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The purpose is to equalize the amount of tax that companies pay. Consider the following example: Assuming a tax rate of 30%, Company A has net income (profit) o

by Naga 6y ago

The purpose is to equalize the amount of tax that companies pay. Consider the following example: Assuming a tax rate of 30%, Company A has net income (profit) of $100 in year 1 and $100 in year two pays $60 in tax on a total profit of $200. Company B has a net loss of $100 in year 1 and net income of $300 ni year 2 has a total profit still of $200. Assuming loss carryforwards are allowed, Company B pays $60 in tax still. Without loss carryforwards, Company B ends up paying $90 in tax on the same amount of profit. It leads to bad headlines when companies claim a bunch of loss carryforwards, but it actually is a fair practice. The other thing to keep in mind is that losses are only paid out in refunds when you actually pay tax. Company B does not earn $30 back from the government for losing money in year 1, it instead gets money back once it starts making profit. Note that at least in Canada, these rules apply to all types of income, not just business income, although losses on employment income basically never happen.

bradleyjg 6y ago
I understand why the rule exists. What I don’t understand is why a similar rule doesn’t exist for people. Here’s another example of where it could help. Take two men, one earns $75k/year (let’s say inflation adjusted) for thirty years as a bus driver. The other plays in the NFL for 1 year makes $2MM and thereafter only makes $250k over the next twenty five years. They’ve made the same amount of money over their lifetimes but the second man paid much higher taxes.
- fitchjo 6y ago
  NOL (net operating loss) carryforwards, which is what is being described above, would not make a difference in the situation you have laid out here - it sounds like your issue is the fact that we have a progressive tax for personal income (versus a flat tax for corporations)
- lupire 6y ago
  Your example is bad one because of time value of money and because the rates aren't equal. Better example is someone who invented an amazing technology after 25 years of failure, or someone who works for the same hourly rate but does 3000 hrs one year and 1000 hrs the next.
- leetcrew 6y ago
  that's not really the same thing. the football player didn't realize a loss in any of those years, at least not in the same way that a company can. they just made less money over time. the real difference here is there are no marginal brackets for taxes paid by a company. it makes sense that companies are taxed differently than individuals. corporate revenues and assets ultimately end up in the pockets of real people, either as wages or capital gains. that said, I do think you make a good point about income tax. it would be more fair if there were some smoothing over time. another example of someone who might get screwed is a contractor with highly variable income. if I make $75k every year, and you oscillate back and forth between $25k and $125k, you pay a lot more income tax for no real reason.
  - bradleyjg 6y ago
    > it makes sense that companies are taxed differently than individuals. corporate revenues and assets ultimately end up in the pockets of real people, either as wages or capital gains. But only some of those real people are subject to the jurisdiction of the country taxing the corporation. So while some corporate income is subject to double taxation some is not. > the real difference here is there are no marginal brackets for taxes paid by a company. Companies can smear revenue out over time to optimize the taxes they face. People cannot. The marginal part is orthogonal.

by Naga 6y ago

bradleyjg 6y ago

I understand why the rule exists. What I don’t understand is why a similar rule doesn’t exist for people. Here’s another example of where it could help. Take two men, one earns $75k/year (let’s say inflation adjusted) for thirty years as a bus driver. The other plays in the NFL for 1 year makes $2MM and thereafter only makes $250k over the next twenty five years. They’ve made the same amount of money over their lifetimes but the second man paid much higher taxes.

fitchjo 6y ago
NOL (net operating loss) carryforwards, which is what is being described above, would not make a difference in the situation you have laid out here - it sounds like your issue is the fact that we have a progressive tax for personal income (versus a flat tax for corporations)
lupire 6y ago
Your example is bad one because of time value of money and because the rates aren't equal. Better example is someone who invented an amazing technology after 25 years of failure, or someone who works for the same hourly rate but does 3000 hrs one year and 1000 hrs the next.
leetcrew 6y ago
that's not really the same thing. the football player didn't realize a loss in any of those years, at least not in the same way that a company can. they just made less money over time. the real difference here is there are no marginal brackets for taxes paid by a company. it makes sense that companies are taxed differently than individuals. corporate revenues and assets ultimately end up in the pockets of real people, either as wages or capital gains. that said, I do think you make a good point about income tax. it would be more fair if there were some smoothing over time. another example of someone who might get screwed is a contractor with highly variable income. if I make $75k every year, and you oscillate back and forth between $25k and $125k, you pay a lot more income tax for no real reason.
- bradleyjg 6y ago
  > it makes sense that companies are taxed differently than individuals. corporate revenues and assets ultimately end up in the pockets of real people, either as wages or capital gains. But only some of those real people are subject to the jurisdiction of the country taxing the corporation. So while some corporate income is subject to double taxation some is not. > the real difference here is there are no marginal brackets for taxes paid by a company. Companies can smear revenue out over time to optimize the taxes they face. People cannot. The marginal part is orthogonal.