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The corporate tax is an absolute mess. Compliance costs are insane. Closing one loophole opens up another. It creates incentives for "paying" executives with lo

The corporate tax is an absolute mess. Compliance costs are insane. Closing one loophole opens up another. It creates incentives for "paying" executives with look-the-other-way corporate jets and luxury hotels and conferences in the Bahamas. It is also indeterminate in how regressive it is[1]...some companies and industries can offload almost all of the tax burden (incidence) onto their workers, while others offload it onto their shareholders. Even in the case where shareholders shoulder the majority of the burden, ownership distribution can still heavily affect how progressive it is in reality. The worst part is that it just isn't that great of a form of revenue. Doubling our effective corporate tax rate would be impossible politically. Superficially, rates can be raised, but tax lawyers will exploit the shit out of it anyway. A coalition might be able to raise it by an effective 25% max before every corporation in the US teams up to vote them six feet under. Seems like a lot of political capital to waste just to get a measly $80B/year. [2]. IMO, the perfect solution would be to eliminate the corporate tax altogether, and tax capital gains and dividends as income instead. At least then you can be assured that it is progressive, and you have more direct control over how progressive it is. [1] http://www.urban.org/uploadedpdf/1001349_corporate_tax_incidence.pdf http://www.urban.org/uploadedpdf/1001349_corporate_tax_incid... [1] http://www.kc.frb.org/Publicat/RegionalRWP/RRWP07-01.pdf http://www.kc.frb.org/Publicat/RegionalRWP/RRWP07-01.pdf [2] http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=203 http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Doc...

chimeracoder 12y ago
> IMO, the perfect solution would be to eliminate the corporate tax altogether, and tax capital gains and dividends as income instead. We already tax capital gains on short-term investments as income. Taxing long-term capital gains at the same rate as income would have a number of other unpleasant consequences - It would eliminate the incentive to hold investments for longer than 365 days - It would reduce the incentive to invest in the market (since you would quite literally be paying double taxes on this income, instead of more like 1.5x the tax (which is what we sometimes misleadingly refer to as "double taxation")) Regarding point #1 - if you sell a stock before 1 year, you already pay normal income tax on any gains. This encourages buy-and-hold, long-term investing, which I believe most people on HN would agree is good for the economy at large, as it reduces volatility and ensures that shareholder incentives are better aligned with growing the company. Regarding point #2, which is mildly controversial (but IMHO only because it is misunderstood): it is good to encourage investments in the economy, because this is literally how business raise capital. Readers of Hacker News should be well aware of the importance of this in the private equity markets (ie, venture capital, which is technically a form of private equity). Similarly, in the public markets, it is good to create incentives for people to park their money in places which help spur the economy[0]. [0] In theory (obviously not always in practice), providing capital to a business has the potential to stimulate the economy more than providing capital to an individual, as the business uses that capital to pursue a profit, hire employees, etc.
- cliftonk 12y ago
  In theory you are correct but the marginal investor (who sets the price of an asset) will always trade based on its present day value. So, in reality, it wouldn't affect market rates much. The corporate tax, on the other hand, is a heinous tax that hurts our economy substantially. We have to make the money somewhere.
- dllthomas 12y ago
  "- It would reduce the incentive to invest in the market (since you would quite literally be paying double taxes on this income, instead of more like 1.5x the tax" Please distinguish between: I make money. It is taxed at X%. 1) I put that money into the market, other people use it to make more money, I receive some money ($Y) for that (in dividends or raised stock price) and that is again taxed at X%. 2) I put that money into making myself a better worker. Next year, I make $(X+Y) more than I would have. The $X I spent, I got to write off as a business expense (maybe). The $Y is taxed at X%.
- buerkle 12y ago
  Point 2: You are not paying double taxes on the income. You are paying taxes on the profit you made selling the investment. If I invest $100 and make $10, I pay taxes on the $10, not the original $100 investment.
  - chimeracoder 12y ago
    Capital gains tax rates are roughly half income tax rates. Currently, we say "double taxation" when we refer to being taxed at the corporate level, and then again at the shareholder level (either as long-term capital gains or as income). Shareholders don't directly feel the corporate tax (though they are still effected by it). What I meant was that, if we eliminated the corporate tax but increased the capital gains tax to be equal to the income tax rate, the tax rate that shareholders pay on the gains would be twice what they are currently paying. (The actual incidence (burden) of the tax is more complicated to calculate; I'm simply referring to the direct tax rates.) This is all very rough, of course, since marginal tax rates vary widely.
cliftonk 12y ago
> IMO, the perfect solution would be to eliminate the corporate tax altogether, and tax capital gains and dividends as income instead. I enthusiastically agree with this. There should be little benefit to holding an asset for longer period to evade taxes. I have friends who regularly end up with losses on trades just so they would avoid being "taxed at income" for gains. It's absurd. There are also plenty of loopholes for those who know what they're doing... like shorting a futures contract where you own the underlying asset, effectively locking in it's price until past the 12 month mark.
- chimeracoder 12y ago
  > There should be little benefit to holding an asset for longer period to evade taxes. I have friends who regularly end up with losses on trades just so they would avoid being "taxed at income" for gains. Without more detail, I'm not entirely sure what you're referring to, but you seem to be conflating two concepts (the tax effects of a long-term capital loss and the tax effects of a short-term investment compared to a long-term investment). IMHO, there absolutely should be a benefit to holding an asset for 12 months (compared to less), as buy-and-hold investing is better for the companies being traded, and reduces volatility in the economy compared to speculative day-trading[0]. > like shorting a futures contract where you own the underlying asset, effectively locking in it's price until past the 12 month mark. This is a strategy that's beyond most casual investors who simply trade mutual funds, sure, but I'm not sure I would classify this as a tax loophole - if so, we'd have to call a normal covered call an "investment loophole". [0] This has nothing to do with high-frequency ("ultra short-term") trading by computers; it's about encouraging long-term vs. short-term investing by individuals.
- Alupis 12y ago
  Absolutely in agreement. The Tax code in the US is insane. Instead of criticizing companies that do the math and determine it's a smart [business] decision to relocate or whatever just to reduce tax liability, why not instead focus on what is making these companies so inclined to make said decision?
Shivetya 12y ago
What companies are doing is nothing more than citizens within the US can and choose to do, they move to places where their tax burden is less. Where you can get the same or similar services for less of your income. However politicians know it is easy to vilify corporations thereby allowing them to either out right lie about how taxation works or lie by omission. Companies moving their head quarters out of your country should be a clear signal that your doing it wrong, except in the case of the US politicians want to punish them for doing what is right for them, their share holders, and their employees. The power tripping in Washington is so extreme that punishing is their first reaction to anything they don't like.
- Scuttles 12y ago
  The Administration will probably just Executive Order their way into a "solution".
- MereInterest 12y ago
  I'm confused. If I cut off my big toe and mail it to a different state, can I claim that I should only pay taxes in that state? Why, then, can a company move a small and inconsequential part of itself to a different jurisdiction, then be taxed under that other jurisdiction? Companies moving out entirely would be analogous to people moving. Companies moving out on paper while continuing to do business in the same location is analogous to tax evasion.
  - mseebach 12y ago
    If the tax code says that the location of your right big toe decides where your entire body pays tax, regardless of where other parts of that body is located (immediately adjacent to the toe or scattered across the world), then yes, where the big toe is, that's where you pay tax. The analogy is more like that the location of you navel decides where you pay tax, and you discover that if you shift your weight around a little, your navel ends op on the other side of the line. The problem is that the tax code fundamentally assumes that businesses are reasonably local and contained operations (analogous to a single body) and only deals with sprawling multinationals through monkey patching in an environment where policies appearing to benefit big businesses isn't exactly a big vote-grabber.
ebiester 12y ago
This would require significant tax treaty changes. http://www.crossborderalliance.com/Resources/NRA%20Tax%20guide.pdf http://www.crossborderalliance.com/Resources/NRA%20Tax%20gui... has some of the basics of how it works. Essentially, this has major consequences on foreign investments which were built on the assumptions of a individual tax. Further, there are trusts that can limit tax burdens. It is quite possible that the total taxation would decrease, and it would decrease on those at the top of the heap, not at the bottom. We would have to figure out how to rebalance. Consider this a refactoring on code that is not easily unit testable.

chimeracoder 12y ago

> IMO, the perfect solution would be to eliminate the corporate tax altogether, and tax capital gains and dividends as income instead. We already tax capital gains on short-term investments as income. Taxing long-term capital gains at the same rate as income would have a number of other unpleasant consequences - It would eliminate the incentive to hold investments for longer than 365 days - It would reduce the incentive to invest in the market (since you would quite literally be paying double taxes on this income, instead of more like 1.5x the tax (which is what we sometimes misleadingly refer to as "double taxation")) Regarding point #1 - if you sell a stock before 1 year, you already pay normal income tax on any gains. This encourages buy-and-hold, long-term investing, which I believe most people on HN would agree is good for the economy at large, as it reduces volatility and ensures that shareholder incentives are better aligned with growing the company. Regarding point #2, which is mildly controversial (but IMHO only because it is misunderstood): it is good to encourage investments in the economy, because this is literally how business raise capital. Readers of Hacker News should be well aware of the importance of this in the private equity markets (ie, venture capital, which is technically a form of private equity). Similarly, in the public markets, it is good to create incentives for people to park their money in places which help spur the economy[0]. [0] In theory (obviously not always in practice), providing capital to a business has the potential to stimulate the economy more than providing capital to an individual, as the business uses that capital to pursue a profit, hire employees, etc.

cliftonk 12y ago
In theory you are correct but the marginal investor (who sets the price of an asset) will always trade based on its present day value. So, in reality, it wouldn't affect market rates much. The corporate tax, on the other hand, is a heinous tax that hurts our economy substantially. We have to make the money somewhere.
dllthomas 12y ago
"- It would reduce the incentive to invest in the market (since you would quite literally be paying double taxes on this income, instead of more like 1.5x the tax" Please distinguish between: I make money. It is taxed at X%. 1) I put that money into the market, other people use it to make more money, I receive some money ($Y) for that (in dividends or raised stock price) and that is again taxed at X%. 2) I put that money into making myself a better worker. Next year, I make $(X+Y) more than I would have. The $X I spent, I got to write off as a business expense (maybe). The $Y is taxed at X%.
buerkle 12y ago
Point 2: You are not paying double taxes on the income. You are paying taxes on the profit you made selling the investment. If I invest $100 and make $10, I pay taxes on the $10, not the original $100 investment.
- chimeracoder 12y ago
  Capital gains tax rates are roughly half income tax rates. Currently, we say "double taxation" when we refer to being taxed at the corporate level, and then again at the shareholder level (either as long-term capital gains or as income). Shareholders don't directly feel the corporate tax (though they are still effected by it). What I meant was that, if we eliminated the corporate tax but increased the capital gains tax to be equal to the income tax rate, the tax rate that shareholders pay on the gains would be twice what they are currently paying. (The actual incidence (burden) of the tax is more complicated to calculate; I'm simply referring to the direct tax rates.) This is all very rough, of course, since marginal tax rates vary widely.

cliftonk 12y ago

> IMO, the perfect solution would be to eliminate the corporate tax altogether, and tax capital gains and dividends as income instead. I enthusiastically agree with this. There should be little benefit to holding an asset for longer period to evade taxes. I have friends who regularly end up with losses on trades just so they would avoid being "taxed at income" for gains. It's absurd. There are also plenty of loopholes for those who know what they're doing... like shorting a futures contract where you own the underlying asset, effectively locking in it's price until past the 12 month mark.

chimeracoder 12y ago
> There should be little benefit to holding an asset for longer period to evade taxes. I have friends who regularly end up with losses on trades just so they would avoid being "taxed at income" for gains. Without more detail, I'm not entirely sure what you're referring to, but you seem to be conflating two concepts (the tax effects of a long-term capital loss and the tax effects of a short-term investment compared to a long-term investment). IMHO, there absolutely should be a benefit to holding an asset for 12 months (compared to less), as buy-and-hold investing is better for the companies being traded, and reduces volatility in the economy compared to speculative day-trading[0]. > like shorting a futures contract where you own the underlying asset, effectively locking in it's price until past the 12 month mark. This is a strategy that's beyond most casual investors who simply trade mutual funds, sure, but I'm not sure I would classify this as a tax loophole - if so, we'd have to call a normal covered call an "investment loophole". [0] This has nothing to do with high-frequency ("ultra short-term") trading by computers; it's about encouraging long-term vs. short-term investing by individuals.
Alupis 12y ago
Absolutely in agreement. The Tax code in the US is insane. Instead of criticizing companies that do the math and determine it's a smart [business] decision to relocate or whatever just to reduce tax liability, why not instead focus on what is making these companies so inclined to make said decision?

Shivetya 12y ago

What companies are doing is nothing more than citizens within the US can and choose to do, they move to places where their tax burden is less. Where you can get the same or similar services for less of your income. However politicians know it is easy to vilify corporations thereby allowing them to either out right lie about how taxation works or lie by omission. Companies moving their head quarters out of your country should be a clear signal that your doing it wrong, except in the case of the US politicians want to punish them for doing what is right for them, their share holders, and their employees. The power tripping in Washington is so extreme that punishing is their first reaction to anything they don't like.

Scuttles 12y ago
The Administration will probably just Executive Order their way into a "solution".
MereInterest 12y ago
I'm confused. If I cut off my big toe and mail it to a different state, can I claim that I should only pay taxes in that state? Why, then, can a company move a small and inconsequential part of itself to a different jurisdiction, then be taxed under that other jurisdiction? Companies moving out entirely would be analogous to people moving. Companies moving out on paper while continuing to do business in the same location is analogous to tax evasion.
- mseebach 12y ago
  If the tax code says that the location of your right big toe decides where your entire body pays tax, regardless of where other parts of that body is located (immediately adjacent to the toe or scattered across the world), then yes, where the big toe is, that's where you pay tax. The analogy is more like that the location of you navel decides where you pay tax, and you discover that if you shift your weight around a little, your navel ends op on the other side of the line. The problem is that the tax code fundamentally assumes that businesses are reasonably local and contained operations (analogous to a single body) and only deals with sprawling multinationals through monkey patching in an environment where policies appearing to benefit big businesses isn't exactly a big vote-grabber.

ebiester 12y ago

This would require significant tax treaty changes. http://www.crossborderalliance.com/Resources/NRA%20Tax%20guide.pdf http://www.crossborderalliance.com/Resources/NRA%20Tax%20gui... has some of the basics of how it works. Essentially, this has major consequences on foreign investments which were built on the assumptions of a individual tax. Further, there are trusts that can limit tax burdens. It is quite possible that the total taxation would decrease, and it would decrease on those at the top of the heap, not at the bottom. We would have to figure out how to rebalance. Consider this a refactoring on code that is not easily unit testable.