4 ms·

Apparently it's also possible to address the issue of shifting corporate profits to tax-havens even without a large scale international agreement, using what's

Apparently it's also possible to address the issue of shifting corporate profits to tax-havens even without a large scale international agreement, using what's called a border-adjustment tax. [1] Basically, corporations have one place money comes in and two places it comes out, like so: sales = expenses + profits If you tax the sales, then deduct the expenses, that leaves the incidence of the tax on the profits. But importantly, unlike profits, it's usually clear to which country a sale belongs to. Where this gets complicated is international borders, the solution there is to only deduct domestic expenses. At first that seems protectionist, but apparently changes to the currency exchange rates eventually balance out the effect and it ends up trade neutral. This idea was actually seriously proposed a few years ago as part of a Republican tax reform initiative, and even economists like Paul Krugman seemed to think it checked out (who has a Nobel on trade, but is normally on the other side of the aisle). In the end it lost momentum after some big companies opposed it. Even though that's maybe more ideal, just going for an agreement also seems reasonable since it's probably more achievable than in-depth reform (so it's likely solutions like this or nothing at least in the medium term). [1] https://en.wikipedia.org/wiki/Border-adjustment_tax https://en.wikipedia.org/wiki/Border-adjustment_tax

wanderingmind 5y ago
If corporates have freedoms like individuals, they must also be taxed like individuals on the total revenues. I don't get to deduct my day to day expenses before paying income tax, why should a corporation be able to deduct it's expenses for tax.
- cjalmeida 5y ago
  Because it’s bad overall. It pushes for large monolithic corporations instead of specialized companies. Also, you do get to deduct expense when doing value adding business activities. Just incorporate. Likewise corporations can’t deduct (loopholes aside) “leisure activities”
  - wanderingmind 5y ago
    Then only tax individual income tax on savings as well because it's bad to see people struggle to make ends meet and the government on top making it more difficult by taxing on entire income
- throwaway34241 5y ago
  The practical reason is that this would penalize smaller companies working together over large, vertically integrated ones. If company A sells an item for $10 and buys $8 in parts from company B, who buys $6 in parts from company C, the total taxed amount will be $10+8+6 = $24, while a totally vertically integrated company would only pay tax on $10. You can get around that by only taxing the value added ($10-$8 etc) which is a VAT tax and a popular way for countries to raise revenue. The bigger issue is companies transact with consumers, workers, and shareholders. But when you have a tax, what matters is really what transaction you tax and not which side of the transaction pays the tax. For example, payroll and income taxes both reduce wages. If you tax revenue, that's basically taxing the transaction from consumer->company, so that tax (VATs, sales taxes, etc) falls on the consumers.
  - wanderingmind 5y ago
    They can have different tax rates based on total revenues like how individuals with lower wages are taxed at lower rate. It's immortal when a corporation can deduct a party expense but a single mom earning minimum wages cannot deduct the expense of buying groceries or even a single restaurant meal.
White_Wolf 5y ago
Wouldn't a % taxation at source be more effective in retaining money inside the borders? Tbh some people here do have a decent point. A private individual can't deduct rent and such. One could argue those are neede to keep working.
- throwaway34241 5y ago
  > Wouldn't a % taxation at source be more effective in retaining money inside the borders? If you're talking about taxing revenue and not deducting expenses like wages etc, yes that's basically how VATs work and they're very popular and can raise a lot of money. The main difference is that falls on consumers and not just shareholders.
trhway 5y ago
>[1] https://en.wikipedia.org/wiki/Border-adjustment_tax https://en.wikipedia.org/wiki/Border-adjustment_tax basically it shifts the tax burden from multinationals onto the domestic consumers (and domestic producers for domestic market) and increases the tax on otherwise cheap foreign import like from China. No wonder the initiative didn't make it - while the government and multinationals are always happy to hit the consumers, that one is really too much. >the solution there is to only deduct domestic expenses it does nothing. A multinational will always be able to shift franchise fees, IP property leases, etc. so that would become "domestic expenses" where it will reduce the taxes most. Global approach like the minimum tax rate is an adult step of recognition of reality of the borders being borders only for small players.
- throwaway34241 5y ago
  > increases the tax on otherwise cheap foreign import like from China The domestic currency is supposed to appreciate in value in proportion to the tax, so for example 1 US dollar buying 20% more Yuan, which cancels out a 20% tax (although I have to admit this is not as intuitive as the other parts, so I'm trusting the economists to do the math there). I'm not sure if the Yuan specifically is a good example, since the Chinese government controls the exchange rate politics might be more important than economics there. > and domestic producers for domestic market If you have a pure domestic business, wouldn't you just deduct your domestic expenses and pay tax on what's left over? That's basically what happens now, so I don't see how it would make a difference. > A multinational will always be able to shift franchise fees, IP property leases, etc. so that would become "domestic expenses" where it will reduce the taxes most. You could set up a domestic subsidiary, but now that subsidiary will have to pay the tax. If it's not a domestic subsidiary, then you have to pay the tax (since you can't deduct it). I get that in the current system it's very easy to do these things, but can you explain in a little more detail how this would work with the border tax?

wanderingmind 5y ago

If corporates have freedoms like individuals, they must also be taxed like individuals on the total revenues. I don't get to deduct my day to day expenses before paying income tax, why should a corporation be able to deduct it's expenses for tax.

cjalmeida 5y ago
Because it’s bad overall. It pushes for large monolithic corporations instead of specialized companies. Also, you do get to deduct expense when doing value adding business activities. Just incorporate. Likewise corporations can’t deduct (loopholes aside) “leisure activities”
- wanderingmind 5y ago
  Then only tax individual income tax on savings as well because it's bad to see people struggle to make ends meet and the government on top making it more difficult by taxing on entire income
throwaway34241 5y ago
The practical reason is that this would penalize smaller companies working together over large, vertically integrated ones. If company A sells an item for $10 and buys $8 in parts from company B, who buys $6 in parts from company C, the total taxed amount will be $10+8+6 = $24, while a totally vertically integrated company would only pay tax on $10. You can get around that by only taxing the value added ($10-$8 etc) which is a VAT tax and a popular way for countries to raise revenue. The bigger issue is companies transact with consumers, workers, and shareholders. But when you have a tax, what matters is really what transaction you tax and not which side of the transaction pays the tax. For example, payroll and income taxes both reduce wages. If you tax revenue, that's basically taxing the transaction from consumer->company, so that tax (VATs, sales taxes, etc) falls on the consumers.
- wanderingmind 5y ago
  They can have different tax rates based on total revenues like how individuals with lower wages are taxed at lower rate. It's immortal when a corporation can deduct a party expense but a single mom earning minimum wages cannot deduct the expense of buying groceries or even a single restaurant meal.

White_Wolf 5y ago

Wouldn't a % taxation at source be more effective in retaining money inside the borders? Tbh some people here do have a decent point. A private individual can't deduct rent and such. One could argue those are neede to keep working.

throwaway34241 5y ago
> Wouldn't a % taxation at source be more effective in retaining money inside the borders? If you're talking about taxing revenue and not deducting expenses like wages etc, yes that's basically how VATs work and they're very popular and can raise a lot of money. The main difference is that falls on consumers and not just shareholders.

trhway 5y ago

>[1] https://en.wikipedia.org/wiki/Border-adjustment_tax https://en.wikipedia.org/wiki/Border-adjustment_tax basically it shifts the tax burden from multinationals onto the domestic consumers (and domestic producers for domestic market) and increases the tax on otherwise cheap foreign import like from China. No wonder the initiative didn't make it - while the government and multinationals are always happy to hit the consumers, that one is really too much. >the solution there is to only deduct domestic expenses it does nothing. A multinational will always be able to shift franchise fees, IP property leases, etc. so that would become "domestic expenses" where it will reduce the taxes most. Global approach like the minimum tax rate is an adult step of recognition of reality of the borders being borders only for small players.

throwaway34241 5y ago
> increases the tax on otherwise cheap foreign import like from China The domestic currency is supposed to appreciate in value in proportion to the tax, so for example 1 US dollar buying 20% more Yuan, which cancels out a 20% tax (although I have to admit this is not as intuitive as the other parts, so I'm trusting the economists to do the math there). I'm not sure if the Yuan specifically is a good example, since the Chinese government controls the exchange rate politics might be more important than economics there. > and domestic producers for domestic market If you have a pure domestic business, wouldn't you just deduct your domestic expenses and pay tax on what's left over? That's basically what happens now, so I don't see how it would make a difference. > A multinational will always be able to shift franchise fees, IP property leases, etc. so that would become "domestic expenses" where it will reduce the taxes most. You could set up a domestic subsidiary, but now that subsidiary will have to pay the tax. If it's not a domestic subsidiary, then you have to pay the tax (since you can't deduct it). I get that in the current system it's very easy to do these things, but can you explain in a little more detail how this would work with the border tax?