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Can you summarize why economists support abolishing corporate tax? AFAIK, corporate tax is optional anyhow. Any company could organize as unlimited partnership

by tomp 10y ago

Can you summarize why economists support abolishing corporate tax? AFAIK, corporate tax is optional anyhow. Any company could organize as unlimited partnership and not pay corporate taxes. But most companies chose not to, and I think that extra tax is a perfectly reasonable way of paying for extra protection (that of a limited company).

Dove 10y ago
From the linked transcript: BLUMBERG: But fortunately, as you know, plank three I think is something that people can get around - a massive tax cut. SMITH: OK. BLUMBERG: Are you ready? SMITH: Yeah. BLUMBERG: A tax cut that's an insidious tax. It's felt everywhere in the American economy. It destroys jobs, stops innovation. SMITH: I am all for it. OK. Who gets this tax cut? BLUMBERG: Not who - what. BAKER: If I'm being blue sky here, I would say the corporate tax is totally a waste. FRANK: The corporate income tax makes no sense whatsoever. SMITH: You are killing the voters here. So far we've got raised taxes on the middle class and eliminate taxes on corporations? BLUMBERG: Yeah. And those were the two most liberal members of our panel, Dean Baker and Robert Frank. And here's the reason that they and pretty much all our panelists hate the corporate income tax, which by the way is one of the highest in the world here in the United States at 35 percent. BAKER: It doesn't make sense really to tax the corporation as such. What we want to do is - I'm going to sound like a Mitt Romney here. What we care about is if the corporation is reinvesting the money. What's wrong with that? Why do we want them to prevent - why do we want to prevent the corporation from reinvesting the money? What we might want to prevent is giving the money to wealthy shareholders or them buying a second, a third, fourth home, getting a new Mercedes every six months, whatever it might be. That's where we want to have the taxes. We don't want to prevent Microsoft or General Motors or whoever it might be from investing more in improving their product line. That's a good thing in my view. BLUMBERG: So a lot of people, you know, when they think the corporate tax, they want to keep the corporate tax in place because they want rich people to pay more taxes. SMITH: And rich people own corporations. BLUMBERG: Right. But our panel agreed. If you want to tax rich people - and not all of our panelists agreed, by the way, that you should tax rich people more than others - but if you did, if that's what you wanted to do, just tax rich people - do that. Don't tax the corporation. tldr: Taxing corporations prevents them from reinvesting the money and doing such things as advancing technology and hiring workers. It is a terribly destructive tax, discouraging exactly the sort of activity that drives the economy. It's the people who own the corporation that you're trying to tax, so tax them when they get the money.
- extra88 10y ago
  So, eliminate corporate tax but at the same time increase capital gains tax, i.e. stop taxing it differently (less) than earned income? My concern with that is people shifting their wealth to be held by a private corporation instead of personally held; "it's not my yacht, it belongs to Extra88 Inc." I think additional changes would need to be made to the nature of corporations to avoid abuse.
  - spoonie 10y ago
    It is a risk yes, but that kind of argument wouldn't make it past an IRS auditor. There is a reason many C-level staff today aren't compensated with benefits like housing and transport.
  - josho 10y ago
    Your example of the yacht is already handled by the tax code (at least in Canada, likely everywhere else too). That is, if you take the yacht for weekend excursions that is a personal benefit and you should be paying tax on that. A tax accountant might try to hide that, but if you get caught that's lying on your taxes and not looked kindly on. These areas are likely why the rich, like Trump, are often under audit. Because there are so many ways they can play the system to avoid taxes. Hmm, maybe I just made your point.
  - grinnbearit 10y ago
    You tax capital gains differently than earned income to incentivise investment over consumption. This is because consumption today is always more valuable than consumption in the future (the discount rate).
    - extra88 10y ago
      Can you explain that? How does does the source of the money affect what I do with it (dividends & interest vs. pay from the sweat of my brow & intellectual output)? If consumption today is more valuable than consumption in the future, why would you want to favor doing something else today, e.g. investment?
hackerboos 10y ago
I listened to that episode and if I recall correctly, economists agreed that corporation taxes should be abolished because they want corporations to reinvest profits and prefer to shift the taxes to shareholders/income. Also mentioned on the podcast is abolishing all deductibles, including mortgage interest.
- crdoconnor 10y ago
  >they want corporations to reinvest profits and prefer to shift the taxes to shareholders/income Which is dumb because the tax incidence of corporate tax already lands on shareholders and corporations aren't reinvesting profits because of anemic demand.
- dingaling 10y ago
  But they can reinvest 'profits' today, for free, by running internal R&D programs, acquisitions, sponsoring a charity and investing in its staff, all of which are deducted from revenue as costs of running-a-company before calculation of taxable profit. Look at Amazon as a famous example which grew enormously year-on-year by reinvesting and thus generating zero profit. 'Profit' is primarily a signalling mechanism to indicate to the market as a whole, and potential investors in particular, that a company is 'successful'; it has so much revenue and such low costs that it can't find a way to spend the money . But it's basically a waste as that money could be achieving something for the company or its staff. Thus Governments punish companies by taking a slice of that profit as a way of saying 'if you don't use the money productively, we will'. Which is a very generous form of taxation compared that to personal income taxation, which comes out of gross revenue before the costs of being-a-person have been met.
  - subhobroto 10y ago
    > compared that to personal income taxation, which comes out of gross revenue before the costs of being-a-person have been met. I agree. Sounds like a use tax would be more beneficial? The taxable income computations and standard deductions seem to be a complicated way to what a use tax could solve efficiently. The possible downside is that a use tax could bring in a recession (people stop spending to stop paying tax) I have no formal economics training and would love to hear from the more educated.
tptacek 10y ago
No, most companies cannot organize as partnerships, because corporate structure also governs the way equity is distributed.
aaronchall 10y ago
S-Corps are the closest alternative to a company that faces double taxation, but they have many restrictions. - Be a domestic corporation - Have only allowable shareholders - May be individuals, certain trusts, and estates and - May not be partnerships, corporations or non-resident alien shareholders - Have no more than 100 shareholders - Have only one class of stock - Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations). https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations https://www.irs.gov/businesses/small-businesses-self-employe...

by tomp 10y ago

Dove 10y ago

From the linked transcript: BLUMBERG: But fortunately, as you know, plank three I think is something that people can get around - a massive tax cut. SMITH: OK. BLUMBERG: Are you ready? SMITH: Yeah. BLUMBERG: A tax cut that's an insidious tax. It's felt everywhere in the American economy. It destroys jobs, stops innovation. SMITH: I am all for it. OK. Who gets this tax cut? BLUMBERG: Not who - what. BAKER: If I'm being blue sky here, I would say the corporate tax is totally a waste. FRANK: The corporate income tax makes no sense whatsoever. SMITH: You are killing the voters here. So far we've got raised taxes on the middle class and eliminate taxes on corporations? BLUMBERG: Yeah. And those were the two most liberal members of our panel, Dean Baker and Robert Frank. And here's the reason that they and pretty much all our panelists hate the corporate income tax, which by the way is one of the highest in the world here in the United States at 35 percent. BAKER: It doesn't make sense really to tax the corporation as such. What we want to do is - I'm going to sound like a Mitt Romney here. What we care about is if the corporation is reinvesting the money. What's wrong with that? Why do we want them to prevent - why do we want to prevent the corporation from reinvesting the money? What we might want to prevent is giving the money to wealthy shareholders or them buying a second, a third, fourth home, getting a new Mercedes every six months, whatever it might be. That's where we want to have the taxes. We don't want to prevent Microsoft or General Motors or whoever it might be from investing more in improving their product line. That's a good thing in my view. BLUMBERG: So a lot of people, you know, when they think the corporate tax, they want to keep the corporate tax in place because they want rich people to pay more taxes. SMITH: And rich people own corporations. BLUMBERG: Right. But our panel agreed. If you want to tax rich people - and not all of our panelists agreed, by the way, that you should tax rich people more than others - but if you did, if that's what you wanted to do, just tax rich people - do that. Don't tax the corporation. tldr: Taxing corporations prevents them from reinvesting the money and doing such things as advancing technology and hiring workers. It is a terribly destructive tax, discouraging exactly the sort of activity that drives the economy. It's the people who own the corporation that you're trying to tax, so tax them when they get the money.

extra88 10y ago
So, eliminate corporate tax but at the same time increase capital gains tax, i.e. stop taxing it differently (less) than earned income? My concern with that is people shifting their wealth to be held by a private corporation instead of personally held; "it's not my yacht, it belongs to Extra88 Inc." I think additional changes would need to be made to the nature of corporations to avoid abuse.
- spoonie 10y ago
  It is a risk yes, but that kind of argument wouldn't make it past an IRS auditor. There is a reason many C-level staff today aren't compensated with benefits like housing and transport.
- josho 10y ago
  Your example of the yacht is already handled by the tax code (at least in Canada, likely everywhere else too). That is, if you take the yacht for weekend excursions that is a personal benefit and you should be paying tax on that. A tax accountant might try to hide that, but if you get caught that's lying on your taxes and not looked kindly on. These areas are likely why the rich, like Trump, are often under audit. Because there are so many ways they can play the system to avoid taxes. Hmm, maybe I just made your point.
- grinnbearit 10y ago
  You tax capital gains differently than earned income to incentivise investment over consumption. This is because consumption today is always more valuable than consumption in the future (the discount rate).
  - extra88 10y ago
    Can you explain that? How does does the source of the money affect what I do with it (dividends & interest vs. pay from the sweat of my brow & intellectual output)? If consumption today is more valuable than consumption in the future, why would you want to favor doing something else today, e.g. investment?

hackerboos 10y ago

I listened to that episode and if I recall correctly, economists agreed that corporation taxes should be abolished because they want corporations to reinvest profits and prefer to shift the taxes to shareholders/income. Also mentioned on the podcast is abolishing all deductibles, including mortgage interest.

crdoconnor 10y ago
>they want corporations to reinvest profits and prefer to shift the taxes to shareholders/income Which is dumb because the tax incidence of corporate tax already lands on shareholders and corporations aren't reinvesting profits because of anemic demand.
dingaling 10y ago
But they can reinvest 'profits' today, for free, by running internal R&D programs, acquisitions, sponsoring a charity and investing in its staff, all of which are deducted from revenue as costs of running-a-company before calculation of taxable profit. Look at Amazon as a famous example which grew enormously year-on-year by reinvesting and thus generating zero profit. 'Profit' is primarily a signalling mechanism to indicate to the market as a whole, and potential investors in particular, that a company is 'successful'; it has so much revenue and such low costs that it can't find a way to spend the money . But it's basically a waste as that money could be achieving something for the company or its staff. Thus Governments punish companies by taking a slice of that profit as a way of saying 'if you don't use the money productively, we will'. Which is a very generous form of taxation compared that to personal income taxation, which comes out of gross revenue before the costs of being-a-person have been met.
- subhobroto 10y ago
  > compared that to personal income taxation, which comes out of gross revenue before the costs of being-a-person have been met. I agree. Sounds like a use tax would be more beneficial? The taxable income computations and standard deductions seem to be a complicated way to what a use tax could solve efficiently. The possible downside is that a use tax could bring in a recession (people stop spending to stop paying tax) I have no formal economics training and would love to hear from the more educated.

tptacek 10y ago

No, most companies cannot organize as partnerships, because corporate structure also governs the way equity is distributed.

aaronchall 10y ago

S-Corps are the closest alternative to a company that faces double taxation, but they have many restrictions. - Be a domestic corporation - Have only allowable shareholders - May be individuals, certain trusts, and estates and - May not be partnerships, corporations or non-resident alien shareholders - Have no more than 100 shareholders - Have only one class of stock - Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations). https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations https://www.irs.gov/businesses/small-businesses-self-employe...