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Although technically true, there's a very widespread misconception underneath that. The low tax rates for business-derived income such as capital gains and div

by T-hawk 14y ago

Although technically true, there's a very widespread misconception underneath that. The low tax rates for business-derived income such as capital gains and dividends exist because that income was already taxed at the corporate level. Uncle Sam already got his bite out of the corporate balance sheet. http://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States http://en.wikipedia.org/wiki/Corporate_tax_in_the_United_Sta... If these business gains were retaxed at the personal level as ordinary income, that would incent company owners and directors to keep the money in the company's coffers safe from taxation. Then you have corporations sitting on illiquid wealth. Giving personal tax breaks for these business gains creates incentive to distribute money back to the economy to be spent and continue flowing. I'm surprised to see a reputable publication like GQ repeat the "rich people pay low taxes" fallacy. But it's such an easy way to score pandering points that pretty much every business article and publication spreads the misinformation now.

mistermann 14y ago
Are you implying that the corporate tax + capital gains tax is roughly equal to that of earned income?
- T-hawk 14y ago
  I hadn't thought through the numbers, but here goes. The Wiki article in my parent post says that the US federal corporate tax rate once beyond the lowest brackets is 34% or 35%. The personal tax rate on capital gains is 15% of the 65% that remains after the corporate taxation step, so 10% of the original total. The total of 45% is higher than the top personal bracket of 35%. (And it's reasonable that it should be, as the child comment points out, the corporation is buying legally protected limitation of liability. The notion that business owners pay less tax than workaday individuals is a media-created myth.)
  - rayiner 14y ago
    Say someone earns a million dollars a year driving a cab. If he negligently hits and kills someone, and gets a $3 million wrongful-death judgment against him, he is personally on the hook for the whole $3 million. If an individual earns a million dollars a year by owning a fleet of cabs, each organized as a separate corporation with the legally-required $50k or whatever of insurance,[1] and one of the cabs hits and kills someone resulting in a $3 million wrongful death lawsuit, the individual is out at most the assets of that single corporation (say $50k + legal fees). It would be ridiculous if the individual paid the same %-age of taxes on that million dollars in both cases. [1] This is actually how many (most?) cab companies are structured.
  - yequalsx 14y ago
    You are looking at the nominal corporate tax rate. What is relevant in such considerations is the effective tax rate.
  - rprasad 14y ago
    Corporations don't care what the base corporate tax rate is. They care about their effective tax rate, which is what they will actually pay in taxes after all deductions, credits, and deferrals are accounted for. Aside: I knew a guy who relied on wikipedia to give out tax advice. He was sued for malpractice and lost. He now owes his former clients $2 million (the amount of additional taxes they had to pay as a result of his erroneous advice).
  - rayiner 14y ago
    It's important to distinguish between a business owner and a passive shareholder. Someone who runs a corporation they own can pay themselves a salary, at market rates, for the work they do, and that money is not taxed when received by the corporation.
  - Aloisius 14y ago
    The notion that business owners pay less tax than workaday individuals is a media-created myth. Uh, except that corporations pay taxes on net while individuals pay taxes on gross. It is entirely possible to structure your corporate income such that you would pay less tax than a normal individual. You simply use your company to pay for all your expenses, take no salary and instead pull in dividends and/or stock that can be sold at long-term capital gains rates in a year. I'm not sure how you missed all those stories about the selfless CEOs taking $1 salaries (and millions of dollars in stock) in order to do just that.
  - mistermann 14y ago
    > The notion that business owners pay less tax than workaday individuals is a media-created myth. I'm one of those media-created myths. I am a programmer, but I work under a "corporation". And I know I pay way less taxes than friends who work as employees with pure earned income. I don't see how this would be any different if I, for example, ran a corner store. (Actually, the possibilities increase even more there, as you can use creative accounting on your taxes, PLUS, very easily run a significant portion of your business "off the books".)
rayiner 14y ago
I've seen this "double taxation" argument in favor of a lower capital gains rate, and it's a flawed one. To see why, consider that your nanny doesn't get taxed at a lower rate just because you pay her with income that was taxed when you received it. The corporation is a distinct legal entity and it is taxed as such. This taxation scheme isn't gratuitous. The corporate vehicle offers investors the tremendous advantage of limited liability. When it comes to a creditor's suit against the company, the corporation is treated as a distinct entity and the investor is not liable in such suits beyond his investment. The cost of being treated like a separate entity in lawsuits is being treated like a separate entity when it comes to taxation. Limited liability is not free. When creditors cannot collect because an investor's corporation has insufficient assets, they bear the losses of activity that is attributable to and generates profits for the investor. If investors did not want to be taxed this way, they could reorganize their investments as partnerships. That way they would be taxed as individuals and bear liability for their business activities like individuals.
- raverbashing 14y ago
  No, It's not a flawed one For a nanny, sure, but apparently you missed Accounting 101 Expenses are deducted from income for tax purposes (talking about a corporation) So this means, for a company, that if let's say, earn (example values) $1000 and pays an employee $400, their taxes are calculated on the $600, not on the $1000 Hence, no double taxation, the taxes on that money are payed 'down the chain'
  - rayiner 14y ago
    Under the theory of the tax code, an 'expense' is an expenditure necessary to earn income. A capital gains distribution is not an expenditure, it is a gratuitous transfer. Therefore it is not deductible.
  - yequalsx 14y ago
    All money is double taxed, triple taxed, etc. The money a business receives from selling a good is 'taxed' money. If you earn a profit (gain) you pay a tax. It's the only way to keep things consistent and fair.
GiraffeNecktie 14y ago
It would be nice if there was some incentive to share a little of that income with the company's employees rather than only with the owners and directors.
- twoodfin 14y ago
  Huh? How do you think places like Microsoft and Google attract top talent? That's the incentive, and it works very well.
  - GiraffeNecktie 14y ago
    Yeah it works great for the lucky people who work at Microsoft and Google. Maybe not so great for most other industries.
drucken 14y ago
I would suggest actual misconceptions are that: 1. Fungability: companies have similar tax flexibility as individuals and are therefore comparable. 2. Consumption equivalence: that income from capital gains or "personal tax breaks for these business gains" is actually redistributed back into the general economy in the same way as it would be as general (wage) income. Both are clearly incorrect. I would go a step further to suggest the US has a relatively high corporation tax compared to other developed countries precisely to compensate for other tax code deficiencies and trends. Of course, in a sense, all the current arrangements do is capture the "middle" or "poor" class of corporates. Large or sophisticated corporates, especially financial companies, have very extensive means to ensure minimal or even, in some cases, no tax is ever paid. A preliminary and revealing book on this issue for laymen is Shaxon's "Treasure Islands" (http://www.amazon.com/Treasure-Islands-Uncovering-Offshore-Banking/dp/0230105017/ref=sr_1_1?ie=UTF8&qid=1341068517&sr=8-1&keywords=shaxson http://www.amazon.com/Treasure-Islands-Uncovering-Offshore-B...).
- rprasad 14y ago
  The US has a relatively low corporate tax rate compared to other developed countries. The U.S. relies significantly more on deductions and credits than any other nation, lowering the effective corporate tax rate below 20%, or even into single digits, for most corporations. Many corporations are able to lower their effective rates to single digits, or even below zero (i.e., GE). Size is not a factor in this; proper planning is. Paying an expert $10,000 to structure your business flows at the beginning can save millions down the line. You would not skip out on hiring a lawyer to properly incorporate your business and draft your shareholders agreements, so why would you skip out on a tax planner?
  - drucken 14y ago
    The US has a relatively low corporate tax rate compared to other developed countries. http://en.wikipedia.org/wiki/Tax_rates_around_the_world#List http://en.wikipedia.org/wiki/Tax_rates_around_the_world#List The capacity to bypass taxes or headline rates is not being compared. In addition, if anything, that only further supports my points.

by T-hawk 14y ago

mistermann 14y ago

Are you implying that the corporate tax + capital gains tax is roughly equal to that of earned income?

T-hawk 14y ago
I hadn't thought through the numbers, but here goes. The Wiki article in my parent post says that the US federal corporate tax rate once beyond the lowest brackets is 34% or 35%. The personal tax rate on capital gains is 15% of the 65% that remains after the corporate taxation step, so 10% of the original total. The total of 45% is higher than the top personal bracket of 35%. (And it's reasonable that it should be, as the child comment points out, the corporation is buying legally protected limitation of liability. The notion that business owners pay less tax than workaday individuals is a media-created myth.)
- rayiner 14y ago
  Say someone earns a million dollars a year driving a cab. If he negligently hits and kills someone, and gets a $3 million wrongful-death judgment against him, he is personally on the hook for the whole $3 million. If an individual earns a million dollars a year by owning a fleet of cabs, each organized as a separate corporation with the legally-required $50k or whatever of insurance,[1] and one of the cabs hits and kills someone resulting in a $3 million wrongful death lawsuit, the individual is out at most the assets of that single corporation (say $50k + legal fees). It would be ridiculous if the individual paid the same %-age of taxes on that million dollars in both cases. [1] This is actually how many (most?) cab companies are structured.
- yequalsx 14y ago
  You are looking at the nominal corporate tax rate. What is relevant in such considerations is the effective tax rate.
- rprasad 14y ago
  Corporations don't care what the base corporate tax rate is. They care about their effective tax rate, which is what they will actually pay in taxes after all deductions, credits, and deferrals are accounted for. Aside: I knew a guy who relied on wikipedia to give out tax advice. He was sued for malpractice and lost. He now owes his former clients $2 million (the amount of additional taxes they had to pay as a result of his erroneous advice).
- rayiner 14y ago
  It's important to distinguish between a business owner and a passive shareholder. Someone who runs a corporation they own can pay themselves a salary, at market rates, for the work they do, and that money is not taxed when received by the corporation.
- Aloisius 14y ago
  The notion that business owners pay less tax than workaday individuals is a media-created myth. Uh, except that corporations pay taxes on net while individuals pay taxes on gross. It is entirely possible to structure your corporate income such that you would pay less tax than a normal individual. You simply use your company to pay for all your expenses, take no salary and instead pull in dividends and/or stock that can be sold at long-term capital gains rates in a year. I'm not sure how you missed all those stories about the selfless CEOs taking $1 salaries (and millions of dollars in stock) in order to do just that.
- mistermann 14y ago
  > The notion that business owners pay less tax than workaday individuals is a media-created myth. I'm one of those media-created myths. I am a programmer, but I work under a "corporation". And I know I pay way less taxes than friends who work as employees with pure earned income. I don't see how this would be any different if I, for example, ran a corner store. (Actually, the possibilities increase even more there, as you can use creative accounting on your taxes, PLUS, very easily run a significant portion of your business "off the books".)

rayiner 14y ago

I've seen this "double taxation" argument in favor of a lower capital gains rate, and it's a flawed one. To see why, consider that your nanny doesn't get taxed at a lower rate just because you pay her with income that was taxed when you received it. The corporation is a distinct legal entity and it is taxed as such. This taxation scheme isn't gratuitous. The corporate vehicle offers investors the tremendous advantage of limited liability. When it comes to a creditor's suit against the company, the corporation is treated as a distinct entity and the investor is not liable in such suits beyond his investment. The cost of being treated like a separate entity in lawsuits is being treated like a separate entity when it comes to taxation. Limited liability is not free. When creditors cannot collect because an investor's corporation has insufficient assets, they bear the losses of activity that is attributable to and generates profits for the investor. If investors did not want to be taxed this way, they could reorganize their investments as partnerships. That way they would be taxed as individuals and bear liability for their business activities like individuals.

raverbashing 14y ago
No, It's not a flawed one For a nanny, sure, but apparently you missed Accounting 101 Expenses are deducted from income for tax purposes (talking about a corporation) So this means, for a company, that if let's say, earn (example values) $1000 and pays an employee $400, their taxes are calculated on the $600, not on the $1000 Hence, no double taxation, the taxes on that money are payed 'down the chain'
- rayiner 14y ago
  Under the theory of the tax code, an 'expense' is an expenditure necessary to earn income. A capital gains distribution is not an expenditure, it is a gratuitous transfer. Therefore it is not deductible.
- yequalsx 14y ago
  All money is double taxed, triple taxed, etc. The money a business receives from selling a good is 'taxed' money. If you earn a profit (gain) you pay a tax. It's the only way to keep things consistent and fair.

GiraffeNecktie 14y ago

It would be nice if there was some incentive to share a little of that income with the company's employees rather than only with the owners and directors.

twoodfin 14y ago
Huh? How do you think places like Microsoft and Google attract top talent? That's the incentive, and it works very well.
- GiraffeNecktie 14y ago
  Yeah it works great for the lucky people who work at Microsoft and Google. Maybe not so great for most other industries.

drucken 14y ago

I would suggest actual misconceptions are that: 1. Fungability: companies have similar tax flexibility as individuals and are therefore comparable. 2. Consumption equivalence: that income from capital gains or "personal tax breaks for these business gains" is actually redistributed back into the general economy in the same way as it would be as general (wage) income. Both are clearly incorrect. I would go a step further to suggest the US has a relatively high corporation tax compared to other developed countries precisely to compensate for other tax code deficiencies and trends. Of course, in a sense, all the current arrangements do is capture the "middle" or "poor" class of corporates. Large or sophisticated corporates, especially financial companies, have very extensive means to ensure minimal or even, in some cases, no tax is ever paid. A preliminary and revealing book on this issue for laymen is Shaxon's "Treasure Islands" (http://www.amazon.com/Treasure-Islands-Uncovering-Offshore-Banking/dp/0230105017/ref=sr_1_1?ie=UTF8&qid=1341068517&sr=8-1&keywords=shaxson http://www.amazon.com/Treasure-Islands-Uncovering-Offshore-B...).

rprasad 14y ago
The US has a relatively low corporate tax rate compared to other developed countries. The U.S. relies significantly more on deductions and credits than any other nation, lowering the effective corporate tax rate below 20%, or even into single digits, for most corporations. Many corporations are able to lower their effective rates to single digits, or even below zero (i.e., GE). Size is not a factor in this; proper planning is. Paying an expert $10,000 to structure your business flows at the beginning can save millions down the line. You would not skip out on hiring a lawyer to properly incorporate your business and draft your shareholders agreements, so why would you skip out on a tax planner?
- drucken 14y ago
  The US has a relatively low corporate tax rate compared to other developed countries. http://en.wikipedia.org/wiki/Tax_rates_around_the_world#List http://en.wikipedia.org/wiki/Tax_rates_around_the_world#List The capacity to bypass taxes or headline rates is not being compared. In addition, if anything, that only further supports my points.