# Explain to me how American taxation is fair. **URL:** \ **Category:** Great Debates\ **Created:** [February 9, 2010, 3:03am UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228 "2010-02-09T03:03:52Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Grumman](https://avatars.discourse-cdn.com/v4/letter/g/43a26b/32.png) [@Grumman](https://boards.straightdope.com/u/Grumman)\ **Post date:** [February 9, 2010, 8:42am UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/21 "2010-02-09T08:42:37Z")
> [@Quartz](#): > > Well, amongst other things, you are paying for America’s defence of your ability to trade freely and fairly. Really? Who is going to defend his ability to trade freely and fairly _from the Americans_? They are, after all, exploiting their position of power to make him buy a service he doesn’t want or need. ---
**Author:** ![Rhythmdvl](https://avatars.discourse-cdn.com/v4/letter/r/85f322/32.png) [@Rhythmdvl](https://boards.straightdope.com/u/Rhythmdvl)\ **Post date:** [February 9, 2010, 9:33am UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/22 "2010-02-09T09:33:59Z")
What? Tax income? Revenue? As in tax the dollars merely coming into my business? So I’d pay taxes on every dollar I pay my subcontractors? That’s crazy talk! ---
**Author:** ![Chief\_Pedant](https://avatars.discourse-cdn.com/v4/letter/c/a6a055/32.png) [@Chief\_Pedant](https://boards.straightdope.com/u/Chief_Pedant)\ **Post date:** [February 9, 2010, 10:15am UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/23 "2010-02-09T10:15:18Z")
It’s hard not to mention that life is unfair… Taxes are unfair. No one pays proportionately and no one gets back proportionately. And very few think the other guy is carrying his weight. In the US, the top 5% for Adjusted Gross Income earn about 35% of all income (by AGI) and pay about 60% of individual income tax. The bottom 50% pay about 3% of personal income taxes. We don’t tax wealth at all, and we never have. A billionaire can show net losses for the year and be taxed nothing. Since we typically elect the wealthy, I don’t see that changing any time soon. Corporations are even more difficult. They keep us employed and we are allowed to invest in them if we think they are making an obscene profit, thus garnering a share of that profit for ourselves. Perhaps we should not tax public corporations at all? Is any of this fair? Of course not. But one guy thinks the rich are taxed too much and the next guy, too little. One guy wants a corporation taxed mightily and the next guy wants the corporation to use that money to create a job. As someone blessed with high income and ridiculously high taxes my own philosophy is to count my blessings, curse my taxes and try and get government to spend more responsibly. The latest thing we’ve decided to tax unmercifully is our unborn children, and I am confident that will be the ruin of the entire Republic. ---
**Author:** ![SmartAlecCat](https://avatars.discourse-cdn.com/v4/letter/s/67e7ee/32.png) [@SmartAlecCat](https://boards.straightdope.com/u/SmartAlecCat)\ **Post date:** [February 9, 2010, 12:24pm UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/24 "2010-02-09T12:24:02Z")
> [@Desert\_Nomad](#): > > Agreed. I have not lived in the US in 8 years, yet I pay roughly $50K every year to a country I rarely even visit. And you reap as much benefit from our foreign aid and wars as us locals do! ---
**Author:** ![Rumor\_Watkins](https://avatars.discourse-cdn.com/v4/letter/r/d9b06d/32.png) [@Rumor\_Watkins](https://boards.straightdope.com/u/Rumor_Watkins)\ **Post date:** [February 9, 2010, 1:39pm UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/25 "2010-02-09T13:39:42Z")
> [@Desert\_Nomad](#): > > Agreed. I have not lived in the US in 8 years, yet I pay roughly $50K every year to a country I rarely even visit. you must be rolling in dough if you’re cutting a 50k check to the U.S. Treasury after accounting for your foreign earned income exclusion and foreign tax paid credits 🙂 ---
**Author:** ![Driver8](https://avatars.discourse-cdn.com/v4/letter/d/b5a626/32.png) [@Driver8](https://boards.straightdope.com/u/Driver8)\ **Post date:** [February 9, 2010, 4:09pm UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/26 "2010-02-09T16:09:05Z")
> [@smiling\_bandit](#): > > Even assuming it’s as easy as that, most countries don’t want people not of their nationality as citizens. And Said individual might not want to be a Czech citizen: he simply doesn’t want to pay taxes which do not in any way benefit him for a nation which has jack-all to do with him. That may or may not be admirable, but it is perfectly sound reasoning. This was difficult to understand. Nationality is typically tied to citizenship - I assume you meant people who didn’t grow up there? In a few years I will apply for United States citizenship and I will become a US national, despite being born in and growing up in South Africa for 24 years with no US ties whatsoever. Even if you did mean people who didn’t grow up there most countries do have a clearly defined path from permanent residence to naturalization, so if countries really don’t want outsiders as citizens they sure have some strange policies! Either way, the United States is a strange case from the point of view of taxing its own citizens who no longer live in the country. In contrast as soon as I moved to the United States as long as I could show that my income and my residence was no longer South African I didn’t have to pay any South African tax. It wasn’t dependent on taking up a foreign citizenship - at the time I was only on a temporary work permit. I just had to be gone. ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [February 9, 2010, 5:35pm UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/27 "2010-02-09T17:35:13Z")
Taxing revenues instead of profit really would benefit companies which have a low cost of goods sold. A few examples of industries with extremely high costs of good sold would be grocery stores or a gas station: two totally different industries that most people would consider important. Can you imagine if a grocery store was taxed on their revenues instead of the the profit? Let’s say they currently buy a box of cereal for on average $2.00 and sell it to you for $2.20. They make 0.20 of profit and pay .07 in taxes on that for a net profit of $0.13. In order to make that same $0.13 profit but being taxed on revenues instead, they would have to sell it to you for $3.28 or a 49% increase over the prior price. How would you like it if your grocery bill went up 49%? Think about a gas station. RBOB Gasoline costs around $1.93 right now. In Texas, the excise taxes at the pump are around $0.40. The price at the pump for regular gasoline in Texas is around $2.50 right now. There are some other costs such as transportation that need to be factored into the COGS, so let’s say those are $0.10 per gallon. That would make the profit per gallon around $0.09. They pay $0.03 in income taxes and result in net profit of $0.06 per gallon. If they were taxed on revenue instead of profit, they would have to charge around $3.21 (28% increase over the current $2.50). These examples assume a 35% corporate income tax rate, and I am ignoring operating costs such as general and administrative expenses. ---
**Author:** ![Desert\_Nomad](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/desert_nomad/32/177_2.png) [@Desert\_Nomad](https://boards.straightdope.com/u/Desert_Nomad)\ **Post date:** [February 9, 2010, 5:47pm UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/28 "2010-02-09T17:47:37Z")
> [@Rumor\_Watkins](#): > > you must be rolling in dough if you’re cutting a 50k check to the U.S. Treasury after accounting for your foreign earned income exclusion and foreign tax paid credits 🙂 A good chunk of it is Social Security… since my wife and I have to pay both sides (we own the company)… so on a $90K salary each, that is roughly $27K… so it is not hard to pay the other $23K when you are in the 33% bracket… just about $70K in income will do that. Only salary (earned income) is eligible for the exclusion so if we drop our salary, instead of paying 15.3% social security, we’d be paying 33% income tax. Thus at $250K in income, while we are doing very well, I still don’t like sending fifty thousand dollars to a country I do not live in. Being based in Dubai, there is no foreign tax to be paid. ---
**Author:** ![Todderbob](https://avatars.discourse-cdn.com/v4/letter/t/e47774/32.png) [@Todderbob](https://boards.straightdope.com/u/Todderbob)\ **Post date:** [February 9, 2010, 5:59pm UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/29 "2010-02-09T17:59:13Z")
> [@Desert\_Nomad](#): > > Being based in Dubai, there is no foreign tax to be paid. Try bribing one of the princes in one of the emirates to impose a special tax on you alone, and then refund it at the end of the year. Tell him that he’ll be “sticking it to America” if all else fails, and it’ll just piss the IRS off. 😛 ---
**Author:** ![smiling\_bandit](https://avatars.discourse-cdn.com/v4/letter/s/e9a140/32.png) [@smiling\_bandit](https://boards.straightdope.com/u/smiling_bandit)\ **Post date:** [February 9, 2010, 8:36pm UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/30 "2010-02-09T20:36:42Z")
> [@Driver8](#): > > This was difficult to understand. Nationality is typically tied to citizenship - I assume you meant people who didn’t grow up there? In a few years I will apply for United States citizenship and I will become a US national, despite being born in and growing up in South Africa for 24 years with no US ties whatsoever. Even if you did mean people who didn’t grow up there most countries do have a clearly defined path from permanent residence to naturalization, so if countries really don’t want outsiders as citizens they sure have some strange policies! The US makes a habit of it. It’s a lot harder to become accepted socially in much (probably the clear majority) of the world, and often countries discourage people from applying for citizenship in a number of ways. Japan’s laws say you can become a citizen there - its practices are much more ambiguous. Germany as well. Plus, there’s just the fact that many nations are sufficiently dominated by one ethnic group that receives automatically favorable treatment in such matters. > [@](#): > > Either way, the United States is a strange case from the point of view of taxing its own citizens who no longer live in the country. That was rather my point. It’s a bit of a sore spot with many Americans who work overseas, but that group is sufficiently small that the tax stays. ---
**Author:** ![Planet\_of\_the\_Shapes](https://avatars.discourse-cdn.com/v4/letter/p/b77776/32.png) [@Planet\_of\_the\_Shapes](https://boards.straightdope.com/u/Planet_of_the_Shapes)\ **Post date:** [February 9, 2010, 10:54pm UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/31 "2010-02-09T22:54:35Z")
> [@Todderbob](#): > > You got it backwards. > > It would benefit major, multinational companies with ridiculously high profit margins, and it would kill small business. I’ve googled for cites, but can’t seem to find anything that definitively makes a connection between company size and profitability. If it is the case that there is no correlation, I would expect taxing income to benefit smaller firms. Simply because it is more economical for large firms to employ tax accountants to reduce their tax bill. Its relatively easy to hide profits, not as easy to hide revenue. [QUOTE=LonghornDave] Taxing revenues instead of profit really would benefit companies which have a low cost of goods sold. A few examples of industries with extremely high costs of good sold would be grocery stores or a gas station: two totally different industries that most people would consider important. Can you imagine if a grocery store was taxed on their revenues instead of the the profit? Let’s say they currently buy a box of cereal for on average $2.00 and sell it to you for $2.20. They make 0.20 of profit and pay .07 in taxes on that for a net profit of $0.13. In order to make that same $0.13 profit but being taxed on revenues instead, they would have to sell it to you for $3.28 or a 49% increase over the prior price. How would you like it if your grocery bill went up 49%? Think about a gas station. RBOB Gasoline costs around $1.93 right now. In Texas, the excise taxes at the pump are around $0.40. The price at the pump for regular gasoline in Texas is around $2.50 right now. There are some other costs such as transportation that need to be factored into the COGS, so let’s say those are $0.10 per gallon. That would make the profit per gallon around $0.09. They pay $0.03 in income taxes and result in net profit of $0.06 per gallon. If they were taxed on revenue instead of profit, they would have to charge around $3.21 (28% increase over the current $2.50). These examples assume a 35% corporate income tax rate, and I am ignoring operating costs such as general and administrative expenses. [/QUOTE] You’re assuming that the rate of tax would remain the same. This is in effect massively raising the tax burden on those businesses - of course the price would have to go up to compensate. If on the other hand the rate was reduced so the firms are still paying the same amounts of tax, it shouldn’t make any difference to the end price to the consumer. One additional benefit i’ve thought of is that taxing income rather than profits would remove the tax benefit of debt finance. At the moment it is more tax efficient to use debt finance over equity finance, because interest payments reduce taxable profit, while dividend payments do not. Corporations financed primarily by equity instead of debt are less likely to go bust. ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [February 9, 2010, 11:17pm UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/32 "2010-02-09T23:17:33Z")
> [@Planet\_of\_the\_Shapes](#): > > You’re assuming that the rate of tax would remain the same. This is in effect massively raising the tax burden on those businesses - of course the price would have to go up to compensate. If on the other hand the rate was reduced so the firms are still paying the same amounts of tax, it shouldn’t make any difference to the end price to the consumer. You are missing my point. If you lowered the tax rate so that the end dollar amount that these low margin companies pay is the same, then you would also significantly reduce the amount of dollars that high profit margin companies are currently paying. Like I originally stated, the companies that would benefit are those with a low cost of goods sold. Consider a company that earns a high percentage of its income in a fee based manner, for example: Goldman Sachs. For the third quarter 2009, Goldman Sachs reported pre-tax profit of $4.794 billion on net revenues of $12.372 billion. They paid income taxes of $1.606 billion for a tax rate of 33.5% on the pre tax profit. If you wanted to lower the tax rate so that a Grocery Store doesn’t have to increase their costs, (using my previous example) you would have to lower the tax rate on revenues to 3.2%. This would end up lowering the amount of taxes that Goldman Sachs paid to $0.394 billion. This would be 75% reduction in the taxes paid by Goldman Sachs. Is that really something you want to do? ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [February 9, 2010, 11:23pm UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/33 "2010-02-09T23:23:57Z")
> [@Planet\_of\_the\_Shapes](#): > > I’ve googled for cites, but can’t seem to find anything that definitively makes a connection between company size and profitability. If it is the case that there is no correlation, I would expect taxing income to benefit smaller firms. Simply because it is more economical for large firms to employ tax accountants to reduce their tax bill. Its relatively easy to hide profits, not as easy to hide revenue. Most large companies are trying to maximize profits not hide them for tax avoidance purposes. ---
**Author:** ![mo50](https://avatars.discourse-cdn.com/v4/letter/m/8797f3/32.png) [@mo50](https://boards.straightdope.com/u/mo50)\ **Post date:** [February 10, 2010, 12:48am UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/34 "2010-02-10T00:48:48Z")
Hey, YOU chose to be incarnated into this mess. so stop your bitchin’! 🙂 The best evidence to support your post is that the US guy in charge of our insane US tax code, sorry don’t recall his name no cite (which is what, like three feet thick?), confessed he has to have someone else prepare his taxes :smack: Somethin’s wrong here folks! ---
**Author:** ![Saint\_Cad](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/saint_cad/32/18907_2.png) [@Saint\_Cad](https://boards.straightdope.com/u/Saint_Cad)\ **Post date:** [February 10, 2010, 1:02am UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/35 "2010-02-10T01:02:27Z")
A lot of you are misinterpreting what I said. I never said tax revenue! I said to tax revenue - (COGS + payroll + depreciation associated with manufacture + etc.) For example: A company has revenue of $100 million with $40 million in payroll, $20 million in COGS, $10 million in new equipment and $30 million to name a stadium and buy a new Lear jet. Their profit for tax purposes is $0 but I contend it is really $30 million counting the costs DIRECTLY associated with the product manufactured or services rendered. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [February 10, 2010, 1:08am UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/36 "2010-02-10T01:08:53Z")
Taxing revenue is distortionary, because it punishes companies that have to invest more to make the same amount of profit. Certain goods would go up wildly in price, while others would go down. And let me ask you this question: Let’s say I invest $100,000 in a new small business. The business turns out to be not viable, and only earns $60,000 in revenue before I shut it down and take my $40,000 loss. What would be a fair tax rate on my $60,000 in revenue? Is there any rate over 0% that makes sense to anyone? And can you imagine what would happen to capital investment if business was taxed on revenue and you couldn’t deduct the cost of doing business? Can you imagine what would happen to areas of the market that have a higher cost to revenue ratio? It’s a nutty idea. ---
**Author:** ![foolsguinea](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foolsguinea/32/14751_2.png) [@foolsguinea](https://boards.straightdope.com/u/foolsguinea)\ **Post date:** [February 10, 2010, 1:10am UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/37 "2010-02-10T01:10:01Z")
> [@Chief\_Pedant](#): > > We don’t tax wealth at all, and we never have. A billionaire can show net losses for the year and be taxed nothing. Since we typically elect the wealthy, I don’t see that changing any time soon. > > The latest thing we’ve decided to tax unmercifully is our unborn children, and I am confident that will be the ruin of the entire Republic. We do tax wealth, but only when you die. I agree that it’s horrid to tax the future economy on the assumption that the economy will always grow enough to cover our debts. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [February 10, 2010, 1:10am UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/38 "2010-02-10T01:10:10Z")
> [@Saint\_Cad](#): > > A lot of you are misinterpreting what I said. > > I never said tax revenue! I said to tax revenue - (COGS + payroll + depreciation associated with manufacture + etc.) > > For example: A company has revenue of $100 million with $40 million in payroll, $20 million in COGS, $10 million in new equipment and $30 million to name a stadium and buy a new Lear jet. Their profit for tax purposes is $0 but I contend it is really $30 million counting the costs DIRECTLY associated with the product manufactured or services rendered. So what you’re saying is that you want additional taxes on those business activities that _you_ think don’t have social value? Such as advertising and ‘corporate jets’? ---
**Author:** ![Saint\_Cad](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/saint_cad/32/18907_2.png) [@Saint\_Cad](https://boards.straightdope.com/u/Saint_Cad)\ **Post date:** [February 10, 2010, 2:44am UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/39 "2010-02-10T02:44:19Z")
> [@Sam\_Stone](#): > > So what you’re saying is that you want additional taxes on those business activities that _you_ think don’t have social value? Such as advertising and ‘corporate jets’? What does “social value” have to do with anything?! I make widgets. I made $100 million selling widgets. I spent $40 million on widget workers, $20 million on widget wood, $10 million on sandpaper, lathes, etc. I also spent $20 million on a new plane to entertain clients as we go to Vegas on the company dime and we just bought the rights for the local stadium to be named Widget World. Are you honestly going to tell me that out of that list, you cannot pick out which costs went directly TO THE MANUFACTURING of the widgets? As I have said repeatedly - companies should be allowed to expense out manufacturing costs, just not all costs. If they want to spend $80,000 on a company car for the CEO, it should be with the expectation that somehow it will somehow generate at least $100,000 (at 20% tax rate) in new revenue. If it doesn’t TFB but they should not be expensing it out for tax purposes because (and this is the important part all y’all seem to be missing), that car does not contribute to the product manufactured or service rendered. Once again. tax a company on revenue MINUS MANUFACTURING COSTS. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [February 10, 2010, 2:52am UTC](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228/40 "2010-02-10T02:52:48Z")
I think your examples are generally caricatures. Do you really think that a lot of businesses spend millions of dollars jetting clients to Vegas? The vast majority of corporate jet time is used to move executives from facility to facility so they can do their jobs. Did you know that if a corporate jet is assigned to you as a personal vehicle, it IS taxable? That if you use it for any non-valid business purpose, you have to declare it as such and pay tax? In my company, we have ethical guidelines that prevent us from giving gifts to clients. That most emphatically means junkets as well. About the most we can do is set them up in a nice hotel if we fly them in for a meeting, sales pitch, or demonstration. We even have to be careful how much we spend on suppers. And I work for one of the biggest companies around. As for putting your name on the side of a stadium - are you saying all advertising should be taxed? Do you understand the real value of a brand as a market signal? The value of advertising in providing information to the marketplace? Let me give you an example from my own experience as a small businessman - one of the absolutely critical things I had to do every year was attend a large annual trade show. It was the best way to introduce customers to my product, allow them to try it out, etc. It also allowed me to connect with suppliers, attend seminars, and kepp up with what the competition was doing. It was also one of my larger annual expenses. Should that have been taxable? Hey, I ate out, stayed in a realy nice hotel (it was always held at some luxury hotel or resort), and had a lot of expenses that were most definitely advertising - booth rental, flyers, ball caps and T-shirts, etc. Was I bad? Should I have been punished? Would my industry have been better off if everyone just stayed home? There is so much more to business than the process of manufacturing a product. But you’ve decided what’s a valid expenditure, and which ones should be punished through taxation, have you? [Previous page](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228.md?page=1) [Next page](https://boards.straightdope.com/t/explain-to-me-how-american-taxation-is-fair/528228.md?page=3)