Obama presses to end corporate trick for evading taxes
reuters.com
reuters.com
It is also indeterminate in how regressive it is[1]...some companies and industries can offload almost all of the tax burden (incidence) onto their workers, while others offload it onto their shareholders. Even in the case where shareholders shoulder the majority of the burden, ownership distribution can still heavily affect how progressive it is in reality.
The worst part is that it just isn't that great of a form of revenue. Doubling our effective corporate tax rate would be impossible politically. Superficially, rates can be raised, but tax lawyers will exploit the shit out of it anyway. A coalition might be able to raise it by an effective 25% max before every corporation in the US teams up to vote them six feet under. Seems like a lot of political capital to waste just to get a measly $80B/year. [2].
IMO, the perfect solution would be to eliminate the corporate tax altogether, and tax capital gains and dividends as income instead. At least then you can be assured that it is progressive, and you have more direct control over how progressive it is.
[1] http://www.urban.org/uploadedpdf/1001349_corporate_tax_incid... [1] http://www.kc.frb.org/Publicat/RegionalRWP/RRWP07-01.pdf [2] http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Doc...
We already tax capital gains on short-term investments as income. Taxing long-term capital gains at the same rate as income would have a number of other unpleasant consequences
- It would eliminate the incentive to hold investments for longer than 365 days
- It would reduce the incentive to invest in the market (since you would quite literally be paying double taxes on this income, instead of more like 1.5x the tax (which is what we sometimes misleadingly refer to as "double taxation"))
Regarding point #1 - if you sell a stock before 1 year, you already pay normal income tax on any gains. This encourages buy-and-hold, long-term investing, which I believe most people on HN would agree is good for the economy at large, as it reduces volatility and ensures that shareholder incentives are better aligned with growing the company.
Regarding point #2, which is mildly controversial (but IMHO only because it is misunderstood): it is good to encourage investments in the economy, because this is literally how business raise capital. Readers of Hacker News should be well aware of the importance of this in the private equity markets (ie, venture capital, which is technically a form of private equity). Similarly, in the public markets, it is good to create incentives for people to park their money in places which help spur the economy[0].
[0] In theory (obviously not always in practice), providing capital to a business has the potential to stimulate the economy more than providing capital to an individual, as the business uses that capital to pursue a profit, hire employees, etc.
The corporate tax, on the other hand, is a heinous tax that hurts our economy substantially. We have to make the money somewhere.
Please distinguish between:
I make money. It is taxed at X%.
1) I put that money into the market, other people use it to make more money, I receive some money ($Y) for that (in dividends or raised stock price) and that is again taxed at X%.
2) I put that money into making myself a better worker. Next year, I make $(X+Y) more than I would have. The $X I spent, I got to write off as a business expense (maybe). The $Y is taxed at X%.
Currently, we say "double taxation" when we refer to being taxed at the corporate level, and then again at the shareholder level (either as long-term capital gains or as income). Shareholders don't directly feel the corporate tax (though they are still effected by it).
What I meant was that, if we eliminated the corporate tax but increased the capital gains tax to be equal to the income tax rate, the tax rate that shareholders pay on the gains would be twice what they are currently paying.
(The actual incidence (burden) of the tax is more complicated to calculate; I'm simply referring to the direct tax rates.)
This is all very rough, of course, since marginal tax rates vary widely.
I enthusiastically agree with this. There should be little benefit to holding an asset for longer period to evade taxes. I have friends who regularly end up with losses on trades just so they would avoid being "taxed at income" for gains. It's absurd.
There are also plenty of loopholes for those who know what they're doing... like shorting a futures contract where you own the underlying asset, effectively locking in it's price until past the 12 month mark.
Without more detail, I'm not entirely sure what you're referring to, but you seem to be conflating two concepts (the tax effects of a long-term capital loss and the tax effects of a short-term investment compared to a long-term investment).
IMHO, there absolutely should be a benefit to holding an asset for 12 months (compared to less), as buy-and-hold investing is better for the companies being traded, and reduces volatility in the economy compared to speculative day-trading[0].
> like shorting a futures contract where you own the underlying asset, effectively locking in it's price until past the 12 month mark.
This is a strategy that's beyond most casual investors who simply trade mutual funds, sure, but I'm not sure I would classify this as a tax loophole - if so, we'd have to call a normal covered call an "investment loophole".
[0] This has nothing to do with high-frequency ("ultra short-term") trading by computers; it's about encouraging long-term vs. short-term investing by individuals.
Instead of criticizing companies that do the math and determine it's a smart [business] decision to relocate or whatever just to reduce tax liability, why not instead focus on what is making these companies so inclined to make said decision?
However politicians know it is easy to vilify corporations thereby allowing them to either out right lie about how taxation works or lie by omission.
Companies moving their head quarters out of your country should be a clear signal that your doing it wrong, except in the case of the US politicians want to punish them for doing what is right for them, their share holders, and their employees.
The power tripping in Washington is so extreme that punishing is their first reaction to anything they don't like.
Companies moving out entirely would be analogous to people moving. Companies moving out on paper while continuing to do business in the same location is analogous to tax evasion.
The analogy is more like that the location of you navel decides where you pay tax, and you discover that if you shift your weight around a little, your navel ends op on the other side of the line.
The problem is that the tax code fundamentally assumes that businesses are reasonably local and contained operations (analogous to a single body) and only deals with sprawling multinationals through monkey patching in an environment where policies appearing to benefit big businesses isn't exactly a big vote-grabber.
An analogy that might work is to move over the county line to reduce property taxes but continue to travel back into the original county to work or shop. Even then, you would still be paying some form of taxes to the original county; much like a company moving countries is not going to eliminate ALL tax liabilities.
By the way, if it is deemed legal then it is not tax evasion.
Wherever you, as an individual, move in the world, you are still supposed to pay US taxes. The US is one of the very few countries in the world to do this. The number of people renouncing their US citizenship to get away from this is on the rise.
He's been told that as of July 1 2014, renouncing US citizenship will have no impact, he still has to pay back taxes, and forward taxes.
I'm doing some googling now, and this might be it, or at least related, I'm not certain
http://www.cbc.ca/news/canada/fatca-facts-what-canadians-nee...
http://en.wikipedia.org/wiki/Foreign_Account_Tax_Compliance_...
Assuming she/he is willing to share that personal info.
Disappearing is not really an option - we're very close to the US border and going there on weekends is one of the major things we do, also, Canada will expedite to the US, and I wouldn't be surprised if they track him down, as we're talking many hundreds of thousands of dollars.
Note that is one thing US citizens cannot do, if you mean a different country versus a different state. The US is one of relatively few countries that tax citizens (and green card holders) no matter where you choose to live, or where your income is earned. (There can be some allowance for taxes already paid.) You can of course give up your citizenship, but good luck getting back into the country.
The amusing thing is that corporations are legally considered people. Why aren't these now foreign companies forced to jump through similar hoops foreigners are, and also subject to the same restrictions on applying money to the political process?
Essentially, this has major consequences on foreign investments which were built on the assumptions of a individual tax.
Further, there are trusts that can limit tax burdens. It is quite possible that the total taxation would decrease, and it would decrease on those at the top of the heap, not at the bottom.
We would have to figure out how to rebalance. Consider this a refactoring on code that is not easily unit testable.
Edit: I don't mean to suggest the tax code shouldn't be changed. I just mean compelling others to sacrifice, doesn't make a person patriotic.
We aren't calling Obama patriotic for suggesting or implementing this. We are calling the companies who do this anyway, who pay U.S. taxes when they could avoid them, patriotic, and those who don't, who mainly operate here, who reap the benefits of our country and don't pay their share? Parasites.
We haven't even finished debating questions like these. Yet taxation is needed in some form, so people do the best they can. Unfortunately, that means planning based on the assumptions of specific answers to unsettled questions.
But the more important point was that these corporations are definitely evading the spirit of our current (outdated) laws, and we need to close this loophole sooner rather than later (i.e. after the years it will likely take to fix our tax system).
To draw a programmer analogy, we should refactor the laws, but this is a critical bug fix. We can't stop supporting the old code just because the new code might fix it.
Again, we aren't talking legality here we are talking morality. The result of the discussion on morality is an attempt to change our legal system. To say "well one of those things is legal" is basically a tautological fallacy in a discussion on whether it should be legal, which is what this is.
As quoted "You must pay taxes. But there's no law that says you gotta leave a tip". As to the morality, it's worth considering those of us who try to live within our incomes so we can afford to pay taxes to a government that can't live within its income'.
From a British perspective: http://blogs.telegraph.co.uk/finance/andrewlilico/100024862/...
'Companies-have-a-moral-duty-to-pay-no-more-tax-than-legally-required'.
But now it has a different meaning.
Tax avoidance is the legal gray area between outright evasion and tax planning.
Avoidance is the bit that your lawyers and accountants say is legal, but which hasn't yet been tested in courts. The plan might not last long before the law is changed. And you might be asked to repay some tax.
Tax avoidance is the use of bizarre systems that serve no purpose but to reduce tax burden. Starbucks is a great example here. They have a gajillion shops in the UK; they employ many people; they're expanding. By any sensible analysis Starbucks is a sucessful company in England. Yet the shops make no profit. The only reason they make no profit is because they have to buy buy coffee beans from one supplier, and that supplier prices the beans very much higher than other bean roasters. That bean-roasting supplier happens to be based in a tax haven.
Can you agree that there is a difference between "not paying tax that you legally do not need to" and "going out of your way to create bizarre semi-legal schemes in the hope that you get away with it; especially taking into account the numbers of people working to create tax avoidance schemes and people working to investigate such schemes".
The other moral point is that these companies make full use of the products of the tax system - they would most certainly call the police if one of their offices was burgled - and so they should consider making sensible donations to that tax system.
(And before anyone mentions wage taxes or sales taxes: these are paid by the employees or by the customers, and merely collected by the company).
I'm surprised at the implication that because of all this shit they're spending money on - shops, employees, expansion, etc. - they must be profitable. (Maybe they are, I don't know. Maybe they are stashing it away elsewhere. It would certainly make sense for them to do that.) But it doesn't automatically follow, because profit is what you have left after you've paid for all this stuff. All this expenditure is in fact bad for the bottom line.
You can't even argue that the money has to come from income, and that therefore the very fact of their profitless expansion is evidence of sharp practice. People have been known to lend out money! Sometimes they'll do it merely in exchange for a share in your business. If they like the cut of your jib, you don't even have to be making money yourself in the first place.
...which is why I'm sort of surprised to see this line of thought implied on HN ;)
But as soon as you become successful, we will punish you via a huge tax burden among other things.
We explicitly advocate success, yet implicitly advocate punishment of success.
It's not hard to imageine why so many companies often see relocation as a way to relieve their tax burden. It's nothing a normal citizen doesn't do.
Instead of focusing on punishing companies (who will eventually just up and leave altogether), we need to fix the core problem that is encouraging the behavior -- ie. the tax code.
You only pay on profit and it's clear up front when you start.
You can agree or disagree on it's efficacy on growing overall prosperity but to call it 'punishment' is strange.
An argument can be made that they earn more/have more profit, and therefore can afford more in taxes -- yet that is the very punishment I'm referring to. "You are more successful than I, therefore you owe a higher percentage of your income".
[1] http://en.wikipedia.org/wiki/Income_tax_in_the_United_States...
What? Who are you to decide how a company or individual spends their money?
Your tone implies you feel that just because some company or individual has more money than they can spend, means they should pay more in taxes?
Why do we charge people more just because they earned more? If you are a citizen, you should owe the same flat amount (percentage-wise).
The Treasury Department is more than happy to accept above and beyond your current tax liabilities.
But it's not tax deductible.
He's trying to stir up support for closing the loopholes.
On a serious note, I wish articles like this actually gave some mechanics about the actual 'tax evasion'. The issue is that the US taxes worldwide earnings at the US tax rate. Other countries, such as the UK[1] don't do this. So if you're a multinational with sizable non-US earnings, it makes a lot of sense not to be domiciled in the US.
[1] https://www.gov.uk/government/uploads/system/uploads/attachm...
If the foreign nation only taxes the company for profit inside the nation and the US taxes profit worldwide, then it isn't too hard to see the better deal even if the foreign nation's tax rate is higher.
President Clinton signed a bill that confiscates part of someone's net worth over a threshold for renouncing US citizenship and moving to another country. Bush and Obama are taking similar steps to keep assets in the USA. While it is reasonable to go after money laundering, it is becoming increasing difficult to do some business transactions internationally, open bank accounts in countries where one spends a lot of time on vacation or has residency, etc.
"Obama presses to reform badly written corporate tax laws."
Yeah! Nationalism! Everyone should put the interests of a blob of land delineated by imaginary lines above their own!
Can we stick to arguments not based on nationalist fervor?
The water wasn't created by the government, the government didn't build the pipes carrying it to my house, and any first world country could have helped to facilitate this glass of water just as much as the country I happen to inhabit.
>using a protocol developed with national funding
Along with contributions from Xerox, BBN, UCL, a number of US universities... And why, exactly, does the fact that a government partially funded a nice project mean that nationalism is a good motive?
No, this is precisely what you are doing. I mentioned that we should not make arguments based on nationalism, and you responded.
>...he says while sipping a glass of nationally funded water, on his computer which arrived via nationally funded sea ports, which sends data over nationally funded computer networks, using a protocol developed with national funding.
which, as you just mentioned, has to do with government, not nationalism.
It's not nationalism to malign those who benefit from the collective tax paying body without contributing to it.
We can, perhaps. The POTUS generally has a harder time winning arguments by doing so.