Here's a simple razor: if the people who wrote the rules, upon learning of what you are doing, would likely have written the rules differently to make illegal what you are doing, it's against the "spirit" of the rules.
Example: if some tax code says, people who make below $100k must pay $10k in taxes, and people who make above $100k must pay $20k, paying someone $99,999 to avoid extra taxes is a foreseeable consequence and therefore not an unethical loophole. However, paying someone exactly $100k so they fall in neither bracket and thus need not pay any taxes is probably not what the policymakers intended; they would surely have amended the rules had they had this pointed out to them before enacting this tax code.
Of course, this requires being a judge of intent, but what ethical framework doesn't have grey areas?
I know you're just making an example for demonstration, but you happened to choose a scenario that many believe is actually how tax brackets work.
Thus, it's worth reiterating: in the American tax system (and I imagine almost everywhere), we use marginal rates for income tax. The first 100k you earn would get taxed at the lower rate, and every incremental dollar above that would get taxed at the higher rate.
For example, play with this calculator: https://smartasset.com/investing/capital-gains-tax-calculato...
I can also confirm this with my own taxes. I only had $10k in long term capital gains last year, but the entire amount was taxed at 23.8% by the federal government.
What part am I not understanding? Is the idea that capital gains tax itself is marginal, but if your other income has already put you in that higher bracket, then you pay that rate?
Edit: playing with the knobs on the calculator seems to indicate that's what it is.
I understand that there is a limit to how much loss you can claim against your gains in the coming year, and that you can claim the loss as a deduction in following years up to a limited number of dollars each year, and limited number of years, but what I don't know is what the losses can be claimed against.
If I have capital losses this year, and I'm getting a refund this year for my income withholdings overpayment... then next year say I owe income taxes from underpayment, but I have that deduction from the previous year, can I cancel them out?
Or do I need to report a capital gain in the next year in order to be able to "use up" the previous year's loss as a deduction? My understanding is I can't use capital losses to pay income taxes, but I am not a CPA.
Perhaps this is a question for my accountant, and this should be a billable conversation, but this is just a question I've had since I started thinking about capital gains, and I've never been able to answer it for myself.
I think capital losses can completely cancel any capital gains - kind of obvious if you think about it - if you lose $10 on sales of stock A and gain $10 on sales of stock B you had not income from your activities.
In addition, you can apply $3,000 in losses to reduce ordinary income (not taxes directly) and carry the remainder to following years. So on sale of stock A you lost $5,000, on sale of stock B you gained $1,000. You can eliminate the gain, have $4,000 left, reduce your taxable income of $100,000 to $97,000 using $3,000 more of the loss, then have $1,000 left over for following years. In the next years I think you can use that loss to reduce gains then income in the same way.
Hope I’m right and that is clear.
https://taxmap.irs.gov/taxmap/instr/i1040gi-015.htm#w24811v1...
You'll see that there are breaks at 0% (Line 8/11), 15% (Line 15/20), and 20% (Line 23). Looking at the lead-up to line 23 is the clearest part.
Line 21 adds the part taxed at 0% (Line 11) and 15% (Line 19). Line 22 then subtracts that from the total gains (Line 12). That final amount is then taxed at 20%.
If they can vote several times to get rid of Obamacare, and then when the vote actually matters and they don’t pass their vote, what is the “spirit”?
Honestly, I used to feel your way, but when you see both sides pull as much shifty crap over the years, I’m following the letter. Screw the spirit - I prefer to donate to charity than give those guys one more dime.
If your tax avoidance can be successfully defended in court it seems completely ethical to me. Change the law if there is a problem with it.
Then perhaps the people writing the rules could tell us what they actually want? By writing it down?
Tax codes (or other laws) don't need to be executed by a computer. They need to be executed by an accountant/auditor/judge. So you can rely on well-defined but still human concepts like "security", "place of residence", "child care", "employment", "property improvement", "dependent", "exchange of goods", etc.
Just because it can't be fully specified in x86 doesn't having a clearly defined tax code is an absurd idea.
Should corporations be able take allowances for their dependents?
Each entity is treated differently because they are different.
the result is that you can shift earnings and inflate costs to reduce gains dodging taxes.
people should be able to claim expenses even for luxuries, but then nobody would have savings because those are capital inefficient.
so there are two different drives that make the tax code asymmetrical, even in principle, before those schemes for dodging fair taxation.
If those people would find it a problem, then just change the rules AGAIN to close said loophole, and go on with your day. I get tired of people talking about the spirit of the law.
Fact of the matter is, most politicians are incompetents and cannot make proper laws (everything is rushed through and hardly read twice).
Make. proper. laws. and stop complaining. Nearly all tax avoidance is the price of having incompetent politicians.
The remainder is the result of smart people who went ahead and understood the tax code well. They're to be applauded -- the pot of gold is waiting at the end of the rainbow for them, just like in any other profession.
(Perhaps the razor would be better worded as "would rewrite" rather than "would have written differently".)
This is a great point that I always try to inject into conversations about “tax avoidance.” People often claim that taking advantage of “loopholes” is ethically equivalent to straight up illegal tax evasion, but that claim implies that companies need to “know” the “correct ethical amount” for them to contribute.
Instead of a half-inch fuel line, Yunick created a two-inch fuel line that was 11 feet long, and held five gallons of gas.
(A car with more gas has to stop less often)
You could say he took a loophole. You could try, I'm sure, to argue "how could he have known he wasn't supposed to make a fuel line that way? What was the correct ethical size of a fuel line?". But it's pretty obvious to most people that took it too far, and specifications for fuel lines were created immediately after the gambit was discovered.
The two rulesets are following different ethical norms.
The difference with taxes is that there isn't some well-agreed upon precise amount or percentage of money that companies are supposed to pay. The rules are very complicated, even for companies that most people wouldn't consider to be "searching for loopholes."
In other words, it may be easy to get a lot of people to agree that Apple should be paying more taxes to the US, but how will they agree on an exact amount?
So a 2in x 11ft fuel line was "too far".
But what about a 1in x 6ft fuel line?
0.75in x 3ft?
Which of these is not too far?
> specifications for fuel lines were created immediately
It sounds like everyone recognized there was underspecification and it was remedied.
Are you suggesting that was wrong?
Comparisons are stupid but still:
Compare loopholes with game glitches. They are not intended, they break the system and every player is hated for using them.
Often "pro-loopholers" claim that everyone tries to optimize their tax, so why not big companies. But tax breaks which are used by the regular guy have clear implications: Support families, incentivize businesses, steer society in a certain direction. Loopholes are just edge cases that have not been thought of, thus have to be closed as soon as possible. They are the glitch in a perfect tax law. Don't exploit them!
That's not my experience, having played numerous competitive games. Bhopping in CS, wavedashing in melee, all of the various glitches necessary when speedrunning almost any game, are pretty universally loved and players that can perform them well are looked up to.
1) How do you know it's a loophole. Sure, there's probably some instances where it's pretty obvious what you're doing is a loophole. But others require you to be up-to-date on economic and political debates as well as being extremely well read in the tax law. Similarly, half of the people who signed the loophole into law may consider it not a loophole and the other half might consider it to be a loophole. In general there's no way to know.
2) What if part of the tax law was signed into law specifically as a favor to a corporate entity who funded a political candidate, but disguised with complicated language so it's not obvious who is getting the favor. In this instance realizing that you qualify for the tax reduction would be considered a loophole by the shady politician that created the law ... or a bonus because it will obfuscate who the kickback is going to.
In case 1), I feel a little bit uncomfortable with calling someone's action unethical when it depends on their ability to understand a complicated law AND the economic scenario and theory behind the law AND the minds of ALL politicians involved with making the law.
In case 2), I actively want everyone to abuse loopholes created for this purpose as much as possible. It's like watching someone burn themselves on a stove. If a politician is doing this sort of thing, I want it to blow up in their face so they learn not to try to do such things in the future.
I don't know if it's that simple. If we define a loophole as a tax exemption that was not intended to be used in a certain way by the lawmakers, then I don't think it's fair to call something a loophole if it has been widely known about and used for many years. It's on the lawmakers to clarify their intentions with new laws. That's literally their only job.
But what counts as a loophole? There's a law that says you can deduct your interest income, so is doing that "using a loophole?" If that doesn't count as a loophole, then why does the double Irish arrangement count as a loophole? They are both just taking advantage of a law.
The obvious response to this dilemma is to bring up what lawmakers intended. That makes sense. But why not just have the lawmakers themselves clarify their intentions by closing things they consider to be loopholes? It seems unreasonable to expect each company to guess the intentions of each tax law.
Devil is in the details.
Imagine it is you or your business, looking at a situation where a loophole will give you a truly consequential big tax savings, maybe 30% of the annual top line income (for you, your company, etc.). It is perfectly legal. What do you do?
OK, now your company is involved in something that promotes general good, social welfare, clean energy, etc. You are at the edge of survival, and using this legal loophole will make the difference keeping you alive for the next year, and actually help poor people or endangered species?
Or, you are merely in the finance division of an ordinary company, with a responsibility to deliver maximum shareholder value and maximum profits to go to employee bonuses, and your job depends on properly and legally maximizing income and avoiding taxes?
While it's easy to proclaim from on high "do what was intended", the actual situation is quite different.
The only solution is better laws, without the bugs, or laws written for situations (such as transaction taxes) that aren't so bug-prone.
10% of what is what the question reduces to.
What if I have an investment that increases in value? Does the gain count as income? What if I don't sell it?
What if I receive non-monetary compensation? Is that income? How valued?
What if I have a loan forgiven (as in the article)? Do I pay tax on the forgiven amount?
What if I lose money or spend money? Does that affect income, or am I being taxed on my gross income?
What if my company pays for my rent and other living expenses? Is that income?
If you don't close these "loopholes" then the 10% just becomes a penalty for the people who don't have the time or the knowledge to circumvent the rule, but for those that do, they just don't have any "income" so there's no problem. The closure of the loopholes creates more loopholes, that push the problem upstream until only the very wealthiest individuals can afford to not pay taxes.
If you have never filed your own tax return before, go skim the instructions for form 1040[0] (117 pages). It includes a 10 page table for the graduated tax rate so most people don't need to do any arithmetic if they make <100,000. Besides a couple tables like that and some administrative pages, the rest is text and worksheets for figuring the amount to apply the rate to. And this is just the basic form that everyone files! There are additional forms someone might file for complex circumstances, let alone filings for all the kinds of trusts and corporations.
Companies already engage in all sorts of shenanigans to show lower profits when it suits them. [1]
Taxing revenue goes against decades, maybe centuries, of established tax law and tradition, which roughly operates on the principle "The state makes money when you make money."
If you start taxing assets, you're going to need very invasive government bureaucracy that knows everything you own, down to the last paperclip.
Anyone who claims they can make taxes simpler is either lying or doesn't understand the subject.
As are business assets, which includes everything from the desk I'm sitting at; the chair I'm sitting on; to the computer I'm using.
Disposable supplies, such as paperclips, are not taxed but once a year I have to fill out paperwork--roughly a 10 page document--to pass onto my local government declaring said assets.
Nothing about taxation is fair because it's not intended to be fair. We agree that society as a whole benefits from every child having access to a high quality education. We agree that society as a whole benefits from free and easy travel. I read an economic report a while back (still trying to find it) that posited that a significant contributor to the US's current economic success and high rate of entrepreneurial system was the USPS. The ability for everybody to mail anything anywhere on the cheap allowed for an untold number of companies to exist and be competitive.
To pretend like taxes should be associated with the consumption of government services is a-historical, fallacious, and based on any number of lies that vilify the poor for being poor.
I agree with this 100%, and thank you for stating it so clearly.
> We agree that society as a whole benefits from [...]
Well, not all of us agree, but certainly a large majority.
> To pretend like taxes should be associated with the consumption of government services is a-historical, fallacious, and based on any number of lies that vilify the poor for being poor.
It also sets up a hell of a strawman for the abolition of taxation in general - if the goal is for the individual to pay based on their consumption, then the most effective means of achieving that with the lowest possible overhead would be to allow a competitive marketplace to develop for those things.
For the record, I do support the abolition of all taxation, but find this argument to be very poorly constructed. My justification is that taxation is instituted through the implicit threat of violence.
That said, from a practical standpoint, if we're going to have a government funded through taxation, it's in our best interest to ensure the overhead for collecting it is as low as possible. That means the ruleset should be as simple as possible, and that using taxation powers to modify behavior should be done rarely if ever in order to maintain that simplicity.
To put it another way...
Question: those dollars you have in your pocket, where'd they come from?
Answer: The government issued them and they eventually found their way to me
Question: How'd the government have them to issue them?
Answer: They taxed it from somebody else.
Question: How'd that person get those dollars?
Taxation is a method of controlling inflation and the implicit threat of violence isn't directly related or due to taxation, but rather it's connected to the government's monopoly on a fiat currency.
Our government is funded through being the monopoly issuer of a currency that it requires all transactions be priced in while enforcing that monopoly with the implicit threat of violence. Our government (and all governments that are monopoly issuers of fiat currency) additionally use taxation as methods of economic control, but not funding.
> it's in our best interest to ensure the overhead for collecting it is as low as possible
I'm not sure I agree with this. If the government is going to tax as a method of inflation control it's in our best interest that that taxation does the "least harm" and as a democratic society we have the opportunity to vigorously debate based on evidence and research how we define "least harm".
The simplest ruleset possible could easily be "everybody contributes $30k/year" (more or less what my annual tax burden is) but suddenly we're bankrupting a majority of Americans.
Perhaps "as possible" includes an implicit "without bankrupting a majority of individuals subject to the tax" but at that point "as possible" is just a doorway to say "taxing should be simple [except when it can't be]" and to me that's the same as saying "taxing is complicated" which is, finally, to say that I think it's really a whole lot of nothing interesting to say "I think tax rules should be simple".
Edit: And yes, I understand that State taxes (as opposed to federal taxes) do fund State services (Property Taxes -> Schools in CA, for ex), but the States are not monopoly issuers of a fiat currency... It's complicated and hairy but the reason I bring up the issue of funding via taxes vs. issuing dollars is because almost always in conversations about flat tax rates or "simplifying tax code" it's in reference to federal taxes and not state/local taxes.
That ends up being significantly larger than the currency issued by the government, so the government might actually get more revenue from taxes than from money printing.
No, those who consume more have benefited more. Earning more is just the opposite: it shows that you've provided more benefit to society than someone who earns less. The ones who benefit most from society are the ones who manage to consume more than they earn.
Usually you can consume more if you have earned more i.e. have more buying power. But I know that's not what you mean.
> Earning more is just the opposite: it shows that you've provided more benefit to society than someone who earns less.
They're not very strongly correlated. It's possible to provide value without seeing much in reward (janitors, nurses, schoolteachers), earn plenty without providing much or even negative value (telemarketers, those opioid manufacturers we're hearing about), or both provide value and earn $$$ (Google, StackOverflow).
In any case the taxman doesn't care about "value" provided to society because it's such a nebulous concept. The IRS doesn't let you take deductions for adding value or add extra taxes because you're a telemarketer. Even if you provided a ton of value to society while getting rich, you still got rich. And your society's enforcement of laws and property rights, educated citizenry, and infrastructure were likely crucial to this.
> The ones who benefit most from society are the ones who manage to consume more than they earn.
This is true in the case of those who inherit large fortunes/trust funds and don't work. Tax laws favor them greatly at present (lower estate and capital gains taxes).
It's not true at the other end of the scale though. If not having a job and being on food stamps/medicaid/unemployment was really all that great, you'd have far more people looking to get in on it. It's actually a miserable situation that most people work their hardest to never fall into.
Sure, but you've produced more as well. The key is whether you're a net producer (earner) or a net consumer. As a general rule, high-earners tend to fall into the first group. Past a certain point earnings tend to outstrip spending; the more capital you have the easier it is to produce things other people want, whereas there's only so much one person can consume.
> They're not very strongly correlated. It's possible to provide value without seeing much in reward (janitors, nurses, schoolteachers), earn plenty without providing much or even negative value (telemarketers, those opioid manufacturers we're hearing about), or both provide value and earn $$$ (Google, StackOverflow).
We obviously aren't using the same definition of "value" here. If something is valuable, people will pay for it voluntarily. Providing things that are already in abundant supply does not contribute much value, even if they're things people claim to approve of. Of course, the reverse is also true: anything people willingly pay for has value to them.
> And your society's enforcement of laws and property rights, educated citizenry, and infrastructure were likely crucial to this.
As others have already pointed out, this doesn't hold water. The more wealth you have the more capable you are of providing these things for yourself. The rich already own most of the infrastructure, provide quite a bit of the financing for education, and are perfectly capable of hiring their own security. No, the ones who benefit most from having these things provided to them "for free" are those who would otherwise have a difficult time paying them on their own.
>> The ones who benefit most from society are the ones who manage to consume more than they earn.
> This is true in the case of those who inherit large fortunes/trust funds and don't work.
If someone is rich because of an inheritance, that inheritance was a gift. By taxing the estate you're punishing the one(s) earned that wealth. If they want to spend their earnings on their kids rather than themselves, who are you to judge?
The recipient of the inheritance is benefiting specifically from the work and prudent saving and investment of the ones who left them that inheritance, not from "society".
> If not having a job and being on food stamps/medicaid/unemployment was really all that great, you'd have far more people looking to get in on it.
I never said that being reliant on government handouts was pleasant, but there's really no question that these are the people the system is designed to benefit—at everyone else's expense. If it were purely a question of optimizing the material factors, achieving an acceptable standard of living with minimal effort, I think you'd see a lot more people relying on welfare. The only reason the system doesn't collapse under it own weight is that the more nebulous cost in self-respect of deliberately choosing to live as a parasitic freeloader is simply too high for most people to ignore.
I think you're right, we are not. It appears we hold very different views about everything being discussed here, and I don't think we'll find much common ground. In the interest of saving your time, and mine, I'll say no more. Have a good weekend :-)
It would be more accurate to say that the opportunity for profit indicates that society is not obtaining the maximum benefit from the available resources.
Under theoretical models of market economics you refer to there is no such thing as long-term economic profit. That's because profit is only realized by moving the economy closer to the ideal state, and in those theoretical perfect-information perfect-competition models you're already in the ideal state. In the non-theoretical world, however, things are never that ideal, and opportunities exist to earn a profit by addressing those deficiencies.
> It means you are benefitting from things that are bad for society, like imperfect information and barriers to entry.
I agree with you 100%. If society didn't have problems then there would be no opportunity to profit by offering solutions. That doesn't mean that you're responsible for those problems, however. Imperfect information is a fact of life, and providing better information is one perfectly legitimate way to earn a profit. Where barriers to entry exist, finding ways to break down those barriers is another way to profit.
Now, if you're creating new problems for society, such as spreading misinformation and erecting barriers to entry where none would naturally exist, that's obviously a problem. Negative externalities such as these require restitution to the victims. At this point we've left the economic realm, however, and crossed into the domain of politics.
Also, an alternative is a higher tax rate but use a UBI so poor people always have an effective negative tax rate. Constant offset, multiplicative tax rate. Ensures a floor of income such that people can always survive and that there are always consumers.
I think people do sometimes overstate the amount of legal and ethical complexity in all this.
What I'm arguing is that the rules themselves don't have a spirit. Not all rules, but most tax rulesets. The complexity of transactions is largely a factor because of the complexity of the rules. They're complex because tax rules are constantly being fiddled with to benefit someone, encourage something or shield something. It's the kind of ruleset you end up with specifically because you're not being principled. The spirit of the tax rules that U2 is taking advantage of is exactly the type of whats-good-for-me-is-good-for-me spirit that he was being accused of. If there's a loophole in the rules to protect some industry or district that happened to have been politically important or connected at some point and some other groups manage to take advantage of it...
For principled rules (don't rape, murder or steal) it makes sense to appeal to the spirit. It's not necessarily inarguable but it exists. We can debate whether something constitutes theft sensibly, and appeal to the spirit of the rule. But, if there were weird rules specifically defining stealing commercial vehicles "not theft" because in the early 90s some economists theorized this would help balance insurance company finances somehow... the "spirit" of the "no stealing" rule becomes meaningless. All you have at that point is the rules in ink.
I'm not even talking about ethical complexity, mostly. This bleeds into empirical reality pretty directly. Where we have complicated and unprincipled tax rules we tend to have complicated and unprincipled avoidance, tax structuring, planning or pick your euphemism.
No, they would have called it a violation if it was found to be illegal in court, or in a settlement. Since that didn't happen, it would be wrong to call it a violation (for essentially technical reasons). I think you're at the very least missing that there is a category of things that are "illegal but not prosecutable". I also don't think your U2 example helps, because I still don't see what it has to do with the issue in the article.
We can’t have it both ways. If loopholes are being intentionally put in we can’t blame people for taking advantage of loopholes.
I’d love a fair tax code but until we have one I won’t begrudge anyone for being smart about how they pay.
>"Look... We (ireland) manipulate our tax rules for all sorts of gain^. How can it be ok for the country but not U2?"
Be that as it may (an admission of guilt, indeed), I find the argument to be absolutely reasonable. To my mind, the most efficient way to enforce any tax-related measure coming from the government is to have the more powerful citizens and entities abide by it systematically; then, they become the social moderators of the measure, increasing the value in respecting it.
That has nothing to do with the US tax system.
Sure you can. A judge could rule that you're breaking the spirit of the law issue appropriate fines. If this became common practice, people and companies would stop utilizing so many "loopholes".
One serves to better the country by adapting to a changing economy, while the other serves a self interest and takes money out of the economy.
However if you’re talking about tax reforms lead by corrupt politicians and lobbyists - then that’s a different matter. But I’d argue that was another tangent entirely.
This is part of the reason (albeit just a small part) why the rich and poor divide grows wider year on year. If it were as simple as you described, that wouldn’t happen.
I'll answer that Bono - because no one in Ireland asked for us to be run by leprechaun economics; that decision was taken by blatantly corrupt political parties that form a golden circle fueled by brown envelopes, protected by even more blatantly by corrupt police and state / billionaire owned media.
Normal people in Ireland :pay their fucking taxes: and he should too.
Irish one though surely? What makes them win elections?
In the nicest way I can say this, might you be in a bit of a bubble? For example, did you pay your Irish Water bill and assume everyone else did too?
For example, we've gone through multiple Garda Comissioners (head of police), a Taoiseach (head of state) and a justice minister over the treatment of a police whistleblower who was smeared as a child molester - twice, by police and the government agency in charge of childcare. But there was only one paper that remotely properly covered it, and this paper was then bought up. It was insane. And just one example of many.
Still, the two parties I speak of are on a long scale downward trend to the point where they're propping each other up with the help of a couple "independents" to stay in power.
About 10 years back, Bono (of U2) was being interviewed on irish tv. They asked about U2's business interests (real estate and hotels), taxes, and overseas holding companies... with a "why don't you pay taxes in ireland" implication.
Bono started with a generic "U2 is a Businezss" answer but he ended with a (IMO) an honest point that people avoid making.. because it's kind of an admission of guilt:
"Look... We (ireland) manipulate our tax rules for all sorts of gain^. How can it be ok for the country but not U2?"
We're an extreme example, but not that extreme. American politicians have also been big believers in complex tax reforms/policies as a way of tweaking all sorts of economic results.
We can't have it both ways. Either we have a "the rules are the rules" approach or we have a principled approach. You can't appeal to the "spirit" of a soulless ruleset.
^We have a highly "engineered" tax system, designed to encourage foreign revenue to be silmultaneously booked and not booked in ireland. >30% of ireland's gdp is Leprechaun money, according to Paul Krugman & some oecd economists. It's here, but not real. Try to touch it, and it will vanish.
A lot of these rules relate to IP which is why the biggest companies utlizing irish tax shenanigans are apple, google and other techcos. Music is also IP.