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As a business owner, when taxes are low, I see that as an incentive to pocket profits. But when taxes are high, I see that as an incentive to hide the profits b

As a business owner, when taxes are low, I see that as an incentive to pocket profits. But when taxes are high, I see that as an incentive to hide the profits by investing in the future. I know this isn't always the case with everyone. And especially investors have a case that higher corporate taxes reduce the value of their investments, possibly to the point of not making them. But this incentive is so blatantly obvious in other cases and so rarely understood. I can only assume that the vast majority of people think businesses are taxed like people. You pay taxes on all of your income. But businesses only pay taxes on their profit. It's a big, big difference that changes the incentives.

rbecker 6y ago
That's a misconception worth clearing up, but the article is about taxes on wealth (i.e. assets), not profit.
- tonystubblebine 6y ago
  I agree that is what the article is about.
riku_iki 6y ago
> I see that as an incentive to hide the profits by investing in the future. Can it be also an incentive to work less, since most of the results of your hard work will be taken from you in form of taxes, or you would need to 'hide the profits' potentially forever?
- coliveira 6y ago
  That would be true if the owner of the business was doing most of the work. But in a large corporation the workers are doing the brunt of the work, so it makes no difference for the shareholders.
  - riku_iki 6y ago
    Author of the comment I replied to identified himself as "business owner", probably not an owner of "large corporation".
zdragnar 6y ago
Strange. Business owner friends of mine have taken the opposite approach over the years. Taxes low? Start up something new, get it going. Taxes go up again? Sell it off (if they haven't already) and go back to early retirement doing whatever. Maybe it is largely the type of business that behavior changes. Their last venture was starting up an aquaponics farm in a borderline urban / suburban area, though I haven't kept in touch and it appears to have been sold off to another family.
- PrinceKropotkin 6y ago
  Federal taxes have been going down my whole life (born 1990 in the US). What era/region are you referring to where taxes go up?
  - zdragnar 6y ago
    Think state and local taxes. Depending on where you live and the type of business you run, they can add up quickly. Also, the people I am speaking about were most definitely born before the 90's. More like 50's or 60's.
    - PrinceKropotkin 6y ago
      Where are you living where state taxes are remotely comparable to federal taxes? State taxes are chump change compared to federal, and federal is what generally pays the bills you actually rely on. Capitalists need to stop crying and find decent businesses to build. The benefit of being in a capitalist society is that nobody deserves any fucking tears when things fall apart.
  - brewdad 6y ago
    State and local taxes have been going up in many places. Often in response to decreased federal support.
    - PrinceKropotkin 6y ago
      Where are state/local taxes remotely comparable to federal taxes? This reeks of crocodile tears. If this is your attitude.... cry more, bitch, we're coming for your cash that you stole from us.
spullara 6y ago
This is a wealth tax that would apply to the valuation of the business, not the profits that it makes.
- tonystubblebine 6y ago
  I was posting a tangent. It resonated, but it's probably a mistake that this is the top comment since I'm not talking about the article specifically, just how wealth is taxed and a way in which the public debate is misinformed.
didibus 6y ago
That seems like the way the incentive is supposed to work no? Motivate the economy by furthering investment back into it.
- maerF0x0 6y ago
  If we tax wealth, people will be incentivized to generate non-wealth things. Why buy a stock if Biden will take 1% of it annually? May as well just buy rapidly depreciating status symbols instead.
  - munk-a 6y ago
    Why work as an average american is the government will take 22% of it? Probably because trading stocks will still leave you with a lot more money than if you threw a tantrum, took your toys home and hid your money under your mattress - no plan that I've seen has investors paying capital gains at the level of their equivalent income - investment is still heavily subsidized.
    - maerF0x0 6y ago
      > capital gains Capital gains happen on money that has already been taxed as income. Capital Gains tax is less because it's round 2 of the taxation game. Also taxing assets on their capital means people will not invest in capitally intensive projects. For example building a new housing complex returning 3% per year (after inflation) is 33% less interesting with an additional 1% wealth tax (on the capital) ...
      - gamblor956 6y ago
        It's very possible to get capital gains on something that has not been already taxed as income. For example: say you purchased 100 shares of Tesla stock a decade ago and sold it today for lots of capital gains. But Tesla has never posted an annual profit on a tax basis, and thus the "income" underlying the shares you sold was not taxed. In fact, the capital gains rates were never about avoiding double taxation. It was simply a giveaway to Republican donors by the Reagan administration. You probably mixed up capital gains and dividends. The logic behind giving dividends special rates (including a 0% rate for certain inter-corporate dividends) is that the corporation paying the dividend has already paid an income tax on those profits, so the shareholders should not be subject to full tax on the shares of the profits they receive, but should still pay some tax to account for the benefits of using the corporate form.
s_dev 6y ago
>As a business owner, when taxes are low, I see that as an incentive to pocket profits. But when taxes are high Where do you live that taxes are as volatile as petrol prices? Taxes change in Ireland but in terms of decades.
- tonystubblebine 6y ago
  The United States. Corporate tax rate dropped from 35 to 21 in 2016. There is talk of reraising them and so I'm mostly projecting my behavior if they do get raised.
  - deleted 6y ago
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- yardie 6y ago
  In the US income tax rarely changes. But tax deductions are fair game and change year to year and administration to administration. Last year, Trump bragged about lowering taxes. He lowered it by increasing the standard deduction for some. But it increased for others, such as myself, who take advantage of other deductions that were cut back or removed.
DubiousPusher 6y ago
> But businesses only pay taxes on their profit. Except in Washington State.
- entangledqubit 6y ago
  Are you referring to the B&O taxes (seems to be based on industry) or are there others around as well? I could imagine some reasonable arguments for having a low tax like that around.
- gamblor956 6y ago
  And Hawaii. See the general excise tax. Fun fact: it's a recursive tax on business revenue (not profit), so if you gross up prices to pass along the tax to customers on a transactional basis, you also need to pay GET on the gross up, ad infinitum. For example, on Oahu this results in a final grossup of approximately 4.7120% (starting from a base GET of 4.5%).
coliveira 6y ago
This is so hidden in the debate that it is almost like a "secret". The more taxes you have on corporate income, the higher the incentive for corporations to invest in the company, so they can avoid paying taxes. This is good for the economy. On the other hand, lowering corporate taxes also generates a cascade of tax avoidance, since you have higher profits that generate the need for more complex tax avoidance schemes to reduce taxation on that large amount of money.
- jquery 6y ago
  > This is good for the economy. Not at all clear to me this is the case.
  - deleted 6y ago
    [deleted]
  - munk-a 6y ago
    I think it's pretty clear that corporate re-investment going up is good for the economy, perhaps looking at the equivalent lengths countries go to draw excess investment money from the international market in is a decent example - or maybe the WPA in the US where the government artificially injected money into employment to restart the economy.
    - tick_tock_tick 6y ago
      It's not like the money leaving the corporation doesn't get invested in something else. I could very easily see the how higher rate lead to less innovation since the money is all tied up in mega corps.
      - ivalm 6y ago
        Often time it leaves corporations simply to inflate the price of assets, which is not productive. While we have been lowering taxes past many decades the velocity of money has gone down.
    - 6y ago
tw04 6y ago
>And especially investors have a case that higher corporate taxes reduce the value of their investments, possibly to the point of not making them. I know you aren't arguing against higher taxes, but my response to that is... and? Does Target benefit more from some random hedge fund buying up $20 million of their shares? Or from consumers buying $20 million in goods from them? Once a company has gone public, unless they're trying to do another round of funding, the share price is almost meaningless beyond the ghost of being taken over by another entity. This belief that institutional investors mean more to the health of a business than ACTUAL SALES is baffling to me (not saying that's your stance).
- conanbatt 6y ago
  > This belief that institutional investors mean more to the health of a business than ACTUAL SALES is baffling to me (not saying that's your stance). Investors making money means more money to invest, which creates more companies and services.
kilroy123 6y ago
I'm convinced the best strategy is a tax system where net worth is capped and heavily taxed based on average net worth of all Americans. There is simply no other way to align interests of the wealthy. https://anacyclosis.org/2020/05/25/how-do-we-save-democracy https://anacyclosis.org/2020/05/25/how-do-we-save-democracy
- MacsHeadroom 6y ago
  I'm in favor of astronomical marginal tax rates. But that post of comically bad at making the argument. The founding fathers, including a handful of those quoted in the linked post, were highly critical of democracy and even of men who didn't own multiple house like they did. We just narrowly missed out on having a constitution which only allowed land owners to vote. There were even years long debates on whether votes should be proportional to the amount of land owned. Using the founding fathers to argue for state enforced equalization of outcomes is plainly absurd.
  - kilroy123 6y ago
    I still think it's a good idea and worth studying. Frankly, I don't care what the plan is. I just want to see a less inequality and a stronger middle class.
georgeecollins 6y ago
And also, if in an emergency you need to sell some of the equity you built up it is taxed as capital gains, which happens to be a lower tax rate then even middle income people pay on their wages. And, you can also avoid the capital gains by harvesting capital losses.
Vaslo 6y ago
It’s very clear that you are a small business owner and don’t really understand how taxes work in a large company.
thaumasiotes 6y ago
> I can only assume that the vast majority of people think businesses are taxed like people. You pay taxes on all of your income. But businesses only pay taxes on their profit. It's a big, big difference that changes the incentives. People are taxed the same way. There are all kinds of ways to spend your money before paying income tax on it. Most obviously, on health "insurance".
vidanay 6y ago
This is something that I have not seen very much research about (not saying it doesn't exist.) When taxes are high, then "wealthy" people will search for a method to reduce their tax burden. For business owners and employers, there are two large options for reducing tax burden - increasing employee salary, and increasing re-investment (R&D, infrastructure, etc). Both of which are commonly cited as deficient in modern business practices.
- senko 6y ago
  For sufficiently large companies, a third option is to create a global corporate structure that minimizes the tax burden. If lawyers + accountants + other fees is considerably less than the tax (which is probably the case for most mid-sized or larger companies), becomes a no-brainer for them. See https://en.wikipedia.org/wiki/Double_Irish_arrangement https://en.wikipedia.org/wiki/Double_Irish_arrangement for a historic example.
  - gamblor956 6y ago
    It used to be a no-brainer to go overseas. But the Double Irish (and similar structuring) is no longer permitted and would be treated as an illegal tax scheme today. (It's grandfathered in for companies already using the structure.) Generally, between BEAT, GILTI, global transfer pricing policies, and the rise of nationalist economic policies, it's now riskier and more expensive to switch to a global corporate structure than to just keep everything in the US. I used to do a lot of outbound structuring work, and now (post TCJA) almost everything is inbound, compliance, or restructuring existing foreign operations to more tax-friendly foreign jurisdictions (i.e., moving out of China to Vietname, etc.)
btilly 6y ago
As a business owner, when taxes are low, I see that as an incentive to pocket profits. But when taxes are high, I see that as an incentive to hide the profits by investing in the future. Let me introduce you to how private equity works. They have figured out how to hide the profits by buying out the original owners! They buy companies by having them borrow heavily to "invest" in buying out the previous owners. And then try to keep the corpse of the company looking good enough that they can flip to someone else. The trick is that debt payments count against profits so the new owner saves on taxes. The people who set up the deal get paid in a variety of ways. But in the end what they get paid tends to be roughly proportional to how much money no longer goes to Uncle Sam. So when you see someone who got rich in private equity, like Mitt Romney, it isn't a bad approximation that their personal wealth reflects how much money the US no longer receives in taxes due to the deals that they structured. Note, if you're over 50 you may remember the "junk bond kinds" of the 1980s. That's the same thing as private equity. They just rebranded themselves after their actions gave them a bad name.
koolba 6y ago
> You pay taxes on all of your income. But businesses only pay taxes on their profit. It's a big, big difference that changes the incentives. It’d be insane to have it any other way for businesses. Whole swathes of low margin businesses would be impossible to operate. For example a super markets average margins are 3-5%. Corporate tax is (generally) on profits because you can deduct costs. It allows for the flow of money to efficiently find a sub supplier for the parts of a good or service. The real scam is when things like health insurance premiums are deductible for a company but not for an individual.
- triceratops 6y ago
  Aren't health insurance premiums deductible for individuals too?
  - saddestcatever 6y ago
    "If you bought medical insurance policies on your own for yourself or your family, you might qualify for a self-employment tax deduction on the premiums." [1] "If you are enrolled in an employer-sponsored health insurance plan, your premiums may already be tax-free. If your premiums are made through a payroll deduction plan, they are likely made with pre-tax dollars, so you would not be allowed to claim a year-end tax deduction." [2] [1]: https://www.nerdwallet.com/article/taxes/self-employment-tax-deductions https://www.nerdwallet.com/article/taxes/self-employment-tax... [2]: https://www.investopedia.com/are-health-insurance-premiums-tax-deductible-4773286 https://www.investopedia.com/are-health-insurance-premiums-t...
    - triceratops 6y ago
      I'm confused. What's the difference between a "tax deduction" and paying with "pre-tax dollars"? Do they mean if for example a company pays $5000/year in employee insurance, they can subtract $5000 from their tax bill? If so, that's a tax credit right? As I understand it, a "tax deduction" is a deduction on taxable income (in the case of an individual) or profit (in the case of a company).
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kortilla 6y ago
But why invest instead of just taking the tax hit unless you’re waiting for a lower tax rate in the future? It seems this scheme of incentives is dependent on some future expectation of taxes dropping.
- jjk166 6y ago
  Let's say that I own a 5 million dollar business that makes 1 million per year in profit, and the corporate tax rate is 40%. I could take my profit and pay my taxes, leaving me with a 5 million dollar company and $600k cash. Alternatively I could "spend" that $600k to get 1 million dollars in cash interest free to invest in my company, raising its valuation to 6 million. Assuming with the investment that that the company continues to generate 20% profit, even if the tax rate stays the same, I make $720k per year after taxes. Considering I invested 1 million and I'm making an extra $120k per year, that's a 12% ROI/yr - not bad, not great. But since it only cost me $600k to make that investment, I'm really getting 20% ROI/yr. If taxes drop in the future, the ROI further increases, but they don't need to for it to be advantageous. Even if I never actually take profits, my net worth is still going up, and I can cash that in by selling the business or some of its assets at some future point.
  - kortilla 6y ago
    That presumes that $600k spent on something increases the value by that much and it also assumes that you can easily scale up revenue with the same profit margin based on the value of the company increasing. The latter is absolutely not a given and the former is only really safe if you invest the money in something that isn’t really an investment in the business. Phrased differently, if you had a magic cash printing business like this that can safely scale up with more money you would be absolutely stupid to not do it regardless of the tax rates.
mmaunder 6y ago
The problem is when you start making money and want to grow the business without funding. You need to build a war chest. Once you've burnt through any carried loss, which happened pretty quickly in our case, we are taxed on the profit we are retaining in order to build up a cash reserve. That cash reserve is needed if we're to self fund big projects and in case of down-turn, lawsuit or other unforeseen event if we are to avoid immediately laying people off. The alternative is to raise money which dilutes founders and employees who own stock or vested options. You won't encounter this issue if you're early stage or if you are "going for growth" by running at a loss and raising money in successive rounds. But it is a huge problem if you are a self funding small or medium sized business.
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golergka 6y ago
> As a business owner You're already a business owner. You're faced with decisions on what to do with an already existing business, not whether to start a new business, and in what state or country to do that.
AnthonyMouse 6y ago
> But when taxes are high, I see that as an incentive to hide the profits by investing in the future. That isn't really the societal win you're making it out to be though. If you "pocket" profits, i.e. pay them to investors, the investors just go out and invest them again in something else. Which is actually better, because it reduces concentration of wealth inside of corporations. Instead of one corporation growing ever larger because they have to invest internally or be subject to punitive taxes, you get many new independent companies being formed as investors seek out new opportunities for the money they receive as dividends. The other problem is that there are many forms of investment that are taxed differently. Government bond interest typically isn't taxed. Real estate appreciation typically isn't taxed until sale, which means they can be deferred indefinitely. Investing in foreign corporations will be subject to the tax rates in those other countries. So if you increase the domestic corporate tax rate, investment moves from domestic companies to things like real estate speculation and foreign companies, which may not be desirable. Moreover, multinational corporations arrange for profits to be declared in whichever jurisdiction has the lowest taxes, so increasing the tax rate on domestic corporations disadvantages them against multinationals that won't be paying those taxes.
- tryptophan 6y ago
  Yes. The op assumes that malinvestment / inefficient use of capital is not a thing. You can only invest so much into a grocery store. The entire point of us having free markets is so that capital can move around. Locking it down into once place is the exact opposite of what you want to do.
- gamblor956 6y ago
  So if you increase the domestic corporate tax rate, investment moves from domestic companies to things like real estate speculation and foreign companies, which may not be desirable. The reverse is actually true. Historically, the lower the tax rate, the more investment you get in real estate speculation and other passive income streams because it's now more efficient to simply not invest in productive activities when you can just get effectively free money without doing any work. The higher the tax rate, the more businesses invest in actual business activities, because they get more expenses they can use to offset income they may earn, and because passive activities generally don't generate enough of a return to be worth the investment compared to (re)investing in an actual business.
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gamblor956 6y ago
And especially investors have a case that higher corporate taxes reduce the value of their investments, possibly to the point of not making them. A business that is not making a profit does not pay income taxes. I don't have a single client that has voluntarily turned down making a profit because they'd had to pay some income tax on it. The only time business income tax rates make a difference is when the business is choosing between multiple profit-generating activities and wants to maximize the net (post-tax) income by minimizing its tax burden.
rayiner 6y ago
That's actually an example of why wealth taxes aren't a great idea. If you invest money back into the business, that might reduce your profits, and therefore any corporate or income taxes. But that investment it will increase the long-term value of the company. Under a wealth tax, that would cause taxes for everyone who holds the stock to go up! In fact, if investing in say a new line of business causes the value of the stock to go up by more than just parking the money in the corporate treasury, a wealth tax creates a perverse incentive to not invest back in the company.
- bhupy 6y ago
  I generally agree with the opposition to wealth taxes (and no, I'm not wealthy), but I'll try to engage with this by providing what I believe is the strongest good-faith counterargument: > a wealth tax creates a perverse incentive to not invest back in the company. This is arguably a "good thing" because one could argue that it's "unfair" that large, high revenue / high income corporations allocate so much capital in our economy. It would arguably be better for them to pay the taxes and instead have that capital be allocated by a democratically accountable body: the government.
  - rayiner 6y ago
    > This is arguably a "good thing" because one could argue that it's "unfair" that large, high revenue / high income corporations allocate so much capital in our economy. It would arguably be better for them to pay the taxes and instead have that capital be allocated by a democratically accountable body: the government. This is certainly "arguable." One of the very few things economists agree on is the market's are better at allocating capital than governments. That's one of the core functions of markets.
    - bhupy 6y ago
      Yep, I don't disagree.
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d1zzy 6y ago
In the US? Because in many countries I'm aware of there are business profit taxes...
tomatocracy 6y ago
This depends a lot on the accounting and tax treatment though. In many industries, that "investment" would be accounted for as capex, and in many countries you don't get an immediate write off against tax for capex but you get it over some approximation of useful life of the assets you've invested in. There is a strong case for allowing immediate, or faster, write-offs for capex spending in preference to lowering corporate tax rates because of this effect.

As a business owner, when taxes are low, I see that as an incentive to pocket profits. But when taxes are high, I see that as an incentive to hide the profits by investing in the future. I know this isn't always the case with everyone. And especially investors have a case that higher corporate taxes reduce the value of their investments, possibly to the point of not making them. But this incentive is so blatantly obvious in other cases and so rarely understood. I can only assume that the vast majority of people think businesses are taxed like people. You pay taxes on all of your income. But businesses only pay taxes on their profit. It's a big, big difference that changes the incentives.

rbecker 6y ago

That's a misconception worth clearing up, but the article is about taxes on wealth (i.e. assets), not profit.

tonystubblebine 6y ago
I agree that is what the article is about.

riku_iki 6y ago

> I see that as an incentive to hide the profits by investing in the future. Can it be also an incentive to work less, since most of the results of your hard work will be taken from you in form of taxes, or you would need to 'hide the profits' potentially forever?

coliveira 6y ago
That would be true if the owner of the business was doing most of the work. But in a large corporation the workers are doing the brunt of the work, so it makes no difference for the shareholders.
- riku_iki 6y ago
  Author of the comment I replied to identified himself as "business owner", probably not an owner of "large corporation".

zdragnar 6y ago

Strange. Business owner friends of mine have taken the opposite approach over the years. Taxes low? Start up something new, get it going. Taxes go up again? Sell it off (if they haven't already) and go back to early retirement doing whatever. Maybe it is largely the type of business that behavior changes. Their last venture was starting up an aquaponics farm in a borderline urban / suburban area, though I haven't kept in touch and it appears to have been sold off to another family.

PrinceKropotkin 6y ago
Federal taxes have been going down my whole life (born 1990 in the US). What era/region are you referring to where taxes go up?
- zdragnar 6y ago
  Think state and local taxes. Depending on where you live and the type of business you run, they can add up quickly. Also, the people I am speaking about were most definitely born before the 90's. More like 50's or 60's.
  - PrinceKropotkin 6y ago
    Where are you living where state taxes are remotely comparable to federal taxes? State taxes are chump change compared to federal, and federal is what generally pays the bills you actually rely on. Capitalists need to stop crying and find decent businesses to build. The benefit of being in a capitalist society is that nobody deserves any fucking tears when things fall apart.
- brewdad 6y ago
  State and local taxes have been going up in many places. Often in response to decreased federal support.
  - PrinceKropotkin 6y ago
    Where are state/local taxes remotely comparable to federal taxes? This reeks of crocodile tears. If this is your attitude.... cry more, bitch, we're coming for your cash that you stole from us.

spullara 6y ago

This is a wealth tax that would apply to the valuation of the business, not the profits that it makes.

tonystubblebine 6y ago
I was posting a tangent. It resonated, but it's probably a mistake that this is the top comment since I'm not talking about the article specifically, just how wealth is taxed and a way in which the public debate is misinformed.

didibus 6y ago

That seems like the way the incentive is supposed to work no? Motivate the economy by furthering investment back into it.

maerF0x0 6y ago
If we tax wealth, people will be incentivized to generate non-wealth things. Why buy a stock if Biden will take 1% of it annually? May as well just buy rapidly depreciating status symbols instead.
- munk-a 6y ago
  Why work as an average american is the government will take 22% of it? Probably because trading stocks will still leave you with a lot more money than if you threw a tantrum, took your toys home and hid your money under your mattress - no plan that I've seen has investors paying capital gains at the level of their equivalent income - investment is still heavily subsidized.
  - maerF0x0 6y ago
    > capital gains Capital gains happen on money that has already been taxed as income. Capital Gains tax is less because it's round 2 of the taxation game. Also taxing assets on their capital means people will not invest in capitally intensive projects. For example building a new housing complex returning 3% per year (after inflation) is 33% less interesting with an additional 1% wealth tax (on the capital) ...
    - gamblor956 6y ago
      It's very possible to get capital gains on something that has not been already taxed as income. For example: say you purchased 100 shares of Tesla stock a decade ago and sold it today for lots of capital gains. But Tesla has never posted an annual profit on a tax basis, and thus the "income" underlying the shares you sold was not taxed. In fact, the capital gains rates were never about avoiding double taxation. It was simply a giveaway to Republican donors by the Reagan administration. You probably mixed up capital gains and dividends. The logic behind giving dividends special rates (including a 0% rate for certain inter-corporate dividends) is that the corporation paying the dividend has already paid an income tax on those profits, so the shareholders should not be subject to full tax on the shares of the profits they receive, but should still pay some tax to account for the benefits of using the corporate form.

s_dev 6y ago

>As a business owner, when taxes are low, I see that as an incentive to pocket profits. But when taxes are high Where do you live that taxes are as volatile as petrol prices? Taxes change in Ireland but in terms of decades.

tonystubblebine 6y ago
The United States. Corporate tax rate dropped from 35 to 21 in 2016. There is talk of reraising them and so I'm mostly projecting my behavior if they do get raised.
- deleted 6y ago
  [deleted]
yardie 6y ago
In the US income tax rarely changes. But tax deductions are fair game and change year to year and administration to administration. Last year, Trump bragged about lowering taxes. He lowered it by increasing the standard deduction for some. But it increased for others, such as myself, who take advantage of other deductions that were cut back or removed.

DubiousPusher 6y ago

> But businesses only pay taxes on their profit. Except in Washington State.

entangledqubit 6y ago
Are you referring to the B&O taxes (seems to be based on industry) or are there others around as well? I could imagine some reasonable arguments for having a low tax like that around.
gamblor956 6y ago
And Hawaii. See the general excise tax. Fun fact: it's a recursive tax on business revenue (not profit), so if you gross up prices to pass along the tax to customers on a transactional basis, you also need to pay GET on the gross up, ad infinitum. For example, on Oahu this results in a final grossup of approximately 4.7120% (starting from a base GET of 4.5%).

coliveira 6y ago

This is so hidden in the debate that it is almost like a "secret". The more taxes you have on corporate income, the higher the incentive for corporations to invest in the company, so they can avoid paying taxes. This is good for the economy. On the other hand, lowering corporate taxes also generates a cascade of tax avoidance, since you have higher profits that generate the need for more complex tax avoidance schemes to reduce taxation on that large amount of money.

jquery 6y ago
> This is good for the economy. Not at all clear to me this is the case.
- deleted 6y ago
  [deleted]
- munk-a 6y ago
  I think it's pretty clear that corporate re-investment going up is good for the economy, perhaps looking at the equivalent lengths countries go to draw excess investment money from the international market in is a decent example - or maybe the WPA in the US where the government artificially injected money into employment to restart the economy.
  - tick_tock_tick 6y ago
    It's not like the money leaving the corporation doesn't get invested in something else. I could very easily see the how higher rate lead to less innovation since the money is all tied up in mega corps.
    - ivalm 6y ago
      Often time it leaves corporations simply to inflate the price of assets, which is not productive. While we have been lowering taxes past many decades the velocity of money has gone down.
  - 6y ago

tw04 6y ago

>And especially investors have a case that higher corporate taxes reduce the value of their investments, possibly to the point of not making them. I know you aren't arguing against higher taxes, but my response to that is... and? Does Target benefit more from some random hedge fund buying up $20 million of their shares? Or from consumers buying $20 million in goods from them? Once a company has gone public, unless they're trying to do another round of funding, the share price is almost meaningless beyond the ghost of being taken over by another entity. This belief that institutional investors mean more to the health of a business than ACTUAL SALES is baffling to me (not saying that's your stance).

conanbatt 6y ago
> This belief that institutional investors mean more to the health of a business than ACTUAL SALES is baffling to me (not saying that's your stance). Investors making money means more money to invest, which creates more companies and services.

kilroy123 6y ago

I'm convinced the best strategy is a tax system where net worth is capped and heavily taxed based on average net worth of all Americans. There is simply no other way to align interests of the wealthy. https://anacyclosis.org/2020/05/25/how-do-we-save-democracy https://anacyclosis.org/2020/05/25/how-do-we-save-democracy

MacsHeadroom 6y ago
I'm in favor of astronomical marginal tax rates. But that post of comically bad at making the argument. The founding fathers, including a handful of those quoted in the linked post, were highly critical of democracy and even of men who didn't own multiple house like they did. We just narrowly missed out on having a constitution which only allowed land owners to vote. There were even years long debates on whether votes should be proportional to the amount of land owned. Using the founding fathers to argue for state enforced equalization of outcomes is plainly absurd.
- kilroy123 6y ago
  I still think it's a good idea and worth studying. Frankly, I don't care what the plan is. I just want to see a less inequality and a stronger middle class.

georgeecollins 6y ago

And also, if in an emergency you need to sell some of the equity you built up it is taxed as capital gains, which happens to be a lower tax rate then even middle income people pay on their wages. And, you can also avoid the capital gains by harvesting capital losses.

Vaslo 6y ago

It’s very clear that you are a small business owner and don’t really understand how taxes work in a large company.

thaumasiotes 6y ago

> I can only assume that the vast majority of people think businesses are taxed like people. You pay taxes on all of your income. But businesses only pay taxes on their profit. It's a big, big difference that changes the incentives. People are taxed the same way. There are all kinds of ways to spend your money before paying income tax on it. Most obviously, on health "insurance".

vidanay 6y ago

This is something that I have not seen very much research about (not saying it doesn't exist.) When taxes are high, then "wealthy" people will search for a method to reduce their tax burden. For business owners and employers, there are two large options for reducing tax burden - increasing employee salary, and increasing re-investment (R&D, infrastructure, etc). Both of which are commonly cited as deficient in modern business practices.

senko 6y ago
For sufficiently large companies, a third option is to create a global corporate structure that minimizes the tax burden. If lawyers + accountants + other fees is considerably less than the tax (which is probably the case for most mid-sized or larger companies), becomes a no-brainer for them. See https://en.wikipedia.org/wiki/Double_Irish_arrangement https://en.wikipedia.org/wiki/Double_Irish_arrangement for a historic example.
- gamblor956 6y ago
  It used to be a no-brainer to go overseas. But the Double Irish (and similar structuring) is no longer permitted and would be treated as an illegal tax scheme today. (It's grandfathered in for companies already using the structure.) Generally, between BEAT, GILTI, global transfer pricing policies, and the rise of nationalist economic policies, it's now riskier and more expensive to switch to a global corporate structure than to just keep everything in the US. I used to do a lot of outbound structuring work, and now (post TCJA) almost everything is inbound, compliance, or restructuring existing foreign operations to more tax-friendly foreign jurisdictions (i.e., moving out of China to Vietname, etc.)

btilly 6y ago

As a business owner, when taxes are low, I see that as an incentive to pocket profits. But when taxes are high, I see that as an incentive to hide the profits by investing in the future. Let me introduce you to how private equity works. They have figured out how to hide the profits by buying out the original owners! They buy companies by having them borrow heavily to "invest" in buying out the previous owners. And then try to keep the corpse of the company looking good enough that they can flip to someone else. The trick is that debt payments count against profits so the new owner saves on taxes. The people who set up the deal get paid in a variety of ways. But in the end what they get paid tends to be roughly proportional to how much money no longer goes to Uncle Sam. So when you see someone who got rich in private equity, like Mitt Romney, it isn't a bad approximation that their personal wealth reflects how much money the US no longer receives in taxes due to the deals that they structured. Note, if you're over 50 you may remember the "junk bond kinds" of the 1980s. That's the same thing as private equity. They just rebranded themselves after their actions gave them a bad name.

koolba 6y ago

> You pay taxes on all of your income. But businesses only pay taxes on their profit. It's a big, big difference that changes the incentives. It’d be insane to have it any other way for businesses. Whole swathes of low margin businesses would be impossible to operate. For example a super markets average margins are 3-5%. Corporate tax is (generally) on profits because you can deduct costs. It allows for the flow of money to efficiently find a sub supplier for the parts of a good or service. The real scam is when things like health insurance premiums are deductible for a company but not for an individual.

triceratops 6y ago
Aren't health insurance premiums deductible for individuals too?
- saddestcatever 6y ago
  "If you bought medical insurance policies on your own for yourself or your family, you might qualify for a self-employment tax deduction on the premiums." [1] "If you are enrolled in an employer-sponsored health insurance plan, your premiums may already be tax-free. If your premiums are made through a payroll deduction plan, they are likely made with pre-tax dollars, so you would not be allowed to claim a year-end tax deduction." [2] [1]: https://www.nerdwallet.com/article/taxes/self-employment-tax-deductions https://www.nerdwallet.com/article/taxes/self-employment-tax... [2]: https://www.investopedia.com/are-health-insurance-premiums-tax-deductible-4773286 https://www.investopedia.com/are-health-insurance-premiums-t...
  - triceratops 6y ago
    I'm confused. What's the difference between a "tax deduction" and paying with "pre-tax dollars"? Do they mean if for example a company pays $5000/year in employee insurance, they can subtract $5000 from their tax bill? If so, that's a tax credit right? As I understand it, a "tax deduction" is a deduction on taxable income (in the case of an individual) or profit (in the case of a company).

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kortilla 6y ago

But why invest instead of just taking the tax hit unless you’re waiting for a lower tax rate in the future? It seems this scheme of incentives is dependent on some future expectation of taxes dropping.

jjk166 6y ago
Let's say that I own a 5 million dollar business that makes 1 million per year in profit, and the corporate tax rate is 40%. I could take my profit and pay my taxes, leaving me with a 5 million dollar company and $600k cash. Alternatively I could "spend" that $600k to get 1 million dollars in cash interest free to invest in my company, raising its valuation to 6 million. Assuming with the investment that that the company continues to generate 20% profit, even if the tax rate stays the same, I make $720k per year after taxes. Considering I invested 1 million and I'm making an extra $120k per year, that's a 12% ROI/yr - not bad, not great. But since it only cost me $600k to make that investment, I'm really getting 20% ROI/yr. If taxes drop in the future, the ROI further increases, but they don't need to for it to be advantageous. Even if I never actually take profits, my net worth is still going up, and I can cash that in by selling the business or some of its assets at some future point.
- kortilla 6y ago
  That presumes that $600k spent on something increases the value by that much and it also assumes that you can easily scale up revenue with the same profit margin based on the value of the company increasing. The latter is absolutely not a given and the former is only really safe if you invest the money in something that isn’t really an investment in the business. Phrased differently, if you had a magic cash printing business like this that can safely scale up with more money you would be absolutely stupid to not do it regardless of the tax rates.

mmaunder 6y ago

The problem is when you start making money and want to grow the business without funding. You need to build a war chest. Once you've burnt through any carried loss, which happened pretty quickly in our case, we are taxed on the profit we are retaining in order to build up a cash reserve. That cash reserve is needed if we're to self fund big projects and in case of down-turn, lawsuit or other unforeseen event if we are to avoid immediately laying people off. The alternative is to raise money which dilutes founders and employees who own stock or vested options. You won't encounter this issue if you're early stage or if you are "going for growth" by running at a loss and raising money in successive rounds. But it is a huge problem if you are a self funding small or medium sized business.

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golergka 6y ago

> As a business owner You're already a business owner. You're faced with decisions on what to do with an already existing business, not whether to start a new business, and in what state or country to do that.

AnthonyMouse 6y ago

> But when taxes are high, I see that as an incentive to hide the profits by investing in the future. That isn't really the societal win you're making it out to be though. If you "pocket" profits, i.e. pay them to investors, the investors just go out and invest them again in something else. Which is actually better, because it reduces concentration of wealth inside of corporations. Instead of one corporation growing ever larger because they have to invest internally or be subject to punitive taxes, you get many new independent companies being formed as investors seek out new opportunities for the money they receive as dividends. The other problem is that there are many forms of investment that are taxed differently. Government bond interest typically isn't taxed. Real estate appreciation typically isn't taxed until sale, which means they can be deferred indefinitely. Investing in foreign corporations will be subject to the tax rates in those other countries. So if you increase the domestic corporate tax rate, investment moves from domestic companies to things like real estate speculation and foreign companies, which may not be desirable. Moreover, multinational corporations arrange for profits to be declared in whichever jurisdiction has the lowest taxes, so increasing the tax rate on domestic corporations disadvantages them against multinationals that won't be paying those taxes.

tryptophan 6y ago
Yes. The op assumes that malinvestment / inefficient use of capital is not a thing. You can only invest so much into a grocery store. The entire point of us having free markets is so that capital can move around. Locking it down into once place is the exact opposite of what you want to do.
gamblor956 6y ago
So if you increase the domestic corporate tax rate, investment moves from domestic companies to things like real estate speculation and foreign companies, which may not be desirable. The reverse is actually true. Historically, the lower the tax rate, the more investment you get in real estate speculation and other passive income streams because it's now more efficient to simply not invest in productive activities when you can just get effectively free money without doing any work. The higher the tax rate, the more businesses invest in actual business activities, because they get more expenses they can use to offset income they may earn, and because passive activities generally don't generate enough of a return to be worth the investment compared to (re)investing in an actual business.

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gamblor956 6y ago

And especially investors have a case that higher corporate taxes reduce the value of their investments, possibly to the point of not making them. A business that is not making a profit does not pay income taxes. I don't have a single client that has voluntarily turned down making a profit because they'd had to pay some income tax on it. The only time business income tax rates make a difference is when the business is choosing between multiple profit-generating activities and wants to maximize the net (post-tax) income by minimizing its tax burden.

rayiner 6y ago

That's actually an example of why wealth taxes aren't a great idea. If you invest money back into the business, that might reduce your profits, and therefore any corporate or income taxes. But that investment it will increase the long-term value of the company. Under a wealth tax, that would cause taxes for everyone who holds the stock to go up! In fact, if investing in say a new line of business causes the value of the stock to go up by more than just parking the money in the corporate treasury, a wealth tax creates a perverse incentive to not invest back in the company.

bhupy 6y ago
I generally agree with the opposition to wealth taxes (and no, I'm not wealthy), but I'll try to engage with this by providing what I believe is the strongest good-faith counterargument: > a wealth tax creates a perverse incentive to not invest back in the company. This is arguably a "good thing" because one could argue that it's "unfair" that large, high revenue / high income corporations allocate so much capital in our economy. It would arguably be better for them to pay the taxes and instead have that capital be allocated by a democratically accountable body: the government.
- rayiner 6y ago
  > This is arguably a "good thing" because one could argue that it's "unfair" that large, high revenue / high income corporations allocate so much capital in our economy. It would arguably be better for them to pay the taxes and instead have that capital be allocated by a democratically accountable body: the government. This is certainly "arguable." One of the very few things economists agree on is the market's are better at allocating capital than governments. That's one of the core functions of markets.
  - bhupy 6y ago
    Yep, I don't disagree.

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d1zzy 6y ago

In the US? Because in many countries I'm aware of there are business profit taxes...

tomatocracy 6y ago

This depends a lot on the accounting and tax treatment though. In many industries, that "investment" would be accounted for as capex, and in many countries you don't get an immediate write off against tax for capex but you get it over some approximation of useful life of the assets you've invested in. There is a strong case for allowing immediate, or faster, write-offs for capex spending in preference to lowering corporate tax rates because of this effect.