2020, Paid a Tax Rate of Less Than 1 Percent
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A lot of growing companies have US taxes that are quite low because they lose money for a long time while they're investing in growth. When they finally become profitable, they're allowed to roll forward those losses (within limits) to offset their profits. That's where a lot of these "Zero taxes paid" headlines come from.
On the other hand there is a legitimate gripe about using IP offshoring to shift profits to low-tax countries and out of the US, using accelerated depreciation to decrease current year profits, allowing tax deductibility of interest and lots and lots of tax deferrals and deductions for property transactions.
Acquired intangible assets must be amortized (aka depreciation for things that don't physically exist) over 15 years, not immediately (some intangibles can be amortized over a 3-5 year time frame). And self-developed intangible assets cannot be amortized at all.
Human beings cannot do the equivalent. Spend the entirety of your 20s making very little money because you are investing in growth and then make $800k as an orthopedic surgeon at age 30, and you’ll pay the top marginal rate. You don’t get to go back and use all the unused 24% bracket income from prior years. You also can’t deduct the interest on the loans you took to finance that growth.
It’s not like individuals don’t have mechanisms to save on taxes.
Yes, individuals can save on taxes, but can most of us get an effective tax rate of 1%? And, many of the common deductions (mortgage interest, charitable deductions, tuition) all have caps. I don't believe there's a cap on a corporation carrying forward losses from year to year.
When you want to tax high-income people at a higher rate, have the courage and forthrightness to simply raise their rate; don't do it via the backdoor complexity of phaseouts.
There was a 20-year cap on corporations carrying forward losses.I had clients that actually timed-out on using carried-forward losses because they had insufficient profits to use their losses against. However, since 2017, losses can be carried forward indefinitely, but in any given year may only offset up to 80% of taxable income. (As a result of the CARES Act, losses between 2018 and 2021 are not subject to the 80% limitation.)
There are section 382 limitations on losses of acquired companies. (In a nutshell, the idea is to discourage a company from being acquired so that the acquirer can use those losses to offset their own taxable profits.)
There are other limitations on loss carrying as well but they tend to be pretty esoteric.
Yes, individuals can save on taxes, but can most of us get an effective tax rate of 1%?
Yes, you can get a 0% (combined tax rate) as an individual if your income is primarily municipal bonds or other tax-free government bonds, even before taking into account deductions. And wage-earners can get single-digit combined tax rates if they are below the poverty line (the exact threshold varies from state to state).
That’s not really an equivalent, though.
These companies aren’t simply giving up opportunity cost. They’re spending real money on real R&D expenditures. In software, that R&D expenditure is largely wages for developers like us.
The tax code gives companies benefits for spending this R&D money because we want to encourage them to make the R&D investment even if it comes at a loss (to the company, the employees still gain wages) for several years. We need to think long and hard about changing incentive structures in ways that reduce incentives for companies to invest in R&D and spend money on paying people.
Deducting every cost associated with a job would be a huge tax benefit that simply doesn’t apply to people. It’s one of the ways that referring to tax burdens based on income as defined by the tax code is misleading.
The initial cost would be tax deductible and could rollover across multiple years, therefore in effect the principle is deductible even if the specific payments aren’t. The way the deduction actually works is actually better than simply deducting principle payments from the loan due to time value of money.
The issue with accelerated depreciation is it’s a subsidy. The government is paying interest on it’s debt so companies can defer tax payments, that’s directly costing actual taxpayers money. Further, communism has already been tried and it’s a bad idea, we really don’t want central planning as part of the tax code because it’s a bad idea. Subsides for industry X over industry Y has all the same issues.
No, if a company buys say land they can’t deduct anything because land retains value until the point of sale. The same is true buying stock or other items that maintain value over time. The general rule is something is a deductible expense at the point of destruction or sale not purchase.
Depreciation is therefore an acceleration of that process. Companies for example used printing presses for a hundred years meanwhile during much of that time the actual value increased above it’s purchase price due to inflation. It’s surprisingly common for companies to sell something for a profit that they have already fully deprecated.
> I don’t understand the point you are making on communism
All specific tax exemptions for business are communist in nature because they replace market forces with government choices. It’s very obvious in the case of farm subsidies for example, but it’s a generalizable rule that government subsidies reduce market efficiency by incentivizing inefficiency.
As to depreciation being an exception that’s what it means when you change the baseline rules of a system with new rules. By default you take the deduction on sale, depreciation means you can take deduction early. It’s literally called “Modified Accelerated Cost Recovery System (MACRS)” the entire point of it is to speed things up rather than as you suggest slow anything down. Thus removing depreciation from the tax code and companies would need to wait years or even decades or deduct these costs from their profits. Thus as I said before it’s a hand out which happens to be built into the tax code.
The day it falls down it stops being useful, the day before that you have full use and therefore value of the building.
Or as I said several posts ago: “The general rule is something is a deductible expense at the point of destruction or sale not purchase.” Sure, it burned in a fire fine assuming you don’t have insurance then it’s a loss at that point.
Really equipment is generally binary either it works or it’s broken, unless you’re selling it then it’s exactly as useful on day 2854 as 2855. Worse, well maintained equipment lasts far beyond the accelerated depreciation benchmarks used. Anything not thrown away the day it’s theoretical value hit’s zero is unambiguously a subsidy, but so is anything with scrap value etc. But, as I clearly demonstrated the idea of depreciation it’s self was created as a subsidy.
> Accelerated depreciation means you pay less tax and have more money at the start of a project when it is needed and pay more to the government later when it has stabilized.
People say stuff like this, yet hopefully suggesting the government hands out zero interest loans to group X raises red flags. Depreciation is a subsidy in effect a zero interest loan and that in and of it’s self is a problem. Opportunity cost is a huge deal and trying to ignore that is why central planning fails.
Initially the company, though audits and penalties help keep them honest.
> accelerated depreciation is a big factor in determining whether projects occur
And clearly that’s a problem. Just as government farm subsidies waste money growing excess food accelerated depreciation causes significant economic waste.
> CPA
Ahh, there’s your problem a CPA has nothing to do with economic issues. This is an economic and thus a policy issue but you’re trying to argue based on the existing law rather than the underlying reality. I don’t expect you to get a in depth education on the topic, but if you’re interested I can recommended some good books to get you started.
But to summarize a huge body of work, the broken window fallacy demonstrates that economic activity isn’t inherently beneficial. Maximum efficiency isn’t equivalent to maximum GDP etc. As such policies that increase economic activity can be and generally are detrimental.
Expenses such as:
1. Rent 2. Marketing 3. Equipment 4. Student loans 5. Malpractice insurance 6. Billing service, unless they want to do this themselves 7. Staff
All these expenses can be written off until the business is established and profitable.
Someone doing that will normally do it within the confines of an LLC by convention (because it almost always implies a business). But you could do it with investing, too. In either case you need not be a megacorp.
There are also income tax offsets for education, provided your tax bracket isn't too high.
Like someone getting a $150k student loan to go to college and/or post-college education?
+Depending on a lot of details
Only up to some low limit. Netflix can deduct unlimited interest.
The point of the thread is that the two are essentially the same in practice (investing current monetary influxes towards future revenues) but the tax law differences favor one over the other.
It's not black and white, of course, and I'm not an accountant, so my knowledge is limited and most likely filled with holes and misunderstandings. But I imagine there's also a matter of scale that's at play here, with tax laws meant to make things easier on small, privately owned businesses in their early years, having unintended consequences to the benefit of companies already behemoth in size investing in getting even bigger. Bigger in ways only made possible in the new digital, globalized world.
The difference is few people start with financing that allows them to amass large investable sums without showing a cash income early in life. That’s because companies can raise VC and sell equity while we (rightly, of course) banned the equivalent practice for people.
It leads to bad headlines when companies claim a bunch of loss carryforwards, but it actually is a fair practice. The other thing to keep in mind is that losses are only paid out in refunds when you actually pay tax. Company B does not earn $30 back from the government for losing money in year 1, it instead gets money back once it starts making profit.
Note that at least in Canada, these rules apply to all types of income, not just business income, although losses on employment income basically never happen.
Here’s another example of where it could help. Take two men, one earns $75k/year (let’s say inflation adjusted) for thirty years as a bus driver. The other plays in the NFL for 1 year makes $2MM and thereafter only makes $250k over the next twenty five years. They’ve made the same amount of money over their lifetimes but the second man paid much higher taxes.
it makes sense that companies are taxed differently than individuals. corporate revenues and assets ultimately end up in the pockets of real people, either as wages or capital gains.
that said, I do think you make a good point about income tax. it would be more fair if there were some smoothing over time. another example of someone who might get screwed is a contractor with highly variable income. if I make $75k every year, and you oscillate back and forth between $25k and $125k, you pay a lot more income tax for no real reason.
But only some of those real people are subject to the jurisdiction of the country taxing the corporation. So while some corporate income is subject to double taxation some is not.
> the real difference here is there are no marginal brackets for taxes paid by a company.
Companies can smear revenue out over time to optimize the taxes they face. People cannot. The marginal part is orthogonal.
Please do not spread disinformation. This is some Qanon level bs.
And in your example you could also use student loan repayments for taxable income reductions in the same manor. Only the interest, but that is the same a business not being able to deduct capital investment.
With the assumption that we are treating debt like income for the individual, except that individuals do not report that as other income.
They can to some extent, actually... See IRS publication Publication 536, "Net Operating Losses (NOLs) for Individuals, Estates, and Trusts".
> Spend the entirety of your 20s making very little money because you are investing in growth
To actually do the equivalent you would need to spend your 20s _losing_ money. And if you do (in the NOL sense per publication 536) then you can in fact keep rolling the losses forward to offset future income until the losses are exhausted.
Now one issue is that things like medical school tuition are not considered "losses" for individuals. So in that sense there is a definite asymmetry here.
But businesses can't "go back and use all the unused 24% bracket", not least because US federal corporate income tax does not have brackets. What they can do is that _if_ they have negative taxable income (i.e. revenues - deductible expenses is negative) then they can roll the "unused" part of the deduction into future years to offset future revenues, which is exactly how NOL works for individuals. The primary difference between businesses and individuals here is in what counts as "deductible expense". The business definition is much wider in general, not just for purposes of NOL.
> You also can’t deduct the interest on the loans you took to finance that growth.
Well, you can until you start making that $800k/year. And only up to a limit, etc. Just like so many other things in the personal tax code, there's an income phaseout and a cap for student loan interest deductions...
As I said above, corporation have a much larger set of things that are considered deductible against revenue to determine taxable income. Starting with the fact that corporations are generally taxed on "profit" while people are generally taxed on "income", which is closer to "revenue" in general.
I don’t understand why we want to equate rules for companies to rules for individuals? People say “it’s not fair”?
Who’s going to employ people? The government can’t produce your salary, companies do that.
Btw, many countries should regulate companies more IMO, but that’s not to say companies shouldn’t be encouraged to grow and prosper.
Of course companies and individuals should have different rules and of course tax should be one of them. Help companies start and grow and salaries will be paid to people.
It’s the workers doing that produce the real value, not a rich person holding capital they’ll only spend on us if we capitulate.
Why do we need the age old tale of a shared ephemeral store like religion and fiat finance when we see those things become monopolized and gamed by the previous generation every time?
We need to believe one old person is literally worth 100x the average person?
Who does that benefit?
In the US that number might be even higher [0] (99% percent according to that article but we’d have to cross check what “small business” means in this context).
Your rhetoric seems to imply that all companies are owned and managed by greedy monopoly-esque despots wearing a penguin suit and smoking a cigar, but reality just doesn’t follow.
You should also consider the alternative. Where is wealth generated if not through companies? Is it the government? In this scheme, the government is the company and covers 100% of business. How’s a government different than the closed board of a monopolic company? Or are they just “the good ones” and therefore somehow immune to produce injustice? To me, as you can probably tell, this notion is naive at best.
I have no issues with taxing the super rich a lot more. I don’t think anyone needs to be worth USD 185 Billion. However, I’m not sour about it and don’t believe a “revolution” is the only solution. Far from it. We’ve dealt with this before: it’s about regulation and policy. Very incremental.
IMHO what makes fairness is a social ladder. As long as there’s a way for the willing, there’s fairness. Any immigrant will tell you as much.
[0] https://www.fundera.com/blog/small-business-employment-and-g...
None of us owe servitude to old debts, contracts, wives tales, sonnets, limericks, hymns, poems, stories.
When the world changes it does so because society decides there are different words to better represent its goals.
Laws are no longer based upon the words of Gods. The rich are not Gods. They don’t represent meritorious effort when they’re inheriting and being gifted wealth with no strings (see Trump admin and covid payouts, it’s still happening under Biden; he’s just less gaudy.)
Why not just logistical distribution of materials to boost communal health, etc.
The masses are already used to only being able afford a vacation every X months. Working off a home for X years.
Why do we still enable a minority to shrug off the same responsibility in deference to old contracts none of us are legally obligated to mind?
I’m disputing our implementation that favors minority capture of collective effort.
Why do I need to be a “company”?
We already have a system of collective effort called “government”.
Why another layer of abstraction?
Why must they run on grandpa’s fiscal beliefs, and previously brokered debt servicing and network effects?
Corporations and small businesses already do this
> It’s the workers doing that produce the real value, not a rich person holding capital they’ll only spend on us if we capitulate.
Yes, but the worker is fungible. The capital holder was entrusted with the money and risk. Workers have little risk, they can walk away from a company at any time. The capital holder is stuck.
> Why do we need the age old tale of a shared ephemeral store like religion and fiat finance when we see those things become monopolized and gamed by the previous generation every time?
What is the alternative? It isn't communism or socialism, both have failed numerous times before.
Also, you're posting on a board for capitalists. YC literally bets capital on moonshots to get a return on investment.
> We need to believe one old person is literally worth 100x the average person?
If the old person, had the capital and took the risk, then yes financial value is higher. In terms of being a person, no, they both go in the same box at the end.
> Who does that benefit?
Society. Jobs created a new economy by introducing the iPhone. YC gambles on new companies that benefit society. The phone in your pocket, the internet and computer you use employees tons of people. More than any government jobs program could.
Plus there is the fairness issue. Corporations are just groups of people working together. So why does a single surgeon not get to be treated as the economic growth engine she is, but two surgeons can incorporate and get special treatment?
Some can. Those with assets to depreciate, for example.
Frankly, the whole corporate tax debate seems manufactured to obscure the top personal tax bracket being about $500,000. Raise corporate taxes and you tax everyone with shares. That hits the rich, sure [1], but it also hits every pension fund and middle class saver. And if the corporate tax rate goes up instead of a $1mm, $2mm, $4mm and $8mm tax bracket being created, everyone at the top comes out ahead.
[1] Screw with the tax code for companies, legal fictions, enough and they’ll magically start moving. Then it’s a game of whack-a-mole. People are much less likely to change their way of life in response to tax codes; this is well documented.
Also, apply taxes (and corresponding benefit eligibility) equivalent to payroll/self-employment taxes to that income.
At the same time, allow corporations to expense disbursements: you are taxing individual income fairly, corporate tax just is a tool to prevent indefinite tax-free deferral of income.
unfortunately I don't write tax law. maybe I could get the tax prep companies to lobby on my behalf.
Yes it does.
OTOH, it doesn't make sense to not have a means of spreading out irregular income by recognizing it for tax purposes over several years in advance of realization if it can be anticipated, or deferring it over several years otherwise, in a progressive tax system. Which is why you should provide that, too (it applies to some subset of LTCG, especially that earned by the middle class, if taxing LTCG as income, but it would apply to lots of non-capital income, too—the income pattern for say, a novelist eho sends several years writing each book thar is a hit isn’t flat or steadily growing year-to-year, but spiky, and ir should be possible to smooth it for tax purposes.)
You don’t have to structurally preference capital income to deal with the fact that, as is true for other income, some capital income is the result of processes that the taxpayer can’t expect the same realized gain from year-to-year.
so let me rephrase my statement about capital gains. it doesn't make sense to treat LTCG as income unless we first make significant changes to the way we assess income tax in the first place. obviously this would be a lot more complicated. imo the existing cap gain rules is a somewhat reasonable solution for a tax system that mostly looks at each year in isolation. the 15% rate is really not much of a concession to a retirement saver who has held a lot of those assets for decades and has experienced meaningful inflation. but the whole system leaves a lot to be desired.
I disagree. LTCG as income without smoothing makes exactly as much sense as taxing regular income without smoothing does.
Yes, there’s a strong case for smoothing. There’s, independently, a strong case for not structurally favoring capital income and not structurally disfavoring labor income. While it is desirable to address both of those (and doing so simultaneously would be a good idea since there is no conflict), there is no dependency between them.
(Likewise, indexing capital asset basis values for inflation is a third thing that there is a good case for, but neither of the other two things depends on it to be a good idea; I’d oppose furthering the favoring of capital by doing it without first taxing capital income as income, though.)
> obviously this would be a lot more complicated.
Smoothing doesn’t have to add significant complication. The essence can boil down to:
(1) a taxpayer may freely recognize any amount of as-yet-unrealized income for tax purposes in any tax year and pay appropriate income tax on it. Any amount of the unused balance may be freely applied to reduce taxable income in any future year to no less than $0 (with one exception, see below.) Unused balances are indexed for inflation.
(2) a taxpayer may defer to the following year recognition of any amount of income over the greater of the top of the lowest marginal rate bracket or prior year taxable income (after applying any deferrals or advance recognition), with thr caveat that no more than 90% of any previously-deferred income may be deferred again.
(3) In final taxes after death, all remaining advance/deferred amounts are applied, with negative taxable income resulting in a refund calculated by applying the minimum marginal rate to the balance.
> Yes, there’s a strong case for smoothing. There’s, independently, a strong case for not structurally favoring capital income and not structurally disfavoring labor income. While it is desirable to address both of those (and doing so simultaneously would be a good idea since there is no conflict), there is no dependency between them.
in theory yes, in practice no. the current system treats the common case where wages slowly increase pretty well. people with highly variable income get screwed, but it's much more common to get a yearly 2-5% salary bump.
in contrast, assets are much more likely to be sold in chunks. I haven't realized any capital gains over $100 in the last five years. but soon I will have to liquidate a large portion of my holdings for a down payment on a house. having those gains taxed at my highest marginal rate would be far worse than the fact that I can't smooth out my yearly raises. it would almost double my taxable income for the year.
aside from that, I agree with what you wrote. I would certainly vote for your solution.
I should also note that even our current tax code admits that the setup with marginal taxes we have is kind of insane. See "Schedule J: Income Averaging for Farmers and Fishermen" which allows those occupations to do exactly what you suggest: average income over multiple years for tax purposes (can average with the previous 3 years). Why only farmers and fishermen? And why do you not get to do the averaging for AMT purposes? That's back to the "insane" part....
That would also incentivize companies to pay dividends, which I think is good for various reasons.
That’s not Biden’s plan. Biden’s plan is to limit the tax preference for capital gains by setting the top rate for LTCG equal to the top rate he has proposed for income taxes, with the top LTCG rate kicking in at $1 million+, while the same rate for normal income would at ~$400K.
> On the other hand, it disincentivizes long term investing.
Even if we assume an actual elimination of the preference, it would only “disincentivize” long teem investing to the same extent that taxes on normal income disincentivize income-producing activities generally, and still less than the even higher taxes on labor income (thanks to payroll/self-employment taxes) discourage labor and its employment.
And yes, I generally agree with your last paragraph. But that said, it is worth noting that taxes on normal income do discourage people from making money. (I'm not saying this to support a reduction in income tax, just as an interesting note.) So I think it is worthwhile to consider incentives. For example, income at x%, short term cap gains at x+10% and long term cap gains at x-5%.
Of course, if you really want to go all the way regarding fairness and incentives, you'll tend towards entirely different systems (Georgism, for example)
LTCG is simply any capital asset held for longer than 365 days. It makes perfect sense to tax gains on assets held for a year or two.
Moreover, capital assets include real estate and other items that appreciate faster than inflation. It absolutely makes sense to tax those assets, since those assets are generally not held for productive use. (See, for example, all the empty storefronts in NYC. Those properties are held with an eye toward making money on the eventual sale of the building without regard to ongoing income; the finances work out as long as incoming cash flow from rents in other units covers debt service payments.)
Indeed, not taxing long-term capital gains would be the biggest subsidy to the wealthy that the world has ever seen. It would encourage the wealthy to acquire assets en masse, hold them without use for long periods, and then sell them at appreciated and untaxed values despite having done nothing to earn the appreciated value.
There is so much politically motivated misinformation going around on social media - it's really concerning.
The whole point, is corporations get the benefits of both, and the downside of neither. They have liability and tax advantages that people don't have, yet they also have tremendous politic power as if acting with personal free speech (citizens united)
If you spent your 20s conducting losing trades in the stock market, you accumulate capital gains losses that you can only apply $3,000 per year against your regular income. If at age 30 you made $800,000 in capital gains you are able to apply all those unused losses against those gains.
So "human beings" aren't much different.
To some extent this is made up for with the standard deduction and various other deductions, but you can’t carry it forward if you made less than the standard deduction, even if you actually are spending more than you make.
The idea of carrying forward losses is unintuitive to most people because we mostly don’t get to do that.
Business expenses are almost always only the costs of actually generating revenues. Thats why there are strict limits on travel & entertainment deductions. Of course there are always exceptions, does the company need that private jet? But their accountants have to justify private jets, etc to ensure the company doesn't face tax fraud charges.
This is an apples and oranges comparison at best. If companies were treated exactly as individuals in this case, I don’t think many companies would survive. With less of the pie to go around, that’s effectively fewer jobs and less wealth created for people who work at these companies.
What is the value of the software engineering services Amazon US provide to Amazon UK, maintaining amazon.co.uk? Because, rationally, that's an expense of the UK company.
How much in the Starbucks brand worth? How do you distinguish a franchise from a subsidiary? If Starbucks split in two, with Starbucks Corporation maintaining only the trademarks and associated IP, and sold all the actual stores it owns to a second company Coffee Shop Corporation which started off as a franchise (and there exist franchised Starbucks stores today), which then paid licensing fees to the franchisor, would that be any different?
Like, there's definitely questions to be had about international accounting, but some of the complexity is because national subsidiaries rarely operate in isolation, and valuing much of what they get from their parent organisation is exceptionally hard.
The very, very easy solution is for every corporate entity to be taxed on revenue in each jurisdiction. E.g. if I am in the UK and I spend £4 on a coffee in Starbucks then their legal entity in the UK now owes the taxman £0.40 (for example). How they pay their operating costs and internally transfer the remainder of £3.60 to their parent company is up to them.
VAT is passed “through” a company, I mean for this to be charged to the company on what is normally considered income. Essentially, since corporations are supposedly people, they can pay income tax like people.
A revenue tax disproportionately hits low-margin industries, which typically account for a disproportionate amount of expenditure of low-income households, which is likely a bad thing.
If the tax paid is found to be unfair by the jury, the company gets nationalised with no compensation to shareholders. The government could re-privatize it by auctioning it off again.
Netflix has been around for 20+ years
Should we only tax companies that are collapsing ?
A company that isn't profitable means every dollar that flows into the company flows out. It flows out to other companies, to payroll, to R&D, to charities. That's where the real economic engine is -- money flowing, investment happening.
And plenty of taxes come from it, too.
Companies pay taxes when they start hoarding profits instead of investing them. That's a good thing.
I'd argue that these are also "good things". There's a reason corporate income taxes aren't tremendously popular among economists (even many economists on the left). Companies are capable of deciding how much cash to keep on their balance sheet, and any government nudges via tax policy are probably introducing some distortions. If we want to tax piles of stagnant wealth, we should tax the wealth directly: estate taxes and land value taxes don't introduce many distortions. If we want to tax companies, we should look at VATs (which are relatively non-distortionary), or perhaps heavy pigouvian taxes to offset negative externalities (e.g. a carbon tax).
Can u give an example for this? Especially in the context on a large, growing tech firm.
I understand the basic stuff like accelerated depreciation, location arbitrage, etc
However, I am paying literally 40% in taxes due to how it was paid out. As someone who desperately needs this money, it’s devastating. To hear that large corps can weasel their way out of paying is extremely infuriating.
Or are you talking about withholding? Which is not accurate to describe as “taxes paid”. Also, if including state tax, then it might be higher, but I would still be surprised if your total tax liability was over 40%.
Someone worked hard, achieved an intermediate goal that they hoped was going to move them one rung up the economic ladder only to find out that taxes took a much larger bite than they’d hoped or previously considered. So, they’re naturally discouraged to read about some big company somewhere paying a much lower overall rate while comparing it to their own.
Perhaps the real question is why the authors of these articles don’t put everything into terms more directly relatable to the people reading the article? That’s because doing so makes for less outrage-sharing of the article.
If it's paid out as some sort of investment income not subject to long-term capital gains treatment (e.g. interest, non-qualified dividends), then your top federal rate is 40.8% (37% regular, 3.8% net investment tax).
That does assume $500k of taxable income not counting the payout we're talking about here, to hit that 37% tax bracket.
If you have kids, you can hit these sorts of marginal rates at lower incomes too, because of the 5% marginal tax rate from the child credit phaseout.
I should note that money is fungible, so the fact that some of this is claimed to be "medicare" tax and some is claimed to be "income" tax is irrelevant to both the person paying the tax and the government collecting the tax. Medicare is not funded solely by the "medicare" tax in practice, so the fact that there's a separate tax is more or less an accounting oddity.
There is also state tax, which can be significant (double digits), esp for top brackets.
Consider this: Where were the last 20 major IPOs? The last 20 major acquisitions? Where were the founding teams (i.e., the ones with the most stock facing such issues.) ...I'll bet 80% or more of these were in CA. I'm only pointing this out because once you're a super-successful startup and you've gone thru all the steps for a successful liquidity event, there is the final bath of taxes :-/
You're going to get enough tax breaks and subsidy for buying the house anyway.
You can weasel out of it as well. You need to exercise your options at least a year before acquisition. Often you can do this even if you haven't vested the options yet.
40% on income from labour shows: dont get income from labour! Small percent on income from property (dividents, etc) show that that's the best place to get money from. Almost zero percent on pollution signals: go for it!
https://www.irs.com/articles/2020-federal-tax-rates-brackets...
If you’re adding state taxes, note that the linked article is discussing federal income taxes only. Even then, including state taxes does not get you to 40% for 99% of people.
Similarly, the incidence of things like the employer half of FICA is somewhat split between the employer and the employee (in the form of lower salary for the latter). Here, as I understand it, the general consensus is that the incidence falls mostly on the employee, except in cases of binding constraints like the minimum wage.
Not true according to this:
https://files.taxfoundation.org/20200225094221/FF697-01.png
https://taxfoundation.org/summary-of-the-latest-federal-inco...
If state and other local taxes need to be factored in, the situation becomes much more complex and almost impossible to compare.
1: https://commonslibrary.parliament.uk/research-briefings/cbp-...
And I reckon most earning between 100k and 125k would avoid that 60% by contributing to their pension, so I don't think many are affected by it.
Decades and decades ago, corporations paid most of the tax. People paid very little.
Then things shifted. Instead of taxing corporations, people were taxed. Said people, with less money in their pocket, required raises. And so, over time, tax shifted from corporate to personal, but with people in the end taking home approximately as much as they had before.
For example, you have $60k pretax, $50k take home. Tax rate goes up. You have less, demand a raise. You now make $65k pretax, yet have $50k take home.
Of course, the numbers are merely there for example.
Why all of this? Why a reduction on corporate taxes?
Well, because now corporations can exist anywhere on the planet. If you tax a corporation too high, it can move, and you have nothing to tax. It used to be that this thing called 'tariffs' and 'duties' were an equalizing factor.
If a car manufacturer moved off short to save corporate tax, why then you'd add import tariffs. The point being, the tariff was there to replace the lost corporate tax.
Of course, tariffs are 'bad', and the goal of international trade now, seems to be to lift the third world out of poverty. Which is a laudable goal, however, with no import taxes on many things, and with corporations able to move at whim?
You must keep corporate tax low, or you lose out to competing regions. This is doubly troublesome in a new economy, in which many goods are entirely virtual, and fly across borders on the Internet.
Thus, taxes remain at the personal level -- for people cannot easily move.
Right or wrong? Well, you have to get tax somewhere. And under the current model, it is hard to get it from corporations, squeeze too much, and they're gone. And this model is enabled by most 1st world governments world wide, which have decided that import tax, tariffs, are a bad thing.
The only alternative to more corporate tax, and less personal tax, is to re-enact import taxes, duty, that sort of thing. Else, how do you prevent corporations from moving?
Of course, it's not entirely as simple as all of this, but nothing at a 10000 foot view is. It's just an overview.
Tax rate changes are well known, but here's an example. Click on 'max' for a decades long look.
https://tradingeconomics.com/canada/corporate-tax-rate
In terms of 'real world' wages not improving, that's a somewhat arbitrary term. If you mean 'pre-tax', wages HAVE improved over time pre-tax. We're talking over 50+ years here.
'post-tax', they did improve, but that was before the great exodus of manufacturing overseas. Since that time, since 'free trade' was a 'good thing', they have fallen steadily.
No issues with product across the border.
So even though many Canadians are in favour of a higher corporate tax rate, it would literally be deadly. We must compete, we must race to the bottom, else corporations will move South.
Facetciousness aside, the Canadian experience is not comparable to the US experience, which is the subject of the article.
There is a savings glut and free trade definitively did contribute to it but it's not the only factor. There are dozens of other factors that play a role as well.
Here is how the loop works. China buys dollars with yuan to maintain a certain rate. China ends up with excess dollars. The dollar gets stronger and people stop buying from USA. The Yuan gets weaker and people buy more from China. China buys US treasury bonds with the USD, which is equivalent to saying that the US government can manage the money better than China (China is probably saving for pensions). The only way the US government can access the money is by issuing debt. If the US government doesn't issue debt then there are excess savings. Savings are deferred consumption and since consumption is paying the wage of a worker it is also deferred employment. If the US government refuses to spend the money then you get unemployment. The truth is that this isn't where it ends. If the US government does issue debt, then it can invest it into infrastructure, education, housing and so on. The US ends up both with infrastructure and low unemployment. It could be worse, Americans would otherwise have to spend their days working in factories and there wouldn't be any time left to build infrastructure.
The downside of all of this, is that workers in regions with abysmal workers rights, win. No health care? No paid holidays? No sick leave? Work 6 or 7 days a week, 12 hour days?
Yay! Your region gets more jobs (China), because your workers cost less.
Government doesn't tax corporations OR workers much? Well, then the worker's wages are even cheaper. The Government can't afford schools, police, etc, etc, but.. yay! You now took jobs from regions which have these things.
Which is what 'fair trade', and 'child labour' campaigns work against, but of course have limited success sadly.
Point is, I really think tariffs and a reduction in free trade, is the only way to prevent a race to the bottom.
People wonder why wages have continuously slipped in the US for the average Joe? Well, how can you compete with places that have workers working in such conditions. Who have abysmal human rights? Have no schools, or infrastructure.
Of course products are cheaper! And thus, with no tariffs, you lose in the end.
I would like to see an across the board lowering of the corporate tax rate, remove the capital gains exception counting all income as income, and making up any losses through a VAT. This would go a long way to decreasing the ability to gain the current system.
For example, wages moving to countries with less worker protections. Couldn't the same argument advocate for lowering worker protections in the US, so that the jobs don't move to China? Which many of the jobs have done anyway, despite low corporate taxes?
Whether this is good or bad is a matter of perspective. Some people are all for lower government spending (sometimes for justifiable reasons) and labour in the lower tax jurisdictions may benefit. What doesn't change is the balance of power: the wealthy will virtually always benefit it. The people at the bottom have very little autonomy since they have to roll with the punches to simply survive.
Regarding corporations paying most of the tax, according to the data at FRED (b. 1947) there has never been a point at which corporate tax receipts have exceeded individual income tax receipts: https://fred.stlouisfed.org/graph/?g=CTxn
Regarding people paying very little, all taxes (the main federal types are income, payroll, corporate, excise, and "other") are ultimately paid by people: customers, employees, shareholders, etc.
How can that possibly be? All corporations cannot just move elsewhere. There is not infinite space or talent or customers in this magical 'elsewhere' that everyone fears the corporations will move to. There are simply not enough trained people while, on the other hand, there are people right here right now currently working the very job in question at these corporations. Sure, out of 1000 companies, maybe 10 would find enough skilled workers to fully staff an office in Germany or Singapore or Australia, but the other ones will have just shot themselves in the foot and they know it. That's why they currently pay the premium to have an American office and not one in Bangladesh today, because if cost was end all be all these companies would have left for Bangladesh in the 1980s. Twitter would be a Bangladeshi company. We would be posting on news.ycombinator.bd right now. It's not cost, it's talent. It's also access to the American market of 400 million people at a higher standard of living than the median person on Earth. If we are worried Ford is going to take their manufacturing jobs to Bangladesh and make us buy Bangladeshi Fords, we could just sanction these industries such that the only legal Ford is an American one, like how we make Honda assemble Civics domestically. We already do this with domestic auto markets to an extent, having certain regulations means certain companies do not bother selling cars here, and vis versa, despite the car being an in demand product world wide.
Progressive taxation has the exact opposite function to what you're suggesting. It's a mechanism designed to reduce economic inequality and the poverty among the low income workers.
Your comment sounds like a rationalization from a middle/upper income person.
> it is not uncommon to pay over 40% of tax
That figure is misleading, because it includes a set of expenses like social security, health insurance, government pension plans etc. Corporations don't pay that and that's why the difference may seems so big.
But I too am quite unhappy with the way the whole taxation system is constructed. But I would go in the opposite direction to the one you described. More in the way to progressive taxation, even negative taxation for the very low income people, basic income.
I would also work a bit towards making corporation pay more for all their externalities.
Income inequality. Totally different thing; really wealthy people can play all sorts of games with income, so it’s not relevant to them. And that’s the way they like this debate framed: ignore their enormous piles of wealth and instead focus on the earnings distribution of ordinary people.
If anything, it just stops you getting anywhere near to joining their ranks on an honest wage.
Wealthy people do not take out mortgages. They borrow cash against their existing wealth. They then buy things with that. Then pay back against the loan. Writing it off too (as per tax law). The 'rich' have sold everyone a bill of goods how they are redoing the tax system for 'the people'. When the reality is they are writing a bunch more exemptions for themselves.
You can do the same thing. Many people when they figure it out 'level up'.
Home equity loans are predominantly used by middle income households [0].
The rich can borrow against securities at the call money rate, currently 2% [1]. Much cheaper than borrowing against real estate [2]. The less rich swap it to a fixed rate for added security; the richer take the rate risk. (They likely have natural hedges.) The super rich seek to borrow at or close to the SOFR [3], typically having Treasuries or similar structured products for the purpose. (If they have a business with float, that could be even cheaper than SOFR.)
[0] http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.574...
[1] https://www.bankrate.com/rates/interest-rates/call-money.asp...
I am not advocating that low income workers pay higher taxes - in fact they should be exempt. I am saying that if you are from such family, progressive tax ensures you'll stay in your lane.
> That figure is misleading, because it includes a set of expenses like social security, health insurance, government pension plans etc. Corporations don't pay that and that's why the difference may seems so big
My number is based on what you get in your pocket from your salary (plus employer's national insurance that is most of the time hidden from the payslip) I didn't include local taxes (like council tax) and so on. Corporations are supposed to pay Corporation Tax, but they can too easily transfer profits offshore and largely avoid that in contrast to SME who mostly pay this tax.
Progressive tax ensures that person from poor background will stay poor.
How so? With progressive tax there is no point at which you make less money than if you had less income.
Your suggestion above that low income workers are exempt from taxes, is a description of a progressive tax.
I’m not really sure I understand what you’re suggesting should be done.
Alternatively, you can cut government spending, which normally means cutting services that disproportionately affects the poor.
Either way, moving from a progressive tax to a flat tax is a guaranteed net negative for the poor.
For the poorest many are paying no or little income taxes so the income is the issue not the taxes.
In most countries that I am aware of, the tax rate becomes essentially flat at, or relatively close to, a median income.
If you tax people on a lower income at that same rate, then that is highly punitive and is likely to put people into poverty.
It's immediately advantageous for governments to set a "progressive" lower tax rate, to avoid paying the cost of resources dealing with poverty.
Aside from this, governments are continuing to tax people up to and approaching median incomes at the highest rate that they can bear.
It's only once you get significantly above median that the tax rate doesn't continue to be punitive - for example, in terms of young people being able to access security of housing.
I'd argue these [existing tax schemes] aren't therefore progressive at all. It's just a different mechanism to provide minimal/essential support to people in poverty.
If anything, you want to replace all consumption taxes with a flat income tax (always 40% for example) combined with a flat deduction (first $40k are not taxed).
If you absolutely must replace income taxes, then replace them with land value taxes because it is impossible to avoid them as the owner (who may not be in the country) or as a person living in the country (because all land is taxed).
This must get fixed or we all screwed. We are at the end of this system. this system is designed to help the rich, the wealthy, not the man or woman working while in middle class... we are getting screwed.
It gets worse when you think about how few people technology companies really employ when compared to more traditional companies (Alphabet employs 130k, Walmart 2.2 million). They have annual profits of 40billion and ~4billion (2019) respectively. It’s bonkers that employing people is a good enough reason to warrant not paying tax.
Also to note, the US (now) has somewhat competitive corporate tax rates compared to its peer countries. However, most countries have a lower (or much lower) corporate tax rate than the US has. We shouldn't be comparing corporate tax rates with personal income tax rates... we should be comparing corporate tax rates amongst similar countries.
The lack of understanding of the tax rules by folks writing these dramatic headlines is really irritating.
I actually disagree. The issue isn't the tax rate, the issue is the arms races we have embedded all over our economy. Take housing, for example. No matter what you put as your tax rate the people in the region are going to compete for the limited amount of housing stock. The same is true for premier universities or top medical care. These arms races in our economies are eating up all the real productivity gains we've made in physical goods. If you compare the cost of a small home across time in something physical like eggs the cost has absolutely sky rocketed and it has nothing to do with tax. There are certain sectors of the economy that the market can't produce more of efficiently, like housing.
First: "if you work on your own small business you can pay even more" ... huh? If you own a small business, you're getting the corporate tax rate, and chances are you're not paying much of taxes anyway because your net revenues probably are $0 or close to $0. What are you talking about here?
Anyway, it's weird to state it as corporation vs worker with respect to tax rate. Those are different kinds of things. Every worker in a corporation pays personal income tax. Shareholders also pay taxes on capital gains and dividends. A corporations also pay plethora of other taxes (like payroll taxes). So let's not pretend there is no tax benefit to having corporations do business in your nation. The vast majority of corporations also have a profit margin in the range of 5%-10% - so it's not like you see crazy profits all over the place.
And given the nature of a corporation and the role it plays, increasing taxes (to say, the level of personal income taxes) to fulfil the fantasies of anti-capitalists, will have disastrous effects on the wider economy of a nation because increasing cost of doing business will be passed down to consumers and workers and possibly lead to large-scale dissolution or abandonment of your region. The vaunted nordic countries opted for a model where personal income is taxed very high, but corporate income is taxed competitively (until the Trump tax cuts, Nordic corporate tax rates were universally lower than those of US).
Finally, tax policy is an area replete with potential 'unintended consequences'. Most people (myself included and you as well - after reading your comment) don't really understand why everything is the way it is (and there are good reasons for many tax regulations), so I would be careful with advocating for restructuring the entire system - you're going to screw it up worse than you think it is now.
Corporations are allowed to bribe (sorry lobby) the government and many politicians end up on board of directors of the same corps after their marriage with the government is done away with. Do you really expect any different outcome in such conditions? In combination with this 2 major political parties ping pong I think the system is pretty much has reached an equilibrium point and nothing short of major turmoil is going to change anything.
On top of that Covid 19 pretty much played to the advantage of big corporations annihilating many small businesses. Some big ones (hotel chains, aviation) got hit as well but they'll come back after a while. Small businesses however may not.
I'm having a hard time understanding the logic here. The government needs a certain amount of money to run [1]. If you make the tax rate flat then, in order to bring in the same amount of money, the lower incomes _must_ pay more taxes. While I'm open to an argument that this is false, I cannot come up with any way it could possibly be. As such, your argument seems to be
> When a person makes over X amount of money, a progressive tax makes it hard for them to save any of that money over X because the amount they make over X is taxed higher. As such, we should tax earnings below X higher, so there's less of a jump.
And that ^ argument makes no sense to me.
[1] This is arguable, but it's fair to say that the amount the government needs is orthogonal to whether taxes are progressive or not.
First the corporation pays 20% (soon to be 28% again) on the profits. Then it pays state income taxes on the remaining profits (0-11%). Then the investor pays capital gains or dividend taxes (10-20%). Finally they pay their state taxes (0-12%).
To the rest of your comment: interesting point. I wonder if there’s a certain tax rate where it makes sense to change how you invest. Sort of like the difference in investing in Voyager digital (VYVGF) or the Voyager token (VGX). Stock buybacks are not tax deductible but buying a cryptocurrency can be a business expense.
Last, I think the business tax rate hardly matters because so much can be written off and justified as business expenses. Just look at Amazon, Netflix and Tesla as examples. Amazon receives customer money before it has to pay suppliers. Thus, it can quickly go spend that surplus money on reinvesting into more distribution centers, better salaries, and automation until the taxable profit is $0.
These are straightforward deductions.
This is why you fill out your timesheets people!
Remember the corps used to get in trouble for not deducting stock options. Now it has turned into a "mechanism to achieve its next-to-nothing tax liability"
Which they are, as discussed elsewhere in this thread, but the journalist doesn't know enough to point to the actual problematic behaviour.
But now is the best time for the tax part to change. The economy has been floated by unprecedented government pay-outs, narrowly avoiding a deep depression that would have crushed even the most cash-flush corporations. If certain people have their way, the working class will foot the bill for this for decades to come. Maybe it's time for those who thrived through this to pay their share just like in the post-WWII era where max tax rates reached 80+% up until the early 60's?
The G.I. Bill after World War 2 is a precedent. Do you think CARES is larger, or smaller?
It's not so much whether it's larger or smaller, but how well it was spent. Free college and the myriad other benefits in the G.I. bill helped build the US into a superpower (well combined with other fortuitous things, like being the only major industrial power that hadn't been bombed to smithereens). The bailout of large industries that a lot of the CARES act went to were not well spent: it was cronyism to prop up underprepared corporate structures (i.e. those that have hollowed out any "emergency fund" due to it being an overhead to their bottom line) and prevent bankruptcy from enabling other folks to come in and perhaps run things better.
Yeah, while I think the CARES act helped individuals, there's no need to try and save every business. Take restaurants for example. In good times, most restaurants fail, and new ones start. The narrative that if restaurants failed they would never come back was simply untrue.
No it wouldn't
It would be an almost level playing field if they had only ONE of those advantages.
At the end of the day, a corporation is an instrument, and its wealth is the wealth of some individuals. Corporations are instruments to coordinate wealth creation, so perhaps the issue is how/whether rich people are profiting too much from "The System" we have in place, be it through an excessive command of corporations (which are allowed certain things) or through other means. I mean, if wealth inequality among individuals were close to nil, then it would not be too polemic to raise taxes if we need more public budget, or lower them if we need to push the economy forward - the issue when taxes need to increase or decrease is where do you cut / take.
So perhaps we're focusing our analysis on optimizing the wrong thing.
For access to roads that are maintained by tax dollars
For environmental damages and other negative externalities that the tax payer has to pay to clean up
For an army and police system that allows the flow of commerce to continue without attacks and interruption
For a sovereign wealth fund if there is a surplus of tax revenue one year
For a court system so that corporations can continue to sue each other
To secure the population access to vaccines to reduce the spread of Covid and other diseases
To fund libraries that help the local population
To build sea ports and airports that provide the economy with better trade and transportation
These are some common things taxes are spent on but they are not reasons why corporations shouldn’t pay taxes on their free cash flow, revenue, or some other financial statement line item (FSLI) instead of their profit.
Why tax profits?
Sorry, but I just can't feel any sympathy for corporations and the wealthy who reap massive profit, in part, because they've long ago set up loopholes and laws to avoid paying a fair share.
So what is a fair share? Well, for starters, one that doesn't rely on a 2+ million word tax code and reams of related laws most of which serve to make exceptions for the wealthy.
If you strictly and only tax consumption and property, you will have large segments of the population living hand-to-mouth, trapped in a vicious cycle of poverty and and hard labor in a hole that requires super-human or generational effort to get out of. Meanwhile, those who started with a leg up will continue to accelerate their net-worth. There are people who "make money" by "having money" and under your rules those people would only pay taxes on the fees they pay to their money manager. We aren't THAT far from that now were it not for the miserly 15% investment income tax.
I realize the typical HN-libertarian-calvinist view is that everything needs to be transactional. Transactional down to the level that the taxes someone pays would ideally go towards the services that they as an individual use, and that everyone needs to work in order order to be "worthy" of a social-safety-net (assuming a safety-net has to exist, which isn't a given in such points of view). It doesn't have to be that way but sadly there are motions in that direction.
Revenue is taxed in many places; it’s called sales tax. Profit is also taxed. It is called an income tax / corporate tax.
>> The government does not have a right to 30%
Apparently it does, since governments all over the globe have been levying taxes on corporations for decades. Unless you think the Cayman Islands, Bahrain, and Isle of Man should be the model for industrial countries.
And, just because the rest of the world's governments are stealing does not make it ok.
Strong disagree.
They should pay reasonable (not low) taxes in any event, not subject to the caveat you identify.
Everyone that gets a dividend pays tax.
Everyone that enjoys capital growth pays tax.
Just looking at the direct corporate tax rate is grossly myopic.
But this is their tax they pay on the money _they_ earned. Not sure why this is okay for corporations to appropriate this tax as theirs.
> Everyone that gets a dividend pays tax.
In my country dividend tax has a lower rate. You have this insanity where a person making money out of their hard work pays more tax than a person living off dividends and doing nothing.
The problem, there is no "they".
But imagine you are some unethical person looking to ensure as little of of your hard earned cash goes to things like a subsidized meal to a hungry person as possible. Your company is raking in millions and you want that money, but you know Uncle Sam is going to take his cut. Maybe you set your personal salary at minimum wage, and have the corporation own your nice house and nice car instead, and use the corporate card for your airfare and dining. IIRC, setting up a corporate trust similar to this was how Jeffrey Epstein was able to get Les Wexner's multimillion dollar Manhattan townhouse for nothing at all on paper. The Trump foundation also got into similar trouble for misuse of funds a few years ago. No doubt a lot of people in this world are abusing the tax advantages offered for corporations towards personal gain, and no doubt they lobby lawmakers to keep things this way.
It's not insanity. They worked and paid taxes on the money they used to buy those dividend bearing stocks, why punish them?
You have to put this into perspective, there are ways to obtain profits from capital gains without doing any work whatsoever, without employing employees at all. Dividends are quite harmless, because those people living off of dividends give people jobs who are then doing productive work. Compare that to getting rich off a stock market bubble, where literally nothing productive was done and no jobs were created.
If we are going to treat corporations as a fictional person, we should only be looking at the direct corporate tax rate.
Abolish sales tax, and punitive fines at the very least, theses are highly regressive in nature.
Though i suspect quite a few don't believe the poor should have more wealth but rather that the government should just get bigger.
A government should be able to achieve control through Pigovian taxation, regulations and fines. I'm not convinced that a blanket corporate tax (which does indeed facilitate targeted tax breaks) is necessary beyond the other tools that already exist.
Money is fungible. From an accounting perspective $1 given via tax credits is identical to $1 check given by the government. That said, your point is still valid because the former is much more politically palatable than the latter.
Your idea would make that money free to keep out of the economy and out of employee's hands.
The current offshore “hoarding” is actually due to the current tax code.
If companies knew they were going to pay the tax one way or the other, there would be no point in hoarding overseas.
We should penalize companies for the behavior until it makes more sense for them to repatriate it immediately.
The whole point is for stakeholders to eventually get paid in a taxable event; either shareholders through a capital gains taxable event or employees through an income taxable event.
Some tech companies are hoarding cash but I don't believe this is due to incentives created by taxation, although I could be mistaken.
Greed, son, greed. That is why 5 people in the US have more money than the bottom 100 million. They didn't work hard to become that rich, they stole it by not paying wages, health care, benefits, or sharing the wealth. Because they do not have to, nothing prevents them from keeping it and paying low wages in an economy where the ONLY jobs are working for them. (Look at the most recent jobs reports, delivery and couriers grew by double digits, most everything else fell: what do you do when there literally are no other jobs except delivering goods to people and peeing in bottles because you don't get a break?)
Apple has paid hundreds of billions of dividends to shareholders the last few years. It's borrowed money to do it because it would be taxed if it repatriated funds to pay dividends with.
If the corporate tax rate was reduced to zero it would have zero reason to keep foreign profits offshore, it would just repatriate them and pay dividends directly.
Right. That's great: the richest employees of apple get richer, and the people doing the worst labor live in dorms and work 18 hour days.
> If the corporate tax rate was reduced to zero it would have zero reason to keep foreign profits offshore,
Again, you seem to be ignoring the abundant evidence. Trickle down has never worked. Corporate tax rates are the lowest they've EVER been (down from >80% in the early 80's) and money still flows out of the US.
Please, study history and try again.
The "worst labor" are jobs that are so much better than typically brutal Chinese rural labor jobs that thousands of applicants stand in line for hours to get them. And Apple audits its labor practices, unlike solely owned Chinese companies.
And the corporate tax rate has never been 80% in the U.S. it was 40-46% in the 1980s and highest ever was 53% in late 1960s. And corporate tax rates were lower than todays rates for the first 163 years of U.S. history, they were first raised above 20% in 1940 to help fund the war.
And even though the current corporate tax rate is historically low, it's still an impediment to returning foreign profits. Repatriating foreign profits costs a minimum of 21%, more with state taxes. For companies it's still cheaper (and legal) to keep the profits in their foreign subsidiaries and wait for a repatriation window, or borrow against some of the deposits to pay dividends.
You should try studying history as well.
Trickle down doesn't work because republicans love pumping the supply side of the economy even when it is fully saturated. The days of a weak US economy are long gone. The real problem is that savings exceed investments. You either let the government create viable investments for the private market, or you just let the government invest directly.
Arthur Laffer tried to argue that tax cuts would lead to an increase in growth enough to produce the same or more tax revenues, which clearly didn't happen. But tax cuts did clearly lead to an increase in growth.
Right now, even under the lower Trump corporate rates, if you want to invest in a U.S. Business you will lose 33-50% of your profits to Federal and State taxes. Thats a tax on investment, reinvestment and savings. If you want to convert savings to investment, just cut those taxes.
Yeah, the reason why this strategy works is because Apple can pay dividends today and just wait for the inevitable tax holiday that comes when a republican president enters the white house. Similar schemes work with cryptocurrency in Germany. Holding onto Bitcoin for one year grants you tax exemption from capital gains. So you just borrow against your Bitcoin for one year.
Corporate taxes have been gamed so much they are purely cosmetic at this point, with some harm done to smaller companies. A better tax code is needed.
1) Increase the incentives to save and invest in the U.S/
2) Restore progressivity to the tax code by taxing profits when paid to investors on a progressive rate based on their tax brackets.
3) Repurpose hundreds of thousands of accountants into doing actual business finance and development of wasting their efforts reconciling the differences between GAAP & a super convoluted Tax code accounting (and searching for loopholes)
4) Simplify business decisions and reward honest management based solely on GAAP accounting with no more "angles" to take advantage of tax code loopholes.
If I'm a greedy shareholder, then I want dividends and cap gains, which are both taxable outside of company tax.
How does hoarding cash inside a company, which is out of my personal reach, help me to satisfy my greed? I can't buy a yacht with it until I get the money out.
Why do companies do dividends or stock buybacks? Because they think investors can do better investments elsewhere with the money.
The shareholder still has to receive a dividend or sell that higher priced stock, which are both taxable events.
So I still don't get it.
Second, the main reason U.S. companies keep foreign profits offshore is they would be taxed if brought back to the U.S.
Your understanding of the problem is exactly backwards.
Startup A wants to get into a market and it buys Zoom licenses, GSuite, AWS servers, etc and pays a hefty tax bill.
Microsoft wants to get into that market? They don't have to buy any of that stuff, they already own everything. No tax dollars, lower cost to the incumbent.
Microsoft and other do own their infrastructure but if they're not renting it to clients it wastes money as it has ongoing costs so not, them using their own infra is anything but free.
Meanwhile with land value taxes, you either own the land and you pay, or you don't own the land and you don't pay. The only way you can dodge this is by not owning assets in the US and by not living in the US. Landlords pass the land value taxes onto renters (individuals and companies) who then end up paying their fair share of the US taxes.
The government needs to collect money to pay for current and futures investments that created that environment... no? What's the most effective way?
[0] https://www.annualreports.com/HostedData/AnnualReports/PDF/N...
Why do you think it is okay for a corporation to appropriate the tax employees pay as theirs? Employee pays this tax, not the corporation.
I'm not saying that the company shouldn't pay a direct tax on their profit, but that I want to know the real number counting everything. Focusing on some fraction of that number can be misleading, especially when the editors try to distill it into a short title, with possible agendas no less.
Put another way: in the steady-state, corporate shareholders end up paying big taxes because distributions are taxed once again at ordinary income rates.
[1] At least, not yet. Elizabeth Warren would like it to be.
Edited for formatting
If I get paid a wage, my employer pays payroll tax, then I pay income tax. Then when I buy something with it, I pay sales tax. Then the company I bought it from pays payroll tax on it when they pay it out to an employee, then the employee pays income tax on it. Then they pay sales tax when they buy something with it, and so on.
I don’t use the term “double taxation” to imply corporations are necessarily a worse structure compared to partnerships; that depends on context. But it’s a useful descriptive term.
So what's the real tax rate in investments in the U.S? Well it's the corporate tax rate. Plus the investors capital gains or dividend tax rate. Plus the state corporate income tax rate. And the investors state income tax rate.
All these layers of taxation means it's almost impossible for taxes on profits to be less than 40% for an investor, and can reach 60%.
And sales tax isn't part of the double taxation layer, because it's voluntary. You could have spent your net earnings on things that don't have a sales tax, or saved it. And sales tax applies equally to the investor receiving a dividend.
https://podcasts.google.com/feed/aHR0cHM6Ly9mZWVkcy5tZWdhcGh...
When Sarah the employee gets options to buy 1,000 shares of company stock at $10, and the stock is trading at $10, those options have value. GAAP has the value estimated based on standard options pricing models (Black Scholes presumably), ie. the volatility of the stock implies how often the options will vest with value. So the company takes a GAAP expense for Sarah's options grant, lets guess $2 per option which would reduce reported profits by $2,000 total that year.
But the IRS doesn't allow this expense for tax calculations. For taxes the company has to wait until the employee exercises the option, then it is required to deduct the difference between what the current stock price is and what the employee paid. So a years later when the stock is at $100, Sarah exercises her options for a windfall of $100,000 in stock that only costs her $10,000, the company gets a tax deduction of $90,000.
The site (in a linked essay) points out how much larger these tax deductions are than the actual GAAP expense and tries to spin this as some sort of tax dodge (even though companies are required by law to follow tax accounting and GAAP rules). But here is the problem with their perspective.
What if the stock price went down? If Sarah does not ever exercise her options, the company never gets any tax expense for them, even though the OPTIONS CLEARLY WERE A COST TO THE COMPANY. The author is making the old have your cake and eat it too argument. In reality only if the company is successful is the tax code treatment of options beneficial, when it's not successful the treatment is unfair.
Note: If you don't think out of the money stock options are valuable, go to your broker and demand some September Tesla $1,000 call options for free because they "aren't worth anything yet" and see how far that gets you.
And Netflix has not (so far) run a share buy back.
So they're either sitting on the excess cash, or they've spent it making more programs. In either case this is exactly what the current tax code is designed to incentivise. Businesses should invest. That's the whole point of taxing profits not net income...
It’s the only thing that will motivate the rest of the legislature to plug the holes.
However, as an individual we can't change this. My (extremely cynical) advice is to hitch your wagon to theirs. Get some market exposure to these large companies and make their lobbying efforts work for you. It won't make society any more just, but at least you won't get left behind.
Couple of years back when I heard about tax havens, I had an idea why not create a service for individuals/small business people who can use it to open offshore bank accounts and use the same loopholes to save/ minimize taxes legally.
Ofcourse I did not have the motivation to do all the research needed for this service but I still wonder if there is such a service for the little guy.
How does it offset them, does it use some shenanigans like other companies?
The first step to a balanced budget is to stop impulse spending on dumb stuff.
My only gripe is I'm not allowed to pay a 1% tax, as I should be.
The problem is that 'dumb stuff' is different for everyone when it comes to country level expenditures.
I don't have an army of accountants to avoid the corporate tax rate for my small business. So as a percentage I pay vastly more taxes than the multinationals.
Why can't we have varying rates depending on the size of the business?* Bigger businesses have a bigger tax rate. This would also incentivize organizations to stay small.
*Calculating the size of a business is tricky. Is it revenue based? Number of employees? Does it change per sector? Anyways, I'm sure it's possible to find a decent set of metrics.
Because corporations are, by nature, arbitrarily divisible, so progressive taxation for corporations just encourages division of corporations into units that pay the minimum tax rate.
There are business forms that allow businesses (often, but not exclusively, small businesses) to avoid corporate taxes entirely (S corps and passthrough LLCs), whule also providing the benefits of incorporation compared to sole prop and partnership forms.
Looks like depreciation (those bastards!) and R&D tax credits. How devious!
Maybe reporters should get an accounting primer before writing articles about taxes?
> Maybe reporters should get an accounting primer before writing articles about taxes?
That will just make them feel bad when they choose the clickbait anyway.
HN is a semi-rarefied atmosphere and even these comments are mostly ignorant rabble. No way the journalists are giving up the sensational headlines for a general audience. Engagement gold dust.
Or is this something else?
It makes all the difference.
Thanks
Ella FitzgeraldI assume they are dodging those taxes as well, but to take net global income and measure that against federal income tax in the US is a flawed calculation unless you are asking for double taxation.
Amazing scale though. It shows the power of cutting out middlemen when they are going direct to consumer without gatekeepers such as cable companies.
US subsidiaries in India do not offer ISO stock and ask us to pay 30% per requisite tax on unfair market valuations
Maybe Netflix could spin off one of its studios into a $999M business, of which Netflix conveniently owns a 51% stake in.
Would they go to the trouble of making themselves 25 different companies?
There might be a way for lawmakers to figure this out...
-- https://www.macrotrends.net/stocks/charts/NFLX/netflix/reven...
Fine, I'll take it.
A less risky version of this is stock ownership, or buying an index. Because it’s less risky, potential rewards are lower.
If you make it somehow, you have the benefit of deducting your R&D against profits, which seems fair to me...Except then people get upset (see comments on this page) that you "aren't paying your fair share of taxes."
This seems ludicrous given how many years startups spend burning their own money to hope to reach the point Netflix has reached. Good for Netflix.
Uhh.... Typo?
why can't we be 1%'ers like them?
I would wager the typical Hacker News reader would be able to explain accelerated depreciation after sixty seconds of reading the instructions for Schedule C. It's not arcane.
Missing out on local investments, IP offshoring, and the capital gains tax rates.
So what we have is a class of people paying significantly lower tax rates than they should be, corporations not paying anything at all, and investment money shifting out of the US.
But at least we can claim to have a progressive tax system, or whatever it is that idealists want to call it.
If you're small, you get hit by the tax. If you're big enough for creative structuring, you're fine.
It's just as disgusting when you get down to individual tax. Larger companies are for the most part taxed territorially (where they make the money) while individuals are fully (and often in ways that are incompatible with local market practice) liable for US taxes, even if they live outside the US.
Year 1: Lose $50 million. Total profit: -$50 million. $0 taxes paid.
Year 2: Lose $10 million. Total profit: -$60 million. $0 taxes paid.
Year 3: Make $35 million. Total profit: -$25 million. $0 taxes paid. People who are either uninformed or petulant ideologues scream about you not paying taxes on $35 million in profit.
Then you have measures intended to rein them in like GILTI & Transition Tax, which end up mostly affecting smaller businesses.