Nothing is hard to understand about it. Taxes affect everyone negatively.
Equity investments are their own reward. There is no benefit to the economy when government encourages investment through lower capital gains taxes. What is the investor class going to do with their cash, stuff it under a mattress? Buy bonds at 2%? The worst that could happen is they would spend it, creating a much more effective stimulus to the economy than equity investment.
Suppose (like Romney) you are sitting on a pile of cash. You use this money to buy state municipal bonds-which are free of Federal and State taxation.
In return, you do get a substantially lowere interest rate.
My question: would your interest income be subject to the AMT?
One major problem with taxing corporations on revenue is that it basically demands a mega-vertical enterprise. An example:
Aaron uses $1 to drill for oil in TX and sells a unit of it for $2 to Beth, making $1 profit.
Beth refines that oil (at an average cost of $1 per unit) and sells it to Charles for $4, making $1 profit.
Charles turns the refined oil into plastic for injection molding (at an average cost of $1 per unit) , and sells it to Dee for $6, making $1 profit.
Dee makes the plastic into a widget and sells it to Ed for $8, but keeping the factory up costs her about $1 per unit. $1 profit.
Ed sells you that widget for $10, making $1 profit after he pays for his storefront and other costs.
You get that widget for $10 plus sales tax.
Compare to the vertically integrated ABCDE drilling and retail corporation. They aren’t any more efficient than the above chain, so they spend:
$1 to drill, $1 to refine, $1 to make plastic, $1 to mold it, and 1 to sell it. Total cost, 5. You get it for the same price, at $10. ABCDE just made $5, which they will be taxed on. It works effectively the same as the first supply chain.
Under a revenue taxing setup, the government taxes the first chain on $30 total revenue, and the second on $10. Whatever the rate is , ABCDE integrated will pay 1/3 the amount paid by Aaron et al.
“One major problem with taxing people on revenue is that it basically demands they share housing.”
Why is this a “problem”? I mean, vertical integration has its own costs. You cannot grow a corporation arbitrarily large without incurring significant organizational costs as well. Your example assumes “all else equal” but in fact all else is not equal. There is already pressure for vertical (and horizontal) integration because firms can—to some limit—reduce transaction costs faster than they accrue organizational costs. This pressure is natural and why markets can achieve efficiency of allocation. Transaction costs are real and if they can be avoided at less cost than that’s excellent. That’s good. Should we adjust the tax code here to let small businesses deduct their transaction costs somehow, because it’s unfair that the big boys deal with easier-to-manage organizational costs?
Generally no, but some municipal bonds are subject to AMT.
And if you as an individual run your a bakery under your own name, you can deduct the rent for that bakery as an ordinary and necessary cost of running a bakery (a for profit enterprise), when you purchase food for your employees you are providing extra compensation to your employees that they are not picking up as income because we have decided not to tax the employees for their food allowance.
You can try to characterize the costs of producing income as consumption but you can also deduct any costs you incur in the pursuit of income. You can deduct part of your personal rent if you use part of your home to run a for profit business, you can deduct a part of your cable internet bill if you need THAT for your for profit business.
There is a difference between short term elasticity and long term elasticity. Short term, the cost is borne almost entirely by the shareholder, over the long term, the cost is borne proportionally by whoever has the least choice (or elasticity), be it the shareholder, the vendors, the consumers or the emplyees.
And what if your shareholder is foreign and lives in a treaty jurisdiction?
I agree that its not realistic but to be fair our deficit is not over a trillion dollars if you correct for the recession, the wars and the Bush tax cuts. Then the deficit is under 500 billion (still too much and we still have to do something about health care costs but without the recession, the deficit is much smaller).
I think we are talking about a very specific tax. Taxes on qualified dividends and capital gains.
Check again. Qualified dividends received by individuals are taxed at 15%, dividends received by corporations depends on how much they own. If they own 80%+, then they are consolidated and they pay no tax, if they own 20% plus they pay tax on 20%, if they own under 20% then the rate is 30%.
The traditional argument for capital gains taxes was not to incentivize investment, it was to smooth tax rates at a time when top marginal rates could reach 90%. IOW it was unfair to tax me at 90% for an invesmtne I had been holding for ten years if I only would have beent axed at a 50% rate if I had recognized one tenth of teh gain each year for the last ten years. As we have continuted to reduce capital gains rates the argument from the right has BECOME the economic theory of encouraging capital investment. This is why you now hear people talking about wanting to eliminate the capital gains tax altogether, they didn’t used to do that.
I believe that there are different types of tax exempt bonds. Some of them get caught by AMT and other do not.
You say that revenue taxing demands that people share housing, but it is obviously not true in the US. Most people live with their immediate family in a house or apartment. It isn’t rare to have roommates, but it’s obviously not necessary for most people. Obviously revenue taxation could encourage a self-sustainable commune-style living, but it hasn’t happened. Most people find it so much more convenient to purchase their necessities. If it became true to the point that apartment buildings could not compete with integrated communes, it might be good to rework the tax code.
I agree that limiting costs is a good thing. If a new widget making machine can reduce production costs, the general public benefits. We shouldn’t give a tax break to inefficient businesses because we benefit from the increased efficiency. Taxes are different. We don’t collect taxes for the purpose of making things fair, but to provide necessary services. Limiting tax liability is a zero-sum game, so savings by one party must be offset by losses from another. Therefore, the tax structure should promote efficiency over inefficiency when possible.
If Aaron can extract oil for $1 while an in-house oil extraction would cost $1.25, the general public loses out if the tax structure encourages in-house production, and the government needs to tax someone else more to make up the shortfall. To make matters worse, it may become prohibitively expensive to start any business that serves as a middle link in a supply chain. Not only does your product need to be better than what companies are already using, it needs to be enough cheaper to pay for the taxes on both ends. Any job for which inputs compose most of the costs will be in-housed if possible, even if it is far less efficient. What local company could be other than a provider of non-outsourcable services? Anything bought domestically would be taxed at each step, so everything other than retail would be off-shored.
Then perhaps you overstate the hypothetical burden on companies, as well? Just a thought.
I encourage you to run with this evidence, see where it takes you with regard to your previous hypothesis.
Not sure what this has to do with treating companies differently than people. I am not interested in fairness. Indeed, all of my detractors seem to be genuinely upset at how unfair it would be to make corporations have to pay taxes like people do.
How did we go from “taxes are zero sum” to “taxes in the way you suggest are inherently bad and we should do it some other way instead”? Historically, small businesses were always expected to be better; the theory of the firm to explain large corporations was what was puzzling. Now we’ve come the other way. If Martin is convinced that I’d be putting Wal-Mart out of business, you’re convinced I’d ensure only Wal-Mart would be in business. Someone needs to get with someone.
If people want to live in a commune, they may avoid some taxes but they give up a lot of autonomy. It appears that so far that has not been worth the sacrifice, as almost nobody lives in a self-sustaining commune. This is not true of corporations. There are some tradeoffs to growing larger, but vertically integrated companies are common.
My example was exaggerated, but it is not uncommon for several companies to be involved serially in the making of a product. It is also not uncommon for a company to purchase a product, modify or use it as a component in a larger assembly, and sell it for a small amount more. People don’t usually do this, and when they do they can write off their related expenses. Generally, a company takes the route that minimizes costs for the product they produce so they can undercut the competition without giving up profits. A revenue tax produces a very real incentive to integrate vertically even when the costs outweigh the benefits.
Compare Joe’s electronics and the Sony store:
Joe buys tv’s in bulk from Sony USA and sells them at a small percent markup that covers his operating costs. He pays taxes on what is left over as either his own income tax or corporate tax depending on how he is set up.
The Sony store sells their own tv’s for the same price Joe sells his. They make the same profit they would have selling to Joe, plus some from the retail end. They are taxed on these profits at a similar rate to Joe, and pay a little more tax on a little more profit.
Change to a revenue tax. Although Joe is doing the same business as the Sony store, the government collects twice the taxes from his operation by taxing sony on the tv and then taxing him on the marked-up tv. Sony is only taxed on the marked up tv at their store. If the markup is small, Sony and Joe together pay almost twice the amount of taxes that Sony pays for selling at their store. Sony will be able to undercut Joe by that difference even if their organization is no more efficient (or even if it is a little less efficient). Should the tax code encourage company stores at the expense of independent stores?
Or let’s do one better. Should a mortgage company pay revenue tax on the full amount of money they receive, without being able to deduct the money they lend out? If the lend 10 million and only get back 9 million because of defaults you would tax them on the 9 million?
But I think the difference between people and companies is really fundamental. Companies exist to maximize profit. I believe that there may be too many ways for companies to hide profits, and if so they should be eliminated. But there is no reason for them to create real extra costs to reduce taxes. Taxing revenue creates an artificial incentive to reduce revenue without regard to costs. People don’t try to maximize profit but to live well. When they spend less than they make it is usually to save money to spend later. Taxing an individual’s “profit” is not only difficult to calculate, but it incentivises spending over saving.
You may have heard of this phenomenon called a “family.”
If small companies aren’t adding any value, I don’t see why I should care whether they exist. If they are, then this comparison is not correct anyway.
Again, I am not super pleased with revenue taxes. I don’t like paying them, either. All these examples apply exactly to people. Please find me an example that indicates why it is good for people to pay revenue taxes but not corporations. So far, all I hear is a lot of apologetics for companies, but nothing that shows why they’re fundamentally different from people in the exact same boat, people that take risks, people that invest in the future, people that are single or people that live in an extended family unit.
And people don’t try to maximize their own welfare?
I don’t mind zero taxes on corporations. But if you’re going to apply a tax, you should do so without extra rules and hand-waiving. What’s good for the goose is good for the gander.
Interesting. I’d think it creates an incentive to be more efficient. Because all taxes (except head taxes) induce avoidance behavior, revenue taxes are no different in that regard.
So?
This is also true of corporations. Corporations are encouraged to not have a profit, lest it be taxed away. So why is that a good thing? Why does your tax code favor excessive spending and growth?
For the love of all that is holy please stop saying this. You are not paying a revenue tax, your income is not your revenue. You’ve already been shown multiple times why this is wrong and yet you’re stubbornly refusing to accept it.
If it really helps you, your income is pure profit, NOT revenue. Let’s review:
Profit = Revenue - Cost
Apple buys a bunch of plastic and electronics for $90, pays $10 to have it assembled, and sells the final product for $300.
Cost = $100
Revenue = $300
Profit = $200
There is absolutely no reason what so ever to tax them on revenue, it’s absurd.
You seem to have confused your costs of living with your costs of earning an income. If you do have legitamate expenses for doing your job THOSE ARE DEDUCTIBLE. But when the things you own are used predominantly for your life, they are not. If you have a job, your company spends money to buy the things you need. Might be a chair, desk, computer, tools, uniform. Those are THEIR costs and thus get deducted from their revenue. If you had to buy them, such as a carpentry tools, or uniforms, that would be a cost for you and you could deduct it.
If your only gripe is that you want more deductions than say that and be done with it. Having everyone deduct food, as an example, is rather pointless since all it does is reduce everyone’s taxes. A lot of the other things you mentioned like a car is only used to get you to work. If it’s part of your job it is deductible, but only so far as you use it part of the day for work, and the rest of the time for personal use. Likewise, companies cannot deduct expenses that are not related to their business.
Because we’re not comparing geese to ganders. So please stop doing it. A business making profit and you earning income are two different concepts. Nearly all of the things you’ve bitched about are tax deductible, the rest aren’t either because nobody can be bothered to add it, or because you’re twisting words like “investment” in order to fit it into your construct.
I see. We both dislike revenue taxes on companies. But we are comparing not a goose and a gander but a moose and a gander.
Profit taxes are bad for families because the vast majority of families at any wealth level don’t make any profits. Every penny is either spent or saved for later spending, both behaviors we want to encourage. Saving for retirement is already tax-advantaged in a variety of ways. The biggest exception to this is charitable giving, which is tax-deductable. How would you define a family’s profit? If you would start with revenue and allow deductions, what could or couldn’t be deducted?
Revenue taxes are less bad for families than for corporations because the revenue of a family is a far better (though far from perfect) indicator of how well off that family is. Knowing that a family takes home $100k a year (after existing deductions) tells you a lot more about that families ability to pay taxes then knowing that a company had revenues of $100k.
And erislover, before you go off on a “let’s you and him fight” I agree with emacknight given his definition of an individual’s profit vs. my constructed “family profit”.
I’m a lefty on just about every subject but gun control and nuclear power. I don’t have any particular love for corporations, but different laws for fundamentally different categories are only common sense. I don’t think corporations should be allowed to hold public office, and I don’t think humans should be allowed to deduct *all *of their expenses before paying taxes.
Yeah, I know emacknight, corporations deserve their profits, people don’t. Don’t have to shout the party line at me.
If you say so, it’s really tiring to see the same fake examples trotted out again and again.
I haven’t confused anything. The tax code is confused.
Yeah, I know things like food and housing aren’t legitimate expenses for people, only for companies. You’re absolutely right.
Right, because people don’t deserve a life. They have to earn it, begging and pleading with corporations that get to deduct rent, even though they have no need of sleep. It’s cool, people don’t count, I got it.
Totally pointless when people—who actually need to eat—do it. But corporations, well, that’s a different matter. Of course they should be able to deduct 50% of those expenses! It’s just common sense.
Only because the tax code makes it so, not because you say it is so.
Why encourage it? Families should be free to save or spend, just like corporations. We shouldn’t tax corporations on profits, either, because it only encourages spending. Why penalize them for doing good? If a business thinks they should be cash-rich because of something—say, a massive recession is coming and they don’t want their savings tied up in non-liquid capital—good for them, that’s a smart decision.
Again—I don’t want to tax people or corporations on profit. But if you’re going to allow corporations—who don’t actually need things like sleep, food, or comfort—to deduct these things, then people—who do need them—should see at least as much kindness from the tax code. (Not that I think discouraging profit is a kindness, again.)
Post hoc, ergo propter hoc. People have adjusted their lives this way, and corporations haven’t, so of course it seems like a better indicator.
No, don’t start with that bullshit. It has NOTHING to do with party line and NOTHING to do with “deserving” profits. If you want to tax their profits more, do it. But don’t pretend that profits and revenue are the same thing. If you want more taxes from companies, you can increase the taxes on their profits. Everyone’s argument with you here is that you can’t seem to understand the different between revenue and profit. It’s really frustrating and not in any way productive. And now you think it’s about party line and love of corporations?
Taxing revenue is simply the dumbest thing I’ve ever heard, it makes no sense. We tax profits, because that’s the money the company actually has. So if you want more taxes from them, increase the tax rate on the profit, don’t try to rationalize how we should take their revenue. The second dumbest thing I’ve ever heard is this attempt to call a person’s income “revenue.” It doesn’t make any sense. Words have meanings, just because you don’t understand those meanings doesn’t change the fact that they exist.
If you know of a business deduction they shouldn’t have, bitch about that. If you don’t think companies should get to deduct the cost of their water-cooler because you can’t, fine, make that argument. Falsely equating revenue, profit, and income isn’t helping your case, it makes you look like you’ve never filed taxes.
No, you really are confused, and apparently have a huge chip on your shoulder as a result. It’s very clear you’re pissed because a company can make deductions you can’t. And now you’ve dug yourself into a hole and are stubbornly refusing to climb out.
Your sarcasm isn’t helping your case. Just reinforcing that you don’t understand what’s going on. I’m sorry you can’t deduct the cost of your shiny new iPod from your taxes, but Bestbuy can. But do you really think Bestbuy is using that iPod the same way you do? What part of that still confuses you?
Yes, a grocery store and restaurant gets to deduct the cost of food, again, do you think they’re using it the same way you are? Again, what part of that confuses you?
If you simply want businesses to pay more taxes and people less, stop with the bullshit and say that. Trying to equate the two isn’t helping you at all.
What the fuck is that supposed to mean? Again, do you think a company that buys a house then sells it uses it the same way you do?
No, because basic economics, common sense, and a bunch of other people in this thread have said so. Enjoy your ignorance, but I don’t recommend continuing with this line of argument.
I don’t. I think profit-taxes are bad.
I don’t.
I could, but that would actually be dumb. I don’t want corporations to divert their profits to avoid taxes, because when corporations divert profits, they over-consume.
I didn’t think so, but if it is, that’s really unfortunate.
Except for people. Oh wait, that’s not revenue, because we toss them a standard deduction bone. LOL!
It’s money I take in, before expenses. It’s really not that hard to see the analogy.
That’s right, it pisses me off.
I don’t think you are sorry.
That isn’t what I want at all and it is fucking pathetic that you’re still going on about it.