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I see this delusion pop up all over and I can't help but just shake my head. Trying to tax a corporation is like trying to trap an octopus in a fishing net. The

I see this delusion pop up all over and I can't help but just shake my head. Trying to tax a corporation is like trying to trap an octopus in a fishing net. They will always find a way to slide out. You have the perfect collusion of incentives: 1) Pooled self interest in the form of shareholders owning value. When a corporation spends money on the shareholder's behalf on lobbying or fancy tax law specialists, in benefits every single shareholder, because stock returns are apportioned. With the personal income tax, it is not in the immediate self interest for someone in the lowest tax bracket to help lobby for lower taxes on the highest bracket. Pooled self interest makes for higher lobbying power. 2) The corporate tax is not a revenue tax (as is the personal income tax), but rather a revenue-minus-costs tax. And businesses are diverse enough in their business models that you couldn't feasibly enact a revenue tax without unfairly penalizing low margin industries like grocery stores or temp agencies. What this means is that anything that the corporation deems to be a cost is automatically tax deductible. This leads to ridiculous shenanigans like using corporate jets to drop off documents that happen to need to be delivered to the same city as the CEO's daughter's university campus. If you want to enforce rules on corporate taxation, you are going to have to scrutinize every single cost they have on their books. Is it any surprise that the corporate tax has the highest compliance and enforcement costs, and lowest effective-to-nominal ratios of any tax form in the US? If you want corporations to pay their fair share of taxes, you have to have them distribute the money to their shareholders and then place the burden of taxation on them. Eliminate the corporate tax altogether, and tax capital gains and dividends as personal income.

kemiller 12y ago
How does this work for foreign shareholders?
gamblor956 12y ago
Very little of what you said was true. 1) A corporation spends money on tax specialists to benefit itself. Any benefit to the shareholders is usually incidental, and the corporation would eliminate these benefits if it increased the benefit to the corporation. 2) Corporate income taxes are profit taxes. The type of shenanigans you have suggested as a means of increasing expenses are what tax practitioners call "tax evasion schemes" that (a) would not work and (b) would result in heft fines and/or prison sentences for the executives, board members, and accountants involved. The US corporate tax code has the highest compliance costs because it has the most deductions and credits of any code in the world, but every dollar spent on compliance usually results in multiple dollars saved with respect to tax liabilities. If you want corporations to pay their fair share of taxes, you tax them on their profits. If the tax is levied only on distributions to shareholders, that will simply move the compliance games to the shareholder level. And this plays into enforcement as well--there are thousands of companies, but there are millions of shareholders, and it is magnitudes easier to enforce tax at the corporate level than the shareholder level.
- HeyLaughingBoy 12y ago
  Any benefit to the shareholders is usually incidental, and the corporation would eliminate these benefits if it increased the benefit to the corporation What's the difference? That is, where do you draw the line between "a corporation" and the shareholders?
  - gamblor956 12y ago
    The corporation is the entity. The shareholders are the owners. The corporate form very specifically exists to be a separate legal person (for the technical meaning of person) that shields its owners from liability for claims against the business. The cost of that separateness is that the corporation is also subject to tax as its own person. If people want to have the benefits of direct taxation of income they are free to choose a flow-through form (i.e., a partnership or LLC).
    - HeyLaughingBoy 12y ago
      I was unclear: I know what constitutes a corporation. My question was really what benefits accrue to the corporation that do not (albeit indirectly) also benefit the shareholders?
- saosebastiao 12y ago
  > A corporation spends money on tax specialists to benefit itself. Any benefit to the shareholders is usually incidental, and the corporation would eliminate these benefits if it increased the benefit to the corporation. This doesn't make any sense. Any benefit to the corporation is a de facto benefit to the shareholders of that corporation. > The type of shenanigans you have suggested as a means of increasing expenses are what tax practitioners call "tax evasion schemes" that (a) would not work and (b) would result in heft fines and/or prison sentences for the executives, board members, and accountants involved. It is only tax evasion if the code is explicit enough to rule it out as allowable behavior...a feat of endurance for tax authorities. Even then, many legal tax avoidance behaviors would be non-existent or drastically less common if it weren't for corporate taxation. Employee benefits, for example, only make sense if there is a bulk discount on those benefits sufficient to make sense to buy as a group. Sometimes vendors offer those discounts. But the existence of benefits as tax deductable expenses means an additional 40% discount over individual purchase. If your corporate lunchroom is subsidized (extremely common in mid to large size corporations), it is likely because that subsidy is tax deductible, whereas an individual purchasing their own lunch is not. Compliance and enforcement costs are roughly proportional to the cartesian product of the complexity of the rules and the number of entities. Sure, pushing taxes onto shareholders increases the number of entities, but drastically reduces the number of rules, due to the fact that personal income tax is not a profit tax. The corporate tax has to have millions of rules and exceptions to rules because businesses are drastically different and legitimate expenses for one business may be illegitimate for another. I totally understand that there are way more shareholders than there are companies, but the difference in the number of rules between corporate taxes and and the marginal increase in rules on personal income taxes easily makes up the difference.
ThomPete 12y ago
I think you are forgetting something there. Technology will create less and less need for workers and so the base for taxation through income tax will minimize substantially. Further more the problem is that many of the types of companies we see in tech are actually capital intensive not salary intensive industries yet they extract a substantially larger part of the economy without giving anything back besides cheaper products. Even out of self-interest corporations should be interested in paying for their advantage because if they loos the mass market who are they going to sell to?
jrochkind1 12y ago
Whatever form profits are required to be reported to shareholders and potential shareholderes -- tax that calculation. Bingo, there is no incentive for minimizing it anymore. Since you want to show profits to shareholders and investors. Plus, you get to save all that money you spent on calculating your taxable income, you only need to calculate it once to report to both investors and the government. I'm sure the devil is in the details and it would be much more complicated than this with many things to be worked out. But I think just that proposal is evidence that it's not impossible to make corporations actually pay taxes by aligning their interests appropriately.
gaius 12y ago
A good technique would be for the US and UK govts to just slap an extra 10% of income tax on all employees of an evading company (upped to 20% if they're found to be employed by a subsidiary for the purposes of tax evasion). That will bring them to heel overnight.

kemiller 12y ago

How does this work for foreign shareholders?

gamblor956 12y ago

Very little of what you said was true. 1) A corporation spends money on tax specialists to benefit itself. Any benefit to the shareholders is usually incidental, and the corporation would eliminate these benefits if it increased the benefit to the corporation. 2) Corporate income taxes are profit taxes. The type of shenanigans you have suggested as a means of increasing expenses are what tax practitioners call "tax evasion schemes" that (a) would not work and (b) would result in heft fines and/or prison sentences for the executives, board members, and accountants involved. The US corporate tax code has the highest compliance costs because it has the most deductions and credits of any code in the world, but every dollar spent on compliance usually results in multiple dollars saved with respect to tax liabilities. If you want corporations to pay their fair share of taxes, you tax them on their profits. If the tax is levied only on distributions to shareholders, that will simply move the compliance games to the shareholder level. And this plays into enforcement as well--there are thousands of companies, but there are millions of shareholders, and it is magnitudes easier to enforce tax at the corporate level than the shareholder level.

HeyLaughingBoy 12y ago
Any benefit to the shareholders is usually incidental, and the corporation would eliminate these benefits if it increased the benefit to the corporation What's the difference? That is, where do you draw the line between "a corporation" and the shareholders?
- gamblor956 12y ago
  The corporation is the entity. The shareholders are the owners. The corporate form very specifically exists to be a separate legal person (for the technical meaning of person) that shields its owners from liability for claims against the business. The cost of that separateness is that the corporation is also subject to tax as its own person. If people want to have the benefits of direct taxation of income they are free to choose a flow-through form (i.e., a partnership or LLC).
  - HeyLaughingBoy 12y ago
    I was unclear: I know what constitutes a corporation. My question was really what benefits accrue to the corporation that do not (albeit indirectly) also benefit the shareholders?
saosebastiao 12y ago
> A corporation spends money on tax specialists to benefit itself. Any benefit to the shareholders is usually incidental, and the corporation would eliminate these benefits if it increased the benefit to the corporation. This doesn't make any sense. Any benefit to the corporation is a de facto benefit to the shareholders of that corporation. > The type of shenanigans you have suggested as a means of increasing expenses are what tax practitioners call "tax evasion schemes" that (a) would not work and (b) would result in heft fines and/or prison sentences for the executives, board members, and accountants involved. It is only tax evasion if the code is explicit enough to rule it out as allowable behavior...a feat of endurance for tax authorities. Even then, many legal tax avoidance behaviors would be non-existent or drastically less common if it weren't for corporate taxation. Employee benefits, for example, only make sense if there is a bulk discount on those benefits sufficient to make sense to buy as a group. Sometimes vendors offer those discounts. But the existence of benefits as tax deductable expenses means an additional 40% discount over individual purchase. If your corporate lunchroom is subsidized (extremely common in mid to large size corporations), it is likely because that subsidy is tax deductible, whereas an individual purchasing their own lunch is not. Compliance and enforcement costs are roughly proportional to the cartesian product of the complexity of the rules and the number of entities. Sure, pushing taxes onto shareholders increases the number of entities, but drastically reduces the number of rules, due to the fact that personal income tax is not a profit tax. The corporate tax has to have millions of rules and exceptions to rules because businesses are drastically different and legitimate expenses for one business may be illegitimate for another. I totally understand that there are way more shareholders than there are companies, but the difference in the number of rules between corporate taxes and and the marginal increase in rules on personal income taxes easily makes up the difference.

ThomPete 12y ago

I think you are forgetting something there. Technology will create less and less need for workers and so the base for taxation through income tax will minimize substantially. Further more the problem is that many of the types of companies we see in tech are actually capital intensive not salary intensive industries yet they extract a substantially larger part of the economy without giving anything back besides cheaper products. Even out of self-interest corporations should be interested in paying for their advantage because if they loos the mass market who are they going to sell to?

jrochkind1 12y ago

Whatever form profits are required to be reported to shareholders and potential shareholderes -- tax that calculation. Bingo, there is no incentive for minimizing it anymore. Since you want to show profits to shareholders and investors. Plus, you get to save all that money you spent on calculating your taxable income, you only need to calculate it once to report to both investors and the government. I'm sure the devil is in the details and it would be much more complicated than this with many things to be worked out. But I think just that proposal is evidence that it's not impossible to make corporations actually pay taxes by aligning their interests appropriately.

gaius 12y ago

A good technique would be for the US and UK govts to just slap an extra 10% of income tax on all employees of an evading company (upped to 20% if they're found to be employed by a subsidiary for the purposes of tax evasion). That will bring them to heel overnight.