
We Don't Need A Corporate Income Tax - cogware
http://www.bloombergview.com/articles/2014-07-16/we-don-t-need-a-corporate-income-tax
======
rayiner
This is an excellent article. The key takeaway starts here:

> I know what you’re thinking. You want a simple tax code that raises a bunch
> of money by closing the loopholes. Many people think this because they think
> that taxing income is simple, so “loopholes” must be illicit backdoors
> placed in the tax code at the behest of greedy corporations.

> And to be sure, the tax code contains plenty of senseless giveaways to
> corporations. But these are small beer. Most of the “loopholes” that we
> argue about are not a result of congressional pandering, or even sharp
> lawyers who bend sensible rules. They’re an artifact of the fact that
> calculating corporate income is really hard.

I realized this when I was taking an introductory course in federal income
tax, and trying to figure out the effect of different depreciation schedules.
There's a neat logic to the income tax, including complex concepts like
depreciation.[1] Yet, things that are simple to state as an equation are quite
complex to implement in practice. For example, things like loss carry-forwards
arise from trying to tax a continuous parameter (changes in wealth over time),
in discrete, annual time-steps.

I disagree with people who think corporate taxes are "double taxation" or
anything like that. Taxing corporations falls naturally out of treating them
as distinct legal persons. A corporation's income is treated, and taxed,
distinctly from shareholders' income for the same reason a corporations legal
liabilities are treated distinctly from shareholders' liabilities. It's just
the flip side of the coin.

That said, while corporate make sense within the logic of the tax code, in
practice they are probably more trouble than they are worth, and create bad
incentives for companies to relocate their operations out of the U.S.

[1] I recommend [http://www.amazon.com/Chirelsteins-Federal-Income-
Taxation-S...](http://www.amazon.com/Chirelsteins-Federal-Income-Taxation-
Students/dp/1587783800) for a very approachable introduction to the topic.
Don't be scared off by the page-count: it's big type on paperback pages.

~~~
jayd16
I never understood the double taxation argument either. Even if I concede its
double taxation, who cares? Its not a natural right to only be taxed once.

~~~
JoshTriplett
"No taxation without representation". You get taxed twice, but only
represented once. (If that.)

It seems completely reasonable for either individuals or companies that are
large enough and mobile enough to relocate to shop around for a better value
for the cost.

~~~
judk
Explain how being taxed once at 40% is better than being taxed twice at 20%.

And then explain how Limited Liability fits your theory -- profit without
accountability for misdeeds.

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roganp
Unfortunately, I don't think eliminating corporate taxes will eliminate tax
code complexity. It will add to the complexity of personal taxes as the well
off rush to hide assets and income in un-taxed corporations. The only solution
to _that_ , for the tax man, are ever more complicated rules for determining
what can be counted as personal income.

~~~
tarikjn
You make a very good point.

Maybe the solution then is to eliminate income tax altogether? We didn't have
Federal income tax until 1913, and I am surprised at why we need to pay so
much in Federal taxes when the state/local governments are the ones providing
most of the services.

The federal government has other significant sources of income, and a large
majority of the spending is definitely wasteful, it would start by eliminating
most of the IRS/tax law/enforcement cost, before even starting to look at the
rest.

Also of note is that the income tax was voted into law amid pretty non-
democratic conditions, and now we assume it must be absolutely needed because
we've become accustomed/dependent on it.

~~~
chasing
Non-democratic? After a quick a-Googlin', it seems like the income tax was
made legal by the 16th Amendment, which has been properly ratified by 42
states.

~~~
tarikjn
My bad, I am confusing with the Federal Reserve Act, which was drafted in
secret meetings and passed into law three days before Christmas. Yet, one
cannot ignore that when the 16th amendment was passed, federal income tax was
2% and required 2/3 of the votes to pass, subsequent increases only required
>50%. A 35% rate for middle class incomes is a far cry from 2%.

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edoceo
I think corporate tax should be simpler but not eliminated.

I have started and run multiple companies in three states.

In the early/small days its annoying to pay the CPA more than the total tax
burden due to "red tape" requirements.

Taxes (in theory) fund education and social services which is a solid
foundation to build my businesses on I'm OK paying just, make it less
terrible.

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ckluis
Without a serious discussion on the actual figures its hard to take political
discussions seriously.

Tax people instead of corporations to make it easier. On principle it might
sound good, but what % does it need to go up and for what % of the population?
On principle - only tax software companies, lawyers, and accountants fight a
simplified tax code.

~~~
sien
It's worth looking at the levels of taxation around the world:

[http://en.wikipedia.org/wiki/List_of_countries_by_tax_rates](http://en.wikipedia.org/wiki/List_of_countries_by_tax_rates)

The US has a high theoretical company tax rate but a low practical one because
of the myriad of deductions.

Reducing the corporate tax rate rather than abolishing it may make more sense
and make less attractive to play tax games and waste effort on that rather
than creating value.

~~~
roganp
These comparisons are hard to make sense of because of the different services
provided by these governments. For example, health care is a government
benefit in most European countries, paid for by their "higher" tax rates.

~~~
adventured
The US has the worst of both worlds currently. Relatively high taxes and a
wildly inefficient government.

We spend $7 trillion per year in government expenditures, at all levels, and
can't even seem to maintain basic infrastructure (we could, but our government
is really terrible).

~~~
chasing
I'd like to hear more about what basic infrastructure is lacking in your part
of the US.

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mwsherman
Despite the title, the real thrust of the piece is that regulations – taxes,
here – are inputs into a complex system. The more complex, the less
predictable and the more likely to have unintended consequences. Or, perhaps,
“intended” consequences which benefit certain participants over others.

We think that of regulations as rules of the road, or adding fairness, or
enhancing transparency. And they might! But those assumptions are, often,
insufficient models and at worst, dangerously incorrect.

------
misterbishop
Corporations receive hundreds of millions in direct public subsidy:
[http://www.businessweek.com/articles/2013-11-12/boeing-
grabs...](http://www.businessweek.com/articles/2013-11-12/boeing-grabs-jumbo-
subsidies-from-washington-state-for-777x-jobs)

Corporations benefit greatly from costly American military efforts abroad:
[http://money.msn.com/investing/10-companies-profiting-
most-f...](http://money.msn.com/investing/10-companies-profiting-most-from-
war)

The Federal government negotiates international trade deals on behalf of
corporations:
[http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/11/e...](http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/11/everything-
you-need-to-know-about-the-trans-pacific-partnership/)

Corporations make massive profits based on the findings of publicly-funded
scientific research:
[http://www.nejm.org/doi/full/10.1056/NEJMsa1008268](http://www.nejm.org/doi/full/10.1056/NEJMsa1008268)

Corporations pay their employees so little that regular people have to
subsidize their income:
[http://www.forbes.com/sites/clareoconnor/2014/04/15/report-w...](http://www.forbes.com/sites/clareoconnor/2014/04/15/report-
walmart-workers-cost-taxpayers-6-2-billion-in-public-assistance/)

This is not a question of being "taxed twice". Corporations are the recipients
of incalculable public welfare, and they generate billions in profit. Of
course they should be taxed. They should be taxed progressively according to
their income.

And the idea that the United States doesn't provide an "attractive climate"
for corporations is just completely insane.

Also, this article is poorly written. Next time, use
[http://www.hemingwayapp.com/](http://www.hemingwayapp.com/)

~~~
oksawe
Thank you. I almost lost it reading the article and the comments here.

Corporations also heavily use the court system, benefit from a publicly paid
education system, roads, infrastructure... I could go on and on.

~~~
misterbishop
The highest positions in government are stacked with former/future corporate
employees. Our former vice president was the CEO of Halliburton. Our current
attorney general was a partner at one of the largest corporate law firms in
the world. This is the norm not the exception.

So the idea that there's friction between corporations and "The Government" is
just not serious. The government largely functions to keep American
corporations happy and profitable.

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arikrak
I don't understand why profits of a company need to be taxed. Either the money
gets re-invested in the business or it gets paid as a dividend. Why does there
need to be a separate tax from the dividend?

~~~
rayiner
Imagine I want to set up a package delivery service in a world where
corporations don't exist. Package delivery services are pretty risky
businesses: delivery drivers race through crowded streets and are liable to
run into someone or someone's property sooner or later.

Now, say I want to figure out a way to insulate myself from that sort of
liability. So I enter into an agreement with a driver. I'll buy him a delivery
truck, and he'll deliver the packages. In return, he'll give me 75% of what's
left over after his expenses. Now I'm insulated from legal liability. I'm just
an investor. If he runs over someone, that person can't sue me in my personal
capacity. All I have at risk is the truck I bought him. But wait. What's the
tax treatment of this arrangement? The driver will be taxed on his net income
(revenues - expenses). Then he'll give me 75% of what he has left over. Then
I'll be taxed on that amount.

Separate taxation of corporation arises naturally from treating corporations
as distinct legal persons.

~~~
judk
"Corporations are legal persons" is begging the question. "Legal person" means
'designated entity with special rules', it doesn't carry any intuition or
logical consequences beyond whatever the chosen rules are.

~~~
rayiner
That's not true. In law, "person" is an abstraction in the same way a file
descriptor is an abstraction in UNIX. The whole point is to carry along with
it a built-in set of intuitions.

------
programminggeek
I don't think taxes are the problem. I think the complexity ends up benefiting
those who have more resources at their disposal and actually acts as a moat to
discourage smaller businesses growth or people from starting businesses.

The ability to afford lawyers and accountants to play the system for every
write off is a big advantage and so if anything the incentives to large
companies is to increase complexity of laws and regulation, which I think is
why for all the money and lobbying, laws are getting MORE complex, not less.

A simple system with minimal regulations, sensible rates, and no "loopholes"
would be much preferable to what we have now. Maybe take it a step further and
make it a small transaction tax whenever money changes hands instead of an
income tax.

Make the transaction tax on every financial transaction, from purchasing
equipment to buying a sandwich, and keep the rates the same for pretty much
everything. Don't have stupid exclusions like large purchases of houses,
equipment, buildings, or expensive services.

All of a sudden write offs and loop holes pretty much go away, you already
have the infrastructure to collect transaction taxes via sales taxes and if
you levied it on ALL financial transactions it would probably be < 1%.

I'm pretty sure it would be too much change to ever make it through government
without being ruined, but it'd probably be better than what we have now.

~~~
roganp
I heard Marc Andreessan make a very similar point in an interview. His theory
is that the large regulatory burden of being a public company is causing a
dearth of IPOs as companies wait to grow large enough to pay for dedicated
compliance departments.

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oksawe
I'm shocked. Most of these comments have to be from a corporate lobby group.

"of the Fortune 500 companies... companies studied paid just 18.5 percent of
their profits in U.S. corporate income taxes... Thirty of the companies paid
less than nothing and had negative corporate income tax rates"

The following article will explain it much better than I could.
[http://ctj.org/ctjreports/2013/04/bernie_sanders_is_right_an...](http://ctj.org/ctjreports/2013/04/bernie_sanders_is_right_and_the_tax_foundation_is_wrong_the_us_has_very_low_corporate_income_taxes.php#.U8c6YlYaCuc)

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pbreit
I'd like to see a proposal more along the lines of "lower rate and simpler".

The two examples don't strike me as that compelling. Carried interest seems
like income. Depreciation is just a question of timing, not amount (time-value
of money notwithstanding; which is marginal).

------
ryandrake
Didn't Lucky Ducky [1] show us how unfair corporate income taxes are?

1: [http://boingboing.net/2013/05/29/tom-the-dancing-bug-
lucky-d...](http://boingboing.net/2013/05/29/tom-the-dancing-bug-lucky-
duc-3.html)

------
cpeterso
An alternative to corporate income tax is Georgism, a land value tax that is
design to encourage productive use of land and other resources:

[https://en.wikipedia.org/wiki/Georgism](https://en.wikipedia.org/wiki/Georgism)

~~~
nextw33k
I do not see how that applies in an Internet era. It would create an incentive
to locate offshore as much as possible.

It you are talking about a capital tax then the same applies. As a CEO I would
look to move assets abroad as soon as possible.

------
anigbrowl
I'm broadly in sympathy with the article's arguments, but:

 _Depreciation of corporate jets, meanwhile, is not some special loophole. All
assets depreciate, which is to say they become less valuable over time as they
become outdated and suffer wear and tear. Both financial accounting and the
tax code recognize this. Depreciation is how the tax code handles investment
expenses; if you disallow this, you would be essentially levying extra-heavy
taxes on capital-intensive businesses._

There's a big difference between depreciation of your plant and machinery that
form a core part of your business and that of luxury purchases for the
C-suite. Airlines should certainly be able to depreciate their jets, so should
companies like UPS and Fedex that run large air freight operations. So should
any business for which flying is part of the business model.

But I'm not convinced that flying executives, investors, and suppliers around
in a Lear Jet is essential in the same way. Rather, that seems like a really
nice intangible bonus for the upper management to enjoy. And if firms want to
spend money on that and shareholders don't object,* then OK - but either tax
it as benefits-in-kind or disallow the depreciation.

* Not that the views of American shareholders are generally welcomed by management, but that's another issue.

~~~
zaroth
Disallowing depreciation would increase the cost by 40%, in other words
basically outlawing the use of private jets. Doesn't sound like a good idea.

How do you single out providing a nicer airplane for business travel as a
taxable benefit without treating the same _any_ asset your employees use to
make doing their job more pleasant? You create an impossible job of trying to
decide what constitutes a "large enough" ROI for the business.

Buy your employees nice monitors? Must be a benefit! Ergonomic chairs? Tax it!
Take a corporate bus to work? Charge em' per mile! A nap room that employees
sometimes spend the night in? Serving filet in the cafe? Forget about that
espresso machine in the break room. Oh, and that artwork on the wall's got to
go. A basket ball hoop in the parking lot; that's a fitness stipend by another
name!

For something to rise to the level of a taxable employee benefit it has to
provide a lot more tangible direct personal value than this, and virtually
zero business ROI.

All this is actually the perfect example for how nice it would be if we could
find a better way to tax which avoided this mess.

~~~
anigbrowl
_For something to rise to the level of a taxable employee benefit it has to
provide a lot more tangible direct personal value than this, and virtually
zero business ROI._

This is the point I was attempting to make in the first place.

