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Lower corporate taxes can also help create structures which allow wealthier people to avoid taxes. For example, if you can create a structure in which all of y
by abhv 9y ago
Lower corporate taxes can also help create structures which allow wealthier people to avoid taxes.
For example, if you can create a structure in which all of your consulting income + capital-asset income goes into a C-corp, and you pay most of your own expenses through the C-corp (e.g., Trump tower home office), then you can keep most of your income taxed at only 15%. The C-corp holds it forever, and pays your expenses, and pays you a small salary for non-expensable items. The C-corp can purchase things like corporate cars, boats, airplanes, and real-estate, and pay for trips as well.
Obviously, there is administrative overhead in setting these things up; you can't be earning 150k and trying to pull this off.
There cannot be a gap between C-corp taxation and individual taxation rates if you want to avoid creating more loopholes for wealthier people---especially those who earn mostly from their capital assets.
- JKCalhoun 9y agoThen that is what the AMT was designed for, no?
- harryh 9y agoNo. The AMT is completely unrelated to the issue abhv brings up. The AMT is essentially a 2nd tax code for individual income taxes were fewer deductions but also lower rates. Individuals compute their personal taxes both ways and pay the higher of the two systems. It's kind of a crazy system.
- JKCalhoun 9y agoBut that's kind of what I mean — if you were using your business as a "deduction" hopefully the alternate computation would ignore that and you would be in for the higher (and deserved, IMO) bracket.
- harryh 9y agoThere is no deduction for "a business" in the way you describe. That's....not how it works.
- JKCalhoun 9y agoI own real estate I rent out. I can deduct all manner of things related to that business from the rental income (insurance, property tax, etc.). In what way are we talking about different things?
- maxerickson 9y agoIt would already be tax evasion to do what you propose. The beneficiary of the nice place to stay is supposed to pay taxes on that benefit.
- harryh 9y agoThe IRS is not stupid. It's perfectly capable of distinguishing a real business from a dummy business set up just to pay personal expenses. There are all kinds of rules about this sort of thing.
- ska 9y agoThe IRS is not stupid, but wealthy enough people have been very effective at creating and exercising approaches to bring their marginal tax rates down to impressively low numbers. So if the IRS is smart but this still happens a lot, there must be something else at work, no?
- harryh 9y agoThe primary way that wealthy people bring down their marginal tax rates is buy earning more of their income as capital gains not through the creation of phony businesses to pay for their personal expenses.
- ska 9y ago[edited summary] Apparently techniques exist to let you capital gains rather than income, increase deductions, or both. In some cases chase subsidies, which is roughly equivalent. And (cf Panama papers) obviously offshoring. All theoretical interest on my part, so who knows. Government estimates on lost revenue from this range wildly (order 1billion to 100billion) from what I've seen, but they are at least convinced it happens in significant amounts.
- DenisM 9y agoI don't think it works this way. If it's a "legitimate" expense it gets deducted from profits, so the tax rate is zero, even under today's rules. If it's not a "legitimate" expense, e.g. a vacation paid by the company, the beneficiary gets taxed as if he got this much money in salary. The part of your list that will be taxed differently under new rules is assets - jets, boats, etc. Even so, usage of the boat for leisure should get taxed to the beneficiary at customary boat rental rates. There is room for creating accounting, as always. But it doesn't look like this is the key change here. A bigger deal is the double-taxed income. If your C Corp earns $1m, it then pays taxes at ~ 35%, with $650k left in the coffers. Then you pay yourself a dividend of $650k and you get taxed at the dividend tax rate which is also 20%, so now you have $520k left, for a combined effective tax rate of 48%. If the corp rate is cut from 35% to to 15% then your have 680k left, for a combined effective tax rate of 32%. Going from 48% to 32% is the real prize here.
- abhv 9y ago1. I agree, your math is better explanation of the point. 2. In very high income categories, many activities can be classified as "legitimate expenses" since deals hinge on reputation, entertaining, etc.
- fauigerzigerk 9y agoThe corporation tax rate over here in the UK is 20%, but I wouldn't be able to do what you're suggesting without committing tax fraud of the most obvious sort. If my company pays for some of my personal expenditure that money becomes part of my remuneration as an employee/director and therefore my personal income tax rate applies.