If a corporation was not taxed then people would create companies to buy their homes, cars, anything and everything they could think of. A company does not die, you simply sell the shares, so you can pass on capital untaxed.
Instead why not tax corporations nett profit at 100%?? They would still provide the benefit of limited liability, an organised business structure, taxable deductions, wages to shareholders (equivalent of dividends) but is there any need for a company to otherwise retain profit? If more capital is needed, borrow more or get it from the shareholders which is how the corporation started in the first place.
Not so. Corporations do not distribute all their profits to stockholders, and as my cite shows they are holding vast reserves of cash, which have grown by 27% in year ending March 2010 to over $800 billion. Removing taxes would just balloon that reserve to trillions of dollars, until consumers start spending again. Demand drives markets, not supply.
Canada, for example, has a corporate tax rate almost half that of the US, and our Gini coefficient is lower. Is there an actual correlation between corporate tax rates and the Gini coefficient?
For an example of how companies would act if there wasn’t a corporate income tax, we have to look all the way to other companies in the U.S. for a comparison.
It turns out that most of you apparently have never heard of the exceptionally common pass-through entity. The most common of these being limited partnerships (LPs), limited liability companies (LLCs), limited liability partnerships (LLPs), and Subchapter S Corporations (S-Corps). As opposed to the common C-Corp, these pass-through entities pay no federal income taxes. Instead the owners (whether they be shareholders, members, unitholders) pay taxes based upon their proportionate ownership of the company at their individual income tax rates.
For example, if I own 10% of an LLC that earns $100,000, then I add $10,000 to my personal income when I am filing my taxes, and I pay at whatever my tax rate is. This happens regardless of whether that company has paid me any dividends or not.
This has several advantages.
The taxes get paid every year by the individuals at their federal income tax rate and not a dividend rate. Lower income earners will pay at their lower tax rate and higher earners will pay at their higher rate and not everyone at a one-size fits all 15% dividend rate.
There is no concept of double taxation. The company’s earnings flow through directly to owner.
Dividend policies will be based on sound business decisions and not based upon any tax effects.
Also, if you think I’m only talking about small companies, here are a few examples of big pass through entities.
Linn Energy, LLC - Publicly traded on NASDAQ with a market cap of $6.6 billion.
It really depends on what you replace it with. I believe in the Canadian example hinted to above the Corporate tax rate is lower but they have a 5% VAT.
I can’t resist making a reference to one of my favorite Gilbert and Sulivan shows Utopia Limited, whose premise is the individual as limited liability company, and ends with the observation that it is much better to be a limited monarchy than a monarchy limited.
First: there would be a LOT of very unhappy tax lawyers and accountants out of business. Many universities offer degrees in tax avoidance, and many lawyers make huge incomes from tax avoidance.
GE (one of the world’s largets corporations) employs an enormous staff of tax experts, who work very well (GE pays NO federal taxes).
Second, stock values would rise.
Third, wealthy individuals (who get the majority of dividend income) would pay more in taxes.
Eliminating corporate taxes would make the US economy more efficient, as tax lawyers and accountants would have to find more productive work.
The *big *change is that corporations would have much less incentive to issue debt, and would tend to raise more money as equity. Currently interest payments are tax-deductible and dividends are not, which creates big incentive to raise capital by borrowing.
As noted, investments in assets like machinery, payments in kind to employees, and such like are all currently tax-deductible, and so there would be no incentive to increase them if the corporate income tax was eliminated. There would *certainly *be no incentive to increase wages for employees.
There is already incentive to do this. All corporate expenses are tax deductible, few personal expenses are. If someone were to self-incorporate the could write off the cost of cars, housing and food. The reason people do not already do this is because it is illegal and would continue to be so no matter what you did with corporate tax laws.
That is only a problem because we tax different benefits at different rates. If all compensation (salary, medical, perks, etc) were taxed equally, that loophole closes.
We are in the process of eliminating corporate taxes and taxes for the wealthy. The right wing told us clearly, starving the beast was their intent. Corporate share of taxes gathered has dropped to less than 8 percent of the intake. The rich have won.
In my mind, corportate taxes are bad for two reasons:
[ul][li]The fact that corporations pay taxes is used as an argument in the granting of the rights of a natural person to the corporation. This all came out of the Supreme Court Case over taxes in California, Santa Clara County v. Southern Pacific Railroad. In the headnote of the unanimous decision was written (in the headnote) [/li]
This, as understand it, the entire basis of corporate person-hood in this country. If corporations did not pay taxes, this would remove one of the biggest arguments for these rights. This could help us get out of the position where we are, where corporations have 1st Amendment rights to free speech in elections.
[li]One of the reasons that Warren Buffet pays less taxes (as a percentage) that his secretary is that taxes on dividends and interest on investments like hedge funds is much lower than income taxes. The reason this is the case is that it has been successfully argued that taxing dividends is double taxation because the corporations already paid taxes on their profits. If we eliminate corporate profits, we can then tax dividends, the carried interest from funds, etc… as income and then Warren Buffett will pay the same or higher percentage as his secretary and cleaning lady.[/ul][/li]
We would have to also put into place a system to tax corporate benefits (company cars, etc…) as income also. This might be a pain in the ass.
For all those who say that eliminating corporate taxes will make the rich richer, what do you think about these points?
If you coupled a lowering or elimination of the corporate tax rate with taxing dividends and capital gains as ordinary income I would likely sign on. If you added legislation (or an amendment or whatever is required) that eliminated corporate campaign spending then I’d likely be an enthusiastic supporter.
And I’m still coming around to the point of view that a broader tax base is necessary, so phasing in a VAT or GST is certainly something I’d want to look at, if only the political headwinds weren’t so strong.
I don’t think I agree. The company is pulling in money and something needs to be done with it. They can (and probably should) sock some of it away for the future but the rest of it just sits around, not doing anybody any good. Giving some of that to the workers gives the company a better chance at retaining its good workers. I would think at worst that the company shareholders would want some of the money released to them (and therefore taxed).
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Out of curiosity, what’s their net? Knowing their taxes are 56% of net profit doesn’t really help. =P
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I don’t really know (he sold out his portion of the company a year or so ago for quite a bit…I don’t know how much but I assume 1/3 of the total value of the company at the time, though I know he didn’t get all of that in cash in a lump sum). I think (pure speculation) they were doing maybe $1-2 million per year in profit, of which I know their total taxes were well over half a million annually, but as I didn’t work for my dad’s company and wasn’t privy to the inner workings on more than a casual basis I couldn’t say precisely.
Again, my understanding is that my dad and his partners were paid a pretty modest annual salary (I think my dad’s was less than $150k/year for some tax reason), and that most of the profit went into various shelters (such as buying new buildings or capital assets like vehicles and such). They were endlessly talking of ways to game the system and shelter themselves and the corporation from taxes, and even then they were always complaining about how much the company was paying. I assume that all this is still going on, though my dad’s involvement has been much reduced since he retired and sold out his part of the company (he is still some sort of consultant or something, though he tries to not have them pay him in money…or something. It’s fairly complex and convoluted).
Again, my understanding is that my dad and his partners were paid a pretty modest annual salary (I think my dad’s was less than $150k/year for some tax reason), and that most of the profit went into various shelters (such as buying new buildings or capital assets like vehicles and such). They were endlessly talking of ways to game the system and shelter themselves and the corporation from taxes, and even then they were always complaining about how much the company was paying. I assume that all this is still going on, though my dad’s involvement has been much reduced since he retired and sold out his part of the company (he is still some sort of consultant or something, though he tries to not have them pay him in money…or something. It’s fairly complex and convoluted).
It must depend on the state, then. With a $2mil per year profit, around here you’d be seeing Federal/State/Local combined rates that topped out around 46% before deductions and whatnot.
A more reasonable explanation would be a difference in the definitions of profit and tax. You could pay an infinite tax rate if you are dividing actual taxes paid by GAAP profit. The simple fact is that unless you analyze the tax return, you are not going to get any sense of what the tax rate is.
