We Don't Need A Corporate Income Tax | Hacker News Reader

We Don't Need A Corporate Income Tax

bloombergview.com

39 pointscogware52 comments

This is an excellent article. The key takeaway starts here:

> I know what you’re thinking. You want a simple tax code that raises a bunch of money by closing the loopholes. Many people think this because they think that taxing income is simple, so “loopholes” must be illicit backdoors placed in the tax code at the behest of greedy corporations.

> And to be sure, the tax code contains plenty of senseless giveaways to corporations. But these are small beer. Most of the “loopholes” that we argue about are not a result of congressional pandering, or even sharp lawyers who bend sensible rules. They’re an artifact of the fact that calculating corporate income is really hard.

I realized this when I was taking an introductory course in federal income tax, and trying to figure out the effect of different depreciation schedules. There's a neat logic to the income tax, including complex concepts like depreciation.[1] Yet, things that are simple to state as an equation are quite complex to implement in practice. For example, things like loss carry-forwards arise from trying to tax a continuous parameter (changes in wealth over time), in discrete, annual time-steps.

I disagree with people who think corporate taxes are "double taxation" or anything like that. Taxing corporations falls naturally out of treating them as distinct legal persons. A corporation's income is treated, and taxed, distinctly from shareholders' income for the same reason a corporations legal liabilities are treated distinctly from shareholders' liabilities. It's just the flip side of the coin.

That said, while corporate make sense within the logic of the tax code, in practice they are probably more trouble than they are worth, and create bad incentives for companies to relocate their operations out of the U.S.

[1] I recommend http://www.amazon.com/Chirelsteins-Federal-Income-Taxation-S... for a very approachable introduction to the topic. Don't be scared off by the page-count: it's big type on paperback pages.

> I disagree with people who think corporate taxes are "double taxation" or anything like that.

Australia has dividend imputation because of this argument. When you receive dividends from shares you own, the tax paid by the company is offset from your own personal income with "franking credits".

So along with a different capital gains framework, the net upshot is that Australian shareholders are quite happy to take dividends, thankyou. Which means companies can focus more on running things at a profit and less on trying to pump up the stock price any way, any how.

The downside is that Australia has a higher headline corporate tax rate than a lot of countries. An argument is sometimes made that we could significantly lower it (as in by double digits) without imputation.

(This is of course not financial advice and I am not an accountant, lawyer, planner or even a dog on the internet).

I never understood the double taxation argument either. Even if I concede its double taxation, who cares? Its not a natural right to only be taxed once.

Well for one thing, it does not control for the differences in income of the stockholders. Each shareholder is taxed at the same rate per share held. Since it penalizes income coming from corporations (by taxing both the corporation and the dividend), it creates perverse incentives that cause some pretty unproductive behavior - like the hording of cash by all the tech giants.

I've always considered double taxation "paying for limited liability."

To be honest, it's worth paying for.

"No taxation without representation". You get taxed twice, but only represented once. (If that.)

It seems completely reasonable for either individuals or companies that are large enough and mobile enough to relocate to shop around for a better value for the cost.

Explain how being taxed once at 40% is better than being taxed twice at 20%.

And then explain how Limited Liability fits your theory -- profit without accountability for misdeeds.

Companies exist for one purpose, to create shareholder value. Shareholder value / the net worth of a company is traditionally defined as the value of future cash distributions.

It's not a matter of taxing once or twice, it's simply a matter of how much taxes have to be paid before the owner(s) get the proceeds. A company's tax rate is effectively the percentage of the company owned by the government. Since corporate structure dramatically impacts the tax rate, founders are forced into playing the game, paying for more complex structures that legally reduce the tax rate, in order to retain a greater share of what we build.

Keep in mind, of the 6 million companies which have employees in the US, 5.9m of them have less than 100 employees, with total sales/receipts of $7.7 trillion, in 2008. That's just shy of a quarter of total U.S sales/receipts. [1]

It's a bit better now that dividends are taxed the same as capital gains, but unfortunately what should be the simplest / easiest / gold standard way of doing it -- the C Corp -- is still highly tax disadvantaged to other more complex forms, for the vast majority of businesses.

The tax code as it stands is a massive drag on productivity and growth. There's literally trillions of dollars of opportunity for improvement here through simplifying the code.

[1] - https://www.census.gov/econ/smallbus.html

The US corporate income tax rate is the highest in the world - literally. If it was something more in-line with other developed nations, call it 20%, I don't think you'd see the current wave of inversions and no one would make a big deal about it. But here we are, 35% and people have finally had enough. I wouldn't eliminate the corporate tax, but I also think that 35% is idiotic and now we're finally seeing corporations vote with their feet.

It appears to be the second highest[0], second only to the UAE's 55%! The global average appears to be about 23.57%.

KPMG state that the US corporate income tax is approximately 40% with the following reasoning:

"The marginal federal corporate income tax rate on the highest income bracket of corporations (currently above USD 18,333,333) is 35%. State and local governments may also impose income taxes ranging from 0% to 12%, the top marginal rates averaging approximately 7.5%. A corporation may deduct its state and local income tax expense when computing its federal taxable income, generally resulting in a net effective rate of approximately 40%. The effective rate may vary significantly depending on the locality in which a corporation conducts business. The United States also has a parallel alternative minimum tax (AMT) system, which is generally characterized by a lower tax rate (20%) but a broader tax base."

[0] http://www.kpmg.com/global/en/services/tax/tax-tools-and-res...

Yes, this is true and I excluded it for a reason. UAE has no personal income tax, property tax, or capital gains taxes. My guess is that it all evens out and then some.

Tangent: UAE is actually effectively 0% corporate tax rate for most industries. From the notes on that KPMG link --

> Although in theory these emirate-level decrees impose tax on the income of all corporate entities, in practice tax is currently only enforced on foreign oil companies engaged in the exploration and production of oil and branches of foreign banks. Although the tax rate applicable to oil companies is generally 55% of operating profits, the amount of tax actually paid by such companies is based on a rate agreed in individual concessions between the company and the respective emirate. This rate can range between 55% and 85%. Branches of foreign banks are subject to tax at 20% of their profits under the banking tax decrees.

They're trying to attract industry to move there. It's kind of pricey for small businesses to take advantage of though, since incorporation (if I remember correctly) costs $7000 once + something like $4000 per year, requires renting office space in a special economic region, and likewise establishing personal tax residence there also requires some mildly expensive registration procedure or other. For someone with a small business making upper-middle class income, the basically-equivalent-to-effective tax rate would probably be somewhere from 10% to 40%, but those are mostly fixed fees that would fall when revenue/income goes up.

Note that the corporate income tax is on profit, not revenue. Personal income tax is on revenue, minus some limited deductions.

Money reinvested or paid to employees is not taxed. Furthermore, corporations pay no sales or income tax on value added inside the corporation for the benefit of the corporation, unlike if the corporation were split into several independent companies.

Unfortunately, I don't think eliminating corporate taxes will eliminate tax code complexity. It will add to the complexity of personal taxes as the well off rush to hide assets and income in un-taxed corporations. The only solution to that, for the tax man, are ever more complicated rules for determining what can be counted as personal income.

Can you elaborate on how personal income, capital gains, and perhaps estate taxes can't cover all scenarios?

How will assets and income be hidden in untaxed corporations?

LLCs allow owners to declare personal/corporate taxes under the same umbrella. Same for sole proprietorship and other structures.

You make a very good point.

Maybe the solution then is to eliminate income tax altogether? We didn't have Federal income tax until 1913, and I am surprised at why we need to pay so much in Federal taxes when the state/local governments are the ones providing most of the services.

The federal government has other significant sources of income, and a large majority of the spending is definitely wasteful, it would start by eliminating most of the IRS/tax law/enforcement cost, before even starting to look at the rest.

Also of note is that the income tax was voted into law amid pretty non-democratic conditions, and now we assume it must be absolutely needed because we've become accustomed/dependent on it.

Non-democratic? After a quick a-Googlin', it seems like the income tax was made legal by the 16th Amendment, which has been properly ratified by 42 states.

My bad, I am confusing with the Federal Reserve Act, which was drafted in secret meetings and passed into law three days before Christmas. Yet, one cannot ignore that when the 16th amendment was passed, federal income tax was 2% and required 2/3 of the votes to pass, subsequent increases only required >50%. A 35% rate for middle class incomes is a far cry from 2%.

Also, to support my point regarding wastefulness, look at this article from the Washington Post that cite a report made that found that out of $1.3 trillion collected, $616B was found to be wasteful, that's 47%!

http://www.washingtontimes.com/news/2014/apr/14/editorial-wh...

This doesn't even start to look at the cost of foreign adventurism or the war on drugs, and all the programs to attempt repairing the damages caused by these efforts.

I think corporate tax should be simpler but not eliminated.

I have started and run multiple companies in three states.

In the early/small days its annoying to pay the CPA more than the total tax burden due to "red tape" requirements.

Taxes (in theory) fund education and social services which is a solid foundation to build my businesses on I'm OK paying just, make it less terrible.

Without a serious discussion on the actual figures its hard to take political discussions seriously.

Tax people instead of corporations to make it easier. On principle it might sound good, but what % does it need to go up and for what % of the population? On principle - only tax software companies, lawyers, and accountants fight a simplified tax code.

It's worth looking at the levels of taxation around the world:

http://en.wikipedia.org/wiki/List_of_countries_by_tax_rates

The US has a high theoretical company tax rate but a low practical one because of the myriad of deductions.

Reducing the corporate tax rate rather than abolishing it may make more sense and make less attractive to play tax games and waste effort on that rather than creating value.

These comparisons are hard to make sense of because of the different services provided by these governments. For example, health care is a government benefit in most European countries, paid for by their "higher" tax rates.

The US has the worst of both worlds currently. Relatively high taxes and a wildly inefficient government.

We spend $7 trillion per year in government expenditures, at all levels, and can't even seem to maintain basic infrastructure (we could, but our government is really terrible).

I'd like to hear more about what basic infrastructure is lacking in your part of the US.

Absolutely.

There's not a single dollar figure in this entire opinion piece. Which makes it tough to really weigh her argument except from a sort of moral or "gee, that seems reasonable" standpoint.

I wish political and economic journalists would be as willing to use real numbers and statistics as sports reporters are...

Despite the title, the real thrust of the piece is that regulations – taxes, here – are inputs into a complex system. The more complex, the less predictable and the more likely to have unintended consequences. Or, perhaps, “intended” consequences which benefit certain participants over others.

We think that of regulations as rules of the road, or adding fairness, or enhancing transparency. And they might! But those assumptions are, often, insufficient models and at worst, dangerously incorrect.

Corporations receive hundreds of millions in direct public subsidy: http://www.businessweek.com/articles/2013-11-12/boeing-grabs...

Corporations benefit greatly from costly American military efforts abroad: http://money.msn.com/investing/10-companies-profiting-most-f...

The Federal government negotiates international trade deals on behalf of corporations: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/11/e...

Corporations make massive profits based on the findings of publicly-funded scientific research: http://www.nejm.org/doi/full/10.1056/NEJMsa1008268

Corporations pay their employees so little that regular people have to subsidize their income: http://www.forbes.com/sites/clareoconnor/2014/04/15/report-w...

This is not a question of being "taxed twice". Corporations are the recipients of incalculable public welfare, and they generate billions in profit. Of course they should be taxed. They should be taxed progressively according to their income.

And the idea that the United States doesn't provide an "attractive climate" for corporations is just completely insane.

Also, this article is poorly written. Next time, use http://www.hemingwayapp.com/

Thank you. I almost lost it reading the article and the comments here.

Corporations also heavily use the court system, benefit from a publicly paid education system, roads, infrastructure... I could go on and on.

The highest positions in government are stacked with former/future corporate employees. Our former vice president was the CEO of Halliburton. Our current attorney general was a partner at one of the largest corporate law firms in the world. This is the norm not the exception.

So the idea that there's friction between corporations and "The Government" is just not serious. The government largely functions to keep American corporations happy and profitable.

I think you misunderstand the concept. It's not that we should never tax all that money, but the theory that you can tax it more simply, fairly, and efficiently by taxing those same dollars but only at certain times.

For example, some states tax corporations based on their total assets. And we already charge taxes whenever money moves out of a corporation (sales tax, income tax, capital gains tax).

The point is you shouldn't have to tax dollars on the way in, dollars at rest, AND dollars on the way out just to allocate the common expense.

I don't understand why profits of a company need to be taxed. Either the money gets re-invested in the business or it gets paid as a dividend. Why does there need to be a separate tax from the dividend?

The only argument you'll tend to get is a strictly emotional, highly irrational one. Namely that without an income tax, corporations will just pile up cash forever, and somehow magically that'll make wealthy people wealthier. This argument will include the notion that only CEOs and uber rich investors control all public corporations, and they'll find a way to steal all that cash without ever paying taxes on it. That 'somehow' the rich will game the changes and all that will happen is the corporate income tax revenue will disappear.

Imagine I want to set up a package delivery service in a world where corporations don't exist. Package delivery services are pretty risky businesses: delivery drivers race through crowded streets and are liable to run into someone or someone's property sooner or later.

Now, say I want to figure out a way to insulate myself from that sort of liability. So I enter into an agreement with a driver. I'll buy him a delivery truck, and he'll deliver the packages. In return, he'll give me 75% of what's left over after his expenses. Now I'm insulated from legal liability. I'm just an investor. If he runs over someone, that person can't sue me in my personal capacity. All I have at risk is the truck I bought him. But wait. What's the tax treatment of this arrangement? The driver will be taxed on his net income (revenues - expenses). Then he'll give me 75% of what he has left over. Then I'll be taxed on that amount.

Separate taxation of corporation arises naturally from treating corporations as distinct legal persons.

"Corporations are legal persons" is begging the question. "Legal person" means 'designated entity with special rules', it doesn't carry any intuition or logical consequences beyond whatever the chosen rules are.

That's not true. In law, "person" is an abstraction in the same way a file descriptor is an abstraction in UNIX. The whole point is to carry along with it a built-in set of intuitions.

LLCs provide limited liability but only have one tax on the personal profit. Why is a separate tax needed for larger companies?

Companies need to be taxed to pay for the percent of the commons that they use. Roads, emergency services, courts, etc.

I don't think taxes are the problem. I think the complexity ends up benefiting those who have more resources at their disposal and actually acts as a moat to discourage smaller businesses growth or people from starting businesses.

The ability to afford lawyers and accountants to play the system for every write off is a big advantage and so if anything the incentives to large companies is to increase complexity of laws and regulation, which I think is why for all the money and lobbying, laws are getting MORE complex, not less.

A simple system with minimal regulations, sensible rates, and no "loopholes" would be much preferable to what we have now. Maybe take it a step further and make it a small transaction tax whenever money changes hands instead of an income tax.

Make the transaction tax on every financial transaction, from purchasing equipment to buying a sandwich, and keep the rates the same for pretty much everything. Don't have stupid exclusions like large purchases of houses, equipment, buildings, or expensive services.

All of a sudden write offs and loop holes pretty much go away, you already have the infrastructure to collect transaction taxes via sales taxes and if you levied it on ALL financial transactions it would probably be < 1%.

I'm pretty sure it would be too much change to ever make it through government without being ruined, but it'd probably be better than what we have now.

I heard Marc Andreessan make a very similar point in an interview. His theory is that the large regulatory burden of being a public company is causing a dearth of IPOs as companies wait to grow large enough to pay for dedicated compliance departments.

I'm shocked. Most of these comments have to be from a corporate lobby group.

"of the Fortune 500 companies... companies studied paid just 18.5 percent of their profits in U.S. corporate income taxes... Thirty of the companies paid less than nothing and had negative corporate income tax rates"

The following article will explain it much better than I could. http://ctj.org/ctjreports/2013/04/bernie_sanders_is_right_an...

I'd like to see a proposal more along the lines of "lower rate and simpler".

The two examples don't strike me as that compelling. Carried interest seems like income. Depreciation is just a question of timing, not amount (time-value of money notwithstanding; which is marginal).

Didn't Lucky Ducky [1] show us how unfair corporate income taxes are?

1: http://boingboing.net/2013/05/29/tom-the-dancing-bug-lucky-d...

An alternative to corporate income tax is Georgism, a land value tax that is design to encourage productive use of land and other resources:

https://en.wikipedia.org/wiki/Georgism

I do not see how that applies in an Internet era. It would create an incentive to locate offshore as much as possible.

It you are talking about a capital tax then the same applies. As a CEO I would look to move assets abroad as soon as possible.

I'm broadly in sympathy with the article's arguments, but:

Depreciation of corporate jets, meanwhile, is not some special loophole. All assets depreciate, which is to say they become less valuable over time as they become outdated and suffer wear and tear. Both financial accounting and the tax code recognize this. Depreciation is how the tax code handles investment expenses; if you disallow this, you would be essentially levying extra-heavy taxes on capital-intensive businesses.

There's a big difference between depreciation of your plant and machinery that form a core part of your business and that of luxury purchases for the C-suite. Airlines should certainly be able to depreciate their jets, so should companies like UPS and Fedex that run large air freight operations. So should any business for which flying is part of the business model.

But I'm not convinced that flying executives, investors, and suppliers around in a Lear Jet is essential in the same way. Rather, that seems like a really nice intangible bonus for the upper management to enjoy. And if firms want to spend money on that and shareholders don't object,* then OK - but either tax it as benefits-in-kind or disallow the depreciation.

* Not that the views of American shareholders are generally welcomed by management, but that's another issue.

Given the theoretically very high level of importance a CEO has within an organization, isn't it critical that their productivity be optimized?

Traditional airport travel now is incredibly inefficient in terms of time cost. Not to mention being able to fly when and where you want to upon command, is very valuable for extremely large businesses.

A CEO like Jeffrey Immelt might fly four or five days per week (per what I've read about his rather insane schedule in the past). Add just two hours per flight to his time cost, and that becomes wildly expensive.

All airport travel is highly inefficient compared to staying in your office and being connected through the internet.

This is one response, and I could add that for flying business class it's not the same sort of standing-in-line tedium that the general public is subjected to. But even then, Sam Walton (of Wal-Mart fame) was famous for flying coach, and I doubt anyone questioned his executive productivity.

But I'm not saying corporations shouldn't ever use private jets, just that their use often seems optional rather than a matter of business necessity, which has implications for how such expenses are taxed.

Disallowing depreciation would increase the cost by 40%, in other words basically outlawing the use of private jets. Doesn't sound like a good idea.

How do you single out providing a nicer airplane for business travel as a taxable benefit without treating the same any asset your employees use to make doing their job more pleasant? You create an impossible job of trying to decide what constitutes a "large enough" ROI for the business.

Buy your employees nice monitors? Must be a benefit! Ergonomic chairs? Tax it! Take a corporate bus to work? Charge em' per mile! A nap room that employees sometimes spend the night in? Serving filet in the cafe? Forget about that espresso machine in the break room. Oh, and that artwork on the wall's got to go. A basket ball hoop in the parking lot; that's a fitness stipend by another name!

For something to rise to the level of a taxable employee benefit it has to provide a lot more tangible direct personal value than this, and virtually zero business ROI.

All this is actually the perfect example for how nice it would be if we could find a better way to tax which avoided this mess.

For something to rise to the level of a taxable employee benefit it has to provide a lot more tangible direct personal value than this, and virtually zero business ROI.

This is the point I was attempting to make in the first place.

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