Is there a reason (honest question) why we have corporate taxes in the first place? Why not tax the money when it passes from the corporation to a physical person? Wouldn't that simplify things in many respects, and make evasion more difficult? And be good for American business?
Someone asked this question last week on a similar thread; the answer I gave there is still relevant so I'm just going to copy and paste it here:
Compounding investment returns. If I loan you $1000 at 5% interest, I have to report $50/year of interest income on my tax return. Since I pay approximately 40% income tax (federal + provincial), I have an after-tax return of 3% compounding annually. If you abolish corporate income taxes, then I could have my company loan you the $1000 and receive the interest; it would then compound at 5% per year, and I would only pay income tax when the money is paid out to me as a dividend. In effect, you would be turning corporations into tax shelters.
Now, this isn't absolutely insurmountable; in fact, Canada already has different tax rates for "active business income" vs. investment income, and theoretically you could have a 0% rate on "active business income" and a 40% corporate tax rate on investment income (which would then create non-taxable dividends when finally paid out to individuals). But you'd still have the complication that "retain profits" produces a different taxation result than "pay out profits as dividends, then raise more funding a few years later".
"If you abolish corporate income taxes, then I could have my company loan you the $1000 and receive the interest; it would then compound at 5% per year, and I would only pay income tax when the money is paid out to me as a dividend. In effect, you would be turning corporations into tax shelters."
Can you explain what the problem is? I mean you use the term "tax-shelter" and we associate that with something bad. But what's wrong with only taxing when you actually get access to the money you made?
You can't even sell the company without having to pay taxes. The money seems 100% unusable till you pay taxes on it. I guess you can reinvest it into something else without cashing out, but that hardly seems like a bad thing
Well they aren't really rich if they can't spend the money haha
But I see your point: Though it would seem that the way people currently get paid with stock options - where you pay tax when you "cash out" - is effectively equivalent (except it's even more regressive because the capital gains tax is a joke).
We really shouldn't. I am a liberal in most ways, but corporate income taxes are a bad idea (in my opinion). Taxes really serve two purposes; to raise revenue and to encourage/discourage behavior. Corporate income taxes really do a bad job of the latter; if we only taxed the money when it is taken out as profit, we would do a better job of encouraging behavior we want.
I'm pretty sure you just described an S Corp, which isn't subject to corporate taxes (they "pass through" to the owners personal returns). Many small businesses already do this.
But as with anything, there are pros and cons to S Corp vs C Corp vs LLC.
Here is a good explanation why corporations are taxable:
Corporations are participants of the economy and their profits depend on tax-financed public goods: healthy and educated workforces; good infrastructure; publicly enforced respect for contracts and property rights, and so on. When corporations avoid or evade tax, legally or illegally, they free ride on the backs of the rest of us. Stop taxing them, and you savagely undermine political community.
Corporations hold onto huge amounts of money, and transfer huge amounts among themselves. If that value, income, and spending were never taxed, it would effectively hide all that money from the tax system.
The money has to cross the corporate border at some point. Companies don't make money just for the fun of it, they do it because the people who control them want money to spend on things like astronomically expensive watches [1], yachts, private islands, sandwiches, etc.
Whatever they buy still isn't as much money as the company is holding on to. Apple is sitting on $150 billion in cash, none of which would have been taxed by now.
As an example, Apple has $100 billion parked in offshore subsidiaries that it refuses to repatriate to the US because the full 35% tax rate would apply. If the US were more tax competitive, this sort of thing wouldn't be happening.
Use/VAT taxes are considered regressive and therefore hurtful, bad, and evil with respect towards lower classes. The great irony is that by avoiding such taxes it hurts the poor and enriches the rich. Tragic.
The tax rate could be 5% or 15% and they would do the same thing. (Edit: If the US lowered there tax rate to 5% ireland would lower theirs to below that to keep the extra income flowing.) The advantage is they can gain compound interest and or cover overseas losses with money that would otherwise be taxed so there is no reason no to do it.
Add to that the occasional tax holiday and companies would be stupid to bring money to the US they don't have to because keeping money overseas is one of the easiest tax loopholes to exploit.
Much of Apple's cash is stashed in Ireland, where the corporate income tax rate is 12.5%. If it were 5% in the US, no doubt that money would return quickly.
> Much of Apple's cash is stashed in Ireland, where the corporate income tax rate is 12.5%. If it were 5% in the US, no doubt that money would return quickly.
Apple did not pay 12.5% tax on the cash that is now in Ireland. They used a loophole known as the double Irish with a Dutch sandwich to avoid taxes in both Ireland and the Netherlands.
Note that the US offers a foreign tax credit. Every dollar of taxes paid overseas is credited against US tax owed when the cash is repatriated. Thus, you wouldn't have to reduce US corporate tax to 5%, just to 12.5%.
Any company that had actually paid 12.5% Irish tax would be able to repatriate its cash tax-free. Except that these companies have actually paid 0% tax, so this wouldn't work.
If it was more profitable to keep the money here rather than moving it overseas, they would keep it here.
They're using legal means to reduce their tax liability. I get that they're big "evil" corporations so we should hate them, but how is this any different than what everyone does on their tax returns except on a larger scale?
Would it? Unless I missed it, the article doesn't say where Apple's tax haven(s) is/are, but if it's a place like Cayman where the rate is zero, well...you can't compete with zero.
This is what happens when you raise taxes to absurd levels. People leave -- especially the rich. If you have a company that provides products or services globally (instead of a business that requires a physical presence such as WalMart or a gas station), what incentive do you have to be based in America?
Denmark (it's in my profile). Our overall taxes are pretty high, though our corporate taxes aren't particularly high. Partly depends on what you count as corporate taxes, since there is a large VAT, large energy taxes, large taxes on corporate vehicle registration, etc. But a good portion is via personal income tax.
That is the wrong question, the correct question is "Given the state of the world, how can I minimize tax payments?"
You see that question only works if the costs salaries of the accountants, the cost of a 'presence' in some foreign country, and other rules is more than offset by the savings in tax rate. It is easy to budget since its an annual thing, plan A we pay $X, plan B we pay $Y, select plan in (A, B) where the tax is lowest.
What it means, in the absence of some pretty crazy laws, is that there is a ceiling on taxes.
US Corporate tax rates are. So big companies with options do all sorts of insane dancing to avoid/reduce them, which leads to lower actual collections rates.
> This is what happens when you raise taxes to absurd levels
Wouldn't any amount above 0% be reason for a company to seek tax havens? With revenues in the billions, it seems like even a 1% tax rate would be more expensive than the cost of relocating that money.
As an American, this looks like a short list of companies to boycott. I don't want anything to do with companies trying to get out of paying their fair share of taxes in the US.
I never understood this. They're trying to pay less tax - they're doing it legally & as far as we know not "evading" anything.
You do the same thing on your tax returns to pay as little tax as possible (or get as big a refund as possible). Why is it worse when a corporation does it?
I don't evade taxes by setting up shell persons in various companies. I would look down on someone who did.
Actually I do know someone who maintains a fake residence for tax purposes, and I do look down on her (a wealthy heiress who didn't want to pay inheritance taxes).
No, I'm not implying they're doing something illegal, merely slimy. I would rather people didn't try to avoid paying their fair share to the society they live in. And I won't give such people my business, if I know about it and can help it. They can play the game, and suffering opprobrium for their actions is a valid rule of the game. If you're talking about only what's legal, it's legal for me to blacklist them, blacklist their employees socially, and to encourage others to blacklist them too.
In the context of U.S. taxes, 'evasion' and related words have a loaded meaning, where evasion is the word for illegal activities and avoidance is the word for legal activities.
"Avoidance" is not the word used by normal people. That's a word only used by tax-evasion consultants (and their clients) to euphemistically refer to what they're doing, which is gaming loopholes (many of which they have themselves lobbied to have added to the laws).
Sure, it implies they're scum! That was intended. I'm not going to correct it by using some newspeak bullshit that no regular humans use, like "tax avoidance". This isn't a corporate prospectus! I have never heard a regular person use the term "tax avoidance strategies", only consultants who are trying to differentiate their brand of tax-evasion (technically legal!) from the other brand of tax-evasion.
By choosing your words poorly, you actually are implying that they're doing something illegal. It could be useful to read through the following articles:
The 2nd article you link specifically says it's just a euphemism that was coined by tax advisers to avoid the "pejorative term tax evasion". In common usage, "tax evasion" refers to attempts to evade taxes, as the English words imply. All of those should be illegal, but some aren't, in part because the corrupt motherfuckers who coined the phrase "tax avoidance" have lobbied, and in some cases paid off, legislators to create loopholes.
I'm not going to defer to a bunch of corrupt scumbags coining newspeak when I choose how to use the English language.
In personal income tax situation it would be an equivalent of paying a fee (bribe) to some 80 year old guy to sign him on as a dependent to claim a deduction your our income tax.
If a company is publicly traded, management is legally obligated to act in the best interest of stock holders and do whatever they can to maximize profits/ minimize tax obligations.
It seems to me that short-term performance incentives are the problem here, not the idea that management should be maximizing shareholder value.
IMO, when they focus on the short term, Management will make decisions that may not be in the best interest of the firm/shareholders in the long term. It is in their individual best interest to prop up Quarterly numbers, etc. to help their stock options/bonus.
These are official tax rates, not effective tax rates, which makes the whole thing disingenuous. AFAIK, the effective tax rate for the US puts it near the very bottom, just above tax havens.
In addition, most of those other countries charge VAT.
The whole point of VAT is to reduce tax evasion by charging tax at every step of the production chain. Thus, countries with VAT tend to have lower corporate tax rates, because they have replaced part of the corporate tax with VAT.
American corporate + sales tax rates are substantially lower than the equivalent corporate + VAT rates in most developed countries.
I think it's also the only other country in the world besides Eritrea that still forces citizens to pay tax based on citizenship rather than residence.
As it gets easier & easier for smaller companies & individuals to setup international businesses, I think this is going to happen on a major scale outside of mega-corporations.
About 10K of my income is from resold web hosting - the numbers actually pan out for me to open a business in Ireland and keep it open for about $1500 per year + $1000 in IE taxes to duck about $3500 in US taxes. If I only spend the profits outside of the US (in the form of vacations), it would work.
Assuming you are a US citizen, you're taxed on your worldwide income. So, you have to figure a way to make that trip abroad not a vacation (personally taxable fringe benefit).
It would be perfectly legal for your Irish company to hold a board meeting in Ireland and compensate the ordinary and reasonable expenses for attending. Clearly, that would not be a vacation. ;)
