On the other hand, lowering corporate taxes also generates a cascade of tax avoidance, since you have higher profits that generate the need for more complex tax avoidance schemes to reduce taxation on that large amount of money.
Tax evasion breaks this system. Profit is taken out of the system and stores offshore, where it doesn't create any value.
Tax evasion is bad. Investing is good.
Honestly, the tax holidays royally piss me off especially coming from a party that "embraces law and order" - it's essentially like pardoning a bunch of robbers - except the actual robbers stole far less money.
Looking at behavior in the extreme case is only valid if behavior scales smoothly up to that limit.
Obviously there are ways to break that, like tax evasion, but hopefully there are other ways to deal with that.
This is not the case, and in the event such an opportunity is available, companies would pursue it regardless of the tax environment, because making some money net of tax is better than no money whatsoever.
What such a policy would actually do is incentivize a massive mis-allocation of capital while simultaneously resulting in lower tax revenues. I fail to see how this makes anyone better off.
At 100% tax rate I would expect that pattern to be magnified. As a board member, I'd use my success to hire or partner with anybody I had the slightest positive feeling for, until there is just enough money left over that I don't have the biggest target painted on my forehead.
It sounds like if taxes are high, I invest and play for time, waiting for some administration to offer me a tax break so I can take money out. Is a targeted tax break then also a chance to extract profit?
I don’t know if this scales all the way up when all the big co’s move their HQ’s offshore. Perhaps we need diff positions for diff business sizes.
If you pay for an expense with pre-tax income (i.e., in December, assuming a calendar tax year), that reduces your tax liability on your profits for the year, for an effective discount of X% on that expense (where X is your effective tax rate).
If you buy that same expense with post-tax income (i.e., in January of Year 2), you don't get the effective discount, and you won't know until the end of Year 2 if it will reduce your Year 2 taxes. Also, you have to wait a year to get any tax benefit out of the expense.
The cost of waiting just a few weeks can be huge. This is why many companies (or corporate departments) choose to blow the remainders of their budgets rushing through projects at year end rather than just taking the time to do things properly after the holidays.
The forced spending by the end of a fiscal tax year is often offset by delivery or implementation contracts to mitigate the damage of having to time the purchase for tax purchases.
But the point is that a business with a higher tax rate has a greater incentive to spend money, and to spend more of it.
And as a practical matter, history has demonstrated that businesses actually invest less during periods of low tax than they do during periods of high tax, even though they have more cash to spend. It's counterintuitive but multiple major tax cuts have borne this trend out.
Certainly considered in isolation this investment sounds attractive. In conjunction with the benefits of paychecks and dividends being spent elsewhere in the economy it’s less certain.
Changing personal income tax rates has a lagging effect on economic spending, because they're spread out over time so that effect ends up being very small on a monthly or bimonthly basis (i.e., the periods over which a person generally receives a paycheck). Generally, consumers don't even notice the change until the file the taxes for the year.
Businesses have had low taxes since the Reagan administration, albeit brief periods of higher taxes during the Clinton and Obama administrations. Notably, business investment was at its highest levels during those periods of high taxes, and the economy grew at its highest rates since the post-WWII reconstruction era. During the periods of low taxes, US businesses actually accelerated off-shoring labor to foreign facilities, and the decline of Detroit and the Rust Belt can be directly correlated with the Reagan tax cuts.
A better option would be to remove corporate incomes taxes entirely. Only tax the outflow instead, which would be simpler to implement and easier to deal with at all levels.
And the lower the incentive to make new investments.
And the higher the incentive to engage in socially wasteful tax-avoidance accounting.
The difference being that the former is low risk and can grow the business, while the other has a good chance of triggering penalties that wipe out the savings and could even result in jail time for one or more executives.
Consider that the historically highest rates of tax fraud are during the current administration, despite historically low levels of tax on corporate income.
Can't speak for all companies, but higher tax rates generally means more money invested in tax avoidance. If for example, your tax rate was 95% of your income it would be rational for you to put a lot more effort into finding ways to avoid those taxes than if the taxes were 1%.
>...The difference being that the former is low risk and can grow the business,
Low risk? Investing in your business can grow the business or it can be money that could have just as well be thrown away. Lots of businesses have failed because they did bad investments, tried to over-expand, etc.
>...while the other has a good chance of triggering penalties that wipe out the savings and could even result in jail time for one or more executives.
There are no penalties or jail time associated with tax-avoidance - you probably mean tax evasion which is a crime.
>...Consider that the historically highest rates of tax fraud are during the current administration, despite historically low levels of tax on corporate income.
How much tax fraud is there with corporations? According to the IRS:
>...The Internal Revenue Service (IRS) has identified small business and sole proprietorship employees as the largest contributors to the tax gap between what Americans owe in federal taxes and what the federal government receives. Small business and sole proprietorship employees contribute to the tax gap because there are few ways for the government to know about skimming or non-reporting of income without mounting more significant investigations.
https://en.wikipedia.org/wiki/Tax_evasion_in_the_United_Stat...
Another source says:
>... Even though corporate misdeeds grab a lot of press, corporate underreporting accounts for only $67 billion of the tax gap, or 14.8 percent.
https://money.howstuffworks.com/personal-finance/personal-in...
It's funny because I'm a tax consultant for a living, and that's simply not been my experience. Businesses want to avoid paying taxes when possible, but it's generally not worth their effort to play tax games. A business doesn't pay taxes unless it's making profits, and it would have to be making sufficient profits that the millions they'd spend on consultants and maintaining tax avoidance strategies every year exceeds the actual tax liability by a material amount. For most businesses, that's not worth it.
Tax rates don't drive business decisions. The only time they matter is when a business is choosing between multiple otherwise equal or similar options and tax issues are the primary differentiators.
There are no penalties or jail time associated with tax-avoidance - you probably mean tax evasion which is a crime.
There are penalties associated with numerous tax avoidance strategies if the tax authority disagrees with your position; it's not necessary for the position to rise to the level of tax evasion. But on that note, there have been a number of tax avoidance strategies that were legal for years but deemed to be tax evasion after the fact, resulting in hefty fines and criminal sentences for those involved.
The Internal Revenue Service (IRS) has identified small business and sole proprietorship employees as the largest contributors to the tax gap between what Americans owe in federal taxes and what the federal government receives.
No citation was provided for that statement in wikipedia. Additionally, that statement conflicts with what the IRS has actually said about the tax collection gap being approximately $500 billion. https://www.irs.gov/newsroom/the-tax-gap. Based on Propublica reporting, at least $100 billion of that $500 billion is wealthy individuals like the Sackler family.
Even though corporate misdeeds grab a lot of press, corporate underreporting accounts for only $67 billion of the tax gap, or 14.8 percent.
True, but I wasn't saying that corporate tax evasion is higher than other types of tax evasion. I was comparing corporate tax evasion now to corporate tax evasion in other times. Measured against itself it's at historically high rates.
Your original claim was "Actually, history bears out that higher tax rates result in corporations re-investing more of their profits in the company and less in tax-avoidance accounting."
To claim that as tax rates go up, companies are less concerned about the amount of tax they pay is an extraordinary claim and requires extraordinary evidence.
>...Tax rates don't drive business decisions.
I agree. If there are investment opportunities companies will make them.
>...I was comparing corporate tax evasion now to corporate tax evasion in other times. Measured against itself it's at historically high rates.
Where are the numbers for recent years? Your source says the tax gap and compliance has stayed pretty much the same since they started trying to estimate it:
>...The latest estimates for tax years 2011, 2012 and 2013 show the nation's tax compliance rate is substantially unchanged from prior years.
I'm just imagining the 1950s cottage industry in compensating executives with a company car, personal assistant outside of work, etc before the IRS caught up?
And all the present day shenanigans with Amazon/Apple etc hiding profits in Ireland?
The present day shenanigans were Apple and Amazon (note: Apple takes historical credit for being the first tech company to implement this structure) hiding profits in Ireland through the double dutch or similar structures. However, the EU has already attempted to crack down on the use of that structure and deemed it illegal. Companies that currently use the structure may be grandfathered in as a result of EU court decisions but no new companies can get implement the structure. Apple especially has been hoarding money overseas and not doing anything with it. In contrast, companies with higher tax rates have been very active about spending their overseas money rather than bringing it back to the US, precisely to avoid paying the higher taxes that repatriation would incur.
Yes, it's counterintutive. But it's how the world actually works.
You're shifting the goalposts. First you were claiming that taxes don't generally spur avoidant behavior. Now you're claiming they do[1], and we want that.
Which is itself dubious. I'm pretty sure "we" don't want people to unilaterally exempt themselves from taxes by relabeling consumption as a business expense. (In the extreme case, imagine you can just pass on every desired purchase as a "wish list" to your employer and they buy it for you, "as a business expense" leaving you with no taxable income. Obviously the IRS has to crack down on that, and no one would call that "things working as intended".)
And we definitely don't want real resources going to gaming of the tax code, which is socially wasteful.
[1] and in the next paragraph, the tack of "but it's cool, they're gonna crack down on that later".
We're talking about different types of avoidance. I'm talking about real business spending, i.e., on facilities, equipment, employees, etc., as a means of tax avoidance. High taxes encourage this type of spending because (a) businesses that are growing are going to do this anyway and (b) they effectively get a discount for this anyway if they're making enough money to actually pay taxes.
But most people are referring to tax avoidance strategies like IP shifting, off-shoring, etc. I'm saying, that based on my professional experience as a tax advisor for a decade, that these activities are not motivated by high tax rates, and indeed were highest during periods of lower tax rates. (In the examples I mentioned above in the earlier comment, the companies weren't engaging in tax avoidance strategies, they were making business investments. The difference is that tax avoidance is entirely or primarily motivated by avoiding taxes and is pursued despite the lack of an actual business need; business investment may be motivated in part by avoiding taxes but is primarily driven by actual business needs and will not be pursued absent a business case for the spending.)
Which is itself dubious. I'm pretty sure "we" don't want people to unilaterally exempt themselves from taxes by relabeling consumption as a business expense
I don't understand where you're going with this. You brought up examples that are considered legitimate business expenses by the tax code, and have been for decades. Hell, they're the basis for all the in-office perks tech companies gave their employees pre-COVID. If you have an issue with whether they should be deductible on moral grounds, that's a separate discussion.
And again, my argument is based on how my clients, and US businesses in general, have actually responded to tax cuts and tax increases, and not to how they were theoretically expected to behave by people who aren't actually running successful businesses.
Dividends are thus actually preferred by most investors, and buybacks generally only advantage the biggest investors.
Additionally, corporations don't get special capital gains rates but do get dividends received exemptions for dividends from related company, so in many cases corporate shareholders would prefer dividends over share buybacks.
Buybacks are big not for tax reasons (because in most cases, companies make buybacks out of borrowed funds, not profits), but because they artificially inflate the stock price, which increases the value of the executive compensation packages of the executives that authorized the buyback.
Historical equities compound growth almost entirely comes from constantly reinvesting dividends to buy more shares which compounds to increase future dividends. So as an example, take a company that returns 5% of their share price and an investor pays a 20% tax rate allowing them to reinvest 4% after tax money to buy more shares. After 40 years, they'd have 1.04^40=4.8 times the proportion of the company. If the same company spent all of its money buying back shares, you'd have 1.05^40=7.039 times the company. Now you still have to pay that 20% on gains once you sell so after you'd have (1.05^40-1)*.8+1=5.83 after selling but that is still a 21% benefit for share buybacks in that example.
Also, I wouldn't call that "artificially inflate the stock price". They are reducing the number of outstanding shares thereby increasing the earnings per share which increases the amount that can be returned to each share such as through higher dividends. It is effectively reinvesting the dividends for you back into the company.
With a buyback, you have fewer shares after the buyback. If you "reinvest" in the company you give up all the proceeds you received to buy back the shares that you just sold to the company. But you've paid taxes as a result of the initial buyback so you have less money than you received to reinvest, and now presumably the shares are all more expensive as well. Your position is economically worse off if you reinvest than when you started, because you have the same amount of shares (or fewer) but paid some tax to get there.
With a dividend, you can keep the dividend, or buy more shares of the company or some combination of both. Your economic position is improved either way regardless of the amount of tax you pay.
Not sure who "you" is but the company will have fewer shares outstanding, investors who don't sell will have the same and those investors will also now own a greater % of the company as well as a greater earnings per share.
> If you "reinvest" in the company you give up all the proceeds you received to buy back the shares that you just sold to the company
I am 100% not saying that as that would eliminate the benefit. The benefit is to long term investors who buy, hold and reinvest dividends and reinvesting dividends to buy more stock is key as that is where the historical exponential returns are because it increases your ownership share and future dividends.
That is where my example numbers come in because you can only reinvest to buy more shares and thus your ownership % the dividend amount minus tax amount whereas the company can spend the entirety of a dividend buying shares to remove them from the outstanding market. The difference between those two numbers (1.05 and 1.04 in my example) then compounds and effectively goes towards increasing share prices which do eventually get taxed but they get the benefit of compounding while the owner holds.
Also, while you need quite a few shares, you can estimate and sell the percentage of shares a company is buying back in order to keep the same % ownership thus acting like a dividend so I myself would prefer all companies I invest in to never give out dividends and only do buybacks unless their P/E ratio is truly absurd.
In most cases in the past decades, buybacks were accomplished using loans rather than profits, leaving the companies in worse financial positions. More than half of the companies that engaged in buybacks in the past decades are either bankrupt, declared bankruptcy in 2020, or are underperforming the market. Only a handful of companies that engaged in buybacks are doing okay, and those companies also issued dividends (see for example, Microsoft).
Some people think it is good for the economy, its not objectively true. If a company invests in itself instead of giving out dividends it's making a choice upon the shareholder, which in turn could mean the company invests in something less efficient than the shareholder could find.
> n the other hand, lowering corporate taxes also generates a cascade of tax avoidance
Unless corporate taxes are 0, and you save all of this issues plus get to fire a lot of corporate layers.
Not at all clear to me this is the case.
If a firm eyeballs a project that is likely to have a good return, they will pursue it regardless of the corporation tax rate at present. Meaning that whether the corporate tax is high, low, or nonexistent, it's better to make money than not make money.
Given this, if a firm cannot see any good opportunities to pursue, incentivizing mass investment in zero or negative return projects, while coincidentally incentivizing lower government revenue is unlikely be a net good for society. That seems to me to be a encouraging massive destruction of wealth and also encourage enormous mis-allocation of capital.
Reinvestment in a corporation is only naturally incentivized when that strategy appears to give the biggest RoI and not all money uninvested from markets, companies etc. will necessarily be reinvested in another venture.
See: https://fred.stlouisfed.org/series/M2V
Our current policy is to paper over bank liquidity or other problems by printing money. Big institutions and the mega-rich are hoarding massive quantities of cash. The economy as a whole would be better off if billionaires were doing stuff with their money rather than hoarding shares.
All BigCorp Ireland LTD has is a brokerage account full of ISIN codes.
How are those tbills delivering value to the shareholders?
And they pay interest to the holder...
The point is, the money isn't keeping out of the economy. It's loaned to the government who spends it.
"Hoarding" is nonsense.
Most of the corporate cash isn’t in equity funds, it in US Treasury debt. Apple holds >$50B of treasury securities, for example.
The low inflation monetary policy has some benefits, but combined with our ass-backwards tax system also makes for strong disincentive to do anything with excess cash.
The effect is almost identical.
It’d be insane to have it any other way for businesses. Whole swathes of low margin businesses would be impossible to operate. For example a super markets average margins are 3-5%.
Corporate tax is (generally) on profits because you can deduct costs. It allows for the flow of money to efficiently find a sub supplier for the parts of a good or service.
The real scam is when things like health insurance premiums are deductible for a company but not for an individual.
To be fair, that this "scam" is still alive today is mostly by accident.
It stems from WWII times, when stateside laborers were uniquely low in supply and high in demand, and when labor had ridiculous bargaining power.
Laborers couldn't really ask for higher wages, because that was politically impossible (appearing to be extorting wartime needs for money was/is a faux pas).
So companies began competing on "benefits": health, accidental death and disability insurance among them.
To help ease the burden on employers and employees, the IRS allowed businesses to "temporarily" deduct insurance premiums. (This relief came against the backdrop of unprecedented wartime tax hikes).
Postwar, it was unfeasible to remove this measure, as the majority of Americans who had insurance got it through their employers: it would upset both businesses who have to pay more, and employees who lose insurance.
Later, some government (I forget which...) signed this stopgap measure into the tax code, making it permanent.
Regardless of the interesting history, I agree with you, it should be universally deductible.
Not just politically impossible, illegal:
>> World War II disrupted those trends. As demand for everything — particularly labor — climbed, Congress passed the Stabilization Act of 1942, which allowed the president to freeze wages and salaries for all the nation's workers. A day after its passage, President Franklin Roosevelt issued an executive order invoking these powers, which applied to "all forms of direct or indirect remuneration to an employee," including but not limited to salaries and wages, as well as "bonuses, additional compensation, gifts, commissions, fees."
But there was an exemption of massive proportions slipped into a fateful clause: "insurance and pension benefits" could grow "in a reasonable amount" during the freeze."
- https://www.chicagotribune.com/opinion/commentary/ct-obamaca...
And, relevant to today's discussion:
>> By slapping corporations with tax rates of 80 or even up to 90 percent on any profits in excess of prewar revenue, Congress all but guaranteed a frenzied search for loopholes.
Also interesting to note that the change in question wasn't a switch from workers paying for their own health insurance to it being paid for by employers. Prior to WW2 less than 10% of Americans had any form of health insurance, by the end of the war it was close to 30%.
I’m for it being universally not deductible. Or at least not deductible for corporations.
The idea is that it forces everyone onto a common public individual market as there would be no tax or cost advantage of corporations to self-insure or provide insurance.
Longer term this gives better mobility to workers and lowers costs of the individual market by bringing in 100M+ healthy people (which lowers the average risk weight cost of insurance).
If it were not deductible for anybody, fewer people would have health insurance. If you're in that pool, it's good for you, because it would probably be cheaper. But fewer people would be insured, so it's overall bad, right?
Am I'm missing some part of your argument?
The idea of making it universally deductible/subsidized for individuals seems to be the path that we're on right now.
Case 1: If you purchase health insurance on the exchange, and are very poor, you can get fully-subsidized plans. (Not to mention if you qualify for medicare).
Case 2: The most plausible proposals of "Medicare for All" are basically expanding the pool of people who qualify for zero-premium medicare advantage plans. This keeps insurance individualized and operated by private companies to maintain quality improvements driven by capitalistic-competition, although the government is the ultimate payer.
Case 3: the government (yes, even the current administration) has taken several steps to encourage employers to subsidize the costs of employees purchasing insurance individually, rather than as a group [see https://www.takecommandhealth.com/ichra-guide].
"If you are enrolled in an employer-sponsored health insurance plan, your premiums may already be tax-free. If your premiums are made through a payroll deduction plan, they are likely made with pre-tax dollars, so you would not be allowed to claim a year-end tax deduction." [2]
[1]: https://www.nerdwallet.com/article/taxes/self-employment-tax... [2]: https://www.investopedia.com/are-health-insurance-premiums-t...
Do they mean if for example a company pays $5000/year in employee insurance, they can subtract $5000 from their tax bill? If so, that's a tax credit right?
As I understand it, a "tax deduction" is a deduction on taxable income (in the case of an individual) or profit (in the case of a company).
Taxes low? Start up something new, get it going. Taxes go up again? Sell it off (if they haven't already) and go back to early retirement doing whatever.
Maybe it is largely the type of business that behavior changes. Their last venture was starting up an aquaponics farm in a borderline urban / suburban area, though I haven't kept in touch and it appears to have been sold off to another family.
Inflation can put a bit of a wrinkle in this, since if you get $20M for your business and then you find that that's worth the equivalent of $2M in 5-10 years it can crimp your early retirement.
My other big question is how this interacts with monetary policy. Inflation tends to preference financial capital by a.) lowering the real cost of outside credit and b.) causing dislocations within the economy that create opportunities for new startups. That could offset higher corporate taxes to some extent, while if combined with low corporate taxes it could spark a mania.
I don't see this holding true. Can you explain how?
Like, yes as a personal investor you now have less to invest, because you are taxed more on your income. But of the money you have left after tax, investment is still investment. There's no other way to make money of your money then to invest it. So as long as you don't spend all the money immediately, the incentive to invest it is there.
Also, the companies you invest in will be incentivized to reinvest in themselves, thus their stock growth potential will be higher, so a good time to invest in them.
Finally, the biggest investors arn't individuals, but investment firms, and because they themselves are a company, they themselves are like all others more incentivized to reinvest into their business, thus they are more likely to want to take their profit and invest it some more, instead of cashing it out as revenue.
Suppose you have $40,000. You can buy some stock in a domestic corporation, or buy some stock in a foreign corporation, or put a down payment on a house, or buy a new car, or invest in government bonds, or ten other things.
If you raise the domestic corporate tax rate, option one becomes less attractive compared to all the other ones.
For corporate tax rate, I think it depends if you're planning a growth investment or a dividend based one. For growth, capital tax rate shouldn't affect you at all, since you'll mostly target companies running at close to no revenue or even declaring losses, but growing very fast.
For dividend investment, it would, since the companies will have less profit post tax, but if you think about it holistically, that's like the best thing to tax. You have a well established business, that's no longer growing or doing so very slowly, and it is making excess money even after paying all its employees and expenses. It seems a very good place to take from and redistribute.
Think about the alternative sources of revenue for the government here? What could be better then that?
There are two issues there. The first is that it's a long-term fail, because the "cash cow" stage is where investors make back their money that was invested during the growth stage in a company that wasn't then paying dividends. If you tax them away, the market value of the company crashes as soon as it hits the cash cow stage, and then who is going to invest at the growth stage when that's their ultimate outcome? So you destroy investment in new companies.
And the second is that it promotes malinvestment, because rather than paying dividends to investors who reinvest them in promising new companies, you create the incentive for the corporation to remain in the growth state indefinitely and use all of its profits to continually expand, even into markets outside of its competency. Then you get huge inefficient conglomerates, which is much as we've seen.
What you really want is to make dividends a tax deduction from corporate income tax, but still taxable to the shareholder. Then they cancel out from a government revenue perspective but you lose the perverse incentive to grow the corporation without bound.
> Think about the alternative sources of revenue for the government here? What could be better then that?
VAT actually works really well. You get to a similar result from the other side: VAT and corporate income tax are really almost the same thing, but instead of deducting dividends from corporate income tax, the corporation has to collect VAT but there is no income tax on the dividends. And it has the further advantage that it's paid to the jurisdiction of final sale rather than wherever a multinational corporation contrives its "profits" to be declared.
Not quite. The fact that taxes are about to go up has already taken a huge chunk out of the sale value of the business. You want to sell it when taxes are low and not about to go up.
Sure — if you're already wealthy enough to get by without any income, that might make sense. But for most business owners the alternative is "work for someone else", not "return to early retirement".
By reducing the expected outcome of a new venture, taxes discourage marginal entrepreneurs from starting businesses.
Sure, they may feel that way. But the person who bought the business off them is still incentivized to behave in the way that the GP post describes.
And before the 1940s, federal taxes were dramatically lower.
Also, the people I am speaking about were most definitely born before the 90's. More like 50's or 60's.
I know you aren't arguing against higher taxes, but my response to that is... and? Does Target benefit more from some random hedge fund buying up $20 million of their shares? Or from consumers buying $20 million in goods from them? Once a company has gone public, unless they're trying to do another round of funding, the share price is almost meaningless beyond the ghost of being taken over by another entity.
This belief that institutional investors mean more to the health of a business than ACTUAL SALES is baffling to me (not saying that's your stance).
Investors making money means more money to invest, which creates more companies and services.
That cash reserve is needed if we're to self fund big projects and in case of down-turn, lawsuit or other unforeseen event if we are to avoid immediately laying people off.
The alternative is to raise money which dilutes founders and employees who own stock or vested options.
You won't encounter this issue if you're early stage or if you are "going for growth" by running at a loss and raising money in successive rounds. But it is a huge problem if you are a self funding small or medium sized business.
> a wealth tax creates a perverse incentive to not invest back in the company.
This is arguably a "good thing" because one could argue that it's "unfair" that large, high revenue / high income corporations allocate so much capital in our economy. It would arguably be better for them to pay the taxes and instead have that capital be allocated by a democratically accountable body: the government.
This is certainly "arguable." One of the very few things economists agree on is the market's are better at allocating capital than governments. That's one of the core functions of markets.
That isn't really the societal win you're making it out to be though. If you "pocket" profits, i.e. pay them to investors, the investors just go out and invest them again in something else. Which is actually better, because it reduces concentration of wealth inside of corporations. Instead of one corporation growing ever larger because they have to invest internally or be subject to punitive taxes, you get many new independent companies being formed as investors seek out new opportunities for the money they receive as dividends.
The other problem is that there are many forms of investment that are taxed differently. Government bond interest typically isn't taxed. Real estate appreciation typically isn't taxed until sale, which means they can be deferred indefinitely. Investing in foreign corporations will be subject to the tax rates in those other countries. So if you increase the domestic corporate tax rate, investment moves from domestic companies to things like real estate speculation and foreign companies, which may not be desirable.
Moreover, multinational corporations arrange for profits to be declared in whichever jurisdiction has the lowest taxes, so increasing the tax rate on domestic corporations disadvantages them against multinationals that won't be paying those taxes.
The reverse is actually true. Historically, the lower the tax rate, the more investment you get in real estate speculation and other passive income streams because it's now more efficient to simply not invest in productive activities when you can just get effectively free money without doing any work.
The higher the tax rate, the more businesses invest in actual business activities, because they get more expenses they can use to offset income they may earn, and because passive activities generally don't generate enough of a return to be worth the investment compared to (re)investing in an actual business.
The purchase price of real estate is ultimately deductible as depreciation, as is mortgage interest, and any profits from rents get reinvested into buying more real estate which becomes deductible as depreciation again. Also, real estate speculation is commonly done using LLCs (passthrough, no corporate income tax anyway).
Most real estate companies are partnerships or REITs due to special tax provisions. But most of their investors are corporate entities.
Generally, profits from rent are not reinvested in buying more real estate because they simply aren't sufficient for that. Real estate is a cash flow game: real properties are purchased through commercial mortgages, and rental income services the debt. Generally, profits arise when real properties are sold for appreciated values. Because of this, real estate investment flourishes in low tax years: as a result of depreciation, the cost basis of the real property has been reduced, so the taxable income from the sale has increased.
The structures are generally the majority of the value of the property.
> Mortgage interest is not included in the basis of real property or in depreciation. It's just another deductible expense.
Nonetheless it's a major expense and fully deductible. They also get to deduct property maintenance etc.
> Most real estate companies are partnerships or REITs due to special tax provisions. But most of their investors are corporate entities.
A group of ten individuals who get together to buy an apartment complex are not a corporation. Moreover, if the investors are a corporation, it's still one less layer of indirection -- for a corporate investor, if the real estate holding company were an S Corp you would be paying corporate income tax twice.
> Real estate is a cash flow game: real properties are purchased through commercial mortgages, and rental income services the debt.
This is true until the debt is paid, but then isn't that the point? They get to deduct the interest and depreciation and maintenance, and wipe out their rental income.
> Because of this, real estate investment flourishes in low tax years: as a result of depreciation, the cost basis of the real property has been reduced, so the taxable income from the sale has increased.
That would result in real estate sales in low tax years, i.e. willingness to divest rather than willingness to invest. During the high tax years people would want to buy/hold and continue speculating to continue to defer paying the high taxes on the appreciation.
Depends, unless you're talking about very large structures like office buildings, factories, or malls in which case the structures are definitely worth more than the land. For most residential and small-to-midsize commercial plots, it depends on where the land is. In states like HI, CA, NY, and NJ, the land is worth more than the structures on top of it, and that is triply true in cities like LA and SF.
Nonetheless it's a major expense and fully deductible.
Yes, it's generally a real property company's biggest expense. But as far as business expenses go, it's not that big compared to the expenses another business would face. (My real estate clients included a number of REITs, including a major mall chain, and the owners of a number of LA, NY, SF office towers.)
They also get to deduct property maintenance etc.
Generally, no. Under a triple-net lease, they would not get to deduct these costs because they're not paying them. Most commercial properties are leased on a triple-net basis, so the tenant is paying maintenance costs.
A group of ten individuals who get together to buy an apartment complex are not a corporation. Moreover, if the investors are a corporation, it's still one less layer of indirection -- for a corporate investor, if the real estate holding company were an S Corp you would be paying corporate income tax twice.
My statement was directed to the real world, in which most investors in REITs and real estate partnerships are corporate entities, not to a hypothetical situation.
Also, I'm not sure if you are aware of this but an S-Corp does not pay corporate income taxes, so there's only a single layer of tax whether they use an S-Corp, LLC, REIT, or LP, or GP. They're all flow-through entities for tax purposes that are differentiated primarily by their legal/compliance burdens.
This is true until the debt is paid, but then isn't that the point? They get to deduct the interest and depreciation and maintenance, and wipe out their rental income.
Yes, that's the point, but more to the point, that's the entire point of real estate investing. You make your money selling the real estate, but it's a holding game until then; you just care that you make enough in rental income to pay your debt service costs (it's not that you wipe out your rental income with expenses, it's that your expenses are covered by the rental income). This is why property owners can let storefronts remain vacant for years, so long as their rental income from the building is otherwise covering debt service.
That would result in real estate sales in low tax years, i.e. willingness to divest rather than willingness to invest. During the high tax years people would want to buy/hold and continue speculating to continue to defer paying the high taxes on the appreciation.
Right, but the flip side of you divesting is someone else investing, at appreciated costs from you paid.
The exception of course is those real property companies that are not engaged in speculation but are primarily in the business of being landlords. They have actual businesses, and correspondingly tend to spend more on upgrades during periods of higher taxes. (See, e.g., LA's or SF's office markets: prior to the TCJA tax cuts, billions or hundreds of millions spent on improving existing office buildings but since then essentially zilch.)
Or large apartment complexes. But isn't that where most real estate investing goes? Detached single family homes are mostly owner-occupied.
> Generally, no. Under a triple-net lease, they would not get to deduct these costs because they're not paying them. Most commercial properties are leased on a triple-net basis, so the tenant is paying maintenance costs.
But then the tenant is paying correspondingly less rent, which means less taxable income to the property owner. It's a wash either way.
> Also, I'm not sure if you are aware of this but an S-Corp does not pay corporate income taxes
You're right, I meant C-Corp.
My point being that if the investor is a "corporation" in the sense that it's paying corporate income tax itself, that has little to do with the thing it's investing in. If it buys ownership of a REIT and the REIT itself doesn't pay corporate income tax, and the corporate tax rate is high, that's more advantageous than the same corporate investor buying shares of Union Pacific, whether or not the entity doing the investing then pays corporate income tax on the income it receives from the investment.
> Yes, that's the point, but more to the point, that's the entire point of real estate investing.
It's one of the two options. Option one, you zero out your taxable income while building equity, and then sell to liquidate. Option two, you zero out your taxable income while building equity, then once the loan is paid off you get to keep the rental income, which can be used as down payment on additional properties if you prefer to invest further rather than pay the tax and spend the money.
> Right, but the flip side of you divesting is someone else investing, at appreciated costs from you paid.
The point being that high turnover during periods of low taxation isn't a result of people wanting to get into the real estate market, it's a result of people wanting to get out. So it tends to cause housing to become more affordable rather than inflating a bubble because people hold who would rather sell if not for selling incurring a major tax bill.
> They have actual businesses, and correspondingly tend to spend more on upgrades during periods of higher taxes.
That's evidence of what I'm saying -- when corporate taxes are high, people move investment from businesses to real estate. Making improvements to real estate is investing in real estate. Lower taxes and they stop because they make more to invest the same money in other businesses.
In terms of absolute deals? Yes. In terms of dollar value? Not even close, commercial property far exceeds residential property.
But then the tenant is paying correspondingly less rent, which means less taxable income to the property owner. It's a wash either way.
Generally, no. That's not how triple-net leases work. Tenant pays market value, and maintenance costs on top of that.
It's one of the two options.
In your hypothetical, sure. But in the real world, you don't make enough money in rent from one property to use to pay a down payment on the other, and actual real estate investment companies don't pay down the loans; they take out balloon mortgages and just pay interest on the loans until they sell (or refinance before the balloon). I've done this for enough real property investor clients to know how they actually think.
That's evidence of what I'm saying -- when corporate taxes are high, people move investment from businesses to real estate. Making improvements to real estate is investing in real estate. Lower taxes and they stop because they make more to invest the same money in other businesses.
No, it's not. Because all businesses make more investments in their businesses during periods of high taxes. And specifically in my example, I wasn't referring to real estate investors, but companies that actually manage buildings with the intent of being landlords and making their money from commercial leases, not from selling their buildings.
You can only invest so much into a grocery store. The entire point of us having free markets is so that capital can move around. Locking it down into once place is the exact opposite of what you want to do.
See https://en.wikipedia.org/wiki/Double_Irish_arrangement for a historic example.
But the Double Irish (and similar structuring) is no longer permitted and would be treated as an illegal tax scheme today. (It's grandfathered in for companies already using the structure.)
Generally, between BEAT, GILTI, global transfer pricing policies, and the rise of nationalist economic policies, it's now riskier and more expensive to switch to a global corporate structure than to just keep everything in the US.
I used to do a lot of outbound structuring work, and now (post TCJA) almost everything is inbound, compliance, or restructuring existing foreign operations to more tax-friendly foreign jurisdictions (i.e., moving out of China to Vietname, etc.)
Why buy a stock if Biden will take 1% of it annually? May as well just buy rapidly depreciating status symbols instead.
I don't necessarily think it leads to purchasing status symbols. Depreciation already kind of incentivizes that, so I don't think there's anything fundamentally game-changing there.
And, depending on what is actually done with the money that Congress has decided to appropriate, it may be redistributed to consumers who will buy more of whatever that publicly traded company produces, or pay off the national debt, or do other things that can increase the health and growth of the economy. (Or not.)
Probably because trading stocks will still leave you with a lot more money than if you threw a tantrum, took your toys home and hid your money under your mattress - no plan that I've seen has investors paying capital gains at the level of their equivalent income - investment is still heavily subsidized.
Capital gains happen on money that has already been taxed as income. Capital Gains tax is less because it's round 2 of the taxation game.
Also taxing assets on their capital means people will not invest in capitally intensive projects. For example building a new housing complex returning 3% per year (after inflation) is 33% less interesting with an additional 1% wealth tax (on the capital) ...
For example: say you purchased 100 shares of Tesla stock a decade ago and sold it today for lots of capital gains. But Tesla has never posted an annual profit on a tax basis, and thus the "income" underlying the shares you sold was not taxed.
In fact, the capital gains rates were never about avoiding double taxation. It was simply a giveaway to Republican donors by the Reagan administration.
You probably mixed up capital gains and dividends. The logic behind giving dividends special rates (including a 0% rate for certain inter-corporate dividends) is that the corporation paying the dividend has already paid an income tax on those profits, so the shareholders should not be subject to full tax on the shares of the profits they receive, but should still pay some tax to account for the benefits of using the corporate form.
We already have wealth taxes, only very narrowly targeted.
Because the stock will allow you to avoid paying taxes. By investing revenue in investment, as a company, you can avoid paying tax on the money. So if you're a small or medium sized business, you have two choices:
1) Cash out and buy a rapidly depreciating status symbol with the money, but get taxed on it at a higher rate.
2) Reinvest the money in growing your business.
At least that's what I understood from OPs reasoning.
Edit: Also spending money in depreciating status symbols is also a contributor to the economy.
Yes, for a single iteration, but it's a vicious cycle of shrinking the pie.
versus creation of new (true) assets makes the pie bigger. A bigger pie means the tax slice grows and there is more to go around. I agree that, for example, Bezos having $300Bn locked up in non-taxable is not ideal too. Ideally that would have been taxes as an "income" as it grew.
Maybe something like the required minimum distribution from 401k would be a good solution?
A business that is not making a profit does not pay income taxes. I don't have a single client that has voluntarily turned down making a profit because they'd had to pay some income tax on it.
The only time business income tax rates make a difference is when the business is choosing between multiple profit-generating activities and wants to maximize the net (post-tax) income by minimizing its tax burden.
There is a strong case for allowing immediate, or faster, write-offs for capex spending in preference to lowering corporate tax rates because of this effect.
Except in Washington State.
I could imagine some reasonable arguments for having a low tax like that around.
People are taxed the same way. There are all kinds of ways to spend your money before paying income tax on it. Most obviously, on health "insurance".
You're already a business owner. You're faced with decisions on what to do with an already existing business, not whether to start a new business, and in what state or country to do that.
The latter is absolutely not a given and the former is only really safe if you invest the money in something that isn’t really an investment in the business.
Phrased differently, if you had a magic cash printing business like this that can safely scale up with more money you would be absolutely stupid to not do it regardless of the tax rates.
Where do you live that taxes are as volatile as petrol prices? Taxes change in Ireland but in terms of decades.
There is simply no other way to align interests of the wealthy.
The founding fathers, including a handful of those quoted in the linked post, were highly critical of democracy and even of men who didn't own multiple house like they did.
We just narrowly missed out on having a constitution which only allowed land owners to vote. There were even years long debates on whether votes should be proportional to the amount of land owned.
Using the founding fathers to argue for state enforced equalization of outcomes is plainly absurd.
Frankly, I don't care what the plan is. I just want to see a less inequality and a stronger middle class.
Can it be also an incentive to work less, since most of the results of your hard work will be taken from you in form of taxes, or you would need to 'hide the profits' potentially forever?
Let me introduce you to how private equity works. They have figured out how to hide the profits by buying out the original owners!
They buy companies by having them borrow heavily to "invest" in buying out the previous owners. And then try to keep the corpse of the company looking good enough that they can flip to someone else. The trick is that debt payments count against profits so the new owner saves on taxes.
The people who set up the deal get paid in a variety of ways. But in the end what they get paid tends to be roughly proportional to how much money no longer goes to Uncle Sam. So when you see someone who got rich in private equity, like Mitt Romney, it isn't a bad approximation that their personal wealth reflects how much money the US no longer receives in taxes due to the deals that they structured.
Note, if you're over 50 you may remember the "junk bond kinds" of the 1980s. That's the same thing as private equity. They just rebranded themselves after their actions gave them a bad name.
I know this isn't always the case with everyone. And especially investors have a case that higher corporate taxes reduce the value of their investments, possibly to the point of not making them.
But this incentive is so blatantly obvious in other cases and so rarely understood. I can only assume that the vast majority of people think businesses are taxed like people. You pay taxes on all of your income. But businesses only pay taxes on their profit. It's a big, big difference that changes the incentives.