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I've heard this suggested before: abolish all corporate tax and increase capital gains tax to equal income tax. This will level the playing field between large

I've heard this suggested before: abolish all corporate tax and increase capital gains tax to equal income tax. This will level the playing field between large and small businesses, since the former has the means to dodge byzantine corporate tax laws. It will also give an incentive for companies to stay onshore. Any downsides?

mdorazio 5y ago
Yes. > increase capital gains tax to equal income tax Is far easier said than done. For example, would you include the $250K capital gains deduction for selling a home in that? Additionally, you're probably referring to raising long-term capital gains tax, but that has the side effect of disincentivizing long-term investment in favor of more short-term speculation.
- fighterpilot 5y ago
  How would it disincentivize long term investment? In the US dividends are taxed at capital gains. I believe if a company makes $X and gives it out as a dividend it makes no difference to the investor whether the split between capital gains and corporate tax is 25/25 versus 43.75/0?
- deleted 5y ago
  [deleted]
- pentae 5y ago
  Not at all. Many countries already do this. For example, in Australia, capital gains is considered as income. It contributes to your progressive tax bracket the same way income does. For property, you do not pay capital gains tax when you sell your primary residence (that you live in) but you do on investment properties.
klyrs 5y ago
What's to stop me from hiding my capital gains in a series of shell companies?
- gruez 5y ago
  Good luck exfiltrating it back to your bank account.
  - tylersmith 5y ago
    If the money is in your company then it's in one of your accounts somewhere.
    - gruez 5y ago
      What are you going to tell the IRS when they ask you about the offshore wire transfers coming in? It's a "consulting fee"? You're going to be paying taxes on that at your marginal rate.
      - klyrs 5y ago
        Sure, but if you pay yourself a very nice income and realize very many nice incomes in capital gains, then you're still coming out way ahead.
        gruez 5y ago
        You do realize that capital gains are taxed at a lower rate than regular income? Doing this only makes you pay more taxes.
        klyrs 5y ago
        Of course I do. But if you're making several times your expenditures in capital gains, then this is still favorable.
  - nodamage 5y ago
    The difference is you only need to transfer enough money to your personal bank account to cover your annual expenses. So if you make $500k/year but only spend $100k/year, then the other $400k will continue to grow tax free.
perryizgr8 5y ago
Corporate tax does not make sense because "income" and "profit" for a company are very loosely defined. Instead, a simple GST on products and services should be enough. Unambiguous and easy to reason about, with very less maneuverability to avoid. In fact, I would rather income tax for individuals also be done away with. Just tax every transaction in the market. That is much fairer and presents less avenues to avoid tax.
- markvdb 5y ago
  A simple tax like that on its own is also socially regressive. Implemented on its own, people would go hungry, causing social unrest. What would you suggest as a simple social stabiliser on top? A negative personal income tax up to a certain rate?
  - perryizgr8 5y ago
    > Implemented on its own, people would go hungry, causing social unrest. Why would that happen?
    - dlp211 5y ago
      Because the poor and working class spend all their money on necessities and in doing so incur higher effective transaction taxes relative to their income.
      - IneffablePigeon 5y ago
        Does differential tax rates on necessities Vs luxuries help here? For example, in the UK, sales tax is discounted or not applied on many types of food, children's clothes, etc. - yes, you end up with strange arguments at the edges (a famous one being the lawsuit to decide whether Jaffa Cakes are legally cakes or biscuits) but I think it _could_ work.
        perryizgr8 5y ago
Vinnl 5y ago
First time I've heard of it, but one thing that comes to mind: if a company is very successful in the Netherlands, in part due to being able to make use of its excellent infrastructure, but its owners are in the US, then they will not be contributing to the maintenance of that infrastructure. You'd then lose the positive feedback loop of the infra paying for itself, enabling more successful businesses.
cjpearson 5y ago
Probably the biggest downside is that the government would lose a major policy tool. If there are no corporate taxes then there's no way to incentivize companies via tax breaks. It would also become more important to enforce taxation on corporate benefits. If a company provides a car, jet, mansion etc for an executive's personal use, then they need to put a monetary value on that usage and tax it as income. It's not that it's impossible to do that, but it's an additional hurdle for enforcement. Not only do you have to confirm that the company provided the employee X benefit, but you also have to confirm that they valued it appropriately. Finally, it's just not good politics. It's really hard to sell a plan like this to voters. Even if it doesn't raise the taxes of the average voter, it sounds like you're moving the burden of taxation from rich companies onto the average citizen. I think there's a lot of economists who love the idea because it really does simplify things. Besides the framing, there's not really a big difference between subsidies or tax breaks. But that third point is probably what kills it.
- fighterpilot 5y ago
  Your third point is a good one. It would take a very clever reframing so the public understands the rationale, although it's doubtful that could ever happen. Regarding your second point, how does this become more of a concern when corporate tax rates are low? If a company buys an employee a car using pretax income, that will be tax free regardless of the capital gains or corporate tax rates.
trutannus 5y ago
Estonia has done just this.

mdorazio 5y ago

Yes. > increase capital gains tax to equal income tax Is far easier said than done. For example, would you include the $250K capital gains deduction for selling a home in that? Additionally, you're probably referring to raising long-term capital gains tax, but that has the side effect of disincentivizing long-term investment in favor of more short-term speculation.

fighterpilot 5y ago
How would it disincentivize long term investment? In the US dividends are taxed at capital gains. I believe if a company makes $X and gives it out as a dividend it makes no difference to the investor whether the split between capital gains and corporate tax is 25/25 versus 43.75/0?
deleted 5y ago
[deleted]
pentae 5y ago
Not at all. Many countries already do this. For example, in Australia, capital gains is considered as income. It contributes to your progressive tax bracket the same way income does. For property, you do not pay capital gains tax when you sell your primary residence (that you live in) but you do on investment properties.

klyrs 5y ago

What's to stop me from hiding my capital gains in a series of shell companies?

gruez 5y ago
Good luck exfiltrating it back to your bank account.
- tylersmith 5y ago
  If the money is in your company then it's in one of your accounts somewhere.
  - gruez 5y ago
    What are you going to tell the IRS when they ask you about the offshore wire transfers coming in? It's a "consulting fee"? You're going to be paying taxes on that at your marginal rate.
    - klyrs 5y ago
      Sure, but if you pay yourself a very nice income and realize very many nice incomes in capital gains, then you're still coming out way ahead.
      - gruez 5y ago
        You do realize that capital gains are taxed at a lower rate than regular income? Doing this only makes you pay more taxes.
        klyrs 5y ago
        Of course I do. But if you're making several times your expenditures in capital gains, then this is still favorable.
- nodamage 5y ago
  The difference is you only need to transfer enough money to your personal bank account to cover your annual expenses. So if you make $500k/year but only spend $100k/year, then the other $400k will continue to grow tax free.

perryizgr8 5y ago

Corporate tax does not make sense because "income" and "profit" for a company are very loosely defined. Instead, a simple GST on products and services should be enough. Unambiguous and easy to reason about, with very less maneuverability to avoid. In fact, I would rather income tax for individuals also be done away with. Just tax every transaction in the market. That is much fairer and presents less avenues to avoid tax.

markvdb 5y ago
A simple tax like that on its own is also socially regressive. Implemented on its own, people would go hungry, causing social unrest. What would you suggest as a simple social stabiliser on top? A negative personal income tax up to a certain rate?
- perryizgr8 5y ago
  > Implemented on its own, people would go hungry, causing social unrest. Why would that happen?
  - dlp211 5y ago
    Because the poor and working class spend all their money on necessities and in doing so incur higher effective transaction taxes relative to their income.
    - IneffablePigeon 5y ago
      Does differential tax rates on necessities Vs luxuries help here? For example, in the UK, sales tax is discounted or not applied on many types of food, children's clothes, etc. - yes, you end up with strange arguments at the edges (a famous one being the lawsuit to decide whether Jaffa Cakes are legally cakes or biscuits) but I think it _could_ work.
      - perryizgr8 5y ago

Vinnl 5y ago

First time I've heard of it, but one thing that comes to mind: if a company is very successful in the Netherlands, in part due to being able to make use of its excellent infrastructure, but its owners are in the US, then they will not be contributing to the maintenance of that infrastructure. You'd then lose the positive feedback loop of the infra paying for itself, enabling more successful businesses.

cjpearson 5y ago

Probably the biggest downside is that the government would lose a major policy tool. If there are no corporate taxes then there's no way to incentivize companies via tax breaks. It would also become more important to enforce taxation on corporate benefits. If a company provides a car, jet, mansion etc for an executive's personal use, then they need to put a monetary value on that usage and tax it as income. It's not that it's impossible to do that, but it's an additional hurdle for enforcement. Not only do you have to confirm that the company provided the employee X benefit, but you also have to confirm that they valued it appropriately. Finally, it's just not good politics. It's really hard to sell a plan like this to voters. Even if it doesn't raise the taxes of the average voter, it sounds like you're moving the burden of taxation from rich companies onto the average citizen. I think there's a lot of economists who love the idea because it really does simplify things. Besides the framing, there's not really a big difference between subsidies or tax breaks. But that third point is probably what kills it.

fighterpilot 5y ago
Your third point is a good one. It would take a very clever reframing so the public understands the rationale, although it's doubtful that could ever happen. Regarding your second point, how does this become more of a concern when corporate tax rates are low? If a company buys an employee a car using pretax income, that will be tax free regardless of the capital gains or corporate tax rates.

trutannus 5y ago

Estonia has done just this.