

You Can't Engineer Around Taxes - pragmatic
http://blogs.law.harvard.edu/philg/2012/06/09/you-cant-engineer-around-tax-rates/

======
andrewem
Fascinating, because the Wall Street Journal said on February 3 "Total
corporate federal taxes paid fell to 12.1% of profits earned from activities
within the U.S. in fiscal 2011, which ended Sept. 30, according to the
Congressional Budget Office. That's the lowest level since at least 1972. And
well below the 25.6% companies paid on average from 1987 to 2008." [1]

So I would argue that the title of the article is false, and in aggregate US
corporations _have_ engineered around taxes. Alternatively, you could say that
they haven't engineered around anything, and the system is operating as
designed, it's just that you can't characterize its behavior by a single
number.

EDIT: To make the point more explicit, OP says the US is losing business to
China because of China's 15% corporate tax rate, and yet that rate is higher
than the effective tax rate in the US. Perhaps there's an argument to be made
that US taxes really are higher, but the evidence cited in this article isn't
it.

[1]
[http://online.wsj.com/article/SB1000142405297020466220457719...](http://online.wsj.com/article/SB10001424052970204662204577199492233215330.html)

~~~
james4k
That effective tax rate of 12% is not by design, though. It is due to
loopholes that have been thoroughly exploited. A big one being foreign profits
are not taxed until it enters the country, so many companies now take their
income outside the US and keep it there. So, I would say the tax system was
more...hustled around than it was engineered around.

~~~
einhverfr
This should be closed. Corporations should pay US income taxes on foreign
retained earnings or other changes in equity.

~~~
james4k
Yes, but it was meant to prevent double taxation, so unfortunately it's not as
simple as just revoking it.

~~~
einhverfr
My view is just that increases in equity of firms held overseas, where the US
firm holds a controlling share (i.e. greater than 50% of voting shares) should
be subject to taxes as corporate income taxes. It also neatly avoids the
problem of double taxation on the basis of dividend payments. Dividend
payments would be deducted for overseas holdings before taxes, meaning that
the dividend payment gets taxed as income but so does the post-dividend
retained earnings. For overseas holdings of less than a controlling share it
seems to me that whatever rules exist for capital gains would apply. If that's
not enough offer a tax credit equal to foreign taxes paid.

I also think our approach to capital gains needs to be rethought. I understand
why taxing capital gains as straight income is undesirable especially where
the middle class is involved and where gains off home sales may be a factor.
However, I wonder if a better option would be to allow capital gains to be
folded into income going forward, amortized for the period of time the asset
was held. So if you live in your home for 10 years and sell it at a capital
gain of $500000, then you would add $50k to your reported income for the next
10 years following the sale. This would also privilege retirement accounts
because at some point the amortization period would exceed life expectancy.

This would neatly address the issue of the super-wealthy paying a lower tax
rate than the middle class, while continuing to favor retirement-oriented and
long-held assets.

------
rcthompson
So I think the concept here is that nations are in competition with each other
to attract businesses by undercutting each other on "price" (i.e. tax rates).
If true, does this mean that corporations, as the buyers in this "market", are
beginning to dictate prices?

I can see how some science fiction writers (Neal Stephenson comes to mind)
have extrapolated this trend to futures where corporations supplant nations
and governments as the dominant political entity.

~~~
sageikosa
To an extent, this happens withing larger nations and federated economic
blocks such as the United States and the EU. Businesses that have mobility
will move to where they have more favorable conditions. Automobile
manufacturing in the US has been shifting southward (mainly to lower labor
costs), companies incorporate in tax-favorable states such as Delaware and
Nevada, insurance companies operate as an entirely different entity in the
state of New York to avoid encumbering the rest of their business with New
York's insurance regulations.

~~~
rcthompson
Yes, that certainly occurs, but then the question becomes whether this
increased choice for companies due to globalization makes it a buyer's market,
forcing the sellers (states and countries) to lower their prices (corporate
taxes and such) to the point of eventually going bankrupt, leaving the
corporations a the dominant organizing force of civilization as some sci-fi
authors have predicted. (Obviously this would take probably hundreds of years
to happen in reality, on contrast to the sci-fi stories which are frequently
"near-future".)

------
leot
Perhaps the simplest and fairest tax scheme is:

1) a VAT (10-25%). Mandate that it be built-in to prices (c.f. pre-deduction
of income taxes)

2) an annual wealth tax (1-3% of household net worth)

(note: total federal US tax receipts are ~$2T; a 20% VAT and a 2% w.t. would
generate ~$1.1T each)

Eliminate:

\- all income taxes

\- all cap gains

\- all corporate taxation

\- all inheritance taxes.

Use laws to prevent "wealth flight". Be flexible to make sure that
gentrification doesn't lead retirees to lose their home. Strictly enforce
disclosure of assets. Use assessors and insurance data to discourage
noncompliance.

This policy incentivizes (and rewards) work, investing, and wealth creation,
and penalizes decadent leisure and letting assets lie fallow.

In any true meritocracy, the deservedly wealthy can earn far more than the
wealth tax (+ inflation) in return on capital, and any entrepreneur should be
far happier to be taxed on the end-result of having wealth than on the work
they performed to get it. The simplicity of a wealth tax consolidates and
smooths issues of income volatility, depreciation, carry-overs, etc. etc.

~~~
meric
I don't think that is fair.

Inheritance tax should be 100%. Why should a person be rich just because their
parents were rich? What about the people without rich parents?

How about:

The only taxes are:

1) VAT X%

2) 100% inheritance tax.

3) No capital or dividend tax.

4) A "basic salary" of a fixed X dollars to every individual.

5) Inflation of 1-3% a year via increase in monetary supply. (This is the
wealth tax).

1\. X depends on how much energy consumed for product/service; this is the
carbon tax.

2\. If you don't want to give all your money to the government when you die -
just donate it to a charity not related to any of your relatives. Your
children will not be left with nothing. See 4.

3\. Encourages people to work and save for passive income for a better than
minimum living conditions, as there will not always be jobs available.

4\. The salary should be the bare minimum to live on. This takes care of
social welfare. It'll be needed as technology increases and unskilled people
have no ability to find jobs.

~~~
einhverfr
I am against inheritance taxes because they privilege corporate ownership
above individual ownership. Corporations never die, so they never have to pay
these taxes. Small family farmers OTOH... well they will be extinct under such
a plan within a generation or two.

What I'd like to see is a 100% exemption from inheritance taxes for productive
land and property (family owned businesses, business assets, office space for
family or individually owned business and land contained thereon, farmland,
etc), and a tax on income derived from renting out land and housing (this is
designed to make it harder to make money from buying up housing to rent, and
thus tilting the balance towards home ownership rather than renting). It would
also help tilt the balance from corporate ownership to individual ownership of
productive assets.

~~~
_delirium
Instead of complex rules about what assets are exempt, I'd favor just a
significant blanket exemption sufficient to cover small-time farmers and small
businessmen. Say, no inheritance tax on the first $10m in assets, a small rate
on $10m-$100m, and quite high rates thereafter. And eliminate all these
shenanigans with trusts.

~~~
einhverfr
My rule is simple. If you can show that the property is tied to producing
things either for a sole proprietorship or a family-run business (in any
form), then it's exempt. I don't think the burden of proof needs to be very
high. The key thing though is that mere rental businesses would not be. Land,
capital, and means of production employed in production would be.

------
robomartin
This is the part that really confuses me. You only have to run a business
--any business-- for a few quarters to understand the negative impact that
taxation and over-regulation can have on the decisions you make, the risks you
take, your ability to compete and how quickly you can grow.

You really don't need a study from Harvard to get data on this. If you don't
get it because of a lack of business experience, go talk to your local high-
school-educated baker, mechanic or gas-station owner for a quick round-down.

The evidence is overwhelming. Yet, we keep dicking around and supporting
policies, politicians and people who somehow think they can violate the laws
of physics and make things better by shafting everyone with more taxes.

When are we going to learn and act? When it is too late?

I owned a manufacturing business for nearly a decade. We designed and
assembled electronics, embedded systems, FPGA's, lots of code. Hell, we even
had a full-blown CNC shop with the latest equipment. As an engineer it was fun
to go to the office. As a business person, it was painful.

Example: One day this guy from the County of Los Angeles Business Property Tax
department shows up in our industrial area going from door to door. The guy
comes into our office and informs us that he was there to confirm how much we
owned in business property taxes. I told him that we leased the 10,000 square
foot building. We didn't own it. He then says: "Do you own desks, computers,
tools, machinery, fax machines, chairs...?". Sure. "Well, you have to pay the
County of L.A. taxes on these and other items". The only thing that I could
say to him was "You have to be fucking joking! I have to pay you taxes on my
desks and chairs, forever? Why?"

Think I am making this up? Here:

<http://lacountypropertytax.com/portal/contactus/ppa.aspx>

Being in manufacturing during the last several years has been a very painful
experience. The supply chain is royally fucked. A lot of what you have to
source you just can't get in the US any more. More an more suppliers are
closing their doors every day. It's painful, difficult and you are getting
killed by product coming from China.

I won't go into the details that led to my decision to abandon
hardware/electronics manufacturing. I, ultimately, decided that it was a far
better idea to transform into a software-only enterprise and move away from
making real physical goods.

Because what we made involved everything from electronics, FPGA's, embedded,
web and workstation software it really wasn't too difficult to shed the
hardware portion of things and stick to software. I pains me because I love
making things, but we, in the US, have somehow managed to FUBAR our system to
such an extent that people like me have to say "fuck it" and move on.

If you continue voting for policies that promote higher taxation and
regulation, more government involvement and government programs you are going
to get exactly the country you are voting for: A third world mess with rats
jumping ship faster than humans. Mark my words. Think about it.

What cracks me up is that you guys are arguing percentages and technicalities.
Coming from my side of the table reading this would be funny if it wasn't so
tragic. Go make something. Then come back and re-read your comments to see
what they sound like.

~~~
codehotter
I do not know enough to disagree with you on your main point, but I do have a
few nits.

 _You really don't need a study from Harvard to get data on this. If you don't
get it because of a lack of business experience, go talk to your local high-
school-educated baker, mechanic or gas-station owner for a quick round-down._

Talking to your local high-school-educated baker is not science. We
confidently believe a great deal of things that are untrue, and getting it
confirmed with science is valuable. In hindsight, it's usually easy to be
unsurprised by a scientific result.

Can you imagine possible circumstances that would lead you to confidently
believe taxation and regulation to be the cause of many businesses' failure
even if it were untrue?

 _The evidence is overwhelming. Yet, we keep dicking around and supporting
policies, politicians and people who somehow think they can violate the laws
of physics and make things better by shafting everyone with more taxes._

I would love to believe this, since that would be a good argument to have less
taxes. However, as your only evidence, you offer an example of absurd property
taxation on desks and chairs.

Such taxes cost a business in legal, accounting, and administration fees, in
addition to the tax itself, and it costs tax money to operate the government
bureau to oversee all of this. All this looks to be a blatant example of
government inefficiency.

However, every country in the world, at least every democracy, suffers from
such problems. At one point or another, the politicians have to trade
political capital to push for the policies really important to them, their
funders and their voter base, and less than ideal compromises do get made.

I believe that taxation is inherently inefficient and I would like to see as
little of it as possible. And I also believe that some functions of government
are useful to society at large. A balance must be struck. This balance will
include inefficiencies that come with running a political society.

Given that a balance must be struck, it is possible that the optimal level of
taxation would be higher than now. I do not know how to judge it - I have no
basis for that. I would like to see the evidence that shows where that balance
must lie. I find it otherwise unsurprising to see business owners arguing for
lower corporate tax.

~~~
Domenic_S
> Talking to your local high-school-educated baker is not science. We
> confidently believe a great deal of things that are untrue, and getting it
> confirmed with science is valuable. In hindsight, it's usually easy to be
> unsurprised by a scientific result.

He's not talking about science per se, but the insane level of rules and
regulations you've got to put up with as a business owner -- especially in
California. In other words, my interpretation of the GP's remark is that you
can get at least an order of magnitude measurement of the pain-in-the-ass/cost
factor, which is likely several orders of magnitude higher than what you think
it is if you haven't owned a business that has enough revenue to put you on
the radar.

The bias on HN is probably more towards software (where we can all 1099 each
other) and not so much towards manufacturing (which is a major compliance
pain). When you're dealing with manufacturing, things are different. You're
dealing the EDD, FTB, INS and IRS (from an employee compliance standpoint),
then you're also dealing with OSHA and the EPA and all their arcane rules and
enforcers that hit you with $15k fines if you use dishsoap incorrectly. Then,
on top of all of that you're paying a 35% tax rate.

Honestly, I'm surprised manufacturing has lasted as long as it has in the US.

> Given that a balance must be struck, it is possible that the optimal level
> of taxation would be higher than now. I do not know how to judge it - I have
> no basis for that. I would like to see the evidence that shows where that
> balance must lie.

Well, you could read the article :) We have a control group (the US) and the
test groups (Germany, China) are far outperforming us.

~~~
_delirium
Germany is interesting as a control, because its overall tax rates are _much_
higher than in the U.S.--- 41% of GDP for Germany, versus only 27% of GDP (at
all levels of government) for the USA. But its corporate tax rate is lower,
because it gets most of its tax revenue from personal income taxes and VAT.

If we wanted the American tax system to become like Germany's, the steps would
look roughly like: 1. significantly lower corporate tax rates; 2. nearly
double personal income tax rates; 3. institute a federal VAT.

But you don't end up with the German economic model if you do only #1...

~~~
dan00
"1. significantly lower corporate tax rates"

This harmed the cities in Germany a lot and increased their debt.

It's kind of a contradiction if Germany should be the economic guide, but it's
cities can't pay for their public baths anymore.

------
rdl
While I'd say I'm quite libertarian, I don't see how this affects a startup
all that much, at least directly.

1) Corporate income tax is a (slightly progressive) tax on profits. Most tech
startups aren't immediately profitable (nor are most businesses), and even
then, profits are relatively low as a percentage of total revenue, especially
early on.

2) Higher taxes do prevent capital accumulation/formation, but that's more an
effect of personal income taxes. A rich consultant/engineer/etc. paying 40%
income taxes (state+fed) plus inflated cost of living, making $150k/yr, won't
realistically be able to save the $100k/yr he would potentially otherwise be
able to. Being able to use your work to accumulate capital, then invest that
capital in starting a business, is key for income mobility. At least in tech
the cost in capital of starting new businesses is falling dramatically, so
$5-10k in savings to the business, plus a low personal burn rate, is probably
enough.

3) Capital gains rates are generally low enough that they don't substantially
disincent investment.

4) The overseas earnings repatriation issue is an issue, but most large and
international US corporations are sitting on huge amounts of capital both
inside AND outside the US. The low interest rate environment makes issuing US
bonds to fund US operations, while sitting on huge amounts of international
pre-tax cash, also an option.

In short, taxes are an issue, but definitely not the low hanging fruit. There
are many regulatory issues to fix first, and systemic problems with the
economy (it's absurd that we have 10-40% unemployment and underemployment,
while at the same time we can't hire anywhere near enough qualified engineers
-- THAT is the big structural defect which 100% of the society's effort should
be going to fix.)

------
fidotron
The same was true of Raspberry Pi, in that the complete item got taxed once if
made completely in China, whereas to assemble it in the UK would've resulted
in them being taxed more on separate components pushing the price up.

It really is utterly stupid.

~~~
rprasad
VAT is imposed only once, albeit at multiple levels in smaller amounts. In
effect, the VAT is a more hasslesome sales/services tax.

Imported items are subject to higher VAT, but usually only once...if
importation was a way to avoid VAT, the EU would not have any manufacturing
facilities at all because it would always be cheaper to manufacture in Asia.

~~~
DanBC
VAT is different to import duties. There will be a customs duty to pay on
imported goods over a certain value (as well as VAT (chargeable to the end
user, rather than each person in the chain.))

VAT (and import VAT) are easy enough - there's a few different rates so as
long as you're careful describing the goods it's okay.

But customs duty is complex. Each item has a commodity code, and that code has
its rate of duty. There are 14,000 different commodity codes.

(<http://www.hmrc.gov.uk/customs/tax-and-duty.htm>)

~~~
tonyedgecombe
I wouldn't say VAT is that easy, for instance I'm in the UK but if I sell
enough into Germany then I'm obliged to register for VAT in Germany, and the
same again for each of the other EU states.

Then there is additional paperwork to fill for every EU sale, each needs the
customers VAT number and if it is wrong the paperwork gets rejected.

~~~
rprasad
VAT is "easy" in the sense that it is easy to figure out, but it is difficult
in the sense that the administrative burdensome exceeds the burden associated
with a sales tax by many orders of magnitude.

------
rprasad
The linked article is inaccurate. While the US has the highest _base_
corporate tax rate, it has the lowest _effective_ corporate tax rate of any
major nation.

The US favors a deduction/credit-based system for lowering taxes.
Manufacturing and research deductions/credits are especially generous.
Ultimately, service-based businesses pay the highest effective rates, but few
_properly advised_ service businesses pay a 35% effective rate. (For example,
choose a tax entity other than a corporation unless you have a compelling
reason for being a corporation.)

It is very possible to engineer around taxes. This is what I and others in my
field do for a living.

~~~
emiliobumachar
Nothing against your chosen profession, but a system in which businesses need
to worry about planning and optimising their taxes rather than focusing on
their weath-creating activities is flawed.

BTW I live in Brazil, where we have big problems with both the tax rates and
the byzantine complexity. Companies spend thousands of man-hours doing taxes.

Again, once you are in such a system, specializing in giving tax advice is a
decent, honest way to make a living. But it's a bad system to begin with.

I think the article's point (maybe poorly expressed) is that having a bad tax
system cripples the economy so much, that it _has_ to be addressed in any
serious effort to increase competitiveness. _That's_ what can't be engineered
around.

~~~
rprasad
I could say the same thing about the need to select proper platforms and
technologies for scaling a website or SaaS (i.e,. AWS, database choice, even
language choice)..."A system in which people need to worry about planning and
optimizing their technology platform for future expectations rather than just
building something that works from the ge-go is flawed."

But that's not the way tech works. And that's not the way tax works either. If
you are a small fry, the tax burden (or savings) will not be large enough to
matter (because as a corporation, you get taxed on _net_ income, i.e.,
profits). Affording a tax lawyer to "game" the tax system won't be necessary
until you are at the scale where you are already pulling in serious profits.

Ultimately, people tend to vastly overestimate (or underestimate) the
difficulty of activities outside of their profession.

~~~
tolmasky
I don't necessarily disagree with your point, but your analogy is severely
flawed. Nothing forces taxes to be complicated, its not some sort of inherent
property of taxes -- and in fact regardless of where people stand on whether
taxes should be higher or lower, I rarely find someone who disagrees that
taxes are too _complicated_ in the US. The people who seem happiest with the
status quo are precisely the ones whose employment relies on it (no offense).

I'm really surprised you'd then compare this situation to choosing between
different available techs: it has nothing in common except "being hard". This
is a legitimate expense from a natural consequence of invention: there are
going to be several options with different trade-offs. You act as if Amazon is
doing you a disservice by providing you with another option. Unlike the tax
world, if there was a way to simplify this choice, everyone in the industry
would immediately jump on board. You don't have to take my word for it, its
the pattern we've been seeing from the beginning of technology. Making and
scaling website today is vastly simpler than 10, 15, and 20 years ago. Can you
say the same for taxes? Or have taxes become increasingly _harder_ to deal
with as time progresses? Many aspects of running a website that required
experts yesterday are completely automated today.

In other words, the cost of "choosing a platform" is justified because there
is no workaround and it is not an artificial position that you have been
placed in. On the other hand, you have not proven that there is no alternative
to a convoluted tax system that requires tax experts -- and furthermore it is
not even clear what the benefits of a convoluted tax system even _are_. BTW, I
am not taking a position on this, I am simply pointing out that that is the
correct attack vector: explaining why this system that requires tax experts is
necessary vs saying "Sure it is hard, but many other things are also hard."

EDIT: Added last sentence.

~~~
enjo
_Nothing forces taxes to be complicated, its not some sort of inherent
property of taxes --_

I think it very well might be. At least with how everyone actually utilize
taxes. After all, government routinely utilize taxes (or rebates) as
incentives to create desired outcomes.

You want more businesses moving into your area? Change the taxes. You want
more home-owners? Change the taxes. You want more money for education? Change
the taxes.

That's how you arrive at complex tax codes. It goes well beyond income taxes
as well. You want a simple income tax? Fine, but I'm going to use sales taxes,
road tolls, and a whole host of other mechanisms to get the desired behavior.

So it may not be an inherent property of taxes, but I'm not sure those things
can ever really be separated.

~~~
saraid216
Since we're drawing weird analogies with technology platforms anyways,

Refactor refactor refactor. Sure, tech companies have the grand luxury of
having fewer stakeholders to be accountable to, but surely it's possible to
refactor, refine, and reduce the tax code every so often?

~~~
einhverfr
The problem is getting the politicians to give up their favorite features in
the process of removing these bugs. ;-)

~~~
saraid216
Indeed.

To drag the analogy further, the politicians are being engineers of the tax
code when they should really be its product owners. Should politicians really
be responsible for the minutiae of how many numbers to put where, or should
they simply give higher-level directives, such as "incentivize alternative
energy"?

------
adventureful
The 12.1% effective tax rate being claimed in multiple posts here is a
temporary number due to a one time tax break for 2010 and 2011 that will
expire. After which the effective US corporate tax rate will skyrocket back up
to around 25% to 26% or so. And it's worth noting, it's a front loaded
expensing, versus expensing over a period of years, so that 12.1% is
completely deceiving.

"In 2010 and 2011, companies were allowed to deduct the full cost of the
purchases of new equipment, while normally these costs would be expensed over
several years. In 2012, this deduction will go down to 50% and be eliminated
altogether thereafter, causing the effective tax rate to return to roughly the
25.6% average effective tax rate corporations paid since the late 1980s,
according to CBO forecasts."

[http://business.time.com/2012/02/06/the-corporate-tax-
rate-i...](http://business.time.com/2012/02/06/the-corporate-tax-rate-is-at-
its-lowest-in-decades-is-big-business-paying-its-fair-share/)

~~~
adgar
My father started a small roofing business in 1980, selling it just recently
to an employee; that tax break was absolutely crucial to getting work going
again. Luckily, my father's now-sold business had the bankroll to take full
advantage of it. The credit others needed wasn't trivial to come by.

~~~
adventureful
Just to clarify, I wasn't arguing for or against the expensing tax adjustment
break (nor whether it was a benefit to the economy). I was pointing out that
the claimed 12.1% effective tax rate isn't an accurate representation of
corporate taxation in the US.

~~~
adgar
Yep, I know, just chiming in with some relevant experience.

