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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 inv

• 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.
    • jquery 6y ago
      You’re (edit: sorry, GP was) espousing the broken windows theory, though. Corporations already have a natural incentive to re-invest in themselves when it’s a profitable decision to do so.
      • munk-a 6y ago
        I don't think so because the corporation isn't a person and no one actually has the corporation's best interests at heart. Everyone is invested or labour for the venture for money - some idealists may want to build a great thing - but those will be far in the minority compared to those that want to sell a great thing. Reinvestment in a corporation is only naturally incentivized when that strategy appears to give the biggest RoI and not all money uninvested from markets, companies etc. will necessarily be reinvested in another venture.
      • Spooky23 6y ago
        In theory sure, but there are many many counter-examples. Corporate management rarely makes decisions that are against their interests.
    • missedthecue 6y ago
      Consider the following: If a firm eyeballs a project that is likely to have a good return, they will pursue it regardless of the corporation tax rate at present. Meaning that whether the corporate tax is high, low, or nonexistent, it's better to make money than not make money. Given this, if a firm cannot see any good opportunities to pursue, incentivizing mass investment in zero or negative return projects, while coincidentally incentivizing lower government revenue is unlikely be a net good for society. That seems to me to be a encouraging massive destruction of wealth and also encourage enormous mis-allocation of capital.
  • Spooky23 6y ago
    Hoarding wealth is bad for the economy, as it lowers the velocity of money. See: https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V Our current policy is to paper over bank liquidity or other problems by printing money. Big institutions and the mega-rich are hoarding massive quantities of cash. The economy as a whole would be better off if billionaires were doing stuff with their money rather than hoarding shares.
    • missedthecue 6y ago
      Do you think big corps convert their retained earnings to cash and stuff it under their mattress?
      • Spooky23 6y ago
        “BigCorp Ireland, Ltd” buys a bunch of treasuries.
        • missedthecue 6y ago
          So they're lending money to the government, who spends it. All BigCorp Ireland LTD has is a brokerage account full of ISIN codes.
          • Spooky23 6y ago
            That doesn’t sound like a typical business argument. We could more efficiently get the money in the government treasury by skipping the corporate middleman and taxing it. How are those tbills delivering value to the shareholders?
            • missedthecue 6y ago
              Collecting and accounting for tax is far far more inefficient than buying electronic tbills. And they pay interest to the holder... The point is, the money isn't keeping out of the economy. It's loaned to the government who spends it.
• munk-a 6y ago
  With an extra hidden secret beneath it. That's true for effective taxes on corporate income - if loopholes exist to allow corporations to offshore their money easily and dodge those taxes they're going to do that so they can pull the money out (or, alternatively, temporarily stash their money abroad since the US has a tax holiday every decade). Honestly, the tax holidays royally piss me off especially coming from a party that "embraces law and order" - it's essentially like pardoning a bunch of robbers - except the actual robbers stole far less money.
• 1123581321 6y ago
  Lower taxes means you have higher profit post-tax. You would not need to avoid paying taxes on post-tax money.
  • azinman2 6y ago
    I think the GP is saying that one avoids taxes by investing in things that grow the company, jobs, R&D, etc. I don’t know if this scales all the way up when all the big co’s move their HQ’s offshore. Perhaps we need diff positions for diff business sizes.
    • 1123581321 6y ago
      If so, they are confused because they are thinking of expenses as paying for themselves with the taxes saved. A business with a lower tax rate would make the same investments and have more money left over, or make more investments with the same money.
      • gamblor956 6y ago
        The expenses do pay for themselves. Assume you have profits in Year 1. If you pay for an expense with pre-tax income (i.e., in December, assuming a calendar tax year), that reduces your tax liability on your profits for the year, for an effective discount of X% on that expense (where X is your effective tax rate). If you buy that same expense with post-tax income (i.e., in January of Year 2), you don't get the effective discount, and you won't know until the end of Year 2 if it will reduce your Year 2 taxes. Also, you have to wait a year to get any tax benefit out of the expense. The cost of waiting just a few weeks can be huge. This is why many companies (or corporate departments) choose to blow the remainders of their budgets rushing through projects at year end rather than just taking the time to do things properly after the holidays.
        • 1123581321 6y ago
          A discount is of course not the same as paying for itself (e.g. a 100% discount.) Some people think of reduced taxes as being a dollar-for-dollar credit (not you, of course.) The forced spending by the end of a fiscal tax year is often offset by delivery or implementation contracts to mitigate the damage of having to time the purchase for tax purchases.
• turbinerneiter 6y ago
  I thought that this is common knowledge, every company I know is doing this. Spend their money in the end of the year to reduce taxable profit. Tax evasion breaks this system. Profit is taken out of the system and stores offshore, where it doesn't create any value. Tax evasion is bad. Investing is good.
• bobcostas55 6y ago
  This is obviously fallacious, just consider the extreme case of 100% taxation. At the macro level the only source of investment funds is income that does not go to consumption. Lower the expected rate of return through taxation, and the result is inevitably a shift from investment to consumption. At the individual firm level it's obvious that taxation lowers the NPV of the firm's available projects - they are obviously not going to respond by investing more.
  • coliveira 6y ago
    You're mixing corporate income taxes an personal income taxes. Corporate income taxes are good because the business wants to avoid paying taxes so it will devise more ways to invest in the company. This is where investment capital will be coming from.
    • missedthecue 6y ago
      Why is investing in mostly flat or negative return projects assumed to be a net-good?
      • Djvacto 6y ago
        It's generally assumed a corporation would be more interested in positive returns on it's investments. Seems like if a company stops investing in positive ROI projects, it won't grow, and then won't survive as long? I haven't thought about it much, but I think on a macro scale even a negative return project still circulates that money back out, in the form of salaries or materials or something, but that may be a naive thought. Obviously there are ways to break that, like tax evasion, but hopefully there are other ways to deal with that.
        • missedthecue 6y ago
          But you're operating on the assumption that companies always have positive investment opportunities available. This is not the case, and in the event such an opportunity is available, companies would pursue it regardless of the tax environment, because making some money net of tax is better than no money whatsoever. What such a policy would actually do is incentivize a massive mis-allocation of capital while simultaneously resulting in lower tax revenues. I fail to see how this makes anyone better off.
• aaaxyz 6y ago
  Would that explain why a lot of companies these days are doing stock buybacks?
  • mox1 6y ago
    Yes, it is considered more tax advantaged method of returning capitol to shareholders. Dividends get taxed as corporate profits, then again as income downstream. Buybacks are not taxed at either stage.
    • gamblor956 6y ago
      Buybacks are taxed as capital gains rates (0%, 15%, or 20%), while dividends are subject to special dividend rates (0%, 10%, or 20%). Dividends are thus actually preferred by most investors, and buybacks generally only advantage the biggest investors. Additionally, corporations don't get special capital gains rates but do get dividends received exemptions for dividends from related company, so in many cases corporate shareholders would prefer dividends over share buybacks. Buybacks are big not for tax reasons (because in most cases, companies make buybacks out of borrowed funds, not profits), but because they artificially inflate the stock price, which increases the value of the executive compensation packages of the executives that authorized the buyback.
      • mrep 6y ago
        Don't buybacks benefit long term investors, not bigger investors precisely for tax reasons. Historical equities compound growth almost entirely comes from constantly reinvesting dividends to buy more shares which compounds to increase future dividends. So as an example, take a company that returns 5% of their share price and an investor pays a 20% tax rate allowing them to reinvest 4% after tax money to buy more shares. After 40 years, they'd have 1.04^40=4.8 times the proportion of the company. If the same company spent all of its money buying back shares, you'd have 1.05^40=7.039 times the company. Now you still have to pay that 20% on gains once you sell so after you'd have (1.05^40-1)*.8+1=5.83 after selling but that is still a 21% benefit for share buybacks in that example. Also, I wouldn't call that "artificially inflate the stock price". They are reducing the number of outstanding shares thereby increasing the earnings per share which increases the amount that can be returned to each share such as through higher dividends. It is effectively reinvesting the dividends for you back into the company.
• hinkley 6y ago
  This conversation makes me wonder about how tax breaks to incentivize certain types of investments are perceived in the board room, especially over the long term. It sounds like if taxes are high, I invest and play for time, waiting for some administration to offer me a tax break so I can take money out. Is a targeted tax break then also a chance to extract profit?
• SilasX 6y ago
  >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. And the lower the incentive to make new investments. And the higher the incentive to engage in socially wasteful tax-avoidance accounting.
  • gamblor956 6y ago
    Actually, history bears out that higher tax rates result in corporations re-investing more of their profits in the company and less in tax-avoidance accounting. The difference being that the former is low risk and can grow the business, while the other has a good chance of triggering penalties that wipe out the savings and could even result in jail time for one or more executives. Consider that the historically highest rates of tax fraud are during the current administration, despite historically low levels of tax on corporate income.
    • SilasX 6y ago
      >Actually, history bears out that higher tax rates result in corporations re-investing more of their profits in the company and less in tax-avoidance accounting. I'm just imagining the 1950s cottage industry in compensating executives with a company car, personal assistant outside of work, etc before the IRS caught up? And all the present day shenanigans with Amazon/Apple etc hiding profits in Ireland?
      • gamblor956 6y ago
        In both of your 1950s examples, those expenditures flowed into the greater economy resulting in multiple additional taxable transactions while also supporting the livelihoods of one or more other economic participants. In other words, exactly what we want. But on a further note: these expenses never went away, many companies still do these kinds of things today. The present day shenanigans were Apple and Amazon (note: Apple takes historical credit for being the first tech company to implement this structure) hiding profits in Ireland through the double dutch or similar structures. However, the EU has already attempted to crack down on the use of that structure and deemed it illegal. Companies that currently use the structure may be grandfathered in as a result of EU court decisions but no new companies can get implement the structure. Apple especially has been hoarding money overseas and not doing anything with it. In contrast, companies with higher tax rates have been very active about spending their overseas money rather than bringing it back to the US, precisely to avoid paying the higher taxes that repatriation would incur. Yes, it's counterintutive. But it's how the world actually works.
• conanbatt 6y ago
  > This is good for the economy. Some people think it is good for the economy, its not objectively true. If a company invests in itself instead of giving out dividends it's making a choice upon the shareholder, which in turn could mean the company invests in something less efficient than the shareholder could find. > n the other hand, lowering corporate taxes also generates a cascade of tax avoidance Unless corporate taxes are 0, and you save all of this issues plus get to fire a lot of corporate layers.
• rayiner 6y ago
  These arguments sound truthy, but economists generally agree that lowering corporate taxes is good for the economy: https://www.npr.org/sections/money/2012/07/19/157047211/six-policies-economists-love-and-politicians-hate https://www.npr.org/sections/money/2012/07/19/157047211/six-...
• gbronner 6y ago
  It is only good for the economy if the reinvested money is more productive than what the the owner of the company would have done with it. This encourages vanity projects.
• manigandham 6y ago
  Most of that is financial engineering, not actually investing in the company to many any progress. A better option would be to remove corporate incomes taxes entirely. Only tax the outflow instead, which would be simpler to implement and easier to deal with at all levels.
• tim333 6y ago
  The devil's in the detail though - there are other ways to reduce taxable corporate income other than sensible investing. Examples - pay the money out to the directors - use iffy transfer pricing to have the profits appear to be made in some Irish company (see msft, appl) - set the company up offshore owned by a trust (see news corp) - pay the profits out as consultant fees to a company owned by your daughter (no idea who that could be) etc.