Is the country headed for disaster??

[Dragline]

This thread turned out to be much more philosophically interesting and fact-based that I usually would have expected.

Must be the inherent quality of the participants.

I was reminded of the wisdom of Jim Rohn on this topic. Listen here: https://youtu.be/FkC2poV41e4?t=1801

Or read this approximation (not quite as good):

"I realize that the topic of taxes may seem like a strange place to begin the discussion of creating wealth. And yet throughout our lives, whether young or old, we must learn the necessity of paying taxes. And as soon as they have any money at all, our children, too, must learn that when they spend money they immediately become consumers. And all consumers of goods and services, no matter how young, must pay taxes. Why?

Because we have all agreed to live as a society, and for that society to function properly, there are some things we cannot do for ourselves alone. For example, we cannot each build a piece of the street. The machinery would be too expensive, and it would take too long to learn how to use it. So we have a government. And a government is made up of people who do things for us that we cannot or do not want to do ourselves. Because the streets, the sidewalks, the police, and the fire department must all be paid for, we’ve agreed to add some money each time we buy something and give it to the government.

We then move on to federal taxes. Here is a good way to explain federal taxes. I call it “The Care and Feeding of the Goose That Lays the Golden Eggs.” It’s so important to feed the goose-not to abuse the goose or tear off its wings-but to feed and care for it.

What’s that you say? The goose eats too much? That’s probably true. But then, don’t we all eat too much? If so, let not one appetite accuse another. If you step on the scales and you’re ten pounds too heavy, you’ve got to say, “Yes, the government and I are each about ten pounds too heavy. Looks like we both eat too much.” No question about it. Every appetite must be disciplined-yours, mine, and the government’s. Hey, we could all go on a diet!

My mentor, Mr. Shoaff, urged me early on to become a happy taxpayer. Now, I must admit it took a while, but I finally did become a happy taxpayer. Part of this transformation occurred when I began to understand the function of taxes and that it is right for everyone to pay his or her fair share."

[IlliniDave]

But it doesn't seem to work that way with corporate tax breaks and benefits. OK, you can argue that companies provide jobs.... but stuff like Wal-Mart getting taxpayer funded air traffic controllers and expenses for the tiny airport that really only their jets use? (Apparently but for Wal-Mart's planes, the airport gets so little traffic it wouldn't qualify for needing air traffic controllers). Do big gas companies create enough jobs and bolster the economy sufficiently to deserve $4 billion in tax breaks (particularly in 2012, when they had record-breaking profits?) What about AIG? They paid back the bailout money... but in addition, also got some significant tax breaks. It's almost like double dipping, and was it worth it for everyone else? Boeing gets enormous tax breaks, and maybe deserved because of military contracts... but in return it held the state of Washington hostage by threatening to leave the state if they didn't get additional tax breaks in 2013.

And don't get me started on farm subsidies....

I guess my point is that comparing the tax benefit of the mortgage interest deductions to the tax benefits provided to corporations is like comparing blueberries to... watermelons? And the purposes of those tax benefits are significantly different, and ultimately can give the corporate recipient of those benefits even more power. I'm not sure that the mortgage interest deduction gives anyone much power to decide the future of the economy and public policy in this country.

One thing about corporations is that in general they do not amass/retain wealth, strictly speaking (Apple at present being a notable exception). They grow and/or pay out profits to shareholders. The largest group of shareholders I believe are the institutional investors (pension funds, endowments, and the like). The next largest is probably people like us accumulating for retirement. Granted there are some questionable things that occur in the US regarding executive compensation, and on Wall Street. But a significantly large fraction of corporate profits stay in motion. And as long as the money is moving around, the gov't can do plenty of bill-dipping, and opportunity is created.

It's people like me perhaps that are more of a "problem", since I take wealth out of circulation and essentially sit on it. It minimizes the croupier's take. Somewhere down the line the money will get spent, but in a consumption society/economy, the model would have been for that same money to be spent many times over during the same time period.

I've never really understood the angst over corporate taxation, especially of public corporations. That's one area where I think a lower, flat, but loophole-free approach would be better.

[Chad]

I've never really understood the angst over corporate taxation, especially of public corporations. That's one area where I think a lower, flat, but loophole-free approach would be better.

It's one reason Apple has enough cash to buy roughly 30% of the largest corporation ever (by market cap)...itself. It potentially could take itself private by 2020.

http://seekingalpha.com/article/1725412 ... te-by-2020

It's not like any of these companies pay anywhere near the top rate anyway. The problem is getting rid of the loopholes, not reducing the base tax amount. Too many special interest groups.

[Riggerjack]

As long as this is going down the corporate tax rate route, I'm going to respectfully disagree.

The corporate tax rate should be zero. Nada. Nothing.

Corporations are not people, and shouldn't be treated as such. All corporate taxes are simply hidden taxes on their customers. They are part of the cost of doing business, and that cost will be passed on to the customer. The only advantage to the corporations in tax avoidance, is if they can avoid a cost their competition can't.

Historically, Federal revenue has been 18% of GDP. In an ideal world, we would just set taxes at 18% of profits, be they earned income, capital gains, or any other form. Money made, minus money spent to make that money, times 18%, equals federal tax bill. No special favors, deductions, exemptions, incentives or subsidies. The same rules for expenses, regardless of source of income.

This would focus all taxpayers on efficiency, rather than tax efficiency. It would remove the incentive to contribute corporate monies to politics. And that's why we can't have it. Congress is in the business of selling favors. Remove the special favors, and suddenly that Congressional seat is not worth the money spent to run for it.

But since we still hear people using phrases like "tax breaks for the rich" while talking about INCOME TAXES, and "corporate welfare" being accelerated depreciation schedules, or "47% don't pay taxes", we can be assured that the population still operates on a soap opera level (the good guys wear white, the bad guys have a goatee) understanding of taxation. That soap opera worldview is what has allowed us to get where we are.

[jacob]

+1!!!!!!

[Dragline]

As long as this is going down the corporate tax rate route, I'm going to respectfully disagree.

The corporate tax rate should be zero. Nada. Nothing.

Corporations are not people, and shouldn't be treated as such. All corporate taxes are simply hidden taxes on their customers. They are part of the cost of doing business, and that cost will be passed on to the customer. The only advantage to the corporations in tax avoidance, is if they can avoid a cost their competition can't.

Historically, Federal revenue has been 18% of GDP. In an ideal world, we would just set taxes at 18% of profits, be they earned income, capital gains, or any other form. Money made, minus money spent to make that money, times 18%, equals federal tax bill. No special favors, deductions, exemptions, incentives or subsidies. The same rules for expenses, regardless of source of income.

This system would be easily gamed, because you have implicitly assumed that the goal of a corporation is necessarily to have customers or run a business and distribute profits to its owners, which is nice and tidy assumption for certain economic arguments, but not grounded in reality. There is no legal requirement that a corporation do any such things or act as some kind of pass-through entity.

The first thing I would do is register a company, put all my assets in it, make myself an employee of the corporation that gets paid a dollar every once in awhile, but the corp. pays all my expenses as part of my "employment". I never make any profits or any income yet my lifestyle does not change. No taxes for me! And I wouldn't have any employer pay me much. Instead, they would agree to pay me a token wage and buy "services" or other tokens from my company that I would never cash out.

Any system that treats one type of legal entity differently than others for tax purposes can be gamed.

And lets not get started on what we would do with partnerships, "funds", trusts, LLCs, LLPs, and non-profits . . .

[Chad]

@Riggerjack
Your proposal would be ideal (corporations are not people), but there would still be issues. On top of what Dragline mentioned, corporations would still have plenty of reasons to buy Congress. Glass Steagall and Sarbanes Oxley were not really opposed by Wall Street because of any impact on taxes. Comcast trying to prevent competition and create monopoly, etc.

We would also have to turn around and raise personal income taxes to make up for the loss of revenue from the corporate tax.

[IlliniDave]

I think the point is, corporate tax is, in the end, personal income tax (or more accurately perhaps its first cousin--sales tax). In the end, all taxes burdens are borne by individuals. Businesses have to pass them on to their customers (and to a degree employees) until it ultimately stops at the individual consumer. There is no other option.

We as a society like to have a villain to punish. Corporations, being faceless, are low fruit. High income earners, being few in number, are low fruit. Both understandably fight back the only way they can, with what they have (money) replacing what they don't have (votes). Hence the mess.

The worst thing about taxes is the lack of transparency of so much of it. When you buy something, you use money that you generally had paid taxes on, AND typically you pay sales tax at the time of purchase, which are pretty apparent. But built into the price you pay is a portion the taxes of everyone who's ever touched that item in its production and distribution. I don't even know how much of every dollar I earn is ultimately sucked up by some government entity somewhere as tax revenue and/or equivalent fees. I remember estimates some years ago that it was north of 50%, and those estimates probably assumed a lower marginal tax rate than mine. We've heard the phrase the "miracle" of compound interest. How do you describe compound taxes?

I recognize that government is necessary and adds some value (how much and of what type is debatable, of course). So I don't reject the idea of paying taxes out of hand. But I would like to know how much I'm paying.

I know it's controversial, but I like the idea of a eliminating all income tax in favor of a consumer sales tax. Encourage saving, investing, and more responsible consumption. No filing, IRS, audits, any of that BS.

Just a fantasy.

[GandK]

I know it's controversial, but I like the idea of a eliminating all income tax in favor of a consumer sales tax. Encourage saving, investing, and more responsible consumption. No filing, IRS, audits, any of that BS.

Just a fantasy.

My mom did public accounting for 25 years and that was what she used to say when I asked her what the best/fairest tax would be. All consumption, point of sale, with exemptions for food and housing.

[Scrubby]

I think the point is, corporate tax is, in the end, personal income tax (or more accurately perhaps its first cousin--sales tax). In the end, all taxes burdens are borne by individuals. Businesses have to pass them on to their customers (and to a degree employees) until it ultimately stops at the individual consumer. There is no other option.

Businesses are trying to make as much money as they possibly can. Taxes on corporations takes a share of the profit, it's not like sales tax that is added to all prices. With your system the corporations would do all their business in the countries with the best infrastructure (including anything that makes it easier to run a business), and the owners would funnel the profits to the countries with the lowest taxes. This would essentially be a transfer of wealth from the workers who pay the taxes which pays for the infrastructure, to the rich who reap the benefits without giving anything back.

With consumer taxes only the taxes will have to be very high, making it extremely profitable to move to countries with low tax countries. Even more of the business owners who benefit from the infrastructure mentioned above would do so.

I don't see any other way to solve it except forcing businesses to pay taxes in the countries they do business. Anything else leads to a race to the bottom and/or tragedy of the commons scenario.

[Dragline]

I know it's controversial, but I like the idea of a eliminating all income tax in favor of a consumer sales tax. Encourage saving, investing, and more responsible consumption. No filing, IRS, audits, any of that BS.

Just a fantasy.

My mom did public accounting for 25 years and that was what she used to say when I asked her what the best/fairest tax would be. All consumption, point of sale, with exemptions for food and housing.

Yes, it would be very difficult to game such a system -- at least within the country -- and very easy to calibrate it to current expenses by raising or lowering the going rate. The gaming would come via exemptions and going across borders to buy stuff, which was relatively easy to stop before the internet, but now it might be much more difficult.

But our system is built on relatively high sticker rates with plenty of exemptions for a bevy of favored economic behaviors. Every once in a while there is partial "clearing" like what happened in 1986 (interest on consumer debt used to be deductible), but that's not likely to happen any time soon. Truth is, most industries like to have the exemptions to make their line of work look better than others (the real estate tax deduction is the prime example; special treatment for hedge funds in another; special saving/retirement vehicles are a third) as long as they can get their exemption and keep it. Something like half or more of the tax code is essentially exemptions for a relatively small number of economic actors, both individuals and corporations. Your average wage earner generally has the fewest options, though.

The best practical thing an individual can do (call her the stoic taxpayer) is structure their economic behaviors to take advantage of as many exemptions/breaks as possible. Better to light a candle than curse the darkness. Fortunately, while annoying in some of the complexities and requiring a bit of planning, its actually not too hard to do.

[IlliniDave]

I think the point is, corporate tax is, in the end, personal income tax (or more accurately perhaps its first cousin--sales tax). In the end, all taxes burdens are borne by individuals. Businesses have to pass them on to their customers (and to a degree employees) until it ultimately stops at the individual consumer. There is no other option.

Businesses are trying to make as much money as they possibly can. Taxes on corporations takes a share of the profit, it's not like sales tax that is added to all prices. With your system the corporations would do all their business in the countries with the best infrastructure (including anything that makes it easier to run a business), and the owners would funnel the profits to the countries with the lowest taxes. This would essentially be a transfer of wealth from the workers who pay the taxes which pays for the infrastructure, to the rich who reap the benefits without giving anything back.

The money used by the business to pay the taxes comes out of the pockets of the customers/consumers. Prices are set high enough to generate sufficient income to the company/corporation so that they make an acceptable profit net of taxes. Taxes take a percentage of income. True profit is what's left after all expenses, including tax, are paid out of the income. In other words, income taxes paid by the business are part of the price the customer/consumer pays for the good or service. So they are added to the price, just not explicitly, and paid by the end user.

Businesses already adjust their operations to take the best advantage of different tax situations in different locations.

With "my system" the businesses wouldn't funnel their profits anywhere for tax reasons because they wouldn't pay tax on their income. Tax would would be collected only at the time their good or service is paid for.

[Scrubby]

The money used by the business to pay the taxes comes out of the pockets of the customers/consumers. Prices are set high enough to generate sufficient income to the company/corporation so that they make an acceptable profit net of taxes.

What is sufficient income? Why is it so much higher for some companies than others? Apple and Microsoft pay very little taxes, but they still charge very high prices for their products compared to what it costs to make them.

Businesses aren't charity operations. If they can charge high prices they will. If all taxes on profits went away they wouldn't lower their prices, they would just pocket the extra money. As they are already trying to maximise their profits it naturally follows that increasing the prices would lead to lower profits after taxes, not matter what the tax rate on those profits is.

[henrik]

What is sufficient income?

Sufficient = enough to justify keeping capital in that business compared to other investments.

[Scrubby]

What is sufficient income?

Sufficient = enough to justify keeping capital in that business compared to other investments.

Which to any investor worth his salt means the highest possible risk adjusted income. How many investors are thinking 'yeah, I could make more money, but the taxes are low enough that I'm just going to give away that income'?

[IlliniDave]

The money used by the business to pay the taxes comes out of the pockets of the customers/consumers. Prices are set high enough to generate sufficient income to the company/corporation so that they make an acceptable profit net of taxes.

What is sufficient income? Why is it so much higher for some companies than others? Apple and Microsoft pay very little taxes, but they still charge very high prices for their products compared to what it costs to make them.

Businesses aren't charity operations. If they can charge high prices they will. If all taxes on profits went away they wouldn't lower their prices, they would just pocket the extra money. As they are already trying to maximise their profits it naturally follows that increasing the prices would lead to lower profits after taxes, not matter what the tax rate on those profits is.

Sufficient in context would mean enough to satisfy investors/meet their targets for investment/growth. I really was speaking more towards a minimum net profit.

Of course, most businesses will charge as much as they can and maximize their profits.

But there's this pesky thing called competition in a free market. For example a gas station may want to increase it's gross proceeds by $0.50/gallon. But if it raises its price $0.50/gallon, it won't sell much gas. It's customers will go to the competitor across the street or down the road where they can get gas $0.50/gal cheaper.

So if business income taxes go away prices will begin to go down as businesses strive to increase their sales by having lower prices than their competition.

Companies like Microsoft and Apple are somewhat unique in that they are a long way ahead of their competition, and in many respects don't really have true competition. But in the wide word of free market capitalism, they are anomalies.

[Scrubby]

So if business income taxes go away prices will begin to go down as businesses strive to increase their sales by having lower prices than their competition.

If increasing sales would make them more money at 0% taxes then it would make them more money if they have to pay 30% of those profits in taxes as well. The competitors are there no matter what the tax rate is, and they have to pay the same taxes. Having taxes on profits won't make it easier or harder to compete for any particular company, and they will sell the same amount of goods and make the same amount of profit before taxes at any particular price point. It will lower the profits for the owners, but it will do so for everybody in every business. It won't make any particular business more or less attractive for investors. I don't really have many more ways to say this, so I would appreciate if you explain why you think this particular point is wrong.

[henrik]

(Un)fortunately, competition and capital nowadays mostly don't care about tax jurisdiction or country boundaries.

[IlliniDave]

There really aren't any profits before income taxes, only net income. So taxes necessarily reduce profit for a given price point and sales volume (i.e., gross revenue).

Taxes are basically a cost of doing business, the same as labor costs, energy costs, material costs, etc. All those things are built into the price the business charges the consumer for the good or service. So the consumer/customer is ultimately paying the taxes as well as all the other costs. Profits are what the company gets to keep after all costs, including taxes, are paid (income tax versus some sort of "profit tax"). When any of those costs can be lowered, the business can take advantage and lower their price to the consumer because they can be equally profitable on lower income. That includes taxes.

In other words, having the income taxes in place only makes things more expensive for the consumer/customer (me and you). For the business it is a pass-through.

I think the confusion is that you are equating net income (before taxes) with net profit, which is not the same thing.

If income taxes are removed from businesses, competition will lower the price of the goods and services by the commensurate amount in the vast majority of instances. The consumer/customer saves money. The government replaces the revenue with a sales tax. It is paid by the consumer, but the consumer now is not paying income tax on his own earnings, plus is paying a lower price for goods/services. If the sales tax is set right, it should be a net wash for government revenue. Savers and people who are careful about their spending are rewarded in such a system.

[Dragline]

Companies like Microsoft and Apple are somewhat unique in that they are a long way ahead of their competition, and in many respects don't really have true competition. But in the wide word of free market capitalism, they are anomalies.

I don't believe this statement/assumption to be factually accurate. Most very successful businesses have what Warren Buffet calls "a moat", which restricts competition in their particular business line. Indeed, most of the Dow component companies fall into this category -- this is why they are so large and successful.

Companies like Starbucks would not even exist if the assumption were not a fallacy. Branding would be almost meaningless, yet we know from practical experience that it is often more important than the product itself, because consumers tend to prefer fewer choices with consistency -- even if it is relatively mediocre -- to doing their own research. This is also why Amazon succeeds where Ebay fails.

This reality is that most industries are dominated by a relatively few number of players. The anomalies are things like gasoline and groceries and personal services like barbers and dry cleaners.