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In this scenario how would you prevent individuals from routing their income through corporations in order to avoid paying personal income tax?

0xDEEPFAC 6y ago
Isn't that what rich people do anyways? Foundations and corporate shells to hide their wealth?
- nodamage 6y ago
  Not really. Or at least, not nearly to the extent possible if you were to zero the corporate tax rate.
ipaddr 6y ago
You can get away with free meals, travel, education, housing, clothes, pocket money and entertainment now. These become expensives and are not taxed anyways. So no change on that front. This makes profit tax-free. Profit is usually split with the shareholders or invested back. Shareholders are taxed if a capital gains event occurs. Why tax profits on money that will be invested back into the company?
- nodamage 6y ago
  Let's say hypothetically John Smith makes $500k/year as a software consultant. Instead of being paid directly he starts John Smith Inc. and routes his income through his corporation. He withdraws $100k/year in dividends to pay his living expenses which is paid under capital gains rates, the other $400k/year is invested in the stock market and grows tax-free forever inside the tax-sheltered corporation. The vast majority of John Smith's income will never be taxed as he only needs to withdraw enough in dividends every year to cover his living expenses.
  - tomp 6y ago
    What exactly is the problem here? How is this meaningfully different from investing your own post-tax $500k into the market and growing it forever? If you dislike this situation, what you need is wealth tax, not profit tax. As the value of John Smith Inc. grows over time, John Smith the person will have to pay increasing amount of wealth taxes...
    - nodamage 6y ago
      > How is this meaningfully different from investing your own post-tax $500k into the market and growing it forever? What's the difference between investing post-tax income vs pre-tax income? The amount of income tax you paid...
  - laughingbovine 6y ago
    I don't think you can "withdraw" money from a company you own. Probably John Smith Inc. would pay John Smith the 100k/year as a salary... a salary which is taxed. But, then again, the Planet Money article says to eliminate income tax as well. Their solution: > Instead, impose a consumption tax, designed to be progressive to protect lower-income households.
    - nodamage 6y ago
      As the sole shareholder of a corporation you can pay yourself $0 in salary and issue yourself $100k in dividends instead.

0xDEEPFAC 6y ago

Isn't that what rich people do anyways? Foundations and corporate shells to hide their wealth?

nodamage 6y ago
Not really. Or at least, not nearly to the extent possible if you were to zero the corporate tax rate.

ipaddr 6y ago

You can get away with free meals, travel, education, housing, clothes, pocket money and entertainment now. These become expensives and are not taxed anyways. So no change on that front. This makes profit tax-free. Profit is usually split with the shareholders or invested back. Shareholders are taxed if a capital gains event occurs. Why tax profits on money that will be invested back into the company?

nodamage 6y ago
Let's say hypothetically John Smith makes $500k/year as a software consultant. Instead of being paid directly he starts John Smith Inc. and routes his income through his corporation. He withdraws $100k/year in dividends to pay his living expenses which is paid under capital gains rates, the other $400k/year is invested in the stock market and grows tax-free forever inside the tax-sheltered corporation. The vast majority of John Smith's income will never be taxed as he only needs to withdraw enough in dividends every year to cover his living expenses.
- tomp 6y ago
  What exactly is the problem here? How is this meaningfully different from investing your own post-tax $500k into the market and growing it forever? If you dislike this situation, what you need is wealth tax, not profit tax. As the value of John Smith Inc. grows over time, John Smith the person will have to pay increasing amount of wealth taxes...
  - nodamage 6y ago
    > How is this meaningfully different from investing your own post-tax $500k into the market and growing it forever? What's the difference between investing post-tax income vs pre-tax income? The amount of income tax you paid...
- laughingbovine 6y ago
  I don't think you can "withdraw" money from a company you own. Probably John Smith Inc. would pay John Smith the 100k/year as a salary... a salary which is taxed. But, then again, the Planet Money article says to eliminate income tax as well. Their solution: > Instead, impose a consumption tax, designed to be progressive to protect lower-income households.
  - nodamage 6y ago
    As the sole shareholder of a corporation you can pay yourself $0 in salary and issue yourself $100k in dividends instead.