8 ms·

The Paradox of Corporate Taxes

28 points by locopati 16y ago

karzeem 16y ago
Even when a company pays little to no tax, the government does get itself a pretty good taste of the profits via the dividend tax.
- DarkShikari 16y ago
  Good thing all big companies, such as, say, Google, pay plenty of dividends, right?
  - jwang815 16y ago
    Nope, Google has no paid out a single dividend. As long as Google thinks it can use the money to reinvest in the company and give investors a nice return from capital gains
    - DarkShikari 16y ago
      Nope, Google has no paid out a single dividend. That was the joke.
  - nickpp 16y ago
    But dividends kept should increase stock value and the government does get a nice cut when selling those, right?
    - 2arrs2ells 16y ago
      Dividends are taxed as ordinary income, while (long-term) capital gains are taxed at a significantly lower rate.
  - karzeem 16y ago
    I know it's called profit, but the money they keep goes back into the business. The ways for it to be profit in the sense of making the shareholders rich(er) are by increasing the value of the stock or by going to shareholders as a dividend. And both of those avenues are taxed.
- 2arrs2ells 16y ago
  Could someone run a quick report - what percent of EBITDA (for the S&P 500) for the past year was paid out as dividends? My hunch is that it's only a tiny fraction, but that might just be because I follow tech stocks primarily (which tend not to pay dividends).
patio11 16y ago
Corporations don't pay taxes any more than the government pays for healthcare: people pay for both. Every dollar paid in taxes is a dollar taken from a real, flesh-and-blood human being. (And, of course, transferred to a real human being. The California corporate tax, for example, is a wealth transfer from anyone beneficially owning a Californian corporation to Californian public employees, who are - far and away - the largest beneficiary of Californian taxes.)
- 2arrs2ells 16y ago
  I'm not sure your comment has any substance to it. I could reframe it "Every dollar paid in taxes is a dollar given to a real, flesh-and-blood human being" and the same facts point to the opposite conclusion. I hope that the HN crowd isn't so ignorant as to think that corporations aren't made up of real people.
  - ecuzzillo 16y ago
    Yeah, but the real flesh-and-blood human beings receiving the dollars, his point is, are not really people whom most people are all that interested in randomly giving dollars to, like starving people in Africa; they're government bureaucrats who often end up serving to make dollar-givers' lives more difficult.
    - gjm11 16y ago
      Except that he only made it sound that way by pretending that the people being paid with those tax dollars are taking the money for doing nothing, whereas in fact they are, e.g., teachers and policemen and firefighters, and the government is handing that money to them in exchange for doing their jobs, and their jobs do in fact involve providing public services. In other words, exactly what taxes are meant to be used for. Now, of course it's possible that California is employing incompetent people to do those things, or that it's prioritizing them badly, or that its bureaucratic overhead is much bigger than it should be. But (1) Patrick didn't offer any sort of evidence for any of those things, or even say them, and (2) those things, if true, aren't problems with taxation but with other functions of government. (Unless they're incurable, so that anything paid for by taxes is inevitably going to be done badly; but, living as I do in a country where all sorts of important things are done quite competently using money raised from taxes, I find that difficult to believe.)
noblethrasher 16y ago
The paradox, as I see it, is that taxation is both the government's primary means of generating revenue and of influencing behavior. When the government wants to use taxation to effect a certain desired behavior it offers 'tax credits' and 'deductions'; but when politically disfavored groups use them they're exploiting 'loopholes'. Yet, a group's political favor is often very much a function of total revenue (or rather the difference between total revenue and the cost of whatever initiatives the government wants to pursue).
- austinB 16y ago
  Many people fail to recognize the social engineering aspect to taxes.
  - gaius 16y ago
    If you tax something you get less of it, if you subsidize it you get more of it - whatever it is. Which has the obvious consequence that if you give people money who make bad decisions with their lives (e.g. getting addicted to drugs) then you will get more people making those decisions. That is why welfare is profoundly evil.
    - Joakal 16y ago
      Welfare seems to be keeping USA from following Egypt with over 35 million Americans on food stamps [0]. Would you still call it profoundly evil? [0] http://www.usatoday.com/news/health/2009-11-02-food-stamps_N.htm http://www.usatoday.com/news/health/2009-11-02-food-stamps_N...
      - borism 16y ago
        I'm pretty sure he'd like revolution in USA, Egypt-style (except americans do have guns).
    - gjm11 16y ago
      Picking on one consequence of a thing and calling it "profoundly evil" (or for that matter profoundly good) on that basis is ridiculous. On that basis you could make anything look either good or bad. Giving money to some people who make bad decisions may very well mean that more people will make similar bad decisions, and yes, that's a bad thing. On the other hand, it may also mean that those people don't starve to death, which most of us would consider a good thing. It may mean that they're less likely to steal to get the money they need or want, which again is probably a good thing. It may mean that some of them get the support they need to fix those bad decisions and get their lives back on track, which again is probably a good thing. Oh, and I liked the way you skipped straight from "giving people money who make bad decisions" to "welfare", as if the two are the same. As if no one ever found themselves in serious financial trouble for any reason other than having made "bad decisions". I think you're looking for profound evil in the wrong place.
nickpp 16y ago
Would a simpler, flat tax system be better? Because the progressive one always has special cases: tax is 30% for under 100k profit, then it becomes 40% but you don't pay tax if you reinvest in factories or if you put it into your retirement account, or... etc. Where there are complex rules there is abuse. How about let's just say 20% tax for everybody on any money earned (profit). No exceptions for the poor, no extra taxes for the rich. Would that work? I think it would at least prevent abuse and increase government revenue...
- Cadsby 16y ago
  Such a system would be simpler, but morally questionable.
  - nickpp 16y ago
    Really? It seemed quite fair to me, everybody paying the exact same share of his pie to Uncle Sam. I find much more morally questionable that today some pay up to 50% while others under 10%...
    - borism 16y ago
      the problem is that it's very hard to design a true flat tax system. corporations have to make deductions, but different industries need to deduct different levels of expenses. thus you still end up with (somewhat) progressive tax system: http://en.wikipedia.org/wiki/Flat_tax#Avoiding_deductions http://en.wikipedia.org/wiki/Flat_tax#Avoiding_deductions another issue which I think previous poster raises, is that it might seem unfair that person below poverty line pays the same tax rate as billionaire. So here in Estonia we make basic income (something that will keep you just above poverty line) tax-free (also everyone pays the same VAT on purchased goods, but obviously poor pay proportionally more in VAT than rich). But that means that it's not a true flat tax system (even though politicians like to claim it is)! Then the question becomes why shouldn't we have progressive tax if we don't have true flat tax system in the first place?
jonburs 16y ago
"Instead, airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success." I wish the article in some way backed up these assertions. While corporation (and wealthy individuals, too) may perform complex machinations to avoid taxes (e.g., the double Dutch Irish jig, or whatever its real name is) they'd only do so if in the end the maneuvering has a net financial benefit. Even with tax benefits idle capital resources (planes you don't need) or other wasted expenditures aren't good business. There are also wider-ranging benefits to the forms of investment granted tax benefits. Capital expenditures presumably benefit other companies, and therefore other (hopefully local) workers. Certainly that would be the case for a purchase of Boeing planes (and probably even an Airbus, given the global nature of the aerospace component industry). Energy companies drilling holes and drug company research involves paying lots of salary (which means payroll taxes, income taxes, and, well, economic growth). What could be construed as the true deadweight loss is the time and effort expended by tax attorneys and accountants...
- lionhearted 16y ago
  > Energy companies drilling holes and drug company research involves paying lots of salary (which means payroll taxes, income taxes, and, well, economic growth). It's a fallacy to look at the salary for non-productive endeavors without considering where it'd go otherwise. See: http://en.wikipedia.org/wiki/Parable_of_the_broken_window http://en.wikipedia.org/wiki/Parable_of_the_broken_window
  - gaius 16y ago
    Yeah, but the context here is how much net tax revenue is raised. If SouthWest buys more airliners than Boeing hires more employees who pay more income tax. Reaganomics proved that cutting taxes rates increased tax revenue overall - because it raised economic activity across the board.
quant18 16y ago
The issue the NYT is complaining about is: the US prefers to use "place of incorporation" instead of "place of effective management" in deciding where a company should be taxed. Of course this should hardly be a surprise, when Delaware alone is "home" to tens of thousands of companies owned by non-resident aliens. For those who are curious or suffering from insomnia, here's the actual laws that make Carnival mostly tax-exempt: Internal Revenue Code Sec. 883: (a) The following items shall not be included in gross income of a foreign corporation, and shall be exempt from taxation under this subtitle: (1) Ships operated by certain foreign corporations: Gross income derived by a corporation organized in a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to corporations organized in the United States. http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000883----000-.html http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_0... "Foreign corporation" is defined in Sec. 7701: (4) Domestic: The term “domestic” when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any State unless, in the case of a partnership, the Secretary provides otherwise by regulations. (5) Foreign: The term “foreign” when applied to a corporation or partnership means a corporation or partnership which is not domestic. http://www.law.cornell.edu/uscode/26/usc_sec_26_00007701----000-.html http://www.law.cornell.edu/uscode/26/usc_sec_26_00007701----... In some countries, the laws and treaties care about the "place of effective management" of a corporation in deciding where it is to be taxed. That would catch out Carnival. For example, the OECD model tax convention says: Profits from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is located http://browse.oecdbookshop.org/oecd/pdfs/browseit/2310081E.PDF http://browse.oecdbookshop.org/oecd/pdfs/browseit/2310081E.P... However, the US uses the following in most of its treaties instead: Profits of an enterprise of a Contracting State from the operation in international traffic of ships or aircraft shall be taxable only in that State. And, there is no double-taxation treaty between the US and Panama in the first place, only a tax information exchange agreement.
iwwr 16y ago
Remember that payroll and social security taxes, even if paid by the employee, still represent an indirect tax to the employer. The fact that the employee or the employer has to pay makes little difference.

28 points by locopati 16y ago

Even when a company pays little to no tax, the government does get itself a pretty good taste of the profits via the dividend tax.

DarkShikari 16y ago
Good thing all big companies, such as, say, Google, pay plenty of dividends, right?
- jwang815 16y ago
  Nope, Google has no paid out a single dividend. As long as Google thinks it can use the money to reinvest in the company and give investors a nice return from capital gains
  - DarkShikari 16y ago
    Nope, Google has no paid out a single dividend. That was the joke.
- nickpp 16y ago
  But dividends kept should increase stock value and the government does get a nice cut when selling those, right?
  - 2arrs2ells 16y ago
    Dividends are taxed as ordinary income, while (long-term) capital gains are taxed at a significantly lower rate.
- karzeem 16y ago
  I know it's called profit, but the money they keep goes back into the business. The ways for it to be profit in the sense of making the shareholders rich(er) are by increasing the value of the stock or by going to shareholders as a dividend. And both of those avenues are taxed.
2arrs2ells 16y ago
Could someone run a quick report - what percent of EBITDA (for the S&P 500) for the past year was paid out as dividends? My hunch is that it's only a tiny fraction, but that might just be because I follow tech stocks primarily (which tend not to pay dividends).

patio11 16y ago

Corporations don't pay taxes any more than the government pays for healthcare: people pay for both. Every dollar paid in taxes is a dollar taken from a real, flesh-and-blood human being. (And, of course, transferred to a real human being. The California corporate tax, for example, is a wealth transfer from anyone beneficially owning a Californian corporation to Californian public employees, who are - far and away - the largest beneficiary of Californian taxes.)

2arrs2ells 16y ago
I'm not sure your comment has any substance to it. I could reframe it "Every dollar paid in taxes is a dollar given to a real, flesh-and-blood human being" and the same facts point to the opposite conclusion. I hope that the HN crowd isn't so ignorant as to think that corporations aren't made up of real people.
- ecuzzillo 16y ago
  Yeah, but the real flesh-and-blood human beings receiving the dollars, his point is, are not really people whom most people are all that interested in randomly giving dollars to, like starving people in Africa; they're government bureaucrats who often end up serving to make dollar-givers' lives more difficult.
  - gjm11 16y ago
    Except that he only made it sound that way by pretending that the people being paid with those tax dollars are taking the money for doing nothing, whereas in fact they are, e.g., teachers and policemen and firefighters, and the government is handing that money to them in exchange for doing their jobs, and their jobs do in fact involve providing public services. In other words, exactly what taxes are meant to be used for. Now, of course it's possible that California is employing incompetent people to do those things, or that it's prioritizing them badly, or that its bureaucratic overhead is much bigger than it should be. But (1) Patrick didn't offer any sort of evidence for any of those things, or even say them, and (2) those things, if true, aren't problems with taxation but with other functions of government. (Unless they're incurable, so that anything paid for by taxes is inevitably going to be done badly; but, living as I do in a country where all sorts of important things are done quite competently using money raised from taxes, I find that difficult to believe.)

noblethrasher 16y ago

The paradox, as I see it, is that taxation is both the government's primary means of generating revenue and of influencing behavior. When the government wants to use taxation to effect a certain desired behavior it offers 'tax credits' and 'deductions'; but when politically disfavored groups use them they're exploiting 'loopholes'. Yet, a group's political favor is often very much a function of total revenue (or rather the difference between total revenue and the cost of whatever initiatives the government wants to pursue).

austinB 16y ago
Many people fail to recognize the social engineering aspect to taxes.
- gaius 16y ago
  If you tax something you get less of it, if you subsidize it you get more of it - whatever it is. Which has the obvious consequence that if you give people money who make bad decisions with their lives (e.g. getting addicted to drugs) then you will get more people making those decisions. That is why welfare is profoundly evil.
  - Joakal 16y ago
    Welfare seems to be keeping USA from following Egypt with over 35 million Americans on food stamps [0]. Would you still call it profoundly evil? [0] http://www.usatoday.com/news/health/2009-11-02-food-stamps_N.htm http://www.usatoday.com/news/health/2009-11-02-food-stamps_N...
    - borism 16y ago
      I'm pretty sure he'd like revolution in USA, Egypt-style (except americans do have guns).
  - gjm11 16y ago
    Picking on one consequence of a thing and calling it "profoundly evil" (or for that matter profoundly good) on that basis is ridiculous. On that basis you could make anything look either good or bad. Giving money to some people who make bad decisions may very well mean that more people will make similar bad decisions, and yes, that's a bad thing. On the other hand, it may also mean that those people don't starve to death, which most of us would consider a good thing. It may mean that they're less likely to steal to get the money they need or want, which again is probably a good thing. It may mean that some of them get the support they need to fix those bad decisions and get their lives back on track, which again is probably a good thing. Oh, and I liked the way you skipped straight from "giving people money who make bad decisions" to "welfare", as if the two are the same. As if no one ever found themselves in serious financial trouble for any reason other than having made "bad decisions". I think you're looking for profound evil in the wrong place.

nickpp 16y ago

Would a simpler, flat tax system be better? Because the progressive one always has special cases: tax is 30% for under 100k profit, then it becomes 40% but you don't pay tax if you reinvest in factories or if you put it into your retirement account, or... etc. Where there are complex rules there is abuse. How about let's just say 20% tax for everybody on any money earned (profit). No exceptions for the poor, no extra taxes for the rich. Would that work? I think it would at least prevent abuse and increase government revenue...

Cadsby 16y ago
Such a system would be simpler, but morally questionable.
- nickpp 16y ago
  Really? It seemed quite fair to me, everybody paying the exact same share of his pie to Uncle Sam. I find much more morally questionable that today some pay up to 50% while others under 10%...
  - borism 16y ago
    the problem is that it's very hard to design a true flat tax system. corporations have to make deductions, but different industries need to deduct different levels of expenses. thus you still end up with (somewhat) progressive tax system: http://en.wikipedia.org/wiki/Flat_tax#Avoiding_deductions http://en.wikipedia.org/wiki/Flat_tax#Avoiding_deductions another issue which I think previous poster raises, is that it might seem unfair that person below poverty line pays the same tax rate as billionaire. So here in Estonia we make basic income (something that will keep you just above poverty line) tax-free (also everyone pays the same VAT on purchased goods, but obviously poor pay proportionally more in VAT than rich). But that means that it's not a true flat tax system (even though politicians like to claim it is)! Then the question becomes why shouldn't we have progressive tax if we don't have true flat tax system in the first place?

jonburs 16y ago

"Instead, airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success." I wish the article in some way backed up these assertions. While corporation (and wealthy individuals, too) may perform complex machinations to avoid taxes (e.g., the double Dutch Irish jig, or whatever its real name is) they'd only do so if in the end the maneuvering has a net financial benefit. Even with tax benefits idle capital resources (planes you don't need) or other wasted expenditures aren't good business. There are also wider-ranging benefits to the forms of investment granted tax benefits. Capital expenditures presumably benefit other companies, and therefore other (hopefully local) workers. Certainly that would be the case for a purchase of Boeing planes (and probably even an Airbus, given the global nature of the aerospace component industry). Energy companies drilling holes and drug company research involves paying lots of salary (which means payroll taxes, income taxes, and, well, economic growth). What could be construed as the true deadweight loss is the time and effort expended by tax attorneys and accountants...

lionhearted 16y ago
> Energy companies drilling holes and drug company research involves paying lots of salary (which means payroll taxes, income taxes, and, well, economic growth). It's a fallacy to look at the salary for non-productive endeavors without considering where it'd go otherwise. See: http://en.wikipedia.org/wiki/Parable_of_the_broken_window http://en.wikipedia.org/wiki/Parable_of_the_broken_window
- gaius 16y ago
  Yeah, but the context here is how much net tax revenue is raised. If SouthWest buys more airliners than Boeing hires more employees who pay more income tax. Reaganomics proved that cutting taxes rates increased tax revenue overall - because it raised economic activity across the board.

quant18 16y ago

The issue the NYT is complaining about is: the US prefers to use "place of incorporation" instead of "place of effective management" in deciding where a company should be taxed. Of course this should hardly be a surprise, when Delaware alone is "home" to tens of thousands of companies owned by non-resident aliens. For those who are curious or suffering from insomnia, here's the actual laws that make Carnival mostly tax-exempt: Internal Revenue Code Sec. 883: (a) The following items shall not be included in gross income of a foreign corporation, and shall be exempt from taxation under this subtitle: (1) Ships operated by certain foreign corporations: Gross income derived by a corporation organized in a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to corporations organized in the United States. http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000883----000-.html http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_0... "Foreign corporation" is defined in Sec. 7701: (4) Domestic: The term “domestic” when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any State unless, in the case of a partnership, the Secretary provides otherwise by regulations. (5) Foreign: The term “foreign” when applied to a corporation or partnership means a corporation or partnership which is not domestic. http://www.law.cornell.edu/uscode/26/usc_sec_26_00007701----000-.html http://www.law.cornell.edu/uscode/26/usc_sec_26_00007701----... In some countries, the laws and treaties care about the "place of effective management" of a corporation in deciding where it is to be taxed. That would catch out Carnival. For example, the OECD model tax convention says: Profits from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is located http://browse.oecdbookshop.org/oecd/pdfs/browseit/2310081E.PDF http://browse.oecdbookshop.org/oecd/pdfs/browseit/2310081E.P... However, the US uses the following in most of its treaties instead: Profits of an enterprise of a Contracting State from the operation in international traffic of ships or aircraft shall be taxable only in that State. And, there is no double-taxation treaty between the US and Panama in the first place, only a tax information exchange agreement.

iwwr 16y ago

Remember that payroll and social security taxes, even if paid by the employee, still represent an indirect tax to the employer. The fact that the employee or the employer has to pay makes little difference.