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Comment by fighterpilot | Hacker News Reader

I've heard this suggested before: abolish all corporate tax and increase capital gains tax to equal income tax.

This will level the playing field between large and small businesses, since the former has the means to dodge byzantine corporate tax laws.

It will also give an incentive for companies to stay onshore.

Any downsides?

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Probably the biggest downside is that the government would lose a major policy tool. If there are no corporate taxes then there's no way to incentivize companies via tax breaks.

It would also become more important to enforce taxation on corporate benefits. If a company provides a car, jet, mansion etc for an executive's personal use, then they need to put a monetary value on that usage and tax it as income. It's not that it's impossible to do that, but it's an additional hurdle for enforcement. Not only do you have to confirm that the company provided the employee X benefit, but you also have to confirm that they valued it appropriately.

Finally, it's just not good politics. It's really hard to sell a plan like this to voters. Even if it doesn't raise the taxes of the average voter, it sounds like you're moving the burden of taxation from rich companies onto the average citizen.

I think there's a lot of economists who love the idea because it really does simplify things. Besides the framing, there's not really a big difference between subsidies or tax breaks. But that third point is probably what kills it.

Your third point is a good one. It would take a very clever reframing so the public understands the rationale, although it's doubtful that could ever happen.

Regarding your second point, how does this become more of a concern when corporate tax rates are low? If a company buys an employee a car using pretax income, that will be tax free regardless of the capital gains or corporate tax rates.

Corporate tax does not make sense because "income" and "profit" for a company are very loosely defined. Instead, a simple GST on products and services should be enough. Unambiguous and easy to reason about, with very less maneuverability to avoid.

In fact, I would rather income tax for individuals also be done away with. Just tax every transaction in the market. That is much fairer and presents less avenues to avoid tax.

A simple tax like that on its own is also socially regressive. Implemented on its own, people would go hungry, causing social unrest.

What would you suggest as a simple social stabiliser on top? A negative personal income tax up to a certain rate?

> Implemented on its own, people would go hungry, causing social unrest.

Why would that happen?

Because the poor and working class spend all their money on necessities and in doing so incur higher effective transaction taxes relative to their income.

Does differential tax rates on necessities Vs luxuries help here?

For example, in the UK, sales tax is discounted or not applied on many types of food, children's clothes, etc. - yes, you end up with strange arguments at the edges (a famous one being the lawsuit to decide whether Jaffa Cakes are legally cakes or biscuits) but I think it _could_ work.

> lawsuit to decide whether Jaffa Cakes are legally cakes or biscuits

We had a lawsuit to determine if KitKat is a chocolate or a biscuit for similar reasons:

https://www.businessinsider.in/KitKat-is-a-biscuit-and-Parac...

> In the case of Nestle India Ltd Vs Commissioner of Central Excise, Mumbai of 1999, it was ruled that KitKat is a biscuit and not a chocolate that is taxed high.

> Corporate tax does not make sense because "income" and "profit" for a company are very loosely defined.

Yes, the verbiage used by the IRS is awful; they use the term "income tax" to describe both the "personal revenue tax" and the "corporate profit tax".

Unfortunately they're stuck with it because the 16th amendment uses (but does not define) the term "income".

So if they call the thing that they're taxing anything other than "income", they have to deal with a bunch of clowns arguing that they aren't allowed to tax that.

First time I've heard of it, but one thing that comes to mind: if a company is very successful in the Netherlands, in part due to being able to make use of its excellent infrastructure, but its owners are in the US, then they will not be contributing to the maintenance of that infrastructure. You'd then lose the positive feedback loop of the infra paying for itself, enabling more successful businesses.

Estonia has done just this.

Yes.

> increase capital gains tax to equal income tax

Is far easier said than done. For example, would you include the $250K capital gains deduction for selling a home in that? Additionally, you're probably referring to raising long-term capital gains tax, but that has the side effect of disincentivizing long-term investment in favor of more short-term speculation.

How would it disincentivize long term investment?

In the US dividends are taxed at capital gains. I believe if a company makes $X and gives it out as a dividend it makes no difference to the investor whether the split between capital gains and corporate tax is 25/25 versus 43.75/0?

Not at all. Many countries already do this. For example, in Australia, capital gains is considered as income. It contributes to your progressive tax bracket the same way income does. For property, you do not pay capital gains tax when you sell your primary residence (that you live in) but you do on investment properties.

What's to stop me from hiding my capital gains in a series of shell companies?

Good luck exfiltrating it back to your bank account.

If the money is in your company then it's in one of your accounts somewhere.

What are you going to tell the IRS when they ask you about the offshore wire transfers coming in? It's a "consulting fee"? You're going to be paying taxes on that at your marginal rate.

Sure, but if you pay yourself a very nice income and realize very many nice incomes in capital gains, then you're still coming out way ahead.

You do realize that capital gains are taxed at a lower rate than regular income? Doing this only makes you pay more taxes.

Of course I do. But if you're making several times your expenditures in capital gains, then this is still favorable.

The difference is you only need to transfer enough money to your personal bank account to cover your annual expenses. So if you make $500k/year but only spend $100k/year, then the other $400k will continue to grow tax free.

That's a pretty big difference. Makes the idea of a sales tax only kind of attractive since it doesn't disadvantage income over capital gains.

You need to follow laws to funnel money through your shell companies. In turn, global agreement could require a tax small tax for any capital gains transfers made by each of those shell companies. The end result is that companies can still dodge taxes, but the more law-abiding ones aren't quite as efficient at doing so. That said, I haven't investigated the details of how this might work, and I'm sure like anything humans invent, there will be exceptions. Perhaps it would apply to large companies only, and suddenly lots of companies break up to become smaller affiliated investors that just happen to invest in the same companies in various jurisdictions, perhaps through an unaffiliated managed ETF. If there's benefit -- read: profit -- to working around a law, I'm sure folks will find a way, unfortunately.

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