It's a real scandal that a person that makes 500.000 $ a month pays only 11% taxes. This system is completely unfair. This is not liberalism: this is simply the law of the strongest.
If these business gains were retaxed at the personal level as ordinary income, that would incent company owners and directors to keep the money in the company's coffers safe from taxation. Then you have corporations sitting on illiquid wealth. Giving personal tax breaks for these business gains creates incentive to distribute money back to the economy to be spent and continue flowing.
I'm surprised to see a reputable publication like GQ repeat the "rich people pay low taxes" fallacy. But it's such an easy way to score pandering points that pretty much every business article and publication spreads the misinformation now.
If an individual earns a million dollars a year by owning a fleet of cabs, each organized as a separate corporation with the legally-required $50k or whatever of insurance,[1] and one of the cabs hits and kills someone resulting in a $3 million wrongful death lawsuit, the individual is out at most the assets of that single corporation (say $50k + legal fees).
It would be ridiculous if the individual paid the same %-age of taxes on that million dollars in both cases.
[1] This is actually how many (most?) cab companies are structured.
Aside: I knew a guy who relied on wikipedia to give out tax advice. He was sued for malpractice and lost. He now owes his former clients $2 million (the amount of additional taxes they had to pay as a result of his erroneous advice).
Uh, except that corporations pay taxes on net while individuals pay taxes on gross. It is entirely possible to structure your corporate income such that you would pay less tax than a normal individual.
You simply use your company to pay for all your expenses, take no salary and instead pull in dividends and/or stock that can be sold at long-term capital gains rates in a year.
I'm not sure how you missed all those stories about the selfless CEOs taking $1 salaries (and millions of dollars in stock) in order to do just that.
I'm one of those media-created myths. I am a programmer, but I work under a "corporation". And I know I pay way less taxes than friends who work as employees with pure earned income.
I don't see how this would be any different if I, for example, ran a corner store. (Actually, the possibilities increase even more there, as you can use creative accounting on your taxes, PLUS, very easily run a significant portion of your business "off the books".)
This taxation scheme isn't gratuitous. The corporate vehicle offers investors the tremendous advantage of limited liability. When it comes to a creditor's suit against the company, the corporation is treated as a distinct entity and the investor is not liable in such suits beyond his investment. The cost of being treated like a separate entity in lawsuits is being treated like a separate entity when it comes to taxation.
Limited liability is not free. When creditors cannot collect because an investor's corporation has insufficient assets, they bear the losses of activity that is attributable to and generates profits for the investor. If investors did not want to be taxed this way, they could reorganize their investments as partnerships. That way they would be taxed as individuals and bear liability for their business activities like individuals.
For a nanny, sure, but apparently you missed Accounting 101
Expenses are deducted from income for tax purposes (talking about a corporation)
So this means, for a company, that if let's say, earn (example values) $1000 and pays an employee $400, their taxes are calculated on the $600, not on the $1000
Hence, no double taxation, the taxes on that money are payed 'down the chain'
But it's dishonest to claim tax rates are only 11%. They aren't.
Most corporate income will not go to its shareholders as dividends (or otherwise). Hence, it is inaccurate to say that the tax cost of limited liability is [x+y]% except in the very limited circumstances where all corporate profits are dividended up to the shareholders. When measuring the true total effective tax rate on a shareholder, you must exclude any corporate income which will not be dividended up from the calculation, so the effective tax rate becomes [x-z+y]%, where z is usually equal to or greater than 95% of x.
Say 10 people each invest $100 in a business. After 1 year of operation, the business generates $10,000 in profits. The business is taxed as a separate person, and has $6,500 left. With the $1,000 of initial capital, it's worth $7,500. Now, say one investor sells his shares for $7,500 / 10 = $750. How much richer is he? ($750 - $100) = $650. Now, say instead the company pays out all of its profits as a dividend. Each investor receives $6,500 / 10 = $650. The $100 of original investment will of course be recovered when he eventually sells his shares.
In each case, the investor is $650 richer than he was previously. What amount should he be taxed on? $650! His net gain is $650. Why should be he taxed any differently on this net gain of $650 for a passive investment than someone who earns $650 in exchange for services?
If a person makes $1000 pre-tax on a $100 investment, we should tax the $900 in a single chunk. The tax rate should probably be the same as the individual income tax rate, and it should be the same regardless of whether it is long or short term capital gains, dividends, interest or royalties.
My objection is to breaking the tax up into pieces X+Y, and then acting as if the investor only paid Y. That's just a way of complicating the tax system and pretending investors pay less than they really do.
C and I are separate legal persons. Everything is accounted that way. E.g. when the U.S.'s GDP is calculated, C's income ($100) and I's income ($65) are added up and contribute $165 to the U.S. GDP.
Yes, the taxes on C reduce the amount available for C to pay I as dividends. But that's true in any transaction between two people. The taxes on my income reduce the amount available for me to pay my nanny, but you don't add together the taxes I pay and the taxes she pays when computing her tax rate.
That's not how it works. The only time shareholders will see the corporation's income is if such income is distributed to them. Generally, this happens via: (1) a distribution of the corporation's assets, (2) a dividend, i.e., a distribution of the corporation's earnings and profits but not its assets, (3) a redemption which decreases the shareholder's ownerhsip, or (4) a liquidation which eliminates all shareholder's ownerships.
Capital gains reflects the increase in the market value of the corporation. It is entirely possible, and usually is the case, that the market value of corporate stock is based on the "goodwill" value of the corporation (i.e., brand strength) rather than the corporation's cash earnings. For example...every tech company purchased in the past decade, including but not limited to, such notable non-revenue producing companies as Reddit and Instagram.
The corporate form comes along and says "let's treat this business as a separate legal person." The corporation, thus, is entitled to the proceeds of its business, and is liable for its debts and other obligations. The important thing to realize is that under this arrangement, the investor is not automatically entitled to a share of the corporation's profits. It's not his money, it's the corporation's money. The only thing the investor is entitled to is his capital contribution (which is not taxable), voting rights, and certain fiduciary duties from the corporate officers. When the corporation pays out a dividend, it's not giving the investor money he's entitled to by operation of law. It's a gratuitous transfer by one person (the corporation) to another. And it's taxed as such.
So it's not at all "dishonest" to say that the tax on capital gains is only 15%. It's a correct statement of the facts. It's no less correct than saying that your nanny's tax rate is 20% or whatever, even though she is paid with post-tax dollars. The corporate income tax isn't some gratuitous tax as the "cost of limited liability." It's just the natural consequence of structuring a business as a separate legal person in a system that taxes transactions between persons.
Yes, that may cause corporations to not pay out profits, but there's nothing wrong with that, because if the profits are not paid out, then the shareholders don't have the problematic high income.
If keeping the profit causes share values to rise, then this rise in value should be taxed appropriately according to the same mechanism.
1. Fungability: companies have similar tax flexibility as individuals and are therefore comparable.
2. Consumption equivalence: that income from capital gains or "personal tax breaks for these business gains" is actually redistributed back into the general economy in the same way as it would be as general (wage) income.
Both are clearly incorrect.
I would go a step further to suggest the US has a relatively high corporation tax compared to other developed countries precisely to compensate for other tax code deficiencies and trends.
Of course, in a sense, all the current arrangements do is capture the "middle" or "poor" class of corporates. Large or sophisticated corporates, especially financial companies, have very extensive means to ensure minimal or even, in some cases, no tax is ever paid.
A preliminary and revealing book on this issue for laymen is Shaxon's "Treasure Islands" (http://www.amazon.com/Treasure-Islands-Uncovering-Offshore-B...).
Size is not a factor in this; proper planning is. Paying an expert $10,000 to structure your business flows at the beginning can save millions down the line. You would not skip out on hiring a lawyer to properly incorporate your business and draft your shareholders agreements, so why would you skip out on a tax planner?
http://en.wikipedia.org/wiki/Tax_rates_around_the_world#List
The capacity to bypass taxes or headline rates is not being compared. In addition, if anything, that only further supports my points.
The solution is simple: stop taxing corporations and replace it with taxes on capital gains/etc. (Also, while we are at it, equalize the taxation of cap gains, dividends and interest.)
My favored solution is having two taxes: a heavily progressive consumption tax, and a flat capital gains/etc. tax. Because what people usually are bothered by are the Paris Hiltons of the world, not the humble billionaire featured in the article.
I don't believe they should be used for revenues, because once you do that, it misplaces the incentive: now the government makes more revenue per unit externality. So I favor a flat rebate for all externality taxes.
The GE type corporations effectively pay very little tax in the present system. They also have the right to spend an unlimited amount of money on election campaigns. In the U.S. system corporations are treated as persons. If a person makes an income (profit) they get taxed.
What we presently have is a broken system in my opinion. The very rich earn their money through capital gains and the capital gains tax is very, very low. The very wealthy in the U.S. do not pay a fair share of the tax burden or for the cost of government. Perhaps eliminating corporate taxes while simultaneously greatly increasing capital gains taxes would be good. There could also be some bad consequences to eliminating corporate taxes altogether.
They don't?? The top 1% of taxpayers paid 36.7% of all income taxes in 2009[1] (yes, that includes capital gains). The top 10% paid 70%!
well, i think we all should be grateful for the %10, we are basically funded by them. Thank you rich folks!
The poor spend all of their income on necessities: food, rent, utilities, clothing. They effectively do not have income after deducting their necessary expenses; many do not have sufficient income before deducting their necessary expenses. The wealthy spend comparatively little of their income on necessities; their income is increasingly used on luxuries. They can afford to do this because of the services provided by the government. The wealthy receive disproportionately more value from the government, yet the only pay 10% more than the rest of us.
In the US the very wealthy pay a disproportionate fraction of taxes, relative to the income they earn.
http://taxfoundation.org/article/new-data-top-1-pay-greater-...
http://i.imgur.com/wa8uu.png (A graph of the data)
The US actually has a more progressive tax system than any other OECD nation - only Ireland and Australia even come close.
http://taxfoundation.org/blog/no-country-leans-upper-income-...
Given that the poor and middle class consume disproportionate amounts of government services (primarily redistribution), while the wealthy pay a disproportionate amount of taxes, it's an untenable position that the wealthy don't pay their fair share.
What matters is not the percentage of all taxes they pay but what percentage of wealth they control and how much they can pay. I agree with Christ in this matter. To whom much is given much is expected.
The US is already more progressive than the rest of the world - how much more progressive do you believe it needs to become?
The focus on income taxes is a red herring. The poor pay a disproportionate amount in regressive taxes such as sales tax. One must look at overall burdens and overall ability to pay. Proportionately the more one has the more one should pay.
If you read the article, you'd know that capital gains are included (since cap gains are included on federal income tax returns).
The poor pay a disproportionate amount in regressive taxes such as sales tax. One must look at overall burdens and overall ability to pay.
Yes, the poor consume disproportionately, and pay a disproportionate amount of consumption taxes. All that says is the rich consume far less than they could, and are much less of a drain on society than the poor.
One must look at all tax receipts and not concentrate on income taxes. The very wealthy are not paying enough to sustain the system that they benefit from.
I did read the article. It wasn't clear if capital gains taxes were included. Capital gains are not income as far I know. I mentioned my ignorance on this point. Clearly I indicated reading the article. Nitpicking on this is also a red herring. The point remains that total tax receipts is the relevant statistic in comparison to total wealth. The top 20% of the U.S. control 93% of the financial wealth in the country. I don't think they are paying 93% of the total tax burden. Taxes are also at a 50 year low and so it's clear that the very wealthy can pay more and should.
On the other hand, yequalsx, your characterization of the poor as a "drain on society" speaks volumes of how little you understand income disparity.
There are values other than pure economic utility, but from a pure economic utility function, a poor person consuming medical services doesn't help the economy. The money paid (via taxes to doctors, equipment vendors, etc.) would be more efficiently used for another purpose -- it's the broken window fallacy.
It would be interesting to figure out where the net consumers stop and net producers begin, and maybe graph that over time and culture.
There are a lot of good reasons to favor an economy which is slightly less productive than optimum, but where a larger percentage of people are net-contributors; redistributing income or wealth from the positive outliers to invest in making more people net-contributors, vs. trying to maximize the total contribution, is probably a good social choice. But it's not the purely efficient choice.
The reasons capital gains taxes are lower than income seem sound to me. You want capital formation and savings.
There's only a problem because the government inflates the currency and manipulates interest rates down. This subsidizes speculation. The solution is just higher interest rates.
Higher interest rates will help increase savings, but it will do little to address the incentivization of speculative markets caused by the tax rate differential. The solution is to increase interest rates and reduce the tax rate differential (either by increasing capital gains taxes or lowering income taxes).
You can think of progressive taxes as a form of insurance policy on the misallocation of resources by wealthy people. Wealthy people may on average make better resource allocation decisions, but sometimes there are mistakes. Progressive taxes prevent wealthy people from gaining so much that a single mistake will be catastrophic.
The mechanism by which the free market performs better than a command economy is that of distributed decisions. Instead of a central planner, everyone makes resource allocation decisions based on price information. This free market mechanism works to the extent that resources are distributed. Thus progressive taxes ensure the continuing efficiency of the market.