Hacker News Reader

Comment by jfruh | Hacker News Reader

What would happen if corporate taxes were lowered to zero, but capital gains were taxed as ordinary income? Corporations are not people, etc., and maybe taxes should only be imposed when they actually enter a human being's possession.

View on HN

One problem. Let's say I own a corporation and the corporation decides to use it's profits to purchase a G5 Jet, a mansion, a fleet of limos, an entertaining budget, etc. I'm essentially going to live like a king tax free. While I wouldn't technically "own" the items I would benefit from them. How can you regulate benefit? Where do you draw the line as a costs of doing business and a direct benefit to the CEO?

As of 1986 (in the US), such things are taxed as compensation.

Before 1986, most compensation to corporate executives was given out in such forms. In many other countries, executive wages are lower and the difference is made up with non-wage compensation such as what you describe.

Incidentally, this change in tax law created the biggest spike ever in (measured) income inequality: http://www.scottwinship.com/1/post/2011/03/what-would-it-mea...

This is very much in evidence if you know e.g. any Japanese CEOs. Our CEO (old day job) was bragging at a meeting one day about the $X00,000 car he drove, and then said "Remember, I work for a living, that's the company's car." It will continue being the company's car for the duration of his tenure with the company, and after he is CEO emeritus and on an advisor-to-the-board position he will naturally be given a new company car, and ...

It also gets straight-line depreciated at, probably, 95 ~ 100% business use.

(This is considered standard business practice here, in the same manner that an American businessman expensing a WSJ subscription would be totally-inconceivable-to-challenge standard business practice. When I bring in my income tax return in March I'm probably going to get chided again by the tax office for "forgetting" so many of my deductions.)

Well, then just Tax Wealth (and set cap gains rates to 0% while you're at it).

If the limos and G5 jet that your company bought were inefficient assets, then as an owner of the company you would still have to pay for them but your return on investment would be decreased, penalizing you for this poor allocation of resources.

That's the libertarian answer, yes. But it doesn't work. In fact this kind of thing is routine in the corporate world. The randian solution here requires that there be a class of corporate executives willing to live comparatively impoverished lives. But they don't exist, because they're chosen by corporate boards populated by people who don't want to see their own perks vanish. And those boards are elected by, overwhelmingly, investment bankers living in the same world who view the inefficiency in their investments as minimal (remember they want to sit on boards some day too, and won't rock the boat).

All of those people (the "1%" I guess) would need to simultaneously decide to take a pay cut to produce your hypothetically efficient executive compensation. It won't happen.

That's strange, because whenever I propose wealth taxes to self-identified libertarians they complain about "double taxation" or somesuch. This is probably why my answer gets voted up by neither libertarians nor, uh, non-libertarians.

The proposal I provided was given in the context of "Let's say I own a corporation ...". Not "Let's say I'm a manager of a large corporation". When the person owns the inefficient corporation, then wealth taxation seems like a viable approach.

I think crappy management is a genuine problem at large companies, but I'm not sure that any kind of corporate taxation will fix it.

Then I misunderstood. I thought your earlier answer was sarcasm. A real libertarian could never accept a tax on wealth. All taxes are bad, but the only ones that are acceptable are taxes on economic activity. Taxing wealth is, in the randian sense, punishing success.

What would Rand say about taxing wealth instead of income, keeping everything else the same?

Wealth taxes are actually just as old as income taxes, predating even Hammurabi. To a degree, the two are highly correlated. For example, a flat property tax on a farm is just a wealth tax while a tax on the farm's crop would be an income tax.

One of the fundamental principles in taxation is that each person should pay in proportion to their ability. The ability can be interpreted to be proportional to their income, profit (income with deductions), or wealth, which leads to different tax schemes. It just so happens that in this century, much of corporate tax is based on profit and much of personal tax is based on income.

I am not quite sure where you are trying to go with your argument based on executive compensation and why that necessitates an income tax over any other type of tax.

Perhaps, if the concern is the increasing remuneration of corporate executives, it would be worthwhile considering what factors have changed over the last century that may have led to the current situation.

It seems that wealth taxes are a far more sensible kind of taxation. But, strangely, there is little serious discussion of them.

I sometimes wonder what it would look like if there were just two kinds of taxes responsible for most government revenue: a VAT and a wealth tax. The problem seems to be that, psychologically, people would rather be taxed via witholdings.

Yeah, I don't really understand taxing business at all. They create jobs, then don't create a tax burden (like say an apartment building full of families attending local school, yet the govt constantly subsidizes building apartments). Why would you tax an entity that enables citizens to earn money and pay their taxes?

A business profit isn't profitable to anyone until it is distributed to employees or shareholders, at which point it is taxed again.

Businesses don't create a tax burden?

Businesses use the country's infrastructure just as much as the citizens. They want police so they don't get robbed, they want roads and a post office, they want electricity for their buildings and sewers and all the other stuff taxes pay for.

Don't the owners of the business and the employees already pay for those services through their taxes?

That's what property tax, and the electric and water bills are for. Roads are paid for by a mix of taxes, a significant part of which is fuel tax. The post office isn't subsidized by taxes.

If electricity is paid through my taxes, why am I paying $300-$500/month to DTE?

And in addition tax cash stock piles to help drive re-investment, research and growth.

The combination says: You'll be taxed individually if you withdraw it, or taxed as a company if you horde it. Why not invest it instead?

Which might lead to greater employment, or more innovation.

* This whole post was a 2-second thought, I'm pretty sure it's flawed, but it amuses me.

What constitutes a "cash stockpile?" Does this disincentivise saving? Is it even legal to tax funds without a transaction?

Why would it be any different from taxing property that you simply own? In fact, where I live, blighted, disused buildings are taxed at a punitive rate.

This idea that people/businesses "horde" cash is simply bizarre to me, yet I see it again and again in discussions about the economy.

Unless it's stacks of paper underneath their mattress, it's in a bank, essentially an investment, and is able to be lent out as capital.

Actually, no. Back in 2008 when banks were failing but the economic numbers showing that we were in a depression hadn't come in yet the Fed was faced with a problem. They felt like they needed to pump money into failing banks, but they were worried that this might cause inflation. To allow them to inject lots of money into banks without it getting out into the rest of the economy they came up with something called the Interest on Reserves, that is the Fed would pay the banks not to lend the money out.

It totally fulfilled its objective. Despite huge growth in the money supply America was soon actually experiencing deflation in 2009. Sweden, on the other hand, actually charged banks interest on the excess reserves they were holding - and their economy recovered very quickly...

But it's not as simple in my view. Yes banks do lend out a portion but currently the reserve they have to keep have increased a lot in the last few years and the flow is not very well distributed (in my view) to through the whole economy.

I'd like to know if there are some analysis of this somewhere. My hypothesis is that certain sectors have seen drops how much money has been added through lending while others have seen increases.

It's definitely possible to "hoard" cash without putting it in a mattress. Just make extremely conservative investments.

Some companies really are hoarding [0] cash. By which I mean, they're stashing it in very liquid investments, rather than investing it in long-term ways back into their own company, and rather than hiring new employees. (And many banks are choosing not to lend those cash stockpiles out as capital.)

Corporations have good reason to do this. For many companies, they want to have the flexibility to take advantage of opportunities created by this economy, but they don't want to move just yet since there's so much political uncertainty. Nobody wants make a big investment only to have Congress levy a punitive tax on that investment. Nobody wants to hire a bunch of new people and then be forced to spend a bunch of money due to an unforeseen change in labor or health care law. So companies are sitting on cash, simply waiting for the political situation to settle down enough that it's safe to start using their cash productively.

[0] horde - a large group of people or warriors. hoard - a stockpile of resources.

That seems the most logical solution to me. But I think corporate taxes are also aimed at "pushing" companies to invest/spend more of their revenue than they would if they could funnel all profits straight into accounts in the Cayman islands or wherever.

I like this in principle a lot, but capital gains tend to be more lumpy than normal income so this interacts badly with our current progressive income tax structure. Better to go to a consumption tax if we're going to do this.

Reply on news.ycombinator.com