

The Paradox of Corporate Taxes - locopati
http://www.nytimes.com/2011/02/02/business/economy/02leonhardt.html

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patio11
Corporations don't pay taxes any more than the government pays for healthcare:
people pay for both. Every dollar paid in taxes is a dollar taken from a real,
flesh-and-blood human being. (And, of course, transferred to a real human
being. The California corporate tax, for example, is a wealth transfer from
anyone beneficially owning a Californian corporation to Californian public
employees, who are - far and away - the largest beneficiary of Californian
taxes.)

~~~
gjm11
Are those Californian public employees paid for doing nothing? If not, then
the California corporate tax is a "wealth transfer" to the same extent as any
salary payment is a "wealth transfer".

Those public employees are doing things like teaching schoolkids and
collecting the garbage and making roads. If they aren't ludicrously overpaid
(I've heard stories suggesting that some public employees are ludicrously
overpaid, but what's the situation in general?) then what's actually happening
is that corporate taxes are transferring ... well, maybe "wealth" sounds too
specifically like money, so let's say "well-being" or "welfare" or something
... from beneficial owners of Californian corporations, to schoolkids and
homeowners and road users and so forth.

Maybe that's a good thing, maybe not, but it's not quite the same as just
taking business-owners' money and handing it to public employees.

(Much the largest expenditure in the California state budget is education. I
think a high-school math teacher in California earns about $60k/year. Doesn't
sound lavishly overpaid to me.)

~~~
joeag
Unfortunately there are also fireman, police, city managers, political
assistants, etc. who make $150,000 to $450,000 a year, and will retire with
90% of that salary per year for LIFE (I kid you not). That's where all CA
taxes (corporate, property, sales, you name it) will end up going. The reason
why is that the unions control lots of voters, and politicians that wanted to
get elected became beholden to those unions and gave them contracts 20 years
ago that the state can't afford.

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noblethrasher
The paradox, as I see it, is that taxation is both the government's primary
means of generating revenue and of influencing behavior.

When the government wants to use taxation to effect a certain desired behavior
it offers 'tax credits' and 'deductions'; but when politically disfavored
groups use them they're exploiting 'loopholes'.

Yet, a group's political favor is often very much a function of total revenue
(or rather the difference between total revenue and the cost of whatever
initiatives the government wants to pursue).

~~~
austinB
Many people fail to recognize the social engineering aspect to taxes.

~~~
gaius
If you tax something you get less of it, if you subsidize it you get more of
it - whatever _it_ is. Which has the obvious consequence that if you give
people money who make bad decisions with their lives (e.g. getting addicted to
drugs) then you will get more people making those decisions. That is why
welfare is profoundly evil.

~~~
Joakal
Welfare seems to be keeping USA from following Egypt with over 35 million
Americans on food stamps [0]. Would you still call it profoundly evil?

[0] [http://www.usatoday.com/news/health/2009-11-02-food-
stamps_N...](http://www.usatoday.com/news/health/2009-11-02-food-stamps_N.htm)

~~~
borism
I'm pretty sure he'd like revolution in USA, Egypt-style (except americans do
have guns).

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quant18
The issue the NYT is complaining about is: the US prefers to use "place of
incorporation" instead of "place of effective management" in deciding where a
company should be taxed. Of course this should hardly be a surprise, when
Delaware alone is "home" to tens of thousands of companies owned by non-
resident aliens.

For those who are curious or suffering from insomnia, here's the actual laws
that make Carnival mostly tax-exempt: Internal Revenue Code Sec. 883:

 _(a) The following items shall not be included in gross income of a foreign
corporation, and shall be exempt from taxation under this subtitle: (1) Ships
operated by certain foreign corporations: Gross income derived by a
corporation organized in a foreign country from the international operation of
a ship or ships if such foreign country grants an equivalent exemption to
corporations organized in the United States._
[http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_0...](http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000883
----000-.html)

"Foreign corporation" is defined in Sec. 7701:

 _(4) Domestic: The term “domestic” when applied to a corporation or
partnership means created or organized in the United States or under the law
of the United States or of any State unless, in the case of a partnership, the
Secretary provides otherwise by regulations. (5) Foreign: The term “foreign”
when applied to a corporation or partnership means a corporation or
partnership which is not domestic._
[http://www.law.cornell.edu/uscode/26/usc_sec_26_00007701----...](http://www.law.cornell.edu/uscode/26/usc_sec_26_00007701
----000-.html)

In some countries, the laws and treaties care about the "place of effective
management" of a corporation in deciding where it is to be taxed. That would
catch out Carnival. For example, the OECD model tax convention says: _Profits
from the operation of ships or aircraft in international traffic shall be
taxable only in the Contracting State in which the place of effective
management of the enterprise is located_
[http://browse.oecdbookshop.org/oecd/pdfs/browseit/2310081E.P...](http://browse.oecdbookshop.org/oecd/pdfs/browseit/2310081E.PDF)

However, the US uses the following in most of its treaties instead: _Profits
of an enterprise of a Contracting State from the operation in international
traffic of ships or aircraft shall be taxable only in that State._ And, there
is no double-taxation treaty between the US and Panama in the first place,
only a tax information exchange agreement.

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jonburs
"Instead, airlines sometimes buy more planes than they really need. Energy
companies drill more holes. Drug companies conduct research with only marginal
prospects of success."

I wish the article in some way backed up these assertions. While corporation
(and wealthy individuals, too) may perform complex machinations to avoid taxes
(e.g., the double Dutch Irish jig, or whatever its real name is) they'd only
do so if in the end the maneuvering has a net financial benefit. Even with tax
benefits idle capital resources (planes you don't need) or other wasted
expenditures aren't good business.

There are also wider-ranging benefits to the forms of investment granted tax
benefits. Capital expenditures presumably benefit other companies, and
therefore other (hopefully local) workers. Certainly that would be the case
for a purchase of Boeing planes (and probably even an Airbus, given the global
nature of the aerospace component industry). Energy companies drilling holes
and drug company research involves paying lots of salary (which means payroll
taxes, income taxes, and, well, economic growth).

What could be construed as the true deadweight loss is the time and effort
expended by tax attorneys and accountants...

~~~
lionhearted
> Energy companies drilling holes and drug company research involves paying
> lots of salary (which means payroll taxes, income taxes, and, well, economic
> growth).

It's a fallacy to look at the salary for non-productive endeavors without
considering where it'd go otherwise. See:

<http://en.wikipedia.org/wiki/Parable_of_the_broken_window>

~~~
gaius
Yeah, but the context here is how much net tax revenue is raised. If SouthWest
buys more airliners than Boeing hires more employees who pay more income tax.
Reaganomics proved that cutting taxes rates _increased_ tax revenue overall -
because it raised economic activity across the board.

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nickpp
Would a simpler, flat tax system be better?

Because the progressive one always has special cases: tax is 30% for under
100k profit, then it becomes 40% but you don't pay tax if you reinvest in
factories or if you put it into your retirement account, or... etc. Where
there are complex rules there is abuse.

How about let's just say 20% tax for everybody on any money earned (profit).
No exceptions for the poor, no extra taxes for the rich. Would that work? I
think it would at least prevent abuse and increase government revenue...

~~~
Cadsby
Such a system would be simpler, but morally questionable.

~~~
nickpp
Really? It seemed quite fair to me, everybody paying the exact same share of
his pie to Uncle Sam.

I find much more morally questionable that today some pay up to 50% while
others under 10%...

~~~
borism
the problem is that it's very hard to design a true flat tax system.

corporations have to make deductions, but different industries need to deduct
different levels of expenses. thus you still end up with (somewhat)
progressive tax system:

<http://en.wikipedia.org/wiki/Flat_tax#Avoiding_deductions>

another issue which I think previous poster raises, is that it might seem
unfair that person below poverty line pays the same tax rate as billionaire.
So here in Estonia we make basic income (something that will keep you just
above poverty line) tax-free (also everyone pays the same VAT on purchased
goods, but obviously poor pay proportionally more in VAT than rich). But that
means that it's not a true flat tax system (even though politicians like to
claim it is)! Then the question becomes why shouldn't we have progressive tax
if we don't have true flat tax system in the first place?

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karzeem
Even when a company pays little to no tax, the government does get itself a
pretty good taste of the profits via the dividend tax.

~~~
DarkShikari
Good thing all big companies, such as, say, Google, pay plenty of dividends,
right?

~~~
jwang815
Nope, Google has no paid out a single dividend. As long as Google thinks it
can use the money to reinvest in the company and give investors a nice return
from capital gains

~~~
DarkShikari
_Nope, Google has no paid out a single dividend._

That was the joke.

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iwwr
Remember that payroll and social security taxes, even if paid by the employee,
still represent an indirect tax to the employer. The fact that the employee or
the employer has to pay makes little difference.

