5 ms·

Why do we even tax corporations instead of just the income that its owners receive from the corporation?

by j_m_b 10y ago

dogma1138 10y ago
Never understood that either, it always seemed to be a double taxation scheme to me. A corporation has effectively only a few things to do with their revenue which are or can be directly taxed more effectively. It can hire more people, or pay it's employees more, which means that money is taxed as income. It can invest the money directly which means that return on that investment can be taxed as capital gains. It can pay out dividends to it's shareholders which means that this money can again be taxed directly as capital gains. It can invest that money internally to expand which again can be taxed at various levels, sales tax, income tax, property tax etc.
- rayiner 10y ago
  > Never understood that either, it always seemed to be a double taxation scheme to me. Corporations are legal persons, and income accruing to distinct legal persons is subject to tax. E.g. I get paid by my employer, and then pay tax on that. Then I pay my nanny with post-tax dollars, and she pays tax on that. That's not "double taxation"--just the nature of an income tax. Imagine that instead of forming a corporation, a bunch of investors nominated Bob to be the legal entity in charge of the whole business. Bob held all the bank accounts, directly employed everyone, and booked all revenue minus his expenses as his income. A series of contractual arrangements required Bob to pay out the profits to the investors. Under that circumstance, there would be no doubt that profits would be taxed when they initially accrued to Bob, then again when he paid the investors. It should be noted that nothing precludes companies from organizing as something other than a corporation. Partnership income, for example, is only taxed when it is received by a partner.
  - marktheknife 10y ago
    I'm going to quibble a bit, hopefully not in an annoying fashion. The distinction is that the tax system does not give a deduction to individuals who are spending their money on personal "consumptive" reasons. By and large, the system does give deductions for expenses incurred for business. In this light, the double taxation of corporations is unusual. Clearly, the dividends are to pay back investors, just as interest is part of paying back lenders. But interest is deductible; why not dividends? Many theories have been advanced to justify this double tax, but none have won wide support among scholars. (Interestingly, in your example, what probably would happen is that Bob would essentially be the effective managing partner of a general partnership. So we would be under partnership tax rules.) A last quibble: partnership tax actually taxes partners even while the income is held by the partnership. (Well, generally; there apparently are some odd trust schemes that sort of avoid this.) in general, Partnerships must allocate the income to the partners, who bear the burden of tax. Then, they must later distribute the income in accord with how they've allocated it.
    - rayiner 10y ago
      Payment of dividends isn't either interest or a repayment of principal, since there is no obligation to pay dividends. They're also not expenses, since the company would generate the same revenue with or without paying dividends.
      - nickff 10y ago
        You are assuming that the company could obtain financing while never buying back stock or paying dividends? This seems to be an implicit (and often explicit) part of the fiduciary duty of the corporate officers (maximizing shareholder returns in the short or long term). I would not purchase stock from a corporation that promised never to return money to shareholders.
kartan 10y ago
That will mean that the money Facebook makes around the world is just taxed at whatever country Mark Zuckerberg lives. It doesn't look like it can work in such a globalized world.
- grahamburger 10y ago
  Well, not really ... Also any country with Facebook employees, or with Facebook investors, or with companies deriving value from Facebook's platform.
  - kuschku 10y ago
    Which might all end up being in the US. Meaning Austrian people pay money to a US corporation, the money is lost from the Austrian circulation, and won’t be taxable either. That issue – of global profits all being moved into the US or taxhavens – has happened for many years now, and is severely hurting the economies of many countries.
mrweasel 10y ago
One solution I've heard proposed is taxing revenue. If a business, like Apple, Starbucks or Amazon sells something in a country, they pay a percentage of the revenue, not the profit. It would be a very drastic change, and may items would need to have their prices adjusted, as low profit items could be a problem. The clever bit is that tax heavens are not longer possible, because it's not important where you move your profit to.
- pipio21 10y ago
  This is not a solution, and it is not clever but stupid. If someone in power is so stupid to do it, companies will stop operating on their country but the world will continue going around and tax heavens will continue existing. Governments are bankrupt totally now, expending way more that what they earn, with 5% deficits or more and want to raise more and more money in taxes, but there is a limit on what they could extract, as people can stop working if they become slaves.
  - mrweasel 10y ago
    I honestly don't believe that a country would stop having companies, or not have access to certain products because of such a tax. Remember your country would have no corporate income tax, it's the consumers of your product who are effectively paying the tax. Only companies not making a profit would take issues with such a scheme. Take Q8, they own gas stations in Denmark. Apparently they've made no profit in Denmark, EVER. That is of cause a blatant lie. They've just moved the profit abroad. Taxing the revenue, directly at the pump, would either drive a lying company out and make room for more honest ones, or they would start paying their share. There's ALWAYS someone who see an opportunity. Coca Cola leaving because they refuse to pay your tax? Fine Pepsi will swoop in that same day. What you're suggestion is that companies will only ever operate in countries that makes it possible to be creative with taxes.
  - shkkmo 10y ago
    Why would any business stop operating in a country when they can simply raise prices to cover the tax? Everyone else will have to raise prices as well so nobody would be at a competitive disadvantage.
axlee 10y ago
Because corporations thrive purely on the society they are making money from. No company lives in a vacuum. However great and driven Elon Musk might be, he would never have made a single cent if he had started Paypal in Somalia. And what differentiates a market in Somalia from another market like, let's say, France? Let's take this further. Zuckerberg makes a lot of money in France solely thanks to the technological infrastructure built by the society living there. Why would the French public let Facebook exploit this environment for his personal profit, while not paying its fair share to maintain the very same socio-economic environment that allows it to make money in the first place (and that everybody else is contributing towards)? Anyone would describe this behavior as parasitism. Let's imagine you spend ten years building a shoe factory. After ten years, a stranger comes in and starts to use your factory at night to make shoes and sell them for his profit. Are you going to let him use your factory for free? Even if your answer to this is "Well maybe there shouldn't be any public infrastructure in the first place", it simply shifts the problem somewhere else: if a private company would be managing the infrastructure, rest assured they would also ask for usage costs...which is precisely like a tax. A feodal tax.
- oh_sigh 10y ago
  Is your argument that owners would just not take any money out of the company so as to not pay the taxes? In OPs example the company would still be taxed but just at different times
  - axlee 10y ago
    I don't see how. Most owners are not taxable residents of the country where companies operates. If I'm personally taxable in the Bahamas, but I make all my capital profits from a company operating in a country with no corporate taxes, that country will never ever see a single tax cent from me, despite me leveraging their infrastructure and society for profit (for virtually free). I would directly profit from their roads, their transportation, their education, their Internet, their police, their laws, their justice, while never contributing to it.
- jfoster 10y ago
  > Even if your answer to this is "Well maybe there shouldn't be any public infrastructure in the first place", it simply shifts the problem somewhere else: if a private company would be managing the infrastructure, rest assured they would also ask for usage costs.. I wouldn't say there shouldn't be public infrastructure. For the last part, though, mightn't Facebook consider charging the company managing infrastructure for the ability of their customers to access Facebook? I think people would be a lot less likely to subscribe to an ISP that didn't facilitate access to Facebook.
edko 10y ago
That is what Estonia does. Corporate income tax is 0%. They tax companies, on a flat rate, on the dividends paid out. This encourages reinvestment and growth.
- yardie 10y ago
  And that is how it should be. But the US and EU tax codes are such a bodge. F500 CEOs are taking $1 salaries because why pay 55% on a $20mm salary when you can pay 15% on preferred stock dividends.
  - nickff 10y ago
    The 15% is actually not as cheap as it looks, because it is double-taxed as it is taken out of retained earnings (which is taxed at the corporate level), whereas salaries are an expenditure, thus the money is not taxed at the corporate level. To the individual, 1 MM in dividends is better than 1 MM in salary, but paying dividends or salary are almost the same to the company and the government. This is why sole proprietorship corporations often pay their owners a salary instead of only dividends (or buybacks).

Why do we even tax corporations instead of just the income that its owners receive from the corporation?

by j_m_b 10y ago

Why do we even tax corporations instead of just the income that its owners receive from the corporation?

Never understood that either, it always seemed to be a double taxation scheme to me. A corporation has effectively only a few things to do with their revenue which are or can be directly taxed more effectively. It can hire more people, or pay it's employees more, which means that money is taxed as income. It can invest the money directly which means that return on that investment can be taxed as capital gains. It can pay out dividends to it's shareholders which means that this money can again be taxed directly as capital gains. It can invest that money internally to expand which again can be taxed at various levels, sales tax, income tax, property tax etc.

rayiner 10y ago
> Never understood that either, it always seemed to be a double taxation scheme to me. Corporations are legal persons, and income accruing to distinct legal persons is subject to tax. E.g. I get paid by my employer, and then pay tax on that. Then I pay my nanny with post-tax dollars, and she pays tax on that. That's not "double taxation"--just the nature of an income tax. Imagine that instead of forming a corporation, a bunch of investors nominated Bob to be the legal entity in charge of the whole business. Bob held all the bank accounts, directly employed everyone, and booked all revenue minus his expenses as his income. A series of contractual arrangements required Bob to pay out the profits to the investors. Under that circumstance, there would be no doubt that profits would be taxed when they initially accrued to Bob, then again when he paid the investors. It should be noted that nothing precludes companies from organizing as something other than a corporation. Partnership income, for example, is only taxed when it is received by a partner.
- marktheknife 10y ago
  I'm going to quibble a bit, hopefully not in an annoying fashion. The distinction is that the tax system does not give a deduction to individuals who are spending their money on personal "consumptive" reasons. By and large, the system does give deductions for expenses incurred for business. In this light, the double taxation of corporations is unusual. Clearly, the dividends are to pay back investors, just as interest is part of paying back lenders. But interest is deductible; why not dividends? Many theories have been advanced to justify this double tax, but none have won wide support among scholars. (Interestingly, in your example, what probably would happen is that Bob would essentially be the effective managing partner of a general partnership. So we would be under partnership tax rules.) A last quibble: partnership tax actually taxes partners even while the income is held by the partnership. (Well, generally; there apparently are some odd trust schemes that sort of avoid this.) in general, Partnerships must allocate the income to the partners, who bear the burden of tax. Then, they must later distribute the income in accord with how they've allocated it.
  - rayiner 10y ago
    Payment of dividends isn't either interest or a repayment of principal, since there is no obligation to pay dividends. They're also not expenses, since the company would generate the same revenue with or without paying dividends.
    - nickff 10y ago
      You are assuming that the company could obtain financing while never buying back stock or paying dividends? This seems to be an implicit (and often explicit) part of the fiduciary duty of the corporate officers (maximizing shareholder returns in the short or long term). I would not purchase stock from a corporation that promised never to return money to shareholders.

kartan 10y ago

That will mean that the money Facebook makes around the world is just taxed at whatever country Mark Zuckerberg lives. It doesn't look like it can work in such a globalized world.

grahamburger 10y ago
Well, not really ... Also any country with Facebook employees, or with Facebook investors, or with companies deriving value from Facebook's platform.
- kuschku 10y ago
  Which might all end up being in the US. Meaning Austrian people pay money to a US corporation, the money is lost from the Austrian circulation, and won’t be taxable either. That issue – of global profits all being moved into the US or taxhavens – has happened for many years now, and is severely hurting the economies of many countries.

mrweasel 10y ago

One solution I've heard proposed is taxing revenue. If a business, like Apple, Starbucks or Amazon sells something in a country, they pay a percentage of the revenue, not the profit. It would be a very drastic change, and may items would need to have their prices adjusted, as low profit items could be a problem. The clever bit is that tax heavens are not longer possible, because it's not important where you move your profit to.

pipio21 10y ago
This is not a solution, and it is not clever but stupid. If someone in power is so stupid to do it, companies will stop operating on their country but the world will continue going around and tax heavens will continue existing. Governments are bankrupt totally now, expending way more that what they earn, with 5% deficits or more and want to raise more and more money in taxes, but there is a limit on what they could extract, as people can stop working if they become slaves.
- mrweasel 10y ago
  I honestly don't believe that a country would stop having companies, or not have access to certain products because of such a tax. Remember your country would have no corporate income tax, it's the consumers of your product who are effectively paying the tax. Only companies not making a profit would take issues with such a scheme. Take Q8, they own gas stations in Denmark. Apparently they've made no profit in Denmark, EVER. That is of cause a blatant lie. They've just moved the profit abroad. Taxing the revenue, directly at the pump, would either drive a lying company out and make room for more honest ones, or they would start paying their share. There's ALWAYS someone who see an opportunity. Coca Cola leaving because they refuse to pay your tax? Fine Pepsi will swoop in that same day. What you're suggestion is that companies will only ever operate in countries that makes it possible to be creative with taxes.
- shkkmo 10y ago
  Why would any business stop operating in a country when they can simply raise prices to cover the tax? Everyone else will have to raise prices as well so nobody would be at a competitive disadvantage.

axlee 10y ago

Because corporations thrive purely on the society they are making money from. No company lives in a vacuum. However great and driven Elon Musk might be, he would never have made a single cent if he had started Paypal in Somalia. And what differentiates a market in Somalia from another market like, let's say, France? Let's take this further. Zuckerberg makes a lot of money in France solely thanks to the technological infrastructure built by the society living there. Why would the French public let Facebook exploit this environment for his personal profit, while not paying its fair share to maintain the very same socio-economic environment that allows it to make money in the first place (and that everybody else is contributing towards)? Anyone would describe this behavior as parasitism. Let's imagine you spend ten years building a shoe factory. After ten years, a stranger comes in and starts to use your factory at night to make shoes and sell them for his profit. Are you going to let him use your factory for free? Even if your answer to this is "Well maybe there shouldn't be any public infrastructure in the first place", it simply shifts the problem somewhere else: if a private company would be managing the infrastructure, rest assured they would also ask for usage costs...which is precisely like a tax. A feodal tax.

oh_sigh 10y ago
Is your argument that owners would just not take any money out of the company so as to not pay the taxes? In OPs example the company would still be taxed but just at different times
- axlee 10y ago
  I don't see how. Most owners are not taxable residents of the country where companies operates. If I'm personally taxable in the Bahamas, but I make all my capital profits from a company operating in a country with no corporate taxes, that country will never ever see a single tax cent from me, despite me leveraging their infrastructure and society for profit (for virtually free). I would directly profit from their roads, their transportation, their education, their Internet, their police, their laws, their justice, while never contributing to it.
jfoster 10y ago
> Even if your answer to this is "Well maybe there shouldn't be any public infrastructure in the first place", it simply shifts the problem somewhere else: if a private company would be managing the infrastructure, rest assured they would also ask for usage costs.. I wouldn't say there shouldn't be public infrastructure. For the last part, though, mightn't Facebook consider charging the company managing infrastructure for the ability of their customers to access Facebook? I think people would be a lot less likely to subscribe to an ISP that didn't facilitate access to Facebook.

edko 10y ago

That is what Estonia does. Corporate income tax is 0%. They tax companies, on a flat rate, on the dividends paid out. This encourages reinvestment and growth.

yardie 10y ago
And that is how it should be. But the US and EU tax codes are such a bodge. F500 CEOs are taking $1 salaries because why pay 55% on a $20mm salary when you can pay 15% on preferred stock dividends.
- nickff 10y ago
  The 15% is actually not as cheap as it looks, because it is double-taxed as it is taken out of retained earnings (which is taxed at the corporate level), whereas salaries are an expenditure, thus the money is not taxed at the corporate level. To the individual, 1 MM in dividends is better than 1 MM in salary, but paying dividends or salary are almost the same to the company and the government. This is why sole proprietorship corporations often pay their owners a salary instead of only dividends (or buybacks).