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Comment by naterator | Hacker News Reader

Is there a reason (honest question) why we have corporate taxes in the first place? Why not tax the money when it passes from the corporation to a physical person? Wouldn't that simplify things in many respects, and make evasion more difficult? And be good for American business?

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why we have corporate taxes in the first place

Someone asked this question last week on a similar thread; the answer I gave there is still relevant so I'm just going to copy and paste it here:

Compounding investment returns. If I loan you $1000 at 5% interest, I have to report $50/year of interest income on my tax return. Since I pay approximately 40% income tax (federal + provincial), I have an after-tax return of 3% compounding annually. If you abolish corporate income taxes, then I could have my company loan you the $1000 and receive the interest; it would then compound at 5% per year, and I would only pay income tax when the money is paid out to me as a dividend. In effect, you would be turning corporations into tax shelters.

Now, this isn't absolutely insurmountable; in fact, Canada already has different tax rates for "active business income" vs. investment income, and theoretically you could have a 0% rate on "active business income" and a 40% corporate tax rate on investment income (which would then create non-taxable dividends when finally paid out to individuals). But you'd still have the complication that "retain profits" produces a different taxation result than "pay out profits as dividends, then raise more funding a few years later".

"If you abolish corporate income taxes, then I could have my company loan you the $1000 and receive the interest; it would then compound at 5% per year, and I would only pay income tax when the money is paid out to me as a dividend. In effect, you would be turning corporations into tax shelters."

Can you explain what the problem is? I mean you use the term "tax-shelter" and we associate that with something bad. But what's wrong with only taxing when you actually get access to the money you made?

You can't even sell the company without having to pay taxes. The money seems 100% unusable till you pay taxes on it. I guess you can reinvest it into something else without cashing out, but that hardly seems like a bad thing

Can you explain what the problem is?

Well, the most obvious problem is that rich people (who can afford to leave their money invested for longer) pay less tax.

Well they aren't really rich if they can't spend the money haha

But I see your point: Though it would seem that the way people currently get paid with stock options - where you pay tax when you "cash out" - is effectively equivalent (except it's even more regressive because the capital gains tax is a joke).

We really shouldn't. I am a liberal in most ways, but corporate income taxes are a bad idea (in my opinion). Taxes really serve two purposes; to raise revenue and to encourage/discourage behavior. Corporate income taxes really do a bad job of the latter; if we only taxed the money when it is taken out as profit, we would do a better job of encouraging behavior we want.

I'm pretty sure you just described an S Corp, which isn't subject to corporate taxes (they "pass through" to the owners personal returns). Many small businesses already do this.

But as with anything, there are pros and cons to S Corp vs C Corp vs LLC.

Here's the first hit on google: http://www.forbes.com/sites/robertwood/2012/05/03/c-or-s-cor...

Here is a good explanation why corporations are taxable:

Corporations are participants of the economy and their profits depend on tax-financed public goods: healthy and educated workforces; good infrastructure; publicly enforced respect for contracts and property rights, and so on. When corporations avoid or evade tax, legally or illegally, they free ride on the backs of the rest of us. Stop taxing them, and you savagely undermine political community.

Corporations hold onto huge amounts of money, and transfer huge amounts among themselves. If that value, income, and spending were never taxed, it would effectively hide all that money from the tax system.

The money has to cross the corporate border at some point. Companies don't make money just for the fun of it, they do it because the people who control them want money to spend on things like astronomically expensive watches [1], yachts, private islands, sandwiches, etc.

[1] eg: http://www.watchcollectinglifestyle.com/home/sihh-2014-van-c...

Whatever they buy still isn't as much money as the company is holding on to. Apple is sitting on $150 billion in cash, none of which would have been taxed by now.

If we're going to do that, we had better drop the corporate personhood bullshit at the same time.

Because Koch brothers!

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