TheAgitator.com
Corporate Income Tax Video
Tuesday, October 28th, 2008I’m amused when I hear Obama talk about giving tax credits to American companies that create jobs here in the U.S. as opposed to overseas. If he agrees that high taxes are the main reason why U.S. companies are moving jobs overseas, wouldn’t it be a better idea just to lower the corporate income tax all around? We have the second-highest corporate income tax in the world. To say that companies should stay here and pay the penalty out of “patriotism” is just silly. Companies can (and should) make decisions that benefit shareholders, not to benefit the governments of whatever borders they happen to be located between.
In any case, that’s my way of introducing the video below, which won the Tax Foundation’s competition for best YouTube video explaining the problems with the corporate income tax.
Any income tax is evil and counterproductive. The more of Obama’s thoughtless feelgood crap I read, the more I move from libertarian to anarchist.
Dump the Corporate Income Tax completely, sit back and watch what happens.
That’s a pretty good video. I know some people have a claim that the U.S. corporate tax rate isn’t quite as high as it seems because of loopholes, but that’s a fairly weak argument. Having a tax that requires businesses to pay more to accountants and tax attorneys is a lame system, promoting less productive activity and an attitude of “gaming the system”, rather than innovation and productivity.
And, regardless of effective rates, the corporate tax is one of those populist illusions, encouraging the growth of government by telling people that big bad corporations are paying for it. And, of course, that is nonsense. All taxes are ultimately paid by individuals, that is the consumers that buy products and earn incomes.
A corporate tax is just a government-mandated price increase on the products and services the corporation provides. All companies have to pass the costs of those taxes along, just like they do their other expenses. So, we consumers end up paying the tax and whatever overhead is spent to do the accounting and filing for them, both at the companies and at the IRS. And, that doesn’t even take into account the market distortions incurred by the taxes and the social engineering politicians have attempted with them.
A flat tax across the board, like Estonia, could help. Not high, no loopholes, just fair & decent.
That video is an incredible oversimplification of reality, but then it is on youtube so no real shock there.
FF says loopholes are a weak argument then goes on to acknowledge that companies pay a lot of money to find those loopholes, so logically the benefits of choosing to partake of those loopholes outweighs the cost of finding those loopholes.
I don’t pretend to know what someone’s “fair” share of the tax burden should be, but I’m not so naive as to believe that simply lowering tax rates, without closing loopholes, is the answer either.
They spelled investment wrong, towards the end … spelled it “investement”.
There shouldn’t be any tax on corporations, simply because the actual impact of the tax is so random and variable. You can’t really “tax” a corporation: you can only make the corporation physically pay the tax on paper, but that money ultimately comes out of the pockets of various people: including consumers, shareholders, employees, and so on.
Income taxes have their own problems of course, but at least they actually predictably target whomever you want to target. Taxing a corporation could just as easily impoverish poor employees or poor consumers rather than rich shareholders. If you want to go after the shareholder’s incomes and assets, you should be upfront about it and go after them directly.
EdinTally,
Freedomfan’s point was that you can’t just look at what a corporation actually pays to the IRS, you have to add on the amounts paid to tax attorneys and accounts who’s job it is to figure out how much a corporation owes in order to determine the total costs to an organization. If loopholes save the company $500,000 but they have to pay another accountant $100,000 to work on finding the loopholes, they have only saved $400,000. So that $100,000 is a cost to the organization but when you look at a corporation’s total tax bill that $100,000 is not included.
#7
All companies have shareholders? Under your proposal, I just keep everything within my company and pay no taxes: zero
So people under the umbrella of a company pay no taxes and people with regular jobs pay income tax?
Interesting to see how that would effect the job market.
Of course one thing you never hear about when it comes to our current tax system is the utter waste of man hours. I like to think of what in the business world is called value added and non value added activities. The work of tax accountants, whether working on corporate or individual tax returns, is not adding any value to society. As it stands we have a lot of smart people who are completely wasting their time.
EdinTally, I meant that the presence of loopholes that lower the effective rate is a weak argument supporting high nominal rates. Obviously, even a shift of a couple percent will be enough to make it worthwhile for a company to spend resources to take advantage of the loopholes.
Why have a corporate tax at all? There are already taxes on individual incomes, dividends, capital gains and so on. I am not a tax accountant and don’t claim any special expertise on the great benefit of yet another tax. But, I think it’s likely that the corporate tax exists because politicians like to spend money when they can say some some faceless entity is picking up the tab. That hides the actual cost of the tax from most people, because they just see the prices of the products and services they buy and not a bill from the IRS.
And, btw, that is very bad tax policy. The costs of government should not be hidden from voters because that encourages people to think government is free. Ideally, tax day would be one week before election day.
Edintally,
You need to get out more, because you have no idea how anything works. Every company has owners of some kind whether they are called shareholders if it’s a public company or owners of a private company. If a private company’s owners want to pay themselves out of its earnings, it would be an income, which would be taxed.
J Mo
And what I’m saying is that the tax isn’t really “X” it’s “X – loopholes” which is not the same thing when complaining about the current tax rate in comparison to other countries.
J MO
You have obviously never owned a business; I have.
If corporate tax were 0%, I WOULDN’T take out an income. Furthermore, I would buy a house in the company name and lease it back to myself, along with my car, my clothes and everything else.
If in fact I needed “income” to buy food and toiletries, I would “pay myself” just enough to facilitate those needs. Even still, it would be poverty wages even if I owned a million dollar company.
Theory is all well and good but the practical ramifications are at least, if not more, important.
11 (I understand your point better, thanks) but…
I guess my point isn’t really the right or wrong of a specific thing but how one thing interacts with another. In that sense, this video (imo) is disingenuous because it simplifies a complex issue and presumably attempts to sway opinion on that simplification and not on the totality of the circumstances (which would probably be a bit much for a Ytube video).
As to your comment about politicians, their first goal is to get (re)elected. To that end, they will act and do what they perceive to be necessary in order to maintain their job.
So if you don’t like high tax rates, which invariably have loopholes, then change how politicians get elected. Right now, it takes a lot of money to run a campaign. Those with the ability to fund those campaigns are the one who get to eat from the trough first and quite frankly get to decide what they eat and what everyone else eats.
(and yes I’m aware that I’ve complained about simplifying and I’ve done the thing I complained about)
Editally,
Even assuming you can do those things you’re talking about, explain to me how that would work with a large corporation. The corporation is going to buy thousands of homes and lease them back to it’s thousands of shareholders? Your logic is seriously flawed.
The point about how tax accounting adds no value is a good one. Nevertheless, it’s perfectly straightforward to point out that the nominal tax rate only loosely correlates to the actual taxes paid by corporations. It’s a fact that’s easy for anyone who prepares their own tax returns to understand.
It’s easy to dash off a line like “[w]e have the second-highest corporate income tax in the world”, but since it’s not true, a reader who knows this will likely tune out at that point, and lose the benefit of anything of value that may follow.
If your business buys a house and leases it back to you,you need income to pay for it.You’d still need to pay taxes.If your company provides all your living expenses THAT’S income and you would pay taxes on that also.Being self employed and having owned a C corp for several years I’ve have a fair understanding of what you can deduct.
By the way,look at the deductions the average worker has.Middle class people rarely pay the full tax rate in their bracket.A flat tax makes the most sense.
Actually, it is extremely simple. But even the attempts to make things more complicated have overlooked some of the ’simple’ problems associated with high corporate taxes.
Increases in corporate taxes cause increases in the cost of supplying products and services. Simple, huh? All else being equal, this causes an increase in prices and a decrease in output. Again, very simple. The difference between the amount x price of output that would have been sold versus the amount x price that gets sold with increased taxes is thus lost. Forever. Production, money, utility, whatever you want to call it…gone. wiped out. To nobody’s benefit. Some of it would have been to the benefit of the corporations, the rest as benefit to consumers. And still some of it would have gone to taxes (that parts lost too).
So not only are x amount of taxes being paid, and y amount being paid for accountants, lawyers, and whatever needs to be spent on complying with tax requirements, and minus z amount for any supposed ‘loopholes’, add the lost profits that the company would have earned. And tack on the lost benefit that consumers would have had in lower prices and more goods and services. Thats the true cost of corporate taxes.
Is it really worth the benefits received by the governments expenditures of those taxes?
So then, is it foolish for a business to move its operations somewhere else when it can see an immediate 10% or more increase in profits, even accounting for increased transportation costs? By the way, that soon translates into decreases in price and increased production, and therefore a competitive edge against companies that still pay the much higher corporate tax rates. Eventually, the companies paying the higher tax rates can’t compete and must close down, causing increased unemployment.
Of course, this is exactly whats been happening in this country for quite a few years now.
And by the way, some of you here really need to read up about business formations and the tax requirements/benefits/disadvantages of the various forms. Its not complicated; wikipedia probably has a simple enough article about it.
Btw: what is the exact claim Obama has made about taxes on corporations? I’ve been really frustrated by my inability to figure out what the proposal is–is there some kind of present tax credit that he’ll phase out for companies that outsource, or what (none of it obviously makes sense to me.
[...] found this video over at http://theagitator.com. I usually don’t repost what Radley does, but it was too good not [...]
“If corporate tax were 0%, I WOULDN’T take out an income. Furthermore, I would buy a house in the company name and lease it back to myself, along with my car, my clothes and everything else.”
1. We already have entities that do not have entity-level tax. They’re called partnerships and are taxed under subchapter K of the internal revenue code. It seems to work out okay, and there is really no justification for treating corporations and unincorporated entities different from a tax standpoint (other than compliance costs for large entities, for whom distributing K-1s would be a royal PIA).
2. You would pay income tax on all the money you got (presumably from the company) to pay those lease payments you’re talking about.
3. If you leased things to yourself at a below-market rate, you would have imputed income.
“If in fact I needed “income” to buy food and toiletries, I would “pay myself” just enough to facilitate those needs. Even still, it would be poverty wages even if I owned a million dollar company.”
4. Partnership treatment removes this incentive (income, deduction, gain, credit and loss are allocated as they happen, whether you make distributions or not).
5. Again, we already have entities taxed under subchapter K (and to a lesser extent, subchapter S) that pay no entity-level tax. Why treat them differently?
“Theory is all well and good but the practical ramifications are at least, if not more, important.”
6. What practical ramifications might those be?
Obama’s tax plan regarding corporations calls for the elimination of certain deductions targeted to specific industries (The bogeyman of choice being the oil & gas industry). As much as I disagree with him on virtually everything else, this is something that is a good idea. Trying to calculate the deductions to which you are entitled under the Internal Revenue Code is virtually impossible for most people who aren’t tax lawyers or accountants (and a LOT of them make mistakes). Removing special entity-level tax deductions is a good idea (the deductions are market distorting). Removing entity-level tax is a BETTER idea.
J Mo: the same exact thing happens with healthcare: both the hospitals and insurers have lots of experts looking at the contracts and diagnoses, and so forth. One side trying to get things covered, the other to disallow coverage, resulting in the same kind of dead-weight loss. I’m not sure what a good way of fixing it would be, honestly.
Don’t you need to look at the total tax burden on businesses? If the corporation tax is lower in a country that has higher income or sales taxes, I think it’s the total that matters at least as much as the individual components.
Well, a corporation only pays corporate income taxes. The individual income tax rates of whatever jurisdiction the corporation is subject to would likely be of small concern to the corporation. Now, the shareholders would pay income taxes on the dividends, if any, but only in their respective jurisdictions. And sales tax would be a concern only in the jurisdictions in which it sells product, which might or might not be the same as where it pays corporate taxes.
One of the biggest complaints about the corporate income tax is that it is in a sense double taxation. The corporation’s profits get taxed, then the profits that get distributed to the shareholders in the form of dividends gets taxed again under individual income taxes.
So, for example, a corporation that earns $1 per share in a fiscal year might pay $0.39 in taxes on that dollar, then distributes the rest in dividends ($0.61). Then an individual shareholder receiving that pays tax on the dividends, say at 40% (state and federal, estimate). So, of the original $1 in profit, $0.63 ends up with the government, and only $0.37 ends up with the actual individuals who invested in and took risks on the corporation.
Pretty fair, huh?
18 you should have created an LLC or hired a better accountant
If you ask your accountant what 2 + 2 equals and he says 4;
You have the wrong accountant.
But hey wtf do I know except that there is an unending supply of kool-aid for the weak-minded and lazy
A corporate income tax is a fair trade for limited liability. I’d be fine with getting rid of the corp inc tax, but then every shareholder should be on the hook if the corp goes bust. That means everyone holding a lehman share or a mutual fund that held lehman would have to write a check.
Since that is impractical shareholders in corporations have to pay a corporate. It may be too high, but it is quite clearly fair.
Wallster, LLC’s are generally taxed as partnerships (no entity-level tax) and have limited liability (so are limited partnerships and limited liability limited partnerships).
The liability shield and the entity-level tax are entirely different issue and there isn’t really a trade-off.
Of course, any of those entities can elect to be taxed as an association, but it’s rare.
John, thank you. I acknowledge that there are LLCs and LLPs have somehow been permitted the best of both worlds, and I admit ignorance in how this came about and what limitations there are (max# of investors, etc.).
I also acknowledge that the liability shield and tax are not inherently linked, however I would dispute those who state that corporate tax, or ‘double taxation’, is unfair for corporate investors, as someone upthread suggested. Is it also unfair that corporate investors do not have unlimited liability, whereas individuals do?
As to the efficiency of corporate income tax and the impact of it on companies capital structures, that is an entirely different matter.
The limited liability of the shareholders in a corporation ( or an LLC, LLP, or what have you) is not absolute. If certain factors are met, then the shareholders (or members, or owners) can be found personally liable for the acts of the corporation; its called ‘piercing the corporate veil.’ (Of course, a shareholder working for the corporation in the normal course of business that causes the liability to arise is personally liable for his own conduct; this may be the case in a small, closely held corporation where all the corporate actors are also shareholders, such as most family owned corporations.) If the corporation is underfunded or under insured or has few assets, then that raises the likelihood of piercing the veil substantially. What the limited liability of a corporation is NOT is a means to avoid liability completely…its simply a means of focusing it to a single entity. The concept of making whole the injured party remains intact; thats why there are usually requirements as to asset holdings and/or insurance for many LLPs. But it does prevent a spiteful plaintiff from seeking recompense out of the company owner’s personal residence rather than the company’s warehouse building, for example.
Even if we deem it a fair ‘price’ to pay for this limited liability protection–and thats very debatable given that ridiculously high insurance coverage would cost substantially less than a 39% tax on all income, why is it fair for the government to get this benefit? They certainly aren’t using it to make whole any injured parties. THAT might be fair.
I’ll leave aside arguments regarding increased revenue = increased power = increased injustice.
From a structural standpoint, there is no limit on the number of members of a partnership or a limited liability company, but there are some (federal) tax restrictions (like those on publicly traded partnerships).
There is nothing unfair about the corporate liability shield. The shield exists to encourage putting capital at risk. Given the amount of wealth-creation that can be traced back to the creation of the first joint stock companies, I do not believe that it can reasonably be argued that the shield is not a net positive.
Our business system is set up such that the residual claimants (shareholders) are the ones who bear most of the loss. People who make deals with corporations know that the shareholders are not liable for the debts, therefore the suppliers and lenders account for that when making the deal (for small corporations, lenders or suppliers usually require individual guaranties).
It is not unfair that individuals have unlimited liability. That is the default status. You don’t have liability to anyone whom you don’t make a deal with, unless you commit a tort. Corporations can be liable in tort as well, and the resulting involuntary claimants do present a problem in any system of limited liability, but it is rare that the corporation is actually the tortfeasor (generally a corporation is responsible because of vicarious liability).
[as an aside, the legal capital regime was intended to address this problem, but given that stock today does not even have to have par value, that is no longer effective. A seriously undercapitalized corporation (which is likely to be small) is likely to have the corporate veil pierced in an involuntary claimant situation).
Nonetheless, there is an analogy with a tortfeasor who is unable to pay the claim and declares bankruptcy. While awards for some torts are not dischargeable, a lot of them ARE, and that is hardly fair to the involuntary claimant. Ultimately, the decision has been taken that the risk of unsatisfied involuntary claimants is an acceptable risk compared to the rewards offered by the corporate liability shield. That might be good policy or bad policy, but it’s certainly not unfair when you know the rules going in.
Like I said, the issue is independent of whether a corporation should be taxed at the entity-level. I happen to think the corporation should NOT be taxed at the entity level because the nature of the entity-level tax encourages the corporation not to reinvest in the business, but to pay out as much as it can in ways that offer tax deductions to minimize the corporation’s taxable income. That seems like bad incentive, requiring any new line of business (or expansion of an old like) to be 35% MORE profitable than it would otherwise have to be for a corporation to expand or enter the new business.
Unsurprisingly, that functions as a barrier to entry favoring larger corporations over smaller corporations.
John, you are correct that it is “not unfair if you know the rules going in”. That also applies to corporate income tax. As a purchaser of stock in a corporation, I know going in that the earnings will be taxed at the corporate level, and again at the personal level when dividends or capital gains are received. So limited liability is as fair or unfair as corp income tax.
I’m not going to debate whether the inefficiency of the corp income tax outweighs the benefit of additional tax revenues, but I will dispute that the corp income tax functions as a barrier to entry. If after tax profits are only 65% of pre-tax profits, that applies to both large companies and start-ups. Both would have to take the after tax income into consideration in determining whether a project or investment is worthwhile. If the large corp has a lower cost of capital, then that would be the case with or without corp income tax.
If you assume the cost to enter into a given line of business is a constant, K (which it isn’t over all lines of business, but we are comparing two corporations trying to enter the same line of business), then the net income required to undertake the line of business on a break-even basis is ~ 1.53*K (assuming a 35% corporate tax rate).
Suppose that K is $100,000.
If a small corporation with annual net income of $200,000 wants to give K a shot, it must spend $153,000 dollars, or 76.5% of its net income, which is a risky move.
A corporation ten times its size would risk only 7.65% of its net income.
Remove the corporate tax and the numbers become 50% and 5%, so the size factor makes it MUCH less risky for the small corporation and only marginally so for the large business, which functions as a barrier to entry for the smaller corporation.
At some point the barrier becomes merely the inability to fund the new line of business, and the tax rate is irrelevant, but the rate does move that line, and those movements affect the smaller corporation much more than the larger one.