tldr; "If corporations are, in effect, U.S. citizens, surely their country is a stakeholder to whom they owe an obligation.... Based on public reporting, we calculate that in 2019, nearly 20 percent of large corporations that reported profits to shareholders of $100 million (or more) paid zero (or even negative) federal income taxes....
"there is no requirement for corporations to make public their taxable profits, or the ways in which they are avoided.... the IRS ... has since 2004 required the annual filing of Schedule M-3 .... this road map is available to the IRS alone, not to the public, who can hold companies accountable, nor to policymakers ...."
I wonder how feasible it is for individuals (or groups of individuals?) in the US, to also incorporate themselves and, through the same or similar loopholes, also pay no tax...
How would the IRS respond in those instances.
Has that been tried? Is anyone aware of anything like that? Is the cost of such a scheme prohibitive for an individual vs. a large Corp? I'd be curious what the challenges and outcome of such an experiment would be.
I can’t figure out what to deduct that is more than the $12.2k single filer deductible. I have $500k/yr I’d love to pay less taxes on at the moment due to a booming side business + healthy salary. Can’t find any deductions worth my time and the CPA filing fees.
In Australia, it’s not so much deductions (home office, car, computer, phone, etc), as much as absurdly legal practices like “distributing” income to your family. This means you can divvy up your income so it’s taxed at each family member’s marginal rate (rather than your own top-line consolidated rate).
That might sound reasonable, until you realize that those family members never see that money. The “distribution” is a complete fiction.
I’m usually fairly conservative when it comes to taxes, but I’m astonished this is allowed to continue.
CPA wanted $3,500 to set up an LLC and turn it into an S-corp + the filing for the year. Said we could deduct 80% of my car and some knick knack stuff. Ran the math, came out to be breakeven. Get $3,500 back to spend $3,500, risk an audit, lots of headache, not worth it to me.
Probably the best reason for an LLC in your case is to split up your finances and protect your personal property (house/cash/other assets) in case your business gets sued. I don't think the tax advantages are huge but the potential losses difference if sued can certainly be huge if you don't separate your assets. I'd be surprised if your accountant didn't bring that up though.
It's not that big of a deal. It can help you with investing back into your business, especially if you have a lot of hardware to buy to operate it, as well as easier to write off business travel, rent, etc. However those are all practical. Your individual income will still be taxed at the same rate. It really just makes your paperwork a bit easier than if you went with a sole proprietorship, there's not a huge difference in overall tax rate.
People have tried and the problem is when you want to bring the money back to use it on something. Say you setup a licensing company on an island nation that use to then charge yourself $10,000 a month to license the software you wrote... that you transferred there. Now lets say you want to buy a house and you bring back a certain amount of money. That money is taxable and that is where people mess up they don't report it.
Big companies like Apple instead of bringing the money back they borrow billions of dollars at low interest rates. This lets them keep their money offshore where they invest it to make a bigger return then their interest rate on borrowing in the US.
Apple also has a routine for money in the US. You will find in Nevada Apple has an investment corporation. They will do the same thing, send the ownership of software to Nevada, charge their company in some xyz state (CA) and then they use that money in Nevada to invest it for more money then it costs them to borrow. So apple is covered both ways.
You're partly correct but here's an overview of what's really going on.
The money is "brought back" (if it even left) into segregated accounts in the US. Most of that US off-shore money is in New York to avoid currency risks, etc. Then those accounts are used as collateral (if needed. I doubt if anybody says to Apple, "Where's your collateral?") for loans.
Also, the biggest money havens in the world are 2 US states, with special privacy laws. All those guys playing games in Panama, etc. were better off just using US state tax shelters.
> The money is "brought back" (if it even left) into segregated accounts in the US. Most of that US off-shore money is in New York to avoid currency risks, etc. Then those accounts are used as collateral (if needed. I doubt if anybody says to Apple, "Where's your collateral?") for loans.
This is super interesting. stupid question perhaps: does Apple have the reserves to move a small currency if they decide to convert their cash all at one go?
The first point of failure is that if you are a US taxpayer, then you are already taxed on your worldwide earnings, including the earnings of your wholly-owned foreign subsidiary. Even if you could borrow domestically against your foreign earnings in order to finance your lifestyle, you would have already been taxed on those foreign earnings, as an individual.
I'm not very familiar with US taxation, but when you do this, don't the transfers end up taxable? Eg. Shouldn't the Nevada company license fee have some sort of CA sales tax on it?
There is no problem if you just don't bring the money back until congress declares a tax holiday. (Yet when another country, like, say, Greece declares a tax holiday, while running a large deficit, our financial press mocks it as populism and corruption...)
Former international tax lawyer here. This would not be possible because these benefits are largely based on international structures, and any non-US corporation owned by a few US-based individuals would be designated as a Controlled Foreign Corporation (CFC). This would prevent you from reaping the biggest benefits from a taxation perspective.
The reason that publicly-traded companies are not CFCs is that a CFC must have 50% of the vote or value of the company owned by US Shareholders. "US Shareholder" is defined as a US person that owns at least 10% of the company. So even if a conglomerate is almost entirely owned by US persons, it would not be a CFC unless the US persons that own it also meet the 10% threshold.
The reason for this cutoff is that the CFC rule is meant to prevent small groups of people who can actually exercise control over a foreign company from getting together and colluding to keep profits off-shore. But this is not a risk in the case of companies whose ownership is spread among many small shareholders. As a result, big companies are able to take advantage of complex international structures in ways that small groups of individuals cannot.
Many countries do not tax their residents on a worldwide basis. So if a person from Country X earns money in Country Y, they are simply not taxed on it in Country X. They don't need to set up a complicated foreign corporate structure to avoid immediate taxation, as US residents do.
Yes, but it would be very difficult to coordinate their overlapping/conflicting interests. It could work in the case of family members, whose interests are generally more aligned. But the tax code allows the IRS to attribute ownership among related persons. So you can't do this sort of thing with people who are close blood relatives, otherwise the ownership structure can be collapsed, and it won't work.
> The reason that publicly-traded companies are not CFCs is that a CFC must have 50% of the vote or value of the company owned by US Shareholders.
Aren't there some public companies where some people have over 50% of the votes? Facebook comes to mind as one. Or are their international subsidiaries designated as CFCs?
You're right, it looks like Zuck has 60% of the voting power of FB. [1] I wouldn't be surprised if FB's tax lawyers came up with a creative way to structure their international operations so that not all of their foreign subs are CFCs.
See that’s your first problem, you think everyone has an adversarial relationship with the IRS and that’s simply not true.
These structures often require a very collaborative relationship with the IRS with many things approved, elected or notified of in advance. The IRS only cares about compliance, not a hardline on actual revenue collection. The IRS has many doors for compliance.
As a US citizen it's somewhat tricky as you are taxed on your worldwide income, but the easiest way is probably to become a tax resident in a country with a low tax rate. Even in the UK, as a contractor/freelancer it's fairly simple to pay single digit percent effective taxes on incomes of £100k+. And that's without even delving into what could be considered a 'tax avoidance' scheme.
Not shure single digit effective is possible nowadays even outside IR35 - and HMRC has unliterally ruled that some professions are in side IR35 eg all it/developer contractors.
Actors, film / tv professionals and lawyers etc are for the large part still treated as "self employed"
i am not in the US but "many" countries around the world use something called "MAT" or minimum alternate tax, wherein if you calculate taxes which is like zero or even a percentage lower than the limits mentioned, you are forced to pay MAT instead.
forced as in, you can claim a loss and all but you still pay MAT taxes which usually are around 18%.
yes. the idea of MAT is like you can claim all the "expenses" and the result would be a loss but when MAT is taken up, you get only "certain" expenses meaning you cant just pull expenses out of thin air. you have to prepare an altogether different p&L with only specified expenses and that always results in a profit and you pay taxes on that figure.
its like saying to a kid who doesnt want to go to school because his knee is bruised. cry all you want, you will go to school.
Stacking new positive rights upon each other seems like an inferior solution as compared to the original, simple solution of respecting private property.
Summers is right, of course releasing M3 would be a no-brainer.
Can we ever reconcile accounting and economics? With its excess cash reserves, if Apple paid tax, absolutely nothing about its business would change.
The more profound perspective is, who is really the tax collector then? Who is playing that economic role? Obviously these giant tax-evading companies. They are accumulating huge stockpiles of cash they cannot spend, a long-running surplus, they can't even effectively give it back to shareholders, and it's not because of tax policy. It's because they are the tax.
That's not controversial, some people call it simply rent seeking, but Summers should be going a few steps further: can we characterize the exact amount of non-tax compulsory payments (NTCPs) we are giving to Apple? Is there a policy process to convert the beneficiary of NTCPs from private ownership to the public, i.e. make it just a plain old tax?
Why does US tax money coming back into the country and at what rate? Wouldn't you want to encourage money to be made elsewhere and brought back to the states for investment? or am i fundamentally misunderstanding economics?
US citizens are taxed on global income regardless of whether they live in the US, or whether any of their money will ever enter the US.
It's only right for US corporations to be taxed the same way. Most of these insane financial contortions are done because they aren't taxed on foreign, non-repatriated earnings - creating an incentive to convert domestic earnings into 'foreign' ones, that get repatriated the next time there's a tax holiday.
I personally would love to earmark my personal income as foreign-sourced, and to not pay any taxes on it until I get a tax discount... But if I were to do that, I would go to jail for tax evasion.
Is it right? I know a lady that has dual-citizenship because a parent is US citizen and one Australian; she had to move in US after living 25 years exclusively in Australia because she had to pay taxes in both countries, in Australia as a resident citizen and in US because she was a citizen. The only other option was to give up to US citizenship, like others do. Is it right?
I agree with your point (probably), but disagree with the restatement. They can repatriate it; it just does not make business sense to do so. (If they actually couldn't repatriate it, it wouldn't be effective to use as collateral.)
I read about tax avoidance schemes like corporate inversions or sending all your patents to a company in some tax free haven and licensing your patents from your company for all your profits, and so on, and it makes me really mad. Companies making many billions of dollars paying no taxes.
My intuition is that if I personally came up with a cute "gotcha" like this where I wound up paying zero in taxes because of some loophole, I would go to prison. Why isn't the same standard applied to rich companies?
"You're technically owned by an Irish company you invented to avoid taxes? Cool. The c-suite plus your accountants are going to prison for the next five years and we're seizing the X billion you actually owe plus a punitive fine."
These tax shenanigans would stop if laws were enforced.
This is a case of economies of scale. A fairly wealthy person could save maybe $50,000 per year with the advice of the smartest tax lawyers and accountants in the world. But it would cost them $500,000 per year to pay for the structure to be created/updated.
When I worked as a tax lawyer, we created structures and defended cases that saved our clients hundreds of millions of dollars. At this scale, paying for our services was a no-brainer.
On top of that, big companies lobby lawmakers to make the tax system favorable to them. This makes sense for the same reason: paying a couple million dollars to create/maintain a provision that saves $100M/yr is a no-brainer.
I'm not saying any of this is right or good (and I am no longer a tax lawyer; I now build tools that help people with disabilities). I'm just saying this is why it makes sense that companies can walk a fine line on taxes, save tons of money, and you and I cannot.
Maybe it's a little too much to ask, but are why are you "not saying any of this is right or good".
Part of my brain wishes that law would actually mean justice but somehow, if I trust only what I know, I cleary cannot judge, as you do, if finance engineering is good or bad.
I'd like to know what prevents you to choose if it's good or right (as person who have worked inside the business)
I do have opinions about various tax provisions that I know well. But the topics I mentioned in my prior comment were not about a specific tax provision, or even tax policy generally. I was just stating the facts of life. It will always be the case that big companies will find it efficient to engage in certain revenue-producing activities that smaller companies/individuals will not.
Just as I don't have feelings about laws of physics, I don't have any feelings about economies of scale.
Lobbying is a bit different. Like most folks, the idea of 'lobbying' strikes me as wasteful/corrupt. But if you try to come up with a definition about what 'lobbying' is, and how you might try to restrict it, you realize that it is very difficult to do so without being underinclusive or overinclusive (or both!). So while I find the idea distasteful, I don't have any answers on how to 'fix' it.
My hobby [1] is helping people think clearly about media bias and filter bubbles, so I'm glad to hear that my comments come across as rational and balanced!
This is an interesting concept. I think this is a tool that I would use, however I don't have an iPhone and I don't use Chrome. Are there plans to release this as a Firefox addon?
So you don’t have any emotional opinions on the work of others that has real effect on your life?
Physicists can be wrong.
Economists can be wrong.
At some point technical nonsense becomes “imperfect people choosing.”
A fix might simply be change tax laws? Kind of like how the billionaires changed them to be less distributed.
But you don’t have feelings enough about economics being purposely wielded at scale to manipulate; let’s hope you’re still one of the privileged enough to be indifferent and comfortable in the future.
popcorn
Real-time meltdown of Pax Americana is pretty metal.
I don't think the poster was saying any of this. They were simply stating that the post was informational and that they weren't offering any commentary on the situation, just giving facts.
I mean, sure a physicist can be wrong, but if they are giving facts as are currently accepted by the community or even as they know them, it isn't an emotional statement of whether they agree. It is just that: Facts as we know them, to the best of our ability and not giving the commentary with it.
They're separable by experimental verification. The laws of physics are multiple orders of magnitude more accurate than the laws of economics, and the physicists are certain that at least one of their models is wrong.
Try getting an admission like that out of an economist!
Economics are an emergent property of human existence. Which economists math do we listen to? Those in love with profiteering? I suppose if that’s your side.
The same way we are distributing information, we could better distribute literally to normalize human condition.
But profits demand we fill stores with gadgets versus TP.
As economists we are certain all of our models are wrong! But some can be useful in a constrained environment to answer specific questions, so thats why we have so damn many of them!
Lobbying is actually not hard to stop at all. It msy be under our current structure, but its not hard to stop
Here are 3 rules that would stop lobbying overnight.
1- Make house of reps sole body to set tax law at federal lvl
2- tie reps in house to very specific, low pop counts. For ex, 1 rep district = 25,000. This would mean house would become gigantic.
3- randomize election outcomes. Swap winner of city treasurer with senate winner. Swap rep seat with state assemblyman. Every seat should have a high random chance of being swapped. If winner does not like position. We should even do this with presidency.
This solves federal level lobbying by taking (1) power into a (2) decentralized body and also (3) inserting downside for lobbyist.
Lobbying is a bit different. Like most folks, the idea of 'lobbying' strikes me as wasteful/corrupt.
Are people aware what everyday lobbying is in it's most basic form? It's companies engaging their elected representatives on policy issues relevant to them.
So when the Obamacare bill was being written, the AMA (representing physicians) lobbied Congress to make sure their views were heard. Completely legitimate. Another example might be a crime bill where the ACLU lobbies Congress. Or the EFF lobbies Congress.
And the lobbying dollars that are spent aren't bundles of cash given to Congresspersons, it's dollar spent on lobby firms that have armies of experts who know how Congress works, who to talk to and how to craft an argument that resonates. That doesn't come cheap.
Now up to this point nothing illegal has happened. You could argue it's unfair that businesses (well, more accurately organizations) have better access to Congress than individual voters, but groups will always have more power than individuals (since they represent more voters). There is nothing to stop a group of voters from forming an organization to lobby Congress on a specific issue. Again, that's what the ACLU and EFF do.
It seems like most people see "the AMA spent $10M on lobbying last year" and picture lobbyists passing bags of cash to Congress. No, that's illegal and has been for a very long time.
Law is the UI for political power, and not inherently for justice.
If you want justice, you have to apply political leverage to steer power in its direction.
Law is also the UI for political self-interest. Unfortunately the same leverage principle applies. Which is why it's almost impossible to get real justice - including tax justice - in a plutocracy. The scales are tilted too heavily in the opposite direction.
The answer is to balance plutocracy with effective political organisation, but that's an incredibly hard problem to solve at all, never mind peacefully.
It the OP, but there’s a difference between holding a moral opinion and stating that opinion in a discussion. OP may simply have not wanted to obscure information presented from an insider perspective with personal opinion, in an attempt to stay objective.
Further, financial engineering by itself is morally neutral. It can create abuses sure, but it can also reduce unnecessary costs so that a company can employ more people, offer goods and services to customers at lower prices, etc. Tax is just one piece of a much bigger puzzle and it can’t always easily be disentangled from other issues.
I’m reminded of the saying about porn, you might not be able to define it, but you know it when you see it. There are plenty of publicly discussed cases of pretty clear and egregious tax evasion, but not all efforts to limit tax liability are abuses. Some of them are responses to deliberate incentives put into the tax system to encourage specific behaviour.
Because he wants to give his technical expertise, and does not want to enter into a political debate about the way we organise society.
If you read between the lines, you can see that he understands that people have reservations (and probably he has chosen). He just chooses to explicitly not make a statement about it, and keep this a technical discussion.
In todays highly politicised society, this is (in my opinion) a sensible thing to do.
> At this scale, paying for our services was a no-brainer.
What? I don't think so. If money is the only thing they care about, sure. But is it? Should it be? And if breaking the spirit of the law is fine, shouldn't breaking the letter of the law be fine as well? As long as the risk is low enough..
You either save the billions in taxes or cannot scale further because now you can't afford to compete with those that do.
Also things sure do look different when you are at the helm. If you decide your company should pay more in taxes the board will probably vote you out on your ass.
> if breaking the spirit of the law is fine, shouldn't breaking the letter of the law be fine as well?
There's no law against breaking the spirit of the law. Breaking the spirit of the law will only get you tried in the court of public opinion. Breaking the letter will also go to a court of justice.
One should read up on the judiciary system in their specific state before they start breaking the spirit of the law.
In some states the judges are quasi-politicians with an implied mandate to rule how they think the people want them to rule. In others the judiciary is a system for evaluating the law and they see they consider it their mandate to enforce the law exactly as written, especially when it gives the legislature and the public the middle finger because that's the incentive for those groups to write and demand good law.
The thing about capitalism is that companies that don’t do everything in their power to increase profit are at a disadvantage against those who do. Profit is the ability to invest more in R&D, attract more investors, scale faster, advertise more. Unless your consumers care enough to only support you if you pay taxes, or you can get substantially more productive employees by paying taxes, or some other advantage in the marketplace by paying taxes, paying taxes when your competition does not is an albatross around your neck. And if your morality creates enough albatrosses around your neck your company will either fold or be eternally small as your competitors without such restrictions have higher efficiency. So it’s a no-brainer in that any company that gets to the scale where spending millions on lawyers is appropriate is already of this mindset.
This is why laws need to be crafted to not give companies the benefit of the doubt when it comes to acting in the best interest of society. Less because it is impossible for a company to be moral in a vacuum, but because if being immoral is allowed and advantageous inevitably the immoral company will out compete the moral one. (Of course it can be hard to agree on what moral is. Some say that taxes are immoral after all.)
>this is why it makes sense that companies can walk a fine line on taxes, save tons of money, and you and I cannot.
Nope, these are the reasons that cause the situation. This outcome does /not/ make sense nobody sane without a huge vested interest would design a system to achieve less tax paid when you earn more. It's entirely contrary to the intent and spirit of the tax code. This is not sensible. How to fix it? That's harder. Start with its a problem and morally and ethically wrong. It's really the only place to start from. I would say keep in mind two wrongs is not an improvement and unchecked government power is far worse than tax cheats but that does not change where this discussion should start.
The problem with (too much) simplification is that it removes political steering capability. For example, governments may want to promote having children (by reducing the tax load for people having children), or incentivize small businesses like shops, or domestic R&D spending...
They could do that by direct subsidies. That would be transparent. Or should transparency be required only of the corporations, but governments could get a pass?
It is more efficient to let people keep money than it is to take it from them and give it back. Even if the laws that allow the former would (/might) be simpler.
That's still a problem, if you think companies minimising their tax is a problem. The game shifts to creating the correct structure to qualify for tax credits.
Uhm, I am not sure what you are talking about. Frictions that arise from taking money and giving them back by design don’t arise if you don’t take anything because you provide a tax credit.
I don't have a problem, but if you're phrasing things like that then perhaps you're seeing an exchange like this as the equivalent to squaring up outside a pub. Disengaging.
Ok let’s do away with withholding then. Instead of just letting the government keep the money we will all take it from the government and give it back at one time on tax day. Much simpler.
I believe you severely underestimate the complexity of actually administering a complex tax system.
Especially because the way a lot of deductions end up working in practice is that you withhold the money from people in the first place and cash it out in the end of the year when you calculate your actual tax burden.
This is another problem that would simultaneously be solved with simpler tax. Government pays for things by paying for things, and also effectively pays for things by giving tax breaks hidden in the 50,000 pages of tax code that now simultaneously how the government collects revenue and pays for things, and is completely incomprehensible to most people.
> The problem with (too much) simplification is that it removes political steering capability.
This is not a problem, this is a benefit. If you separate tax collection from tax policy you are still able making economic and social policy via other tools.
Basically tax policy is a low bar to entry way to get the laws you want but in a lossy capacity. Instead of making something legal/illegal outright you can just make it "illegal unless you jump through hoops and/or pay money" or you can provide a tax incentive for something you like (easier to sell than a subsidy). This lets you get dumb policy that would otherwise never pass. Big business benefits from this by getting carve-outs that make them more money or by getting policy that lets them use scale to their advantage. The authoritarian upper middle class benefits from this by using tax policy to create a carrot/stick system to kinda sorta make the poors act the way they want. And of course the government and politicians benefits from the current system because it gives them influence and power.
So right now we've got big business, the top ~30% or so of society and politicians/the government benefiting from the status quo. In order to remove politics from taxes big business is going to have to pay more (or everyone else will have to pay less, an equally large pill for a lot of people to swallow), the upper middle class will have to lose a set of carrots/sticks to kick the poors around and the government will have to accept a net decrease in power. The only way to get these groups to accept this is to spend a century boiling the frog. I don't think we'll ever get simple tax policy overnight.
If the tax law gets complicated enough, the incentives might not work because people don't know about them. I personally don't optimise my taxes to government incentives because figuring out what they are is too difficult.
Or do like Europe is finally starting: just tax revenue.
They can suppress their 'profit' whichever way they want, they can't suppress their revenue in a given country.
The digital services tax is imposed at a rate of 3% on the gross revenues derived from digital activities of which French “users” are deemed to play a major role in value creation. The law not only affects digital companies but, more generally, digital business models.
> Or do like Europe is finally starting: just tax revenue.
That rapidly turns into a disaster of consolidations and monopolies. You don't want that.
Think about the difference between big company $BIG selling you the consumer a million Widgets for 10^9 currency units, versus 26 small companies $a..$z each selling to the next in a long supply chain which results in a million Widgets.
In revenue taxation, big company $BIG pays 10^9∗$TAX_RATE.
Whereas the 26 small companies pay something more like 26∗10^9∗$TAX_RATE because each time a company pays the next company, that's revenue for the next company.
The difference in tax between those two scenarios is so enormous, that it would create enormous pressure for companies $a..$z to consolidate into a single company.
Repeat this across the entire economy, and you have enormous pressure to consolidate everything into as few companies as possible.
Companies buy a combination of goods and IP (patents and trademarks). The goods come from a developed country and the IP is licensed from a tax haven. The goods are sold at near cost with the markup being in the IP. The result is a supply of goods between countries that causes a significant diversion of the revenue to the tax haven. This is used by most big companies in tech, pharma, etc. The government can’t challenge these schemes because there is no open market for IP (because they’re monopoly rights) so there’s no way to argue that the price paid wasn’t the open market price.
So, the reason that people want to tax revenue is to negate the benefits of transfer pricing.
For instance, Google France makes 1bn euro in revenue, but purchases Google services from Google Ireland for 999mn, thus almost no profit and thus no tax. Google Ireland make 20bn but pay 19.99bn to Google Bermuda, which is the exclusive licensee of Google IP worldwide (even though the IP is almost exclusively produced in the US).
Taxing revenue means that these shenanigans do not reduce the tax paid in a particular country to zero.
"Purchase price" is not the same thing as costs and "revenue price - purchase price" is completely different from profits.
With a broad enough definition and inclusion of other, unrelated prices at that negative part, one can claim that in a time-frame of several years, both average to nearly the same. But that doesn't make them equal, and if you go read those tax-codes, you will discover the ones being discussed add to very different figures even on the long term.
I'll just add here another encouragement to go out and get an understanding of tax codes. Odds are they will be relevant for everybody that frequents here at some point on their lives, and odds are that if you don't know them, you'll only discover their relevance after the fact, when they have already caused you some problem.
Yeah. To be pedantic maybe we should say "a tax on gross profit". Regardless, it's closer to taxing profit than what most people mean when they propose a revenue tax.
For example, if you sell something before you have paid for it (this is very common), and then put the money from selling into a bank where it earns interest, and then withdraw that money and pay for the thing you sold:
You will have made sale_price - purchase_price + interest.
In a VAT system, you will pay VAT on sale_price - purchase_price (or your customer will, depending on how you sell things), but not on the extra interest you earned.
So that's already a loophole. You can game the tax system by selling things before you buy them and earning interest.
If you're smart enough, you might even sell things for exactly the same as you pay for them, and still make a profit due to the interest while you hold the money. You could get even smarter, and hold that money on behalf of your upstream supplier to withdraw when they need to spend it. Before you know it, you're paying zero VAT, and all your profit looks like interest.
But you have to pay an accountant to make sense of all these for you. The cost of the accountant isn't a direct cost of making the thing you're selling.
So that gives you the difference between gross profit (sales price minus costs associated with the thing you're selling) and net profit (what you have after paying for everything needed to run the business).
Although true, that seems moot because all tax on business (whether VAT or not) is, one way or another, passed along to the end customer (or not passed on according to business pricing decisions).
No matter which company in the supply chain pays it!
With VAT, it's raised prices and shown on the receipt.
With other business taxes, it's raised prices and not shown on the receipt.
Customer pays either way.
Of course, competition and other factors also govern prices. It's not a given that changing business taxes always causes a business to change its prices by a related amount.
But that is the same for VAT and other business taxes too.
Yes, VAT is tax on revenue of the entire supply chain as a whole (not individual companies), so long as it is within a group of countries using VAT.
But it didn't look to me like that's what the GP comment meant. I assumed they meant tax on revenue taken by each company. No need to account for expenses...
I'd hoped that would be obvious from my comment, but if not I hope I've clarified that now.
ps. It looks like other commenters here are confused about this language, and arguing over the semantics of what "tax on revenue" means.
VAT doesn't solve all tax fairness problems unfortunately, which is a shame because it's a fairly well administered system, and good at catching fraud.
There are good reasons why VAT is not the only tax on businesses. One of those reasons is that immediate revenue and expenses are a poor model of many business accounts. Accountants use more sophisticated models (there are professional standards they have to adhere to), and despite their quirks and loopholes, these are generally better, fairer, more representative models of the state and value of a business and the money flowing through it, and as a result, for most "ordinary" businesses (i.e. not international corps gaming the system heavily), that ends up making taxation fairer.
Someone mentioned using a higher rate for higher revenue. That suggests an example where the better models which incorporate time and stored value results in fairer, more appropriate taxation. If you have a higher sustained revenue, year on year, it makes sense to use the higher rate if that's the policy. But if you make zero in year $X and twice your normal in year $X+1, then back to normal in years $X+2..., all just because you had a big customer pay late for the first year, fairness says you ought to end up paying the appropriate tax rate for your steady normal in the long run, not twice as much tax thanks to your late-paying customer!
The accountants' model handles that just fine, as it says you earned the money fair and square in year $X even though you didn't get paid that year. And that's generally better for limiting tax avoidance too, because it reduces the ways in which co-operating companies can game the system by timing their payments to each other to cheat. (VAT doesn't show this problem because it's a fixed percentage, but it occurs with progressive taxes, meaning variable percentage.)
My comment actually wasn't in relation to the GP comment, I meant that revenue taxing in the form of VAT works fine for certain situations.
My current biggest gripe with taxation is that it's mostly paid in the countries where the corporation lives, not where the revenue is made. Facebook sells 10 mil worth of ads in France? Facebook should pay (some) taxes for the 10 mil in France.
I liked the the idea of taxing profits via taxing revenue (with a VAT) and deducting domestic expenses that was proposed a while back. I think it was called a border adjustment tax, and the idea was that the incidence of the tax was on the profits and it was apparently trade neutral because the currency values would adjust (which would cancel out foreign expenses being non-deductible).
It seemed like such a simple solution to the often complained about problem of multinationals shifting profits to tax havens, since it’s much easier to determine where revenue is from, but I almost never see it discussed when corporate taxes come up. I wonder if it will ever go anywhere.
You can always address that, like VAT (and other commentators have said), by allowing refunding of tax on purchase (for example) for business purposes.
Simply swing the antitrust hammer judiciously, in that case.
I'm suddenly hit with the image of a child whining that having to do homework AND chores is too hard, and their parent telling them to suck it up.
Besides, tax revenue doesn't just disappear into some govt hole, it gets redistributed as services and grants and the like. The loss in operating revenue is likely made up in increased business. Your low margin goods get fked but people are more willing to purchase the higher margin value-adds.
Given that we are all using fiat currency, an interesting way to think about taxation is that the Government is destroying money through taxation, and creating money from via spending.
With this thinking, you can very much say that tax revenue does just disappear into some hole. The effect of taxation in this thinking is that it applies brakes upon the accumulation of wealth and causes existing wealth to be worth more (via deflation). This is counteracted by the inflation from created wealth via govt spending.
A weird alternative to taxation could be to print more and more money without taxing any of it. This would be functionally a flat tax on all existing wealth in that fiat currency via inflation.
> With this thinking, you can very much say that tax revenue does just disappear into some hole.
It doesn't just disappear into the misty fog of the central bank though. It goes onto some government ledger.
This ledger has some considerable effect. It greatly constrains what the government can spend.
If the ledger meant nothing, you would not see government needing to borrow via issuing bonds when it needs to spend more. The cost to government of borrowing goes up and down according to circumstances, and is outside of government's direct control.
In other words, all the parts are related, partly by design, and this strongly affects the consequences of issuing (or destroying) currency at the central bank to the point where it's not really meaningful to think of taxation as destroying currency.
If the government did issue enough currency to go on a spending spree, before long not only would inflation harm other parts of the economy, it would also find that the prices of its spending spree went up, so it would have to issue more, and...
Ultimately no matter how much currency it issues, there's a strong drag in real terms on how many things the government can obtain from others and cause others to do via commerce.
That limit on its spending power makes the ledger balance something much stronger than a hole into which tax disappears.
The obvious solution to that is to make it more difficult to consolidate companies. Disallow at will M&A's,and also force anyone that still goes down that route and manages to succeed to justify their continued consolidated existence.
In short the market/regulatory environment should support disaggregated business as a first class citizen, mergers and vertical integration as a very second-class construct. To the tune of if you merge, you must maintain 3 sets of accounts. The original accounts separately, and a combined set. You must gain more capability or utility to create value for the public as the combined company than by being separate. The capacity to measure the utility amplification being facilitated through the extra set of books. As more companies are bought and merged, the audit workloads would increase very quickly. Failure to make a good case for why you should continue to run as a merged company kicks in an orderly spin-off of the previous acquisition to get operated by someone else. M&A's should not be one and done. This greatly complicates hostile takeovers, makes the business model by which large entrenched entities buy out and kill up and coming competitors, at best, a stalling tactic, but more often a worthless waste of time to the perpetrating company as much as it is to the public.
If you let M&A's have their cake (the capital assets of another company) while giving them the option to cut fat without insisting that they "compensate" the public for the decrease in competition, only one side will ever benefit, and it won't be the public.
It's not an obvious solution, because in that regulatory environment people will avoid creating small companies in the first place.
They won't avoid it to get some minor edge.
They will avoid it because every company formation and financial advisor will point out that it's commercial suicide to start your own company in that environment, and that instead you should take your idea to an existing company which specialises in opening "nearly autonomous departments", for an instant 30% or so increases in post-tax income, or 30% edge over competition on prices, or 30% edge on salaries you can pay, for exactly the same kind of business. (30% representative of some countries not others... adjust for your locale).
The few real companies specialising in that would love your M&A and tax regulations, as they could take a few % of every small business' profits, and have some levers of control, effectively government mandated.
After that, the millions of small companies which already existed, who cannot consolidate due to your M&A restrictions, will gradually either go out of business due to competition, or find a way, though contracts, deeds etc, to transfer their activity into these "autonomous department" companies without actually merging. It's not uncommon to transfer some of a company's activity this way already, so that would just be scaling it up.
You can try restricting all of that, but it will be very difficult as you would have to do it restrict what sorts of things people can agree to in contracts in a very significant way, and in doing so, restrict what are currently effective business arrangements for some companies to make them less effective. That would be an enormous change to business culture, and I suspect even if you did restrict what can be agreed in private contract terms, alternative ways to transfer what gets done where would be found very quickly and easily.
I know this isn't exactly parallel to the digital service tax, but for the larger debate: The huge obvious revenue tax is VAT. On (almost) anything sold in France they get 20%, and it's very hard to dodge. It does not depend on where you claim your headquarters to be.
All these arguments about which country gets to collect a few percent tax, of a few percent profit, are dwarfed by this much larger slice. Which every country is free to adjust as they wish.
The companies in the middle of the supply chain can reclaim any VAT they paid on goods/services used in the business [1], so effectively they don't pay it.
VAT is definitely not a tax on profit, that's usually called "corporate tax" [2] which is a completely different thing.
Well, who pays tax is kind-of a complicated question. VAT is collected at many points along the supply chain (and sales tax typically at just one). But who pays economically depends on a bunch of elasticities: if the consumers will buy X at any price, then the tax lands on them, whereas if they will only pay at maximum Y (otherwise they go without) then the tax lands on the seller. (But in reality, nothing is at either endpoint.)
Maybe, but there are several arguments against using it in this context:
- Collection can be reduced by deducting VAT on company purchases, meaning the company only pays the difference between the VAT charged to the customer and the VAT they've incurred on purchases.
- It's regressive. It primarily affects poorer consumers since it is effectively a tax on the end user rather than the company.
- Some countries aren't free to set their own rates. For example, in the EU the standard rate cannot be set below 15% without first changing EU law (and convincing a majority of Member States to agree to do that) so it's not very competitive.
Sure, it's not the same as a revenue tax. But compared to a profits tax, money spent on company purchases also never makes it into the profit column. But money the company later spends on salaries, is taxed by VAT.
There's an argument that VAT is regressive but this isn't it. Who effectively pays (meaning economic incidence) is complicated. But sometimes it works out that poorer people pay a larger proportion of their income in VAT than do richer people. It seems entirely OK to have a mixture of regressive and progressive taxes.
And sure, not completely free within the EU, but the range of acceptable rates is pretty wide, maybe 17-27 exist today? I haven't done the numbers but France could surely raise an order of magnitude more money from VAT than they collect from corporate profits, if they wished.
I live in Argentina and we have a revenue tax. It's a shit show and basically any marketplace / fintech business that operates on low margins is either economically unviable or needs some flaky loophole to operate.
Taxing revenue makes companies with high capital and/or labor overhead non viable, like banks, oil companies. Only companies with high profit to revenue ratios could survive in an environment like that, I’m sure even France has lots of exemptions.
Better to tax value adds than revenue, which is simply money flowing through the economy.
Its interesting as many people have a revenue tax on people -- it's called income tax. Your expenses (rent, food, commute, power) are generally not removable -- some expenses can be taken off before tax, but most can't.
Most people operate on low margins economically, saving 5% of your paycheck would be an outstanding achievement for many.
I would highly recommended reading "A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System." It compares tax systems around the world, unpacks common issues and suggests a fix (in short a "broad base low rate" strategy).
If only there was a website where people who automate things congregate. They could automate creating this legal structure so we could all do it, then governments would be forced to do something about it.
It seems like the comment (from a former tax advisor) you are responding to is explaining that the high cost of gaming the system is cost effective for large companies, but not for individuals. In that respect, it "makes sense" that individuals cannot take advantage of these loopholes that companies use.
In contrast, you seem to be arguing a different point--that, to you, it "doesn't make sense" that the system is designed poorly.
I don't think so. I interpreted the comment the same way probably because the comment was replying to one disputing the morality of it, not the feasibility of it.
What would happen if we did away with the income tax, sales tax, estate tax, property tax, and all other taxes?
The government could simply finance itself by printing money / inflation. Let’s say the government total expenditures were 5% of GDP each year, then you would simply have 5% inflation.
This would solve all the problems we have with income inequality, worthless heirs of the wealthy hoarding riches, and of very complex and expensive IRS and CPA work.
Everyone would need to invest their money rather than stuff it under a mattress so they could keep it growing rather than allowing inflation to shrink it.
Why would anyone invest in your currency? Why would anyone hold your currency? What would your interest rates be? What would that do to businesses making decisions on borrowing for CapEx etc etc.
I've said that paying for CoronaVirus will probaby be done by inflation rather than taxes, but I'm not sure that as the only source of revenue it makes any sense
IMO you need to come up with a way to eliminate tax arbitrage. You see it causing issues between US States where there’s a race to the bottom to give tax breaks and as long as companies can go to places like Vanuatu there will be ways for them to avoid taxes.
Since you can’t control what other sovereign nations do all you can do is make laws restricting what companies that operate in tax havens can do in local jurisdictions. But they will of course lobby that you’re restricting freedom and hobbling your economy and take their HQs elsewhere.
Why would eliminate tax arbitrage between states? I'd prefer to see states competing over taxes - it provides a great incentive for efficiency. And no, a company won't always choose the lower tax rate, there are other factors at play like: 1)where are the employees located, 2) will they even go to a state with lower business taxes, 3) what services do I get as a company from the state gov't, 4) what's the general business climate in the state.
I hate the derogatory use of "race to the bottom" since it's the reason why we have handheld computers in our pockets and 60 inch flat screen TVs that cost $300. Every company is "racing to the bottom" to provide as much value for the least cost as possible.
I don't think they were trying to stand up for it, just explaining how it happens. Which we all suspected (if you are paying attention at all) but did it from the point of view of someone who actually was "there". I found it quite interesting.
This is why I've always been skeptical of high _income_ tax rates. First tax avoidance is at base a fixed cost. It's the price of a really tax lawyer (or at the extreme a couple of US Senators). If that fixed price is less then your tax bill only idiot pays the tax bill.
The second reason is that I don't believe people view money fractionally - I think they look at it absolutely. For me am million dollars is a lot of money. For Bill Gates though a million dollars is ... a lot of money. It doesn't matter that he's a billionaire he's still not going to throw around a million dollars the same way I'd throw around the same fraction of my wealth that a million is to him. He still recognizes the absolute value of that money and he can still see it's potential to make things happen in the world just as I can see what a hundred dollars (or whatever my fractional equivalent is) can do in the world.
Na, you're both wrong, GP for assuming he knows how a billionaire views a million dollars and you for your weak rebuttal that his home proves he doesn't value money.
You both need to stop speculating about Bill Gates.
> that saved our clients hundreds of millions of dollars.
Could you elaborate, from your experience, what happened to these $$$? Do they sit in banks without being used or do they get get invested and recirculated in the economy?
Also, given that just about every function of the US govt has been privatised, what would the US govt spend this money on? Spend it on defence (and channel the money back to private defense entities)? Pay off trade deficit? I'm not aware of US budget break down on expenditure side so any pointer would be great.
IIRC defense is about 20% of the US federal budget. About 40% of that (ie 8% of total federal spending) is paid to staff. In some ways it's the largest redistributive program.
The trade deficit is private, it's an accounting summary between private importers and exporters. Nothing to "pay off".
My startup’s tech makes reading on screen easier. It is used by all types of readers, but is especially helpful popular among people with dyslexia, ADHD, vision impairment, and various chronic conditions.
This has been on my mind for quite a while: is there a way to set up saving structures like those of Big Corp to poor people - i.e. find a way for the people least able to pay tax to pay less of it.
Would you mind chatting about your expertise here? Do you think there is any feasible way of generalizing these tax avoidance structures so that Joe and Jane can reap some of those sweet sweet loophole benefits as well?
sorry for the nitpick, but I don't think tax incidence [0] is the term you were looking for here. it's hard for poor people to take advantage of tax loopholes because they don't directly pay much tax after the standard deduction and (possibly) EITC. whether they bear the burden (ie, tax incidence) of taxes levied against other entities is controversial.
Economies or scale... How about just power? These companies have too many people in their pocket. When you have enough power you can get away with this. These companies, even if not paying taxes directly, are huge contributors of economy. You threaten them, and they threaten you back. Do you want them to take their 10,000 jobs somewhere else? It's not tax laws and enforcing them, just rather just too much power on too few people's hands.
Do you have any input as to how they can be prevented from beating the system or do you think there will always be enough loop holes for them to get out of paying taxes because they essentially own the law makers?
> Companies making many billions of dollars paying no taxes.
I feel like if that's the case, then you shouldn't expect the US Government to participate in the enforcement of your patent. You licensed in some tax haven? Then adjudicate it in that same tax haven, we want no part of your disputes over it.
There are actually some traps for the unwary at the intersection of tax optimization and patent enforcement. For example, if you aren't careful in how you offshore your patents and file your patent lawsuits, you can be ineligible for 'lost profits' as a measure of damages.
This is hugely impactful because the 'lost profits' method can generate much greater payouts than the 'reasonable royalty' method.
This isn't motivated by the sentiment you express, but it nonetheless illustrates that companies that are aggressive on taxes can end up getting bitten in other arenas.
If you are upper middle class it is possible to pay zero taxes. Between tax loss harvesting, 401ks, opportunity zones, and LLC formation, a citizen can legally pay no taxes some years. It's a bit of a learning curve but none of the mechanics are particularly difficult.
"Once income and spending exceed this level, taxes must be paid. Unless…
Unless that income comes from qualified dividends or long-term capital gains. In this case, a married couple can have $24,400 a year in income AND $78,750 in investment income, TAX-FREE"
If you can get 78k$ yearly investment income from index funds, you already have a net worth of several million $, and you're thus already among the people that don't need to work (or you had some incredible luck for smaller investments)
If it's a real loophole, the government is out of luck; best it can do is remove it next year.
When the money flowing through a corporation actually makes someone rich, it becomes his personal income. It's not clear that corporations paying their own taxes is even a good idea vs. collecting the same revenue through higher marginal tax rates on the beneficial owners.
Expensives can be hidden at the corporate level but used personally. The company plane can be used for both personal/business and those are hard to separate.
There are actually very detailed rules about how personal use of corporate planes needs to be reported for both tax purposes and shareholder reporting purposes.
Even if a plane is already going from City A to City B for business purposes, if the CEO brings a spouse along for personal reasons, there can be reporting consequences. Of course, this only matters if the company is under sufficient scrutiny to actually report such details.
An alternative to attempting to tax companies, is to tax people.
There is no company that would just exist to forever eat money away from the public. Eventually they intend to pay the profits to a real person (either in money, or other benefits). Taxing that dividend or salary transaction might be simple enough to just work. And you have a real person to put to jail when the taxes were avoided.
This could work, but it would have to be reconciled with the existing basis step-up at death, which is a key part of our intergenerational personal tax system. If you only taxed people when there is a dividend or salary payment, a savvy CEO of a private company could follow the tax advice of "borrow, buy, die". Instead of taking a huge salary, the CEO would borrow money to pay for everything, using the shares of the company as collateral. Then when the CEO dies, the loans are repaid out of the estate. And the basis in the remaining shares is stepped up when passed to heirs.
So while you can get rid of corporate taxation, the tax treatment of natural persons at death means that folks could greatly reduce the amount of income realized during their lifetime.
> Instead of taking a huge salary, the CEO would borrow money to pay for everything, using the shares of the company as collateral.
This would mean that they essentially pay a "wealth tax" (interest on all their borrowed net worth, with probably a decent premium for the risk) to the bank.
> Then when the CEO dies, the loans are repaid out of the estate.
And at this point, income is raised out of the company and would become taxable. At least where I live, the estate of a natural person pays taxes for their income like a living natural person.
> the tax treatment of natural persons at death means that folks could greatly reduce the amount of income realized during their lifetime
But they'd still pay the taxes eventually. I don't see this as a huge issue. If the society can't wait to get their the taxes (IMHO a nation state should plan for timeframes longer than a single lifetime), they can use the same trick to get a loan from the bank with the future tax income as collateral.
We could even invent borrowing mechanisms where governments could get money today in exchange for a binding agreement to make future payments against those future tax revenues. We could call these binding agreements a government bond.
Forever is a long time. In practice there are wealthy people willing to pass vast majority of their wealth through generations.
Personally I don't think it is fair or likely healthy in the long term for the society to let vast majority of the income/wealth of wealthy and thus powerful people to go untaxed - even[1] if that income/wealth is not consumed.
[1] Actually it should be "especially if it is not consumed". In the old days there was a shortage of capital for investments indicated by relatively high interest rates. Nowadays there is shortage of consumption. But that to my understanding is a bit of a heterodox view, so I am just leaving it there.
> Personally I don't think it is fair or likely healthy in the long term for the society to let vast majority of the income/wealth of wealthy and thus powerful people to go untaxed
But this is already happening even with the current system that attempts to tax company profits, isn't it? My point is that taxing the person instead of the company would enable taxing the wealthy. There are already quite severe restrictions of using company assets for your personal benefit, at least where I live that is taxable as income.
I should amend how I expressed the idea: I never meant that companies pay no tax at all, only that they'd pay no tax on profit (which can be hidden for the yearly checkpoint by creative accounting). That leaves all sorts of tax categories still available for use (land, transactions, resource usage), which are much harder to hide or deny. A company making profit would be involved in some activity that would be taxable through these. Money on a bank account is by itself a bad medium to store wealth, as it's generally subject to 1%~5% yearly inflation.
Whether wealth (aside from income/profit) of individuals or companies should be taxed is a different discussion. Many countries choose to tax wealth only when it's in form of land or constructed property.
If we transform the taxation so that the income/profit of people and corporations is no more taxed, but the tax revenue is still somehow fairly collected, I am all in. It is just that typically when people propose stopping taxing corporate profits, they offer nothing to replace the tax.
One of my pet ideas is to stop taxing income/profits of limited liability companies completely. Instead make the the companies issue a certain percentage of their stock to the tax authorities annually. For public companies, Tax authorities just sell the shares in exchange. For private ones, the shares would be auctioned publicly.
Outcomes:
- No negative tax cashflows to companies. Ever.
- No need for creative tax accounting. Only ones left to fool with accounting are the owners of the companies.
- Strong incentive to simplify corporate structures. Any company owned by a company would add to tax burden of the ultimate owners.
(For private companies, it might be nice to allow them to ask to postpone the auctions for e.g. 5 years if they want to keep the control of the company but are short of cash to buy the stock from the auction)
Fundamentally it is not any different. In the current model, either the company can afford to pay taxes by cash without issuing new stock, or then it does not and needs to issue new stock, thus diluting current ownership.
In my model, either company can afford to buy back the stock from the auction thus keeping the company completely private, or then it does not, thus diluting current ownership.
(I personally would expect a tax rate of around 1% p.a in my model. If your company can't buy back 1% pa of its stock without needing to pay any other tax, I am not sure it is a healthy company)
Last, strongly ideologically, in my opinion limited liability is so massive benefit given to the owners by the society that I am not sure there is any reason to even have perpetual private limited companies. Either you grow up to public scrutiny of a publicly traded company or you do not succeed and die trying.
Would you accept the forced sale of 1% of your personal income-earning ability each year? You get to keep 100% of your 2021 salary iff you can outbid the highest bidder?
I do not understand why public ownership should be a prerequisite for anthropomorphic treatment of companies. A thing is a thing regardless of who owns it.
As for taxes, yes we all pay more. But we do not have our earning power attenuated each year because the government forces us to put ourselves on some incremental slave block.
If you like how the company you built spends money more than how the state spends money, you're going to want your company to capture more money/worth without relinquishing it to the public. Another rationale could also be when you can give a stake in your company to your family, that way you won't ever have need to pay profits during your lifetime, since the company (which could be a charity) will actually work as a cross-generational fund.
Also, this works well with the ethos of some companies (like Amazon, allegedly) which reinvest a lot of their profits to cut margins/develop new products... And overall just tighten their hold on the market
> Also, this works well with the ethos of some companies (like Amazon, allegedly) which reinvest a lot of their profits to cut margins/develop new products... And overall just tighten their hold on the market
Should a businesses goal not be to tighten their hold on the market? I’m pretty sure if I don’t, someone else will.
Pure greed dictates that companies must do what is best for the individual company. Grow like cancer, engulf all competition, capture the market etc.
However, the owners of the company are humans that do not need to be constrained by those rules. Indeed, humans can hold other values higher - such as seeing that acting in the benefit of the entire society or even to benefit the entire planet is better than focusing on the best for a single corporation.
Pretend for a while that you are the majority owner of an internet company that preys on attention. You can capture the attention of millions, even billions of humans, and grow your vast empire. You can even become so successful that humans choose your product before the attention of other humans, choosing the dopamin kick from social media before real social interactions.
But...should you? Replacing the social interactions of an entire planet might make you rich today, but the price might be very high. Even your own offspring might suffer and perish in a world where social life has been replaced by hearts, thumbs up and endless scrolling.
The question is whether that moral owner can successfully compete in the unregulated marketplace. The answer is clearly No, which is why regulation is needed.
It's unpopular in some circles to praise Bezos, but during this pandemic, I sure am glad that they had built such an expansive and performant logistics supply chain to help people get the goods they needed without having to go to the (often closed) malls.
That's a 2020 benefit to an entire society that arose from 25 years of effort to grow in a sustainable way.
Is there a single market which has remained with a dozen of those companies which didn't have a cartel or preapportioned monopoly? Just with random variance I would expect three at most still around at the "traditional international size" level even if we started with a dozen Jeff Bezos Clones all told they were the real one with the goal of Amazon given identical starting funds (all too stubborn to merge).
We already tax people and most of the noise about companies not paying tax basically ignores that because it makes a good headline. I'm of the opinion that taxes on corporations are a bit of a nonsense tax. If they sell goods or services, there's sales tax. If their employees and shareholders receive salaries and profits, they get income and dividend tax. When we see a headline of a company paying almost no taxes, they've usually paid more in sales taxes and their staff and shareholders will be paying more in taxes than corporation taxes can ever dream of bringing in. Taxes on profits is difficult, profits can be moved easily. Tax profits too much and companies simply won't make any profits. Sales tax is good since it goes to the actual market the product is sold into, it's the cost of having access to that market. Income/dividend taxes brings in the money where the employees and shareholders live and spend their money, so it's the cost of benefiting from the society they live in. We can quibble about loopholes and levels around those taxes because they make sense, but corporation taxes is never going to bring in enough money to warrant all the noise.
> My intuition is that if I personally came up with a cute "gotcha" like this where I wound up paying zero in taxes because of some loophole, I would go to prison. Why isn't the same standard applied to rich companies?
I know of one "gotcha" that works in my country at least: work for low / no wage but instead have loads of assets like stocks; dividend taxes are much lower than income taxes.
I could be wrong. I'm just reminded of people like the Google founders who humblebragged about only earning $1 / year in salary. They still became multi-billionaires off of stocks.
In my country, assets are taxed by a percentage of a percentage (they tax estimated return on investment, which is ridiculous if you only have a savings account that nowadays has either no interest or even negative interest). I think there should be an additional tax on any money or assets moving out of said investment account.
Because that's how rich people do it; they hardly pay any taxes because they have hardly any taxable income or assets. They put their house into a corporation or foundation, funnel any cash they need through various shell organizations and tax havens, etc.
I know of one "gotcha" that works in my country at least: work for low / no wage but instead have loads of assets like stocks; dividend taxes are much lower than income taxes.
This is a common trick in the UK, or at least it was before the IR35 crackdown. Programmers, sportsmen, celebrities, even politicians and civil servants would run single-person companies and get their salaries paid to them. Then those companies in turn would pay them in dividends.
The saving is more from a National Insurance perspective than an income tax one as income tax is paid on dividends (and dividends come out of profit after tax)
Only first 2k of dividends is tax free, then its 7.5% within the basic earnings band, and 32.5% in the higher band.
This is from funds that have already had 19% corporation tax applied to them.
Of course anything paid as dividends doesn't attract either employees or employers National Insurance so there's a saving there, and adding a spouse or partner as a director allows the income and dividends to be split so reducing tax.
Merging National Insurance into Income Tax is one way to start addressing the issue also simplifies administration work (for companies and government) but you'd get the political issue of tax increases on pensioners savings.
Fundamentally we need to start treating earned (salary) and un-earned (interest, dividends) income the same from a tax point of view
Really rich people do this with a complex network of shell organisations that's as opaque as possible.
It's not just that a corporation owns their house, it's that another corporation owns that corporation, and a holding company in the Cayman Islands with a nominee director who lives in a postbox owns everything, except the IP rights which are in Panama - this year. And personal spending goes through a credit card set up by their own personal offshore bank, which effectively makes it loan. Etc.
If there are enough shell companies you can decide your own tax payments, because you can hide everything you choose to hide. It's not that these networks can't be disassembled, it's that they can't be disassembled efficiently. It can literally take months or years of full-time auditing effort to trace all the relationships.
Somewhat oversimplified, you don't need a herd of corporations to do this - simply sell your house to a trust fund of which you or someone you trust is the primary beneficiary. In Jersey, Luxembourg or the like. You pay a lawyer who already does this for many funds to administer yours.
You then either rent the house from the trust for a minimal amount, or the trust lets you stay there rent-free as a guest. This is also how many of the wealthy get around inheritance tax. When you cash in your chips your will appoints your offspring/significant other as the primary beneficiary and the wheel keeps turning.
As with all things in life knowing the thing is often the hard part. Most of us don't know what questions to ask.
I was under the impression that living somewhere rent-free, or renting at under the market rate for a typical location, was still taxable income that needed to be declared.
Not in any country I've lived, but I imagine there'll be inevitable outliers. Rent is rent though, no? I'd love to know which country penalises you for finding a place to live with low rent...
Well, you can blame the US governments for it being needed in the first place. If you're an American company operating in another country, you get to pay taxes twice on the same money. In the country where you sold the product, and in the US due to their worldwide taxation.
> Why isn't the same standard applied to rich companies?
Prosecuting you is cheap and easy. Prosecuting a multinational billion dollar company is expensive and difficult.
One of the reasons it's difficult is that they're not (usually) outright evading tax. They're avoiding tax. The law is what's written, but also how that's interpreted by the courts. Sometimes the courts have not yet decided how to interpret a bit of the written law, and so companies will continue to use those bits in interesting ways.
Finally, some places have a "light touch" approach to regulation and they use courts as a measure of last resort, for the worst offenders. Everyone else will be persuaded to change their tax affairs. One consequence of this is that courts only rule on the obvious stuff, and we don't build up case law for the gray areas that get used in tax avoidance schemes.
I agree it's baffling that we let them get away with it. In the UK we think there are between £30bn and £120bn in tax that's evaded, avoided, or uncollected.
If you found a cute gotcha, then you would do just fine. You would get thrown in jail if you lied, or didn't have the cute gotcha. But the odds that you find a loophole like that, that you could take advantage of, is fairly slim
Well look at the Sacklers. Kill 500,000 people and you pay a $225 million fine out of the $8 billion you made from their deaths. Kill 10 people and they give you a lethal injection.
Earlier this year I read the book The Chickenshit Club on the advice of someone on here. It has a lot of interesting information but I didn't agree with the author's summary, basically: "prosecutors are cowardly and don't fight cases that don't look easily winnable. They should be braver and go for the highest-profile cases to make a statement". This seems wrong to me because a) litigating a complex, lengthy case and losing is a huge waste of public funds (it isn't a deterrent if the defendants know they can hire expensive lawyers and get off) and b) it can often be counterproductive, since it leads judges to set precedents which make their work harder in future.
One regulatory ideas I thought of was a salary cap on criminal defence attorneys (lawyers can make as much money as they want in civil law, but letting the wealthy hire a different league of lawyers in criminal cases is a huge distortion of justice). This is all more about actual crimes than violating the spirit of the law, but maybe the same could apply to tax law. (I feel like there must be a flaw with this, would be happy to hear what it is.)
The flaw is simple: you'll end up with only having as criminal defence attorneys those people who didn't succeed at being civil case attorneys, as everyone will prefer to earn more money with mostly the same training. So you won't have any outstanding criminal defence attorneys, which is equivalent to undermining the rights of those of need to defend themselves in criminal cases.
If you want to go this way, you have to go for the full-fledged solution: either the defendant choses their attorney (at a capped price) or an attorney shall be selected at random among all attorneys registered with the bar and must take charge of the case, the only exception being if they have a valid conflict of interest in that case.
But prosecutor salaries are (more or less) fixed, so if you let defence attorneys earn the same as prosecutors I don't think this harms the right of the defendant. You have a right to a reasonably good lawyer, but not to be defended by the most brilliant legal mind on earth who could get anybody acquited. The randomisation suggestion sounds good too.
A defense attorney is not defending only against a prosecutor in some kind of 1:1 coverage. They're defending against the prosecutor who also has a substantial fraction of the power of the entire government behind them. They can use a large amount of crime lab, detectives, investigators, etc.
I would argue almost the opposite. I don't see how it serves the public interest to limit the amount of resources people are allowed to use to defend themselves against the state. it's sort of like combating inequality by burning down the nicest houses. you've made everyone more equal, but no one is better off for it.
I think the imbalance is actually much worse in civil cases, which are disputes between people who ought to be peers. the fact that people have to give up their right to see an opponent in court because they can't afford counsel seems much worse than some rich people getting a better defense against the state.
I'd go further than this and make a positive case.
If we want the free market to work, business models need to be clear. We want people to see a successful business and say "hey, I can do that better". Part of that is transparent accounts, and part of that is transparent ownership.
Would also help againt some of the more egregious frauds we've seen in recent years. Some of them would have gotten caught if they'd just had more eyes on them, and you get more eyes if things are transparent.
Tax loopholes (and tax lawyers) exist only because there is sufficient complexity in the tax system/tax code.
This is because the tax system actually has 2 conflicting uses: (i) collect revenue for the gov't and (ii) create incentives/disincentives that are meant to push taxpayers in ways that are deemed beneficial, be it to the economy or to certain policy like environment, housing, etc.
If you drop (ii) you can end up with an extremely simple tax code as most of the tax code complexities deal with those incentives/disincentives.
So the question is: to what extent can you do away with (ii), or more generally with tax code complexity?
No, the tax system is complex because businesses are synthetic entities that can be arbitrarily complex. This is because corporations are allowed to exist unchecked since the 19th century. Return to the original intention of corporations, that they must be chartered and regulated in order to preserve their exemption from human individual law, and most of the problem goes away.
That is a very charitable interpretation of the original intention of corporations. For all intents and purposes, the earliest corporations were the shipping companies in Holland and England of the 16- and 1700s that were made to distribute the risk of colonial trading operations. Chartering and regulation came much later, when the various governmental structures of the time recognized the vast profits that were being made and decided to use their standing armies to get some of that money for themselves. The earliest corporate law is only from ~1798, almost 2 centuries after the founding of the VOC.
The original intention of corporations was to make more money for their owners and that is pretty much still the case. Chartering and regulation were introduced later, to curb the worst excesses of human greed. Arguably, this very discussion thread and the push by governments to curtail tax evasion is proof of that ongoing process.
> Tax loopholes (and tax lawyers) exist only because there is sufficient complexity in the tax system/tax code.
I don't think this is entirely correct. Even if there were no deductions and no other complexities, and the corporate income tax was simply based on "all revenue minus all costs", a company could still reduce or even eliminate its tax burden entirely by simply paying IP licensing costs to a different company located in a tax haven.
> My intuition is that if I personally came up with a cute "gotcha" like this where I wound up paying zero in taxes because of some loophole, I would go to prison. Why isn't the same standard applied to rich companies?
The same standards do apply, the loopholes just don’t really exist down at a normal individual income level.
Calling it a “loophole” is a bit of a misnomer as well since it’s just the regular law. Being a subsidiary of another company is extremely common and isolating particular resources into subsidiaries with exclusive licensing/usage agreements for liability/accounting/ownership/management purposes is extremely common.
> These tax shenanigans would stop if laws were enforced.
Again, the laws are enforced. Tax avoidance schemes operate within the bounds of the law. It sounds like you’re confusing with “tax evasion”, which is illegal and is enforced.
> These tax shenanigans would stop if laws were enforced.
At the end of it all, laws are enforced by the judiciary. The judiciary (similarly to politicians) are human people, and each individual's interpretation of what is law will vary.
Probably the biggest example of the difficulty of enforcement is the Irish Apple case[0]. The European Commission carried out a two-year investigation that found Apple avoided paying €13 billion in taxes to the Irish state. The Irish state rejected the Commission's findings and appealed the findings to the European General Court (EGC). And the EGC found in favour of the Irish state (and Apple).
> I read about tax avoidance schemes like corporate inversions or sending all your patents to a company in some tax free haven and licensing your patents from your company for all your profits, and so on, and it makes me really mad. Companies making many billions of dollars paying no taxes.
This used to be a typical loophole but is being closed by the OECD, a lot of tax havens are now taxing royalties differently. 10 years ago after reading up on this, I've decided that it was only fair for me to read up and try the same methods. I didn't see why I should pay high taxes when the richest in my country didn't.
It's not overly difficult to do this completely legally (that's the difference between tax avoidance and tax evasion), it's not an issue of the laws being enforced, it's mostly that there are many countries in the world and some have an incentive to compete on tax law. So, you can do a lot while still being completely legal (it's easier though if you are willing to move and live in different countries and if you're not american but still possible otherwise).
In the last 5 years, the OECD has been fighting against this and forced a lot of tax havens to change their laws. From my read of the texts and has someone who has been impacted by this, it doesn't really make avoiding tax impossible just more expensive, meaning it's increasingly difficult and costly for a single person who is middle class like me to do it but still relatively easy for big corporations with an army of accountants to do it. I'm not sure that's really an improvement.
It's insane that a nation delegates its sovereignty to others. There's no reason to allow subjects to shop around for better tax rates, except corruption.
The laws have always and will always favor those with capital. Its naive to think otherwise. There will always be loopholes, resources to fight it, go lobby a d bribe.
The "corruption" is a feature, not a bug. If you truly want go get rid of the assymetry, then the answer is not more regulations and extractions, but less across the board. Fund the services without relying on taxes to income, not only will it be fair for you and mc.corp, it will also create efficient market incentives and eliminate the vectors for corruption when there is nothing to gain.
"You're technically owned by an Irish company you invented to avoid taxes? Cool. The c-suite plus your accountants are going to prison for the next five years and we're seizing the X billion you actually owe plus a punitive fine."
Seems like this is a bit on the difficult to enforce side. Incidentally, profit is what is taxed, so the easy way to avoid tax is to simply not be profitable. Individuals pay tax on all of our income from interest and employment so this difference always feels somewhat unfair. The very laws that allow companies to avoid paying income tax are usually created as incentives: do this (HQ in Ireland), and in trade, you get to pay less in tax. The C suite and lawyers are usually guilty of meticulously obeying the law, which really makes the whole thing feel even more unfair. Reality is that the system is working as coded, but there are bugs in the code.
This tax shenanigans happen because we have built an absurdly complex tax framework which can be gamed/abused with economies of scale. The solution is to streamline the tax framework as to make its implementation almost unavoidable.
Long-story short, my bet is:
- Sales tax (VAT)
- Inflation
- UBI
Sales tax is far less gameable as it's linked to concrete economic activity. It also has the benefit of tracking the added value produced by an economy (it has the right properties as a tax). It has a problem though, it's regressive, see last point. Every economic activity should be included (e.g. stocks should have a VAT; you sell stock you collect VAT, you buy stocks, you pay VAT). Some progressiveness may be included by using different VAT rates for different products, to be done judiciously.
Inflation is a fantastic tax, very hard to game as it's quite pervasive and taxes the accumulation of capital so it tends to be distributive, anti-regressive. Cash sitting idle does nothing for the economy so disincentivizing it makes sense. This doesn't mean that inflation has to be high (the usual moderately low and positive that economists aim for may be reasonable), just that inflation should be seen as the taxation mechanism for the accumulation of capital. And we shouldn't reduce it to a single number for the entire economy but understand how inflation is evolving in the different parts of the economy to make sure monetary and fiscal policy are hitting the targets.
UBI, fixes the regressiveness of VAT. UBI is not too different from having a lowest tax-free income bracket or even negative-tax income bracket if you prefer to look at it that way. UBI can also help hit the right inflation rates in consumer products which we have been having great trouble achieving through conventional central bank policies.
I think this mix is far less gameable, tracks better the size of the economy, places the right incentives and disincentives and will survive better the ongoing economic transformations (good luck taxing income when most of the economic output is produced by computers).
Sales tax would be the only conventional tax in the scheme proposed. So it would need to be as high as needed to fit the public government spending. In some EU countries that would be above 50%, in the US may be roughly 40%. That may seem like a lot but averaged it would be the same than the average tax payer paid before, except more evenly distributed so likely median tax payer would be benefited.
UBI by itself is progressive, a simple flat UBI creates a progressive effective rate. You can tweak the numbers to obtain your desired target tax curve; increasing or decreasing UBI, having different VATs for different products. As John Von Neumann said, "with 3 parameters I can draw an elephant and with 4 I can make it wiggle its trunk". There is enough free parameters to make the taxation more or less progressive.
I'm not prescribing those details because I think there should be ample room for fine-tuning. What size government spending should have in an economy and how progressive should a tax system be are questions that different countries have answered differently and you find success and failure all across the spectrum. So I consider it a transversal issue.
My focus is on efficiency, resiliency to abuses/gameability and economic incentives.
I admire the proposed simplicity (and agree that setting the levels can largely mitigate any concerns of regressive nature [especially as compared to today]).
My concern under a sales-tax only system is that politicians also like to be seen as aiding employment and a sales-tax only system does not seem as supportive of employment as today's system where employment expenses are offset in part by their tax deductibility. No one goes out and employs someone for $100 to save $20 on taxes (still -$80), but I still employ more people when it costs me $80 than when it costs me $100 to do so. In that regard a VAT is superior to a straight sales-tax.
Inflation is a tax on capital held in monetary form. It is not a tax on capital held as the earning power of an ongoing business. If I hold $1M of cash, I care about inflation eroding that over decades. If I hold $1M worth of DCF of Coca-Cola's future profit streams, inflation does not concern me for that portion of my capital.
Correct, thanks for bringing to attention that distinction.
My point is that the idle capital held in monetary form does nothing, so I want to disincentivize that to some extent. While I have nothing against that capital being available to an enterprise, they inject it back to the economy through their CapEx, R&D, income for employees, etc...
Potentially a company may also sit in vast piles of idle money (e.g. Apple), the value of the company will take into account the DCF and also the existing liquid reserves. In that case the liquid reserves will be progressively diluted by inflation and again, that's a desired outcome (in my view).
This is my personal opinion, but even if we had perfect global tax laws, people would still find a way to abuse the system. I see the issue being too much power concentrating into too few hands. If you have too much power humans naturally use it. Rich get richer and poor become poorer. How do you see better tax code and UBI will fix this? How do you prevent abusing power?
> Inflation is a fantastic tax, ..., anti-regressive.
_Thomas Picketty has entered the chat_. History has shown that the rich are able to (easily) outpace inflation, while the poor (read: effectively ~95% of the planet) do not.
So I'm not too sure that is a desirable claim to make here.
Some excerpts (it's a great, long piece. Read it all):
"In 2017, researchers estimated that fraud by America’s largest corporations cost Americans up to $360 billion annually between 1996 and 2004. That’s roughly two decades’ worth of street crime every single year."
"Even though auditing millionaires and billionaires is one of the most cost-effective government activities imaginable—an independent report estimated in 2014 that it yielded up to $4,545 in recovered revenue per hour of staff time—the IRS investigated the returns of just 3 percent of American millionaires in 2017."
"It is, as one of those high-priced lawyers might say, improbable that these demographic and economic facts exert no influence whatsoever on judges' rulings. In a 2012 review of sentencing data in Florida, researchers found that “high-status” white collar criminals, such as doctors scamming Medicaid, were 98.7 percent less likely to receive prison terms than welfare fraudsters. A 2015 study found that judges showed increasing mercy as fraud offenders moved up the income scale: Criminals who stole more than $400 million got sentences that were less than half of the minimum recommended by federal guidelines. Criminals who stole $5,000 or less served sentences well over the minimum."
"The only thing that consistently worked was to combine them— warnings from government agencies, surveillance of the worst actors, harsher punishments for repeat offenders and, yes, at the top of the ladder, criminal prosecutions for corporations that refused to shape up.
This is hardly some exotic, untested concept. When it comes to every other form of crime, law enforcement agencies are perfectly comfortable cracking down on offenses at every level. This is the country that invented three-strikes laws and “broken windows” policing. When it comes to street gangs and drug distribution networks, the criminal justice system has no problem simplifying complex criminal liability questions into four simple words: You should have known. "
First off tax avoidance isn't fraud even given such shenanigans. They really do have offshore corporate offices in those countries. If they tried faking paperwork and really kept it in a corporate bank account? Actual fraud.
There is a reason for that - said strict criminal liability is broken it just breaks single lives and horrifyingly can be ignored. But break an entire systems and that leads to instability.
Take a complex economy with byzatine rules - either you have selective enforcement and effectively a dictatorship with extra steps or it is applied mercilessly across the board. Given the added risk to investments unsurprisingly many would choose to get the hell out of there.
Really the answer should be to do away with strict liability bullcrap.
It gets very complicated at the high levels of tax compliance. I am part of a company who had paid a specialized company to set up a tax advantaged structure in a foreign country several years ago in order to avoid capital gains tax.
The tax treaty document between the US and this country was over 100 pages long. When it came time to actually take the tax advantages on a return, we decided to figure out what the risks were of being audited and potential penalties. We engaged several tax experts to give their opinion.
What ensued was eye opening. We received wildly different opinions depending on the expert. The entire case hinged upon how one line in that 100+ page document could be interpreted. At the end of the day you are subject to the mercy of the IRS. For a large corporation, you may be able to afford the litigation (or avoid it all together as you could proactively play to the court of public opinion).
For us, we decided to fire the tax consultant and pay the tax. It was - for us - a very large sum, several million dollars.
Ultimately the “laws” are less like a set of rules and more a set of malleable guidelines. People who say, “oh I can just take whatever loopholes I’ve been given” don’t understand the sheer complexity and ambiguity of the tax code.
While I’m disappointed that we “lost” that money (one could argue it wasn’t ours to begin with), and disappointed that others are morally flexible enough or big enough to get away with it, I am left with the feeling that we did the right thing for the country as a whole. I am sad that more companies and individuals don’t consider that in their moral calculation.
> Ultimately the “laws” are less like a set of rules and more a set of malleable guidelines. People who say, “oh I can just take whatever loopholes I’ve been given” don’t understand the sheer complexity and ambiguity of the tax code.
I wonder if it's laziness or by design.
> While I’m disappointed that we “lost” that money (one could argue it wasn’t ours to begin with), and disappointed that others are morally flexible enough or big enough to get away with it, I am left with the feeling that we did the right thing for the country as a whole. I am sad that more companies and individuals don’t consider that in their moral calculation.
That's the thing: Moral should never come into play. If it does, that means the law wasn't written properly.
It's funny how that works as companies scale up. A relative owns a small business and needed to get rid of an employee. She wound up laying her off, and taking the insurance hit. She wasn't the best employee and there probably could have been an argument for causal firing, "I'm not going to just lie" is what she said.
Many larger orgs would just try to go for a causal firing, so they can block the employee from receiving unemployment. It doesn't even matter if they're an otherwise decent employee. We'll save money so lets just lie, basically. It's pretty crushing to the individual, and IMO this practice should be abolished.
This is totally anecdotal and plenty of small to medium businesses act shady, but it's interesting that things tend to get even shadier (lawful evil) as things scale up. Yet there's less at stake for the individual employees and more ability to "not be evil", without closing up shop.
Not that I defend it, but largely because non business entities don't have the concept of losses against which to deduct revenue, unless you actively trade equities. But I don't mean to just be pedantic about it: this really is the main reason. Summers' plea here strikes me as futile. He really thinks if the complex accounting were all laid out that it would lead to some mass awakening? I doubt it...
> My intuition is that if I personally came up with a cute "gotcha" like this where I wound up paying zero in taxes because of some loophole, I would go to prison.
Your intuition is wrong. There are lots of small business people that expense everything and pay negligible tax if any.
You would go to prison, because you didn't have a legal team to tie up the issue until the end of time. You can't save enough on your taxes to pay a team of lawyers.
The laws /are/ being enforced. Business taxation is based upon profit and has deductible expenses essentially to help avoid what happened with US Steel and not investing in their infastructure and then the world passed them by. If they actually spent or redistributed the parked money domestically without going through the proper channels they would be in deep shit.
Similarly limits on capital travel hampers both foreign investment and international business expansion as it gets "routed around".
IP expense transfers are the third piece and whatever was tried to do away with would result in giving up what the US already wins big on.
It isn't a problem of enforcement. Every last piece is policy of the loophole is policy working by design.
For what it is worth: The OECD has made a lot of changes to their transfer pricing guidelines, and starting in 2018, individual countries have a lot of leeway in re-assigning profits to other jurisdictions. The effect is not fully felt yet because the new guidelines are not evenly applied, but a friend of mine (who spent most of the 2000s building aggressive tax structures for multinational pharma companies) has spent the last few years mostly unwinding the aggressive structures again, in reaction to the OECD changes.
If you are interested in the details of this, Google "OECD BEPS transfer pricing"; it is quite a fascinating topic.
On a side note: The same updated guidelines, when misapplied by an aggressive tax authority, can cause all sorts of headaches for fully-distributed, fully remote companies, and the extent how this can cause trouble is underappreciated by the startup scene.
Your intuition is incorrect. Almost nobody goes to jail for tax related crimes. The ones that do are folks like Wesley Snipes who just refuse to pay taxes period.
they'd let you get away with it, you wouldn't go to prison. i'm pretty sure individuals used to take way more weird writeoffs. but mostly these have been closed over the years for individuals.
the laws are generally enforced the problem is various companies and nations working very hard to make sure that loopholes in the tax code are preserved.
> My intuition is that if I personally came up with a cute "gotcha" like this where I wound up paying zero in taxes because of some loophole, I would go to prison. Why isn't the same standard applied to rich companies?
Because the tax code is relatively simple for W2 employees. Not so much for corporations.
> "You're technically owned by an Irish company you invented to avoid taxes? Cool. The c-suite plus your accountants are going to prison for the next five years and we're seizing the X billion you actually owe plus a punitive fine."
It gets doubly complicated once you cross borders, because transferring assets like that might be legal under some treaty between country A and B.
Truth is, if society doesn't want these practices to be legal it has to write a tax code that doesn't make them legal.
International companies are allowed to avoid taxes because governments wage war through infiltrating the supply chains of other countries and conquering them economically, with citizens shouldering the financial burden of the effort.
Anyone can learn how accounting and taxes work and anyone can set up a company wherever they want in the world. IMHO a lot of these "they don't pay any taxes" statements come from not understanding how accounting and taxes work. There is nothing illegal about setting up a company to manage your IP and license it to your other companies and I don't see what's wrong with that, sorry.
unfortunately, it doesn't exist. Otherwise, if it does, then there's a way to arbitrage the extra money savings into a service that you can pay for (in lieu of tax).
The fact that such a service doesn't exist for the pleb individual means that this can't be done.
at least in europe , there is a market for "tax optimization" for middle-to-upper middle class people that is not prohibitively expensive, involving the many tax havens of the EU for certain kinds of businesses, for those willing to go through the hassle.
I just want healthcare. We pay more than enough taxes to get healthcare. Why do I not get healthcare for the taxes I pay? The government is busy trying to use my wealth to mine asteroids or shoot brown people or some stupid shit. I appear to get approximately zero benefit from the taxes I pay. Unlike, apparently, many americans, I am far more worried about blood pressure than I am about aggressive brown people and our failure to colonize mars.
Wrong incentives.
When basing on salary/personal income taxes, government is interested to raise everyone's income less inflation if it wants more taxes (let's skip 20th century aberrations like > 90% income taxes for now).
Corporate tax is an opaque mechanism with unknown corrupt incentives, effectively turns into blackmailing of business and IMO should be dropped whatsoever.
Many countries are adopting zero corporate tax (having dividend and salary taxes instead).
Solid point, though those on here that don’t run businesses probably don’t get the scope of what companies pay that those big ones aren’t able to avoid.
Right, but if the company didn't create the job, the income tax collected would be zero.
I'm not saying the income tax collected is purely coming from the company, but take Amazon for example - their economic activity creates jobs which pay salaries that are taxed.
yes, but the employee would've gotten another job else where, so it's _not_ the company that's creating the taxation benefit! They therefore, should not be given the benefit of attributing that taxation (for PR purposes)!
The company did make some investment which led to the job - but they did said investment for their own benefit, not to create more jobs for which taxation can be levied.
Well, if my employer is a small company, they pay my additional taxes plus their own. So, why big companies should have an edge in front of the small ones?
This will not end until people will all "incorporate" and apply the same tax tricks as major corporations. In other words we need the revolution of the "personal corporation". The startup that offers this will be the next Apple. Or, will be shut down when the law is changed. Either way, it's a win for society.
Stripe Atlas is a step in the right direction, but it does only the low hanging fruit. Accounting, handling audits and winding down is where the pros are required.
Unfortunately, sophisticated tax advice simply does not scale down to the level that would make it applicable to most companies/people. This type of advice is heavily fact-specific, and if you create a complicated legal structure, you can't take your eye off the ball for a minute. Otherwise you can end up blowing the whole thing up, or worse.
I would note that the world you describe (where people have tax tricks just like corporations) used to exist. Before the tax reform bill of 1986, doctors/lawyers/dentists/etc. were able to take advantage of tax shelters that greatly reduced their wage income, without actually incurring any real losses. These passive loss tax shelters were heavily marketed by accounting firms because of their general applicability. But in 1986 they were eliminated by a tax reform bill that outlawed perceived abuses and lowered tax rates.
I have to say I like your replies on this topic here and elsewhere. Almost sounds like these tax avoiding entities are software and there's a big maintenance cost as laws change all the time. I've always thought that a big part of law should be "programable" and I think we are slowly getting there.
Next up, imagine a machine learning trained entity just roaming the international law landscape, just trying to survive.
I'm not sure I understand (or agree with) his assumption that the full tax returns of corporations are private matters and always must be. That's a choice that Congress can make.
If corporations are the way for entities to achieve individual profits without individual liabilities, then surely privacy is not the same concern as for individuals' tax returns. Why are corporations (whose structure is granted by law to reap certain benefits with incorporated protections) then further shielded from their tax returns being public to show how they did it?
We can (if our leaders were incentivized to do it) choose to have it be true.
But our leaders aren't incentivized to do it, because our leaders are incentivized only by the very corporations in question.
As in, the corporations, through lobbying, quite literally write the legislation, not the people we actually elect to office.
So uprooting corporate tax info transparency rules is something that will never come to pass until other existing systems are demolished, but how do you get the legislators to legislate against their own self-interest?
I just read a story about how in the 1950s some citizens in Appalachia couldn't get their representatives to give a damn about fixing the run-down single bridge to their small isolated town far away from the big cities of importance.
So what they did was to ask the Soviet Union's representative office in the United States to sponsor their bridge repair, and they let all the newspapers know about it.
Sooner than you could blink, the state politicians reversed course and ponied up the $ for the bridge.
Maybe sometimes what you need is your enemies to be shown to be exploiting your weaknesses so that someone cares enough to fix it.
As if Larry Summers doesn't know how they do it.
Is he trolling?
Why doesn't he just write the article "This is how corporations pay no tax"?
Maybe it has something to do with un-elected officials, who generally represent the not-public, being Treasury Secretary.
It's not really a secret, the laws are public, the methods exactly aren't hidden as they must abide that and people in the profession understand liability mitigation.
The challenge here is education the public what assets, tax liability and general liability are for a corporation and what a corporation actually is (basically, almost, kinda a person.)
So it isn't shenanigans, it's the general public inability to learn a specific niche field and people whoa are knowledgeable, exploiting a legal loophole, on purpose whether or not the spirit/letter of the law was for that.
Not possible since TRUTH is suppressed in the name of trust/loyalty/compliance/privacy/conspiracy/discipline/patriotism/sedition/job/national security/intellectual property https://yts.mx/movies/citizenfour-2014
That's not taxing us, that's just them (or businesses they, or non-rich people, run) getting some tax relief. They will still be either paying more tax or employing more people or investing in more companies that employ people than I do, that's for sure.
If you spread that wealth (the non-stocks and shares kind, actual money) per-employee, you will not get very much money. That's why this sort of statement is silly.
This is a US specific comment but I was reading the David Shor article yesterday and he pointed out that the (vast) majority of funding (for democrats?) comes from individual (wealthy) donors - ie not the corporations who tend not to own the politicians so much anymore.
As usual The Economist has a lot that’s very sensible to say about tax reform. In particular putting more emphasis on taxing investors (you can shift your profits between jurisdictions but not your investors), property and inheritances. The main target should be rents.
I think this is the only way to get corporation onboard for pricing in climate change. I don't see it happening though as they have a boot on the necks of almost every member of Congress because the corps essentially fund their careers as politicians.
I see so many posts that have the wrong idea. So many of our politicians and lobbyists are former lawyers. Even the accountants are in on it. The laws are written to be purposely complicated so mega corporations keep smaller entrepreneurs down and lawyers/accountants big fees for knowing the rules inside out(they wrote them).
Why do you think large companies give stock options as compensation instead of straight cash. It is to avoid taxes.
The average American has one source of income a W2. A simple tax filing. Next time you do your tax filing, look at the questions TurboTax or FreeTaxUSA asks you and then look at the offical government tax doc(this is what gets filled out with your answers).
Most large companies have transitioned to giving shares (RSUs) rather than stock options (NQSOs in the case of large companies) for non-executives. Compliance risks/costs are lower and payouts to employees are more predictable (and therefore valued more highly by employees).
The government can compulsorily acquire the domestic domiciled assets of any company for 50? 100? times that company's declared taxable income with some appropriate average over the previous 5 years.
You earn nothing taxable here? Great for your tax bill but now you can worry about the capital loss and loss of control of trademarks & patents domestically. Better to declare the profit and pay the tax like an honest person...
There are legitimate reasons for a valuable company to make little to no profits. Namely re-investment in growth. Your proposal would make it impossible for businesses to spend todays profits on growth for tomorrow, and would thereby dramatically slow economic growth.
Yes. The whole idea of describing the tax on profits as an involving "declared taxable income" is misleading.
Few workers work without a salary, but plenty of companies run without profit... because they are re-investing and growing, or because they are slowly shrinking and dying. Lots of tax can still be collected (on money going out as salaries, and through VAT on money coming in) and their existence can still be useful (making stuff we need, and employing people) even if the books exactly balance at the end of the year.
No you're incorrect, and drawing a false distinction between spending company money on growth instead of profits, and other business expenses. There is no distinction for tax purposes, nor should there be.
If you buy assets you can claim the depreciation on them as a tax deductable expense.
If investment was tax deductable no company would pay tax ever. Simply invest all profits in an s&p500 index fund and pay no tax.
There is a distinction between business expenses and investment. There is one for tax purposes. It is abused roundly in tax dodges.
This conversations will now go nowhere. If you care about understanding it you've got some research to do to convince yourself, I will be unable to do so.
I don’t fully understand why corporations are taxed in the first place.
All the money the corporation takes in ultimately gets spent on operating expenses, or is profit that is then distributed to shareholders who then owe taxes on that income.
If it’s annoying and counter intuitive that corporations are in some legal senses considered people, it is even more confusing that they pay taxes.
This sets up a crazy situation where employees of the corporations start lobbying and messing with policy and regulations so it favors the organization.
Seems like bad piled on top of bad. Increasing the tax rate on investment income is basically the same thing as taxing corporations, but would remove all these perverse incentives.
This makes a lot of sense. There’s no way for the money to get out of the corporation without being taxed, we have all these R&D deductions to make many companies able to pay nothing, why not be direct about it?
On the other hand, is the status quo ok? Are we getting something out of companies having to do these specific activities to deduct?
>There’s no way for the money to get out of the corporation without being taxed
Not totally true. Interest free loan to the owner or his mother in law. Company buys a house / car / jet owner can use. Company buys consultancy services from the owners other company based in the Bahamas etc
They are taxed because they are beneficiaries of society's investment in infrastructure and people. They benefit directly from a healthy, educated population, enforcement of construction codes, the operation of the legal system, roads and waterways, etc. Companies aren't entirely benign, either, so part of those taxes goes to environmental impact assessment and handling they don't pay for, such as pollution, health hazards, etc.
If you were to make the case the healthy, educated employees could be compensated through their wages, then that still leaves infrastructure, externalities and the legal system.
While you could privatise infrastructure, I think it would be a bad idea. It could lead to shady schemes where a corporation "taxes" its employees on the toll road leading up to the building. Considering historical examples like company stores, I'm not sure we could rule that scenario out. Also, where does infrastructure stop and what does it include? The last miles of telecoms, power, water and other utilities or more?
As to the legal system, it seems self-evident we don't want that privatised. Do you disagree?
On the topic of externalities: I suppose it's feasible to create new taxes specifically for what are now considered externalities, so corporations pay for them: pollution, carbon footprint, burnouts/boreouts, etc. Would you be in favour of those?
A corporation is an abstraction that does not exist, so it cannot benefit from those things you listed.
The human shareholders and human staff benefit (and profit) from those things, and there are already mechanisms in place to tax those human beings, either as shareholders or as staff with ordinary income.
Corporations can be criminally charged. They are not abstractions, they are associations of people. You need to rethink your arbitrary definition of "abstraction".
Are you sure about that? Corporations cannot act (they have no hands, and no brains), and thus they cannot break the law. It also is relatively difficult to throw a corporation in jail for a criminal violation.
Even a much more informal association of people, a "criminal conspiracy", cannot be criminally charged as a single abstracted entity: the individuals who performed that conspiracy must be charged.
A corporation exists, just as a thought exists, they are both information and they can both change "reality" quite profoundly. Just because you can't touch it doesn't mean it doesn't exist and can't change things.
I believe an income tax should be the only tax, since it covers any and all economic transactions, and it's the only progressive tax.
- There's only a single loophole: People who use their business to pay for personal expenses. They are easy to catch, and the simplicity of the tax scheme allows collectors to focus on this one loophole.
- It's simple to collect: Ask all the banks for everyone's statement, and apply a percentage to their calendar year's income. You could even deduct tax when people deposit money.
- It's simple to forecast and calculate: Everyone knows how much tax they owe, and knows how much tax they will owe.
- It's progressive: The more people make the more they pay. Property tax, sales tax, gas tax, etc. all disproportionately affect people with less money.
Property tax can easily be made progressive. The only barrier is that some state Constitutions ban progressive property tax due to "originalist constructionist" misinterpretations.
>I don’t fully understand why corporations are taxed in the first place.
Because as economically inefficient as a corporate income tax is, without it you would create an enormous incentive for individuals to incorporate, filter all their income through the corporation, have the corporation pay all their expenses as business expenses, purchase their assets for them as business assets, and compensate them in the form of loans which never get paid back. Yes, you could write the law in such a way as to prohibit this and spend a fortune on enforcement, but ultimately it would fail against such incentives.
That can be easily fixed by making loans taxable and payback creditable. Want a $100K loan? Get a $140K loan, pay $40K tax. Pay back the loan? Deduct from taxes.
The UK has laws that prevent all of these things AND still has corporation tax.
Expensing anything is difficult as it must be solely for the business purposes and not personal use.
For example, you cannot generally expense food, clothes, housing, education etc. (You can probably expense an insignificant part of that though under some circumstances.) It’s not possible to take loans for extended periods of time without them actually counting as income for individuals (and being subject to income tax).
A while ago I listened to a podcast [1] where the guest Stephan Kinsella argued that the state justifies taxing and regulating corporations by granting them special rights like limited liability. The guest then continued to explain that this justification is flawed since the these supposed special rights are actually not special at all. The argument made a lot of sense but it only explains the justification and not the reason for corporate taxation. In my opinion the reason is obviously to increase the state's control over us.
> This sets up a crazy situation where employees of the corporations start lobbying and messing with policy and regulations so it favors the organization.
How is that part crazy? It isn't ideal certainly but the same thing held for farmers, fishermen, and tradesmen back when it was cottage industry. That is fundamentally a result of representative government and them being able to vote. Everybody has interests of some sort.
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[ 5.8 ms ] story [ 429 ms ] thread"there is no requirement for corporations to make public their taxable profits, or the ways in which they are avoided.... the IRS ... has since 2004 required the annual filing of Schedule M-3 .... this road map is available to the IRS alone, not to the public, who can hold companies accountable, nor to policymakers ...."
How would the IRS respond in those instances.
Has that been tried? Is anyone aware of anything like that? Is the cost of such a scheme prohibitive for an individual vs. a large Corp? I'd be curious what the challenges and outcome of such an experiment would be.
Lots of people do it. Self employment comes with some risks, but if you own it, and convert your employment towards it, it can have benefits.
Its how landscapers drive F250s, for example.
You should try it some time.
That might sound reasonable, until you realize that those family members never see that money. The “distribution” is a complete fiction.
I’m usually fairly conservative when it comes to taxes, but I’m astonished this is allowed to continue.
Big companies like Apple instead of bringing the money back they borrow billions of dollars at low interest rates. This lets them keep their money offshore where they invest it to make a bigger return then their interest rate on borrowing in the US.
Apple also has a routine for money in the US. You will find in Nevada Apple has an investment corporation. They will do the same thing, send the ownership of software to Nevada, charge their company in some xyz state (CA) and then they use that money in Nevada to invest it for more money then it costs them to borrow. So apple is covered both ways.
https://en.wikipedia.org/wiki/Braeburn_Capital#:~:text=Braeb....
https://www.businessinsider.com/how-apple-dodges-billions-in...
The money is "brought back" (if it even left) into segregated accounts in the US. Most of that US off-shore money is in New York to avoid currency risks, etc. Then those accounts are used as collateral (if needed. I doubt if anybody says to Apple, "Where's your collateral?") for loans.
Also, the biggest money havens in the world are 2 US states, with special privacy laws. All those guys playing games in Panama, etc. were better off just using US state tax shelters.
There's a couple of states that quietly hide money, nothing to do with any useful purpose to the public.
This is super interesting. stupid question perhaps: does Apple have the reserves to move a small currency if they decide to convert their cash all at one go?
Edit: NVM. I saw your explanation in another comment. Good info :-)
I worked in Japan for a while and had to file but never paid taxes.
The reason that publicly-traded companies are not CFCs is that a CFC must have 50% of the vote or value of the company owned by US Shareholders. "US Shareholder" is defined as a US person that owns at least 10% of the company. So even if a conglomerate is almost entirely owned by US persons, it would not be a CFC unless the US persons that own it also meet the 10% threshold.
The reason for this cutoff is that the CFC rule is meant to prevent small groups of people who can actually exercise control over a foreign company from getting together and colluding to keep profits off-shore. But this is not a risk in the case of companies whose ownership is spread among many small shareholders. As a result, big companies are able to take advantage of complex international structures in ways that small groups of individuals cannot.
Aren't there some public companies where some people have over 50% of the votes? Facebook comes to mind as one. Or are their international subsidiaries designated as CFCs?
1: https://www.vox.com/recode/2019/5/30/18644755/facebook-stock...
These structures often require a very collaborative relationship with the IRS with many things approved, elected or notified of in advance. The IRS only cares about compliance, not a hardline on actual revenue collection. The IRS has many doors for compliance.
Actors, film / tv professionals and lawyers etc are for the large part still treated as "self employed"
forced as in, you can claim a loss and all but you still pay MAT taxes which usually are around 18%.
its like saying to a kid who doesnt want to go to school because his knee is bruised. cry all you want, you will go to school.
https://en.wikipedia.org/wiki/Double_Irish_arrangement
https://www.investopedia.com/terms/d/double-irish-with-a-dut...
Would a right for the public to know the specific steps an entity uses to retain property go even further afield from the original premise?
Hopefully this clarifies my intent.
https://en.wikipedia.org/wiki/Negative_and_positive_rights#:....
Stacking new positive rights upon each other seems like an inferior solution as compared to the original, simple solution of respecting private property.
Where does the expansion of positive rights end?
Can we ever reconcile accounting and economics? With its excess cash reserves, if Apple paid tax, absolutely nothing about its business would change.
The more profound perspective is, who is really the tax collector then? Who is playing that economic role? Obviously these giant tax-evading companies. They are accumulating huge stockpiles of cash they cannot spend, a long-running surplus, they can't even effectively give it back to shareholders, and it's not because of tax policy. It's because they are the tax.
That's not controversial, some people call it simply rent seeking, but Summers should be going a few steps further: can we characterize the exact amount of non-tax compulsory payments (NTCPs) we are giving to Apple? Is there a policy process to convert the beneficiary of NTCPs from private ownership to the public, i.e. make it just a plain old tax?
It's only right for US corporations to be taxed the same way. Most of these insane financial contortions are done because they aren't taxed on foreign, non-repatriated earnings - creating an incentive to convert domestic earnings into 'foreign' ones, that get repatriated the next time there's a tax holiday.
I personally would love to earmark my personal income as foreign-sourced, and to not pay any taxes on it until I get a tax discount... But if I were to do that, I would go to jail for tax evasion.
“Some lists of countries that tax citizens and legal residents on their worldwide income include Libya, North Korea, Eritrea and the Philippines.”
Both from the first search result, https://premieroffshore.com/which-countries-tax-worldwide-in....
At least we’re in good company?
You still have to file, and to pay the difference, if any, every year.
they (the corps) can use this asset that they cannot repatriate as collateral for cheap loans.
My intuition is that if I personally came up with a cute "gotcha" like this where I wound up paying zero in taxes because of some loophole, I would go to prison. Why isn't the same standard applied to rich companies?
"You're technically owned by an Irish company you invented to avoid taxes? Cool. The c-suite plus your accountants are going to prison for the next five years and we're seizing the X billion you actually owe plus a punitive fine."
These tax shenanigans would stop if laws were enforced.
When I worked as a tax lawyer, we created structures and defended cases that saved our clients hundreds of millions of dollars. At this scale, paying for our services was a no-brainer.
On top of that, big companies lobby lawmakers to make the tax system favorable to them. This makes sense for the same reason: paying a couple million dollars to create/maintain a provision that saves $100M/yr is a no-brainer.
I'm not saying any of this is right or good (and I am no longer a tax lawyer; I now build tools that help people with disabilities). I'm just saying this is why it makes sense that companies can walk a fine line on taxes, save tons of money, and you and I cannot.
Part of my brain wishes that law would actually mean justice but somehow, if I trust only what I know, I cleary cannot judge, as you do, if finance engineering is good or bad.
I'd like to know what prevents you to choose if it's good or right (as person who have worked inside the business)
thx
Just as I don't have feelings about laws of physics, I don't have any feelings about economies of scale.
Lobbying is a bit different. Like most folks, the idea of 'lobbying' strikes me as wasteful/corrupt. But if you try to come up with a definition about what 'lobbying' is, and how you might try to restrict it, you realize that it is very difficult to do so without being underinclusive or overinclusive (or both!). So while I find the idea distasteful, I don't have any answers on how to 'fix' it.
- You clearly differentiate between opinion, observation and fact. - You don't try to find an easy answer.
Thanks. Comments like these make me come back and read on HN.
1: http://www.readacrosstheaisle.com
Physicists can be wrong.
Economists can be wrong.
At some point technical nonsense becomes “imperfect people choosing.”
A fix might simply be change tax laws? Kind of like how the billionaires changed them to be less distributed.
But you don’t have feelings enough about economics being purposely wielded at scale to manipulate; let’s hope you’re still one of the privileged enough to be indifferent and comfortable in the future.
popcorn
Real-time meltdown of Pax Americana is pretty metal.
I mean, sure a physicist can be wrong, but if they are giving facts as are currently accepted by the community or even as they know them, it isn't an emotional statement of whether they agree. It is just that: Facts as we know them, to the best of our ability and not giving the commentary with it.
Economics are defined by humans.
They’re taught to each other by humans.
It’s all wrapped in how we treat each other at scale.
Separating the two is impossible except as a semantics game.
Try getting an admission like that out of an economist!
The same way we are distributing information, we could better distribute literally to normalize human condition.
But profits demand we fill stores with gadgets versus TP.
Here are 3 rules that would stop lobbying overnight.
1- Make house of reps sole body to set tax law at federal lvl 2- tie reps in house to very specific, low pop counts. For ex, 1 rep district = 25,000. This would mean house would become gigantic. 3- randomize election outcomes. Swap winner of city treasurer with senate winner. Swap rep seat with state assemblyman. Every seat should have a high random chance of being swapped. If winner does not like position. We should even do this with presidency.
This solves federal level lobbying by taking (1) power into a (2) decentralized body and also (3) inserting downside for lobbyist.
Are people aware what everyday lobbying is in it's most basic form? It's companies engaging their elected representatives on policy issues relevant to them.
So when the Obamacare bill was being written, the AMA (representing physicians) lobbied Congress to make sure their views were heard. Completely legitimate. Another example might be a crime bill where the ACLU lobbies Congress. Or the EFF lobbies Congress.
And the lobbying dollars that are spent aren't bundles of cash given to Congresspersons, it's dollar spent on lobby firms that have armies of experts who know how Congress works, who to talk to and how to craft an argument that resonates. That doesn't come cheap.
Now up to this point nothing illegal has happened. You could argue it's unfair that businesses (well, more accurately organizations) have better access to Congress than individual voters, but groups will always have more power than individuals (since they represent more voters). There is nothing to stop a group of voters from forming an organization to lobby Congress on a specific issue. Again, that's what the ACLU and EFF do.
It seems like most people see "the AMA spent $10M on lobbying last year" and picture lobbyists passing bags of cash to Congress. No, that's illegal and has been for a very long time.
If you want justice, you have to apply political leverage to steer power in its direction.
Law is also the UI for political self-interest. Unfortunately the same leverage principle applies. Which is why it's almost impossible to get real justice - including tax justice - in a plutocracy. The scales are tilted too heavily in the opposite direction.
The answer is to balance plutocracy with effective political organisation, but that's an incredibly hard problem to solve at all, never mind peacefully.
Further, financial engineering by itself is morally neutral. It can create abuses sure, but it can also reduce unnecessary costs so that a company can employ more people, offer goods and services to customers at lower prices, etc. Tax is just one piece of a much bigger puzzle and it can’t always easily be disentangled from other issues.
I’m reminded of the saying about porn, you might not be able to define it, but you know it when you see it. There are plenty of publicly discussed cases of pretty clear and egregious tax evasion, but not all efforts to limit tax liability are abuses. Some of them are responses to deliberate incentives put into the tax system to encourage specific behaviour.
If you read between the lines, you can see that he understands that people have reservations (and probably he has chosen). He just chooses to explicitly not make a statement about it, and keep this a technical discussion.
In todays highly politicised society, this is (in my opinion) a sensible thing to do.
What? I don't think so. If money is the only thing they care about, sure. But is it? Should it be? And if breaking the spirit of the law is fine, shouldn't breaking the letter of the law be fine as well? As long as the risk is low enough..
</rant>
Also things sure do look different when you are at the helm. If you decide your company should pay more in taxes the board will probably vote you out on your ass.
There's no law against breaking the spirit of the law. Breaking the spirit of the law will only get you tried in the court of public opinion. Breaking the letter will also go to a court of justice.
In some states the judges are quasi-politicians with an implied mandate to rule how they think the people want them to rule. In others the judiciary is a system for evaluating the law and they see they consider it their mandate to enforce the law exactly as written, especially when it gives the legislature and the public the middle finger because that's the incentive for those groups to write and demand good law.
This is why laws need to be crafted to not give companies the benefit of the doubt when it comes to acting in the best interest of society. Less because it is impossible for a company to be moral in a vacuum, but because if being immoral is allowed and advantageous inevitably the immoral company will out compete the moral one. (Of course it can be hard to agree on what moral is. Some say that taxes are immoral after all.)
Nope, these are the reasons that cause the situation. This outcome does /not/ make sense nobody sane without a huge vested interest would design a system to achieve less tax paid when you earn more. It's entirely contrary to the intent and spirit of the tax code. This is not sensible. How to fix it? That's harder. Start with its a problem and morally and ethically wrong. It's really the only place to start from. I would say keep in mind two wrongs is not an improvement and unchecked government power is far worse than tax cheats but that does not change where this discussion should start.
Make a tax code as simple as possible. So simple there is no room for interpretation.
>It is more efficient to let people keep money than it is to take it from them and give it back
Direct subsidies in the form of tax credit don't incur any costs of moving money because no money are moved, but functionally it is almost the same.
Especially because the way a lot of deductions end up working in practice is that you withhold the money from people in the first place and cash it out in the end of the year when you calculate your actual tax burden.
See ~26 minute into this interview for a more in depth proposal that makes a lot of sense. Separate collecting money and spending money. https://www.econtalk.org/john-cochrane-on-economic-growth-an...
This is not a problem, this is a benefit. If you separate tax collection from tax policy you are still able making economic and social policy via other tools.
Basically tax policy is a low bar to entry way to get the laws you want but in a lossy capacity. Instead of making something legal/illegal outright you can just make it "illegal unless you jump through hoops and/or pay money" or you can provide a tax incentive for something you like (easier to sell than a subsidy). This lets you get dumb policy that would otherwise never pass. Big business benefits from this by getting carve-outs that make them more money or by getting policy that lets them use scale to their advantage. The authoritarian upper middle class benefits from this by using tax policy to create a carrot/stick system to kinda sorta make the poors act the way they want. And of course the government and politicians benefits from the current system because it gives them influence and power.
So right now we've got big business, the top ~30% or so of society and politicians/the government benefiting from the status quo. In order to remove politics from taxes big business is going to have to pay more (or everyone else will have to pay less, an equally large pill for a lot of people to swallow), the upper middle class will have to lose a set of carrots/sticks to kick the poors around and the government will have to accept a net decrease in power. The only way to get these groups to accept this is to spend a century boiling the frog. I don't think we'll ever get simple tax policy overnight.
They can suppress their 'profit' whichever way they want, they can't suppress their revenue in a given country.
The digital services tax is imposed at a rate of 3% on the gross revenues derived from digital activities of which French “users” are deemed to play a major role in value creation. The law not only affects digital companies but, more generally, digital business models.
https://home.kpmg/us/en/home/insights/2019/07/tnf-france-dig....
That rapidly turns into a disaster of consolidations and monopolies. You don't want that.
Think about the difference between big company $BIG selling you the consumer a million Widgets for 10^9 currency units, versus 26 small companies $a..$z each selling to the next in a long supply chain which results in a million Widgets.
In revenue taxation, big company $BIG pays 10^9∗$TAX_RATE.
Whereas the 26 small companies pay something more like 26∗10^9∗$TAX_RATE because each time a company pays the next company, that's revenue for the next company.
The difference in tax between those two scenarios is so enormous, that it would create enormous pressure for companies $a..$z to consolidate into a single company.
Repeat this across the entire economy, and you have enormous pressure to consolidate everything into as few companies as possible.
Ie, you buy through 1000 transactions, and you sell through 1500 transactions for a net total of +€5k within the country.
Tax that €5k, not the individual transactions.
Unless I'm missing something.
I'm still not seeing how it applies to the proposed example.
For instance, Google France makes 1bn euro in revenue, but purchases Google services from Google Ireland for 999mn, thus almost no profit and thus no tax. Google Ireland make 20bn but pay 19.99bn to Google Bermuda, which is the exclusive licensee of Google IP worldwide (even though the IP is almost exclusively produced in the US).
Taxing revenue means that these shenanigans do not reduce the tax paid in a particular country to zero.
That they would pay French taxes on that €1bn, and the French wouldn't care what they did after that.
That's literally a tax on value added.
https://www.investopedia.com/terms/v/valueadded.asp
With a broad enough definition and inclusion of other, unrelated prices at that negative part, one can claim that in a time-frame of several years, both average to nearly the same. But that doesn't make them equal, and if you go read those tax-codes, you will discover the ones being discussed add to very different figures even on the long term.
I'll just add here another encouragement to go out and get an understanding of tax codes. Odds are they will be relevant for everybody that frequents here at some point on their lives, and odds are that if you don't know them, you'll only discover their relevance after the fact, when they have already caused you some problem.
For example, if you sell something before you have paid for it (this is very common), and then put the money from selling into a bank where it earns interest, and then withdraw that money and pay for the thing you sold:
You will have made sale_price - purchase_price + interest.
In a VAT system, you will pay VAT on sale_price - purchase_price (or your customer will, depending on how you sell things), but not on the extra interest you earned.
So that's already a loophole. You can game the tax system by selling things before you buy them and earning interest.
If you're smart enough, you might even sell things for exactly the same as you pay for them, and still make a profit due to the interest while you hold the money. You could get even smarter, and hold that money on behalf of your upstream supplier to withdraw when they need to spend it. Before you know it, you're paying zero VAT, and all your profit looks like interest.
But you have to pay an accountant to make sense of all these for you. The cost of the accountant isn't a direct cost of making the thing you're selling.
So that gives you the difference between gross profit (sales price minus costs associated with the thing you're selling) and net profit (what you have after paying for everything needed to run the business).
No matter which company in the supply chain pays it!
With VAT, it's raised prices and shown on the receipt.
With other business taxes, it's raised prices and not shown on the receipt.
Customer pays either way.
Of course, competition and other factors also govern prices. It's not a given that changing business taxes always causes a business to change its prices by a related amount.
But that is the same for VAT and other business taxes too.
But it didn't look to me like that's what the GP comment meant. I assumed they meant tax on revenue taken by each company. No need to account for expenses...
I'd hoped that would be obvious from my comment, but if not I hope I've clarified that now.
ps. It looks like other commenters here are confused about this language, and arguing over the semantics of what "tax on revenue" means.
VAT doesn't solve all tax fairness problems unfortunately, which is a shame because it's a fairly well administered system, and good at catching fraud.
There are good reasons why VAT is not the only tax on businesses. One of those reasons is that immediate revenue and expenses are a poor model of many business accounts. Accountants use more sophisticated models (there are professional standards they have to adhere to), and despite their quirks and loopholes, these are generally better, fairer, more representative models of the state and value of a business and the money flowing through it, and as a result, for most "ordinary" businesses (i.e. not international corps gaming the system heavily), that ends up making taxation fairer.
Someone mentioned using a higher rate for higher revenue. That suggests an example where the better models which incorporate time and stored value results in fairer, more appropriate taxation. If you have a higher sustained revenue, year on year, it makes sense to use the higher rate if that's the policy. But if you make zero in year $X and twice your normal in year $X+1, then back to normal in years $X+2..., all just because you had a big customer pay late for the first year, fairness says you ought to end up paying the appropriate tax rate for your steady normal in the long run, not twice as much tax thanks to your late-paying customer!
The accountants' model handles that just fine, as it says you earned the money fair and square in year $X even though you didn't get paid that year. And that's generally better for limiting tax avoidance too, because it reduces the ways in which co-operating companies can game the system by timing their payments to each other to cheat. (VAT doesn't show this problem because it's a fixed percentage, but it occurs with progressive taxes, meaning variable percentage.)
My current biggest gripe with taxation is that it's mostly paid in the countries where the corporation lives, not where the revenue is made. Facebook sells 10 mil worth of ads in France? Facebook should pay (some) taxes for the 10 mil in France.
It seemed like such a simple solution to the often complained about problem of multinationals shifting profits to tax havens, since it’s much easier to determine where revenue is from, but I almost never see it discussed when corporate taxes come up. I wonder if it will ever go anywhere.
GP comment (me) points out that the proposed change is not a good idea.
P comment (riknox) points out we can always address that problem by doing what we currently do already (VAT).
I agree, we can solve the problem of the proposed change by continuing to do what we are already doing :-)
I'm suddenly hit with the image of a child whining that having to do homework AND chores is too hard, and their parent telling them to suck it up.
Besides, tax revenue doesn't just disappear into some govt hole, it gets redistributed as services and grants and the like. The loss in operating revenue is likely made up in increased business. Your low margin goods get fked but people are more willing to purchase the higher margin value-adds.
With this thinking, you can very much say that tax revenue does just disappear into some hole. The effect of taxation in this thinking is that it applies brakes upon the accumulation of wealth and causes existing wealth to be worth more (via deflation). This is counteracted by the inflation from created wealth via govt spending.
A weird alternative to taxation could be to print more and more money without taxing any of it. This would be functionally a flat tax on all existing wealth in that fiat currency via inflation.
It doesn't just disappear into the misty fog of the central bank though. It goes onto some government ledger.
This ledger has some considerable effect. It greatly constrains what the government can spend.
If the ledger meant nothing, you would not see government needing to borrow via issuing bonds when it needs to spend more. The cost to government of borrowing goes up and down according to circumstances, and is outside of government's direct control.
In other words, all the parts are related, partly by design, and this strongly affects the consequences of issuing (or destroying) currency at the central bank to the point where it's not really meaningful to think of taxation as destroying currency.
If the government did issue enough currency to go on a spending spree, before long not only would inflation harm other parts of the economy, it would also find that the prices of its spending spree went up, so it would have to issue more, and...
Ultimately no matter how much currency it issues, there's a strong drag in real terms on how many things the government can obtain from others and cause others to do via commerce.
That limit on its spending power makes the ledger balance something much stronger than a hole into which tax disappears.
In short the market/regulatory environment should support disaggregated business as a first class citizen, mergers and vertical integration as a very second-class construct. To the tune of if you merge, you must maintain 3 sets of accounts. The original accounts separately, and a combined set. You must gain more capability or utility to create value for the public as the combined company than by being separate. The capacity to measure the utility amplification being facilitated through the extra set of books. As more companies are bought and merged, the audit workloads would increase very quickly. Failure to make a good case for why you should continue to run as a merged company kicks in an orderly spin-off of the previous acquisition to get operated by someone else. M&A's should not be one and done. This greatly complicates hostile takeovers, makes the business model by which large entrenched entities buy out and kill up and coming competitors, at best, a stalling tactic, but more often a worthless waste of time to the perpetrating company as much as it is to the public.
If you let M&A's have their cake (the capital assets of another company) while giving them the option to cut fat without insisting that they "compensate" the public for the decrease in competition, only one side will ever benefit, and it won't be the public.
They won't avoid it to get some minor edge.
They will avoid it because every company formation and financial advisor will point out that it's commercial suicide to start your own company in that environment, and that instead you should take your idea to an existing company which specialises in opening "nearly autonomous departments", for an instant 30% or so increases in post-tax income, or 30% edge over competition on prices, or 30% edge on salaries you can pay, for exactly the same kind of business. (30% representative of some countries not others... adjust for your locale).
The few real companies specialising in that would love your M&A and tax regulations, as they could take a few % of every small business' profits, and have some levers of control, effectively government mandated.
After that, the millions of small companies which already existed, who cannot consolidate due to your M&A restrictions, will gradually either go out of business due to competition, or find a way, though contracts, deeds etc, to transfer their activity into these "autonomous department" companies without actually merging. It's not uncommon to transfer some of a company's activity this way already, so that would just be scaling it up.
You can try restricting all of that, but it will be very difficult as you would have to do it restrict what sorts of things people can agree to in contracts in a very significant way, and in doing so, restrict what are currently effective business arrangements for some companies to make them less effective. That would be an enormous change to business culture, and I suspect even if you did restrict what can be agreed in private contract terms, alternative ways to transfer what gets done where would be found very quickly and easily.
All these arguments about which country gets to collect a few percent tax, of a few percent profit, are dwarfed by this much larger slice. Which every country is free to adjust as they wish.
VAT is definitely not a tax on profit, that's usually called "corporate tax" [2] which is a completely different thing.
[1] https://www.gov.uk/reclaim-vat
[2] https://en.wikipedia.org/wiki/Corporate_tax
- Collection can be reduced by deducting VAT on company purchases, meaning the company only pays the difference between the VAT charged to the customer and the VAT they've incurred on purchases.
- It's regressive. It primarily affects poorer consumers since it is effectively a tax on the end user rather than the company.
- Some countries aren't free to set their own rates. For example, in the EU the standard rate cannot be set below 15% without first changing EU law (and convincing a majority of Member States to agree to do that) so it's not very competitive.
There's an argument that VAT is regressive but this isn't it. Who effectively pays (meaning economic incidence) is complicated. But sometimes it works out that poorer people pay a larger proportion of their income in VAT than do richer people. It seems entirely OK to have a mixture of regressive and progressive taxes.
And sure, not completely free within the EU, but the range of acceptable rates is pretty wide, maybe 17-27 exist today? I haven't done the numbers but France could surely raise an order of magnitude more money from VAT than they collect from corporate profits, if they wished.
Better to tax value adds than revenue, which is simply money flowing through the economy.
Most people operate on low margins economically, saving 5% of your paycheck would be an outstanding achievement for many.
https://www.amazon.com/Fine-Mess-Global-Simpler-Efficient/dp...
In contrast, you seem to be arguing a different point--that, to you, it "doesn't make sense" that the system is designed poorly.
The government could simply finance itself by printing money / inflation. Let’s say the government total expenditures were 5% of GDP each year, then you would simply have 5% inflation.
This would solve all the problems we have with income inequality, worthless heirs of the wealthy hoarding riches, and of very complex and expensive IRS and CPA work.
Everyone would need to invest their money rather than stuff it under a mattress so they could keep it growing rather than allowing inflation to shrink it.
Thoughts?
I've said that paying for CoronaVirus will probaby be done by inflation rather than taxes, but I'm not sure that as the only source of revenue it makes any sense
Since you can’t control what other sovereign nations do all you can do is make laws restricting what companies that operate in tax havens can do in local jurisdictions. But they will of course lobby that you’re restricting freedom and hobbling your economy and take their HQs elsewhere.
I hate the derogatory use of "race to the bottom" since it's the reason why we have handheld computers in our pockets and 60 inch flat screen TVs that cost $300. Every company is "racing to the bottom" to provide as much value for the least cost as possible.
The second reason is that I don't believe people view money fractionally - I think they look at it absolutely. For me am million dollars is a lot of money. For Bill Gates though a million dollars is ... a lot of money. It doesn't matter that he's a billionaire he's still not going to throw around a million dollars the same way I'd throw around the same fraction of my wealth that a million is to him. He still recognizes the absolute value of that money and he can still see it's potential to make things happen in the world just as I can see what a hundred dollars (or whatever my fractional equivalent is) can do in the world.
You both need to stop speculating about Bill Gates.
Could you elaborate, from your experience, what happened to these $$$? Do they sit in banks without being used or do they get get invested and recirculated in the economy?
Also, given that just about every function of the US govt has been privatised, what would the US govt spend this money on? Spend it on defence (and channel the money back to private defense entities)? Pay off trade deficit? I'm not aware of US budget break down on expenditure side so any pointer would be great.
IIRC defense is about 20% of the US federal budget. About 40% of that (ie 8% of total federal spending) is paid to staff. In some ways it's the largest redistributive program.
The trade deficit is private, it's an accounting summary between private importers and exporters. Nothing to "pay off".
http://www.beelinereader.com
Would you mind chatting about your expertise here? Do you think there is any feasible way of generalizing these tax avoidance structures so that Joe and Jane can reap some of those sweet sweet loophole benefits as well?
Mind you, most actually poor people have a low tax incidence in the first place due to progressive tax rates.
[0] https://en.wikipedia.org/wiki/Tax_incidence
I feel like if that's the case, then you shouldn't expect the US Government to participate in the enforcement of your patent. You licensed in some tax haven? Then adjudicate it in that same tax haven, we want no part of your disputes over it.
This is hugely impactful because the 'lost profits' method can generate much greater payouts than the 'reasonable royalty' method.
This isn't motivated by the sentiment you express, but it nonetheless illustrates that companies that are aggressive on taxes can end up getting bitten in other arenas.
https://www.propublica.org/article/ultrawealthy-taxes-irs-in...
Unless that income comes from qualified dividends or long-term capital gains. In this case, a married couple can have $24,400 a year in income AND $78,750 in investment income, TAX-FREE"
If you can get 78k$ yearly investment income from index funds, you already have a net worth of several million $, and you're thus already among the people that don't need to work (or you had some incredible luck for smaller investments)
*and have $5M+ in assets
When the money flowing through a corporation actually makes someone rich, it becomes his personal income. It's not clear that corporations paying their own taxes is even a good idea vs. collecting the same revenue through higher marginal tax rates on the beneficial owners.
Even if a plane is already going from City A to City B for business purposes, if the CEO brings a spouse along for personal reasons, there can be reporting consequences. Of course, this only matters if the company is under sufficient scrutiny to actually report such details.
There is no company that would just exist to forever eat money away from the public. Eventually they intend to pay the profits to a real person (either in money, or other benefits). Taxing that dividend or salary transaction might be simple enough to just work. And you have a real person to put to jail when the taxes were avoided.
So while you can get rid of corporate taxation, the tax treatment of natural persons at death means that folks could greatly reduce the amount of income realized during their lifetime.
This would mean that they essentially pay a "wealth tax" (interest on all their borrowed net worth, with probably a decent premium for the risk) to the bank.
> Then when the CEO dies, the loans are repaid out of the estate.
And at this point, income is raised out of the company and would become taxable. At least where I live, the estate of a natural person pays taxes for their income like a living natural person.
> the tax treatment of natural persons at death means that folks could greatly reduce the amount of income realized during their lifetime
But they'd still pay the taxes eventually. I don't see this as a huge issue. If the society can't wait to get their the taxes (IMHO a nation state should plan for timeframes longer than a single lifetime), they can use the same trick to get a loan from the bank with the future tax income as collateral.
Personally I don't think it is fair or likely healthy in the long term for the society to let vast majority of the income/wealth of wealthy and thus powerful people to go untaxed - even[1] if that income/wealth is not consumed.
[1] Actually it should be "especially if it is not consumed". In the old days there was a shortage of capital for investments indicated by relatively high interest rates. Nowadays there is shortage of consumption. But that to my understanding is a bit of a heterodox view, so I am just leaving it there.
But this is already happening even with the current system that attempts to tax company profits, isn't it? My point is that taxing the person instead of the company would enable taxing the wealthy. There are already quite severe restrictions of using company assets for your personal benefit, at least where I live that is taxable as income.
I should amend how I expressed the idea: I never meant that companies pay no tax at all, only that they'd pay no tax on profit (which can be hidden for the yearly checkpoint by creative accounting). That leaves all sorts of tax categories still available for use (land, transactions, resource usage), which are much harder to hide or deny. A company making profit would be involved in some activity that would be taxable through these. Money on a bank account is by itself a bad medium to store wealth, as it's generally subject to 1%~5% yearly inflation.
Whether wealth (aside from income/profit) of individuals or companies should be taxed is a different discussion. Many countries choose to tax wealth only when it's in form of land or constructed property.
One of my pet ideas is to stop taxing income/profits of limited liability companies completely. Instead make the the companies issue a certain percentage of their stock to the tax authorities annually. For public companies, Tax authorities just sell the shares in exchange. For private ones, the shares would be auctioned publicly.
Outcomes: - No negative tax cashflows to companies. Ever. - No need for creative tax accounting. Only ones left to fool with accounting are the owners of the companies. - Strong incentive to simplify corporate structures. Any company owned by a company would add to tax burden of the ultimate owners.
(For private companies, it might be nice to allow them to ask to postpone the auctions for e.g. 5 years if they want to keep the control of the company but are short of cash to buy the stock from the auction)
No company could be held privately in perpetuity. Taking ownership away is very different from taxing ownership.
In my model, either company can afford to buy back the stock from the auction thus keeping the company completely private, or then it does not, thus diluting current ownership.
(I personally would expect a tax rate of around 1% p.a in my model. If your company can't buy back 1% pa of its stock without needing to pay any other tax, I am not sure it is a healthy company)
Last, strongly ideologically, in my opinion limited liability is so massive benefit given to the owners by the society that I am not sure there is any reason to even have perpetual private limited companies. Either you grow up to public scrutiny of a publicly traded company or you do not succeed and die trying.
(But just to note, currently I am forced to pay tens of percentage points of my total salary as taxes.)
As for taxes, yes we all pay more. But we do not have our earning power attenuated each year because the government forces us to put ourselves on some incremental slave block.
Ingvar Kamprad net worth was "only" 3 billion $
That's about 25 billion $ lower than if he had unfettered access to all of IKEA's worth.
https://www.forbes.com/profile/ingvar-kamprad/
If you like how the company you built spends money more than how the state spends money, you're going to want your company to capture more money/worth without relinquishing it to the public. Another rationale could also be when you can give a stake in your company to your family, that way you won't ever have need to pay profits during your lifetime, since the company (which could be a charity) will actually work as a cross-generational fund.
Also, this works well with the ethos of some companies (like Amazon, allegedly) which reinvest a lot of their profits to cut margins/develop new products... And overall just tighten their hold on the market
Should a businesses goal not be to tighten their hold on the market? I’m pretty sure if I don’t, someone else will.
However, the owners of the company are humans that do not need to be constrained by those rules. Indeed, humans can hold other values higher - such as seeing that acting in the benefit of the entire society or even to benefit the entire planet is better than focusing on the best for a single corporation.
Pretend for a while that you are the majority owner of an internet company that preys on attention. You can capture the attention of millions, even billions of humans, and grow your vast empire. You can even become so successful that humans choose your product before the attention of other humans, choosing the dopamin kick from social media before real social interactions.
But...should you? Replacing the social interactions of an entire planet might make you rich today, but the price might be very high. Even your own offspring might suffer and perish in a world where social life has been replaced by hearts, thumbs up and endless scrolling.
That's a 2020 benefit to an entire society that arose from 25 years of effort to grow in a sustainable way.
I know of one "gotcha" that works in my country at least: work for low / no wage but instead have loads of assets like stocks; dividend taxes are much lower than income taxes.
I could be wrong. I'm just reminded of people like the Google founders who humblebragged about only earning $1 / year in salary. They still became multi-billionaires off of stocks.
In my country, assets are taxed by a percentage of a percentage (they tax estimated return on investment, which is ridiculous if you only have a savings account that nowadays has either no interest or even negative interest). I think there should be an additional tax on any money or assets moving out of said investment account.
Because that's how rich people do it; they hardly pay any taxes because they have hardly any taxable income or assets. They put their house into a corporation or foundation, funnel any cash they need through various shell organizations and tax havens, etc.
This is a common trick in the UK, or at least it was before the IR35 crackdown. Programmers, sportsmen, celebrities, even politicians and civil servants would run single-person companies and get their salaries paid to them. Then those companies in turn would pay them in dividends.
Only first 2k of dividends is tax free, then its 7.5% within the basic earnings band, and 32.5% in the higher band.
This is from funds that have already had 19% corporation tax applied to them.
Of course anything paid as dividends doesn't attract either employees or employers National Insurance so there's a saving there, and adding a spouse or partner as a director allows the income and dividends to be split so reducing tax.
Merging National Insurance into Income Tax is one way to start addressing the issue also simplifies administration work (for companies and government) but you'd get the political issue of tax increases on pensioners savings.
Fundamentally we need to start treating earned (salary) and un-earned (interest, dividends) income the same from a tax point of view
For income tax apart from the £2k(divi) and £500 (savings interest) allowances, it is already on the same basis.
It's not just that a corporation owns their house, it's that another corporation owns that corporation, and a holding company in the Cayman Islands with a nominee director who lives in a postbox owns everything, except the IP rights which are in Panama - this year. And personal spending goes through a credit card set up by their own personal offshore bank, which effectively makes it loan. Etc.
If there are enough shell companies you can decide your own tax payments, because you can hide everything you choose to hide. It's not that these networks can't be disassembled, it's that they can't be disassembled efficiently. It can literally take months or years of full-time auditing effort to trace all the relationships.
You then either rent the house from the trust for a minimal amount, or the trust lets you stay there rent-free as a guest. This is also how many of the wealthy get around inheritance tax. When you cash in your chips your will appoints your offspring/significant other as the primary beneficiary and the wheel keeps turning.
As with all things in life knowing the thing is often the hard part. Most of us don't know what questions to ask.
Prosecuting you is cheap and easy. Prosecuting a multinational billion dollar company is expensive and difficult.
One of the reasons it's difficult is that they're not (usually) outright evading tax. They're avoiding tax. The law is what's written, but also how that's interpreted by the courts. Sometimes the courts have not yet decided how to interpret a bit of the written law, and so companies will continue to use those bits in interesting ways.
Finally, some places have a "light touch" approach to regulation and they use courts as a measure of last resort, for the worst offenders. Everyone else will be persuaded to change their tax affairs. One consequence of this is that courts only rule on the obvious stuff, and we don't build up case law for the gray areas that get used in tax avoidance schemes.
I agree it's baffling that we let them get away with it. In the UK we think there are between £30bn and £120bn in tax that's evaded, avoided, or uncollected.
Edit: Just for the record I'm against benefit fraud and tax evasion.
One regulatory ideas I thought of was a salary cap on criminal defence attorneys (lawyers can make as much money as they want in civil law, but letting the wealthy hire a different league of lawyers in criminal cases is a huge distortion of justice). This is all more about actual crimes than violating the spirit of the law, but maybe the same could apply to tax law. (I feel like there must be a flaw with this, would be happy to hear what it is.)
(Wrote more about the book here: https://www.goodreads.com/review/show/3507224023)
If you want to go this way, you have to go for the full-fledged solution: either the defendant choses their attorney (at a capped price) or an attorney shall be selected at random among all attorneys registered with the bar and must take charge of the case, the only exception being if they have a valid conflict of interest in that case.
I think the imbalance is actually much worse in civil cases, which are disputes between people who ought to be peers. the fact that people have to give up their right to see an opponent in court because they can't afford counsel seems much worse than some rich people getting a better defense against the state.
If we want the free market to work, business models need to be clear. We want people to see a successful business and say "hey, I can do that better". Part of that is transparent accounts, and part of that is transparent ownership.
Would also help againt some of the more egregious frauds we've seen in recent years. Some of them would have gotten caught if they'd just had more eyes on them, and you get more eyes if things are transparent.
This is because the tax system actually has 2 conflicting uses: (i) collect revenue for the gov't and (ii) create incentives/disincentives that are meant to push taxpayers in ways that are deemed beneficial, be it to the economy or to certain policy like environment, housing, etc.
If you drop (ii) you can end up with an extremely simple tax code as most of the tax code complexities deal with those incentives/disincentives.
So the question is: to what extent can you do away with (ii), or more generally with tax code complexity?
The original intention of corporations was to make more money for their owners and that is pretty much still the case. Chartering and regulation were introduced later, to curb the worst excesses of human greed. Arguably, this very discussion thread and the push by governments to curtail tax evasion is proof of that ongoing process.
I don't think this is entirely correct. Even if there were no deductions and no other complexities, and the corporate income tax was simply based on "all revenue minus all costs", a company could still reduce or even eliminate its tax burden entirely by simply paying IP licensing costs to a different company located in a tax haven.
The same standards do apply, the loopholes just don’t really exist down at a normal individual income level.
Calling it a “loophole” is a bit of a misnomer as well since it’s just the regular law. Being a subsidiary of another company is extremely common and isolating particular resources into subsidiaries with exclusive licensing/usage agreements for liability/accounting/ownership/management purposes is extremely common.
> These tax shenanigans would stop if laws were enforced.
Again, the laws are enforced. Tax avoidance schemes operate within the bounds of the law. It sounds like you’re confusing with “tax evasion”, which is illegal and is enforced.
At the end of it all, laws are enforced by the judiciary. The judiciary (similarly to politicians) are human people, and each individual's interpretation of what is law will vary.
Probably the biggest example of the difficulty of enforcement is the Irish Apple case[0]. The European Commission carried out a two-year investigation that found Apple avoided paying €13 billion in taxes to the Irish state. The Irish state rejected the Commission's findings and appealed the findings to the European General Court (EGC). And the EGC found in favour of the Irish state (and Apple).
Does this count as laws being enforced?
[0] https://en.wikipedia.org/wiki/EU_illegal_state_aid_case_agai...
This used to be a typical loophole but is being closed by the OECD, a lot of tax havens are now taxing royalties differently. 10 years ago after reading up on this, I've decided that it was only fair for me to read up and try the same methods. I didn't see why I should pay high taxes when the richest in my country didn't.
It's not overly difficult to do this completely legally (that's the difference between tax avoidance and tax evasion), it's not an issue of the laws being enforced, it's mostly that there are many countries in the world and some have an incentive to compete on tax law. So, you can do a lot while still being completely legal (it's easier though if you are willing to move and live in different countries and if you're not american but still possible otherwise).
In the last 5 years, the OECD has been fighting against this and forced a lot of tax havens to change their laws. From my read of the texts and has someone who has been impacted by this, it doesn't really make avoiding tax impossible just more expensive, meaning it's increasingly difficult and costly for a single person who is middle class like me to do it but still relatively easy for big corporations with an army of accountants to do it. I'm not sure that's really an improvement.
These tax shenanigans would stop if laws were enforced.
Those who could enforce them have no interest to do so.
The "corruption" is a feature, not a bug. If you truly want go get rid of the assymetry, then the answer is not more regulations and extractions, but less across the board. Fund the services without relying on taxes to income, not only will it be fair for you and mc.corp, it will also create efficient market incentives and eliminate the vectors for corruption when there is nothing to gain.
Concentration of power in congress is a feature, not a bug.
You can remove concentration of power and simply aee corruption/bribe/lobbying dissappear overnight
See my post above for how to do this with 3 simple laws
Seems like this is a bit on the difficult to enforce side. Incidentally, profit is what is taxed, so the easy way to avoid tax is to simply not be profitable. Individuals pay tax on all of our income from interest and employment so this difference always feels somewhat unfair. The very laws that allow companies to avoid paying income tax are usually created as incentives: do this (HQ in Ireland), and in trade, you get to pay less in tax. The C suite and lawyers are usually guilty of meticulously obeying the law, which really makes the whole thing feel even more unfair. Reality is that the system is working as coded, but there are bugs in the code.
These tax discounts should really be subsidies, and open to the public to view.
Proper accounting is where fairness starts.
Long-story short, my bet is:
- Sales tax (VAT)
- Inflation
- UBI
Sales tax is far less gameable as it's linked to concrete economic activity. It also has the benefit of tracking the added value produced by an economy (it has the right properties as a tax). It has a problem though, it's regressive, see last point. Every economic activity should be included (e.g. stocks should have a VAT; you sell stock you collect VAT, you buy stocks, you pay VAT). Some progressiveness may be included by using different VAT rates for different products, to be done judiciously.
Inflation is a fantastic tax, very hard to game as it's quite pervasive and taxes the accumulation of capital so it tends to be distributive, anti-regressive. Cash sitting idle does nothing for the economy so disincentivizing it makes sense. This doesn't mean that inflation has to be high (the usual moderately low and positive that economists aim for may be reasonable), just that inflation should be seen as the taxation mechanism for the accumulation of capital. And we shouldn't reduce it to a single number for the entire economy but understand how inflation is evolving in the different parts of the economy to make sure monetary and fiscal policy are hitting the targets.
UBI, fixes the regressiveness of VAT. UBI is not too different from having a lowest tax-free income bracket or even negative-tax income bracket if you prefer to look at it that way. UBI can also help hit the right inflation rates in consumer products which we have been having great trouble achieving through conventional central bank policies.
I think this mix is far less gameable, tracks better the size of the economy, places the right incentives and disincentives and will survive better the ongoing economic transformations (good luck taxing income when most of the economic output is produced by computers).
UBI by itself is progressive, a simple flat UBI creates a progressive effective rate. You can tweak the numbers to obtain your desired target tax curve; increasing or decreasing UBI, having different VATs for different products. As John Von Neumann said, "with 3 parameters I can draw an elephant and with 4 I can make it wiggle its trunk". There is enough free parameters to make the taxation more or less progressive.
I'm not prescribing those details because I think there should be ample room for fine-tuning. What size government spending should have in an economy and how progressive should a tax system be are questions that different countries have answered differently and you find success and failure all across the spectrum. So I consider it a transversal issue.
My focus is on efficiency, resiliency to abuses/gameability and economic incentives.
My concern under a sales-tax only system is that politicians also like to be seen as aiding employment and a sales-tax only system does not seem as supportive of employment as today's system where employment expenses are offset in part by their tax deductibility. No one goes out and employs someone for $100 to save $20 on taxes (still -$80), but I still employ more people when it costs me $80 than when it costs me $100 to do so. In that regard a VAT is superior to a straight sales-tax.
My point is that the idle capital held in monetary form does nothing, so I want to disincentivize that to some extent. While I have nothing against that capital being available to an enterprise, they inject it back to the economy through their CapEx, R&D, income for employees, etc...
Potentially a company may also sit in vast piles of idle money (e.g. Apple), the value of the company will take into account the DCF and also the existing liquid reserves. In that case the liquid reserves will be progressively diluted by inflation and again, that's a desired outcome (in my view).
_Thomas Picketty has entered the chat_. History has shown that the rich are able to (easily) outpace inflation, while the poor (read: effectively ~95% of the planet) do not.
So I'm not too sure that is a desirable claim to make here.
Some excerpts (it's a great, long piece. Read it all):
"In 2017, researchers estimated that fraud by America’s largest corporations cost Americans up to $360 billion annually between 1996 and 2004. That’s roughly two decades’ worth of street crime every single year."
"Even though auditing millionaires and billionaires is one of the most cost-effective government activities imaginable—an independent report estimated in 2014 that it yielded up to $4,545 in recovered revenue per hour of staff time—the IRS investigated the returns of just 3 percent of American millionaires in 2017."
"It is, as one of those high-priced lawyers might say, improbable that these demographic and economic facts exert no influence whatsoever on judges' rulings. In a 2012 review of sentencing data in Florida, researchers found that “high-status” white collar criminals, such as doctors scamming Medicaid, were 98.7 percent less likely to receive prison terms than welfare fraudsters. A 2015 study found that judges showed increasing mercy as fraud offenders moved up the income scale: Criminals who stole more than $400 million got sentences that were less than half of the minimum recommended by federal guidelines. Criminals who stole $5,000 or less served sentences well over the minimum."
"The only thing that consistently worked was to combine them— warnings from government agencies, surveillance of the worst actors, harsher punishments for repeat offenders and, yes, at the top of the ladder, criminal prosecutions for corporations that refused to shape up.
This is hardly some exotic, untested concept. When it comes to every other form of crime, law enforcement agencies are perfectly comfortable cracking down on offenses at every level. This is the country that invented three-strikes laws and “broken windows” policing. When it comes to street gangs and drug distribution networks, the criminal justice system has no problem simplifying complex criminal liability questions into four simple words: You should have known. "
There is a reason for that - said strict criminal liability is broken it just breaks single lives and horrifyingly can be ignored. But break an entire systems and that leads to instability.
Take a complex economy with byzatine rules - either you have selective enforcement and effectively a dictatorship with extra steps or it is applied mercilessly across the board. Given the added risk to investments unsurprisingly many would choose to get the hell out of there.
Really the answer should be to do away with strict liability bullcrap.
The tax treaty document between the US and this country was over 100 pages long. When it came time to actually take the tax advantages on a return, we decided to figure out what the risks were of being audited and potential penalties. We engaged several tax experts to give their opinion.
What ensued was eye opening. We received wildly different opinions depending on the expert. The entire case hinged upon how one line in that 100+ page document could be interpreted. At the end of the day you are subject to the mercy of the IRS. For a large corporation, you may be able to afford the litigation (or avoid it all together as you could proactively play to the court of public opinion).
For us, we decided to fire the tax consultant and pay the tax. It was - for us - a very large sum, several million dollars.
Ultimately the “laws” are less like a set of rules and more a set of malleable guidelines. People who say, “oh I can just take whatever loopholes I’ve been given” don’t understand the sheer complexity and ambiguity of the tax code.
While I’m disappointed that we “lost” that money (one could argue it wasn’t ours to begin with), and disappointed that others are morally flexible enough or big enough to get away with it, I am left with the feeling that we did the right thing for the country as a whole. I am sad that more companies and individuals don’t consider that in their moral calculation.
I wonder if it's laziness or by design.
> While I’m disappointed that we “lost” that money (one could argue it wasn’t ours to begin with), and disappointed that others are morally flexible enough or big enough to get away with it, I am left with the feeling that we did the right thing for the country as a whole. I am sad that more companies and individuals don’t consider that in their moral calculation.
That's the thing: Moral should never come into play. If it does, that means the law wasn't written properly.
Many larger orgs would just try to go for a causal firing, so they can block the employee from receiving unemployment. It doesn't even matter if they're an otherwise decent employee. We'll save money so lets just lie, basically. It's pretty crushing to the individual, and IMO this practice should be abolished.
This is totally anecdotal and plenty of small to medium businesses act shady, but it's interesting that things tend to get even shadier (lawful evil) as things scale up. Yet there's less at stake for the individual employees and more ability to "not be evil", without closing up shop.
Your intuition is wrong. There are lots of small business people that expense everything and pay negligible tax if any.
Similarly limits on capital travel hampers both foreign investment and international business expansion as it gets "routed around".
IP expense transfers are the third piece and whatever was tried to do away with would result in giving up what the US already wins big on.
It isn't a problem of enforcement. Every last piece is policy of the loophole is policy working by design.
If you are interested in the details of this, Google "OECD BEPS transfer pricing"; it is quite a fascinating topic.
On a side note: The same updated guidelines, when misapplied by an aggressive tax authority, can cause all sorts of headaches for fully-distributed, fully remote companies, and the extent how this can cause trouble is underappreciated by the startup scene.
the laws are generally enforced the problem is various companies and nations working very hard to make sure that loopholes in the tax code are preserved.
Because the tax code is relatively simple for W2 employees. Not so much for corporations.
> "You're technically owned by an Irish company you invented to avoid taxes? Cool. The c-suite plus your accountants are going to prison for the next five years and we're seizing the X billion you actually owe plus a punitive fine."
It gets doubly complicated once you cross borders, because transferring assets like that might be legal under some treaty between country A and B.
Truth is, if society doesn't want these practices to be legal it has to write a tax code that doesn't make them legal.
Not just that, they need cheap access to the same infrastructure.
The fact that such a service doesn't exist for the pleb individual means that this can't be done.
that's the employee's contribution, not the company's.
I'm not saying the income tax collected is purely coming from the company, but take Amazon for example - their economic activity creates jobs which pay salaries that are taxed.
yes, but the employee would've gotten another job else where, so it's _not_ the company that's creating the taxation benefit! They therefore, should not be given the benefit of attributing that taxation (for PR purposes)!
The company did make some investment which led to the job - but they did said investment for their own benefit, not to create more jobs for which taxation can be levied.
Stripe Atlas is a step in the right direction, but it does only the low hanging fruit. Accounting, handling audits and winding down is where the pros are required.
I would note that the world you describe (where people have tax tricks just like corporations) used to exist. Before the tax reform bill of 1986, doctors/lawyers/dentists/etc. were able to take advantage of tax shelters that greatly reduced their wage income, without actually incurring any real losses. These passive loss tax shelters were heavily marketed by accounting firms because of their general applicability. But in 1986 they were eliminated by a tax reform bill that outlawed perceived abuses and lowered tax rates.
Next up, imagine a machine learning trained entity just roaming the international law landscape, just trying to survive.
If corporations are the way for entities to achieve individual profits without individual liabilities, then surely privacy is not the same concern as for individuals' tax returns. Why are corporations (whose structure is granted by law to reap certain benefits with incorporated protections) then further shielded from their tax returns being public to show how they did it?
We can (if our leaders were incentivized to do it) choose to have it be true.
As in, the corporations, through lobbying, quite literally write the legislation, not the people we actually elect to office.
So uprooting corporate tax info transparency rules is something that will never come to pass until other existing systems are demolished, but how do you get the legislators to legislate against their own self-interest?
Also the Big Four are not going to like that, they make a lot of money off this.
So what they did was to ask the Soviet Union's representative office in the United States to sponsor their bridge repair, and they let all the newspapers know about it.
Sooner than you could blink, the state politicians reversed course and ponied up the $ for the bridge.
Maybe sometimes what you need is your enemies to be shown to be exploiting your weaknesses so that someone cares enough to fix it.
The challenge here is education the public what assets, tax liability and general liability are for a corporation and what a corporation actually is (basically, almost, kinda a person.)
So it isn't shenanigans, it's the general public inability to learn a specific niche field and people whoa are knowledgeable, exploiting a legal loophole, on purpose whether or not the spirit/letter of the law was for that.
Tax avoidance, subsidies, bailouts, stimuli, etc.
Want to tax the rich? No. They tax you.
For example, Walmart pays minimum wage and asks employees to use Medicaid while their leadership gets enormously rich.
https://www.economist.com/leaders/2018/08/09/overhaul-tax-fo...
Land tax + VAT would be ideal and difficult to avoid.
Tax on labour and housing are dis-incentivizing "good behavior".
Why do you think large companies give stock options as compensation instead of straight cash. It is to avoid taxes.
The average American has one source of income a W2. A simple tax filing. Next time you do your tax filing, look at the questions TurboTax or FreeTaxUSA asks you and then look at the offical government tax doc(this is what gets filled out with your answers).
The government can compulsorily acquire the domestic domiciled assets of any company for 50? 100? times that company's declared taxable income with some appropriate average over the previous 5 years.
You earn nothing taxable here? Great for your tax bill but now you can worry about the capital loss and loss of control of trademarks & patents domestically. Better to declare the profit and pay the tax like an honest person...
Few workers work without a salary, but plenty of companies run without profit... because they are re-investing and growing, or because they are slowly shrinking and dying. Lots of tax can still be collected (on money going out as salaries, and through VAT on money coming in) and their existence can still be useful (making stuff we need, and employing people) even if the books exactly balance at the end of the year.
Business expenses are tax deductable. Investment is not.
Yes I'm completely aware that this is one of Amazon's stated defences for tax dodging. Tax dodging is their core competency. I hate that.
If investment was tax deductable no company would pay tax ever. Simply invest all profits in an s&p500 index fund and pay no tax.
There is a distinction between business expenses and investment. There is one for tax purposes. It is abused roundly in tax dodges.
This conversations will now go nowhere. If you care about understanding it you've got some research to do to convince yourself, I will be unable to do so.
All the money the corporation takes in ultimately gets spent on operating expenses, or is profit that is then distributed to shareholders who then owe taxes on that income.
If it’s annoying and counter intuitive that corporations are in some legal senses considered people, it is even more confusing that they pay taxes.
This sets up a crazy situation where employees of the corporations start lobbying and messing with policy and regulations so it favors the organization.
Seems like bad piled on top of bad. Increasing the tax rate on investment income is basically the same thing as taxing corporations, but would remove all these perverse incentives.
On the other hand, is the status quo ok? Are we getting something out of companies having to do these specific activities to deduct?
Not totally true. Interest free loan to the owner or his mother in law. Company buys a house / car / jet owner can use. Company buys consultancy services from the owners other company based in the Bahamas etc
If you were to make the case the healthy, educated employees could be compensated through their wages, then that still leaves infrastructure, externalities and the legal system.
While you could privatise infrastructure, I think it would be a bad idea. It could lead to shady schemes where a corporation "taxes" its employees on the toll road leading up to the building. Considering historical examples like company stores, I'm not sure we could rule that scenario out. Also, where does infrastructure stop and what does it include? The last miles of telecoms, power, water and other utilities or more?
As to the legal system, it seems self-evident we don't want that privatised. Do you disagree?
On the topic of externalities: I suppose it's feasible to create new taxes specifically for what are now considered externalities, so corporations pay for them: pollution, carbon footprint, burnouts/boreouts, etc. Would you be in favour of those?
The human shareholders and human staff benefit (and profit) from those things, and there are already mechanisms in place to tax those human beings, either as shareholders or as staff with ordinary income.
Are you sure about that? Corporations cannot act (they have no hands, and no brains), and thus they cannot break the law. It also is relatively difficult to throw a corporation in jail for a criminal violation.
Even a much more informal association of people, a "criminal conspiracy", cannot be criminally charged as a single abstracted entity: the individuals who performed that conspiracy must be charged.
- There's only a single loophole: People who use their business to pay for personal expenses. They are easy to catch, and the simplicity of the tax scheme allows collectors to focus on this one loophole.
- It's simple to collect: Ask all the banks for everyone's statement, and apply a percentage to their calendar year's income. You could even deduct tax when people deposit money.
- It's simple to forecast and calculate: Everyone knows how much tax they owe, and knows how much tax they will owe.
- It's progressive: The more people make the more they pay. Property tax, sales tax, gas tax, etc. all disproportionately affect people with less money.
Because as economically inefficient as a corporate income tax is, without it you would create an enormous incentive for individuals to incorporate, filter all their income through the corporation, have the corporation pay all their expenses as business expenses, purchase their assets for them as business assets, and compensate them in the form of loans which never get paid back. Yes, you could write the law in such a way as to prohibit this and spend a fortune on enforcement, but ultimately it would fail against such incentives.
Expensing anything is difficult as it must be solely for the business purposes and not personal use.
For example, you cannot generally expense food, clothes, housing, education etc. (You can probably expense an insignificant part of that though under some circumstances.) It’s not possible to take loans for extended periods of time without them actually counting as income for individuals (and being subject to income tax).
[1] http://www.stephankinsella.com/paf-podcast/kol-026-freedomai...
How is that part crazy? It isn't ideal certainly but the same thing held for farmers, fishermen, and tradesmen back when it was cottage industry. That is fundamentally a result of representative government and them being able to vote. Everybody has interests of some sort.