When I worked as a tax lawyer, we created structures and defended cases that saved our clients hundreds of millions of dollars. At this scale, paying for our services was a no-brainer.
On top of that, big companies lobby lawmakers to make the tax system favorable to them. This makes sense for the same reason: paying a couple million dollars to create/maintain a provision that saves $100M/yr is a no-brainer.
I'm not saying any of this is right or good (and I am no longer a tax lawyer; I now build tools that help people with disabilities). I'm just saying this is why it makes sense that companies can walk a fine line on taxes, save tons of money, and you and I cannot.
Nope, these are the reasons that cause the situation. This outcome does /not/ make sense nobody sane without a huge vested interest would design a system to achieve less tax paid when you earn more. It's entirely contrary to the intent and spirit of the tax code. This is not sensible. How to fix it? That's harder. Start with its a problem and morally and ethically wrong. It's really the only place to start from. I would say keep in mind two wrongs is not an improvement and unchecked government power is far worse than tax cheats but that does not change where this discussion should start.
In contrast, you seem to be arguing a different point--that, to you, it "doesn't make sense" that the system is designed poorly.
The government could simply finance itself by printing money / inflation. Let’s say the government total expenditures were 5% of GDP each year, then you would simply have 5% inflation.
This would solve all the problems we have with income inequality, worthless heirs of the wealthy hoarding riches, and of very complex and expensive IRS and CPA work.
Everyone would need to invest their money rather than stuff it under a mattress so they could keep it growing rather than allowing inflation to shrink it.
Thoughts?
I've said that paying for CoronaVirus will probaby be done by inflation rather than taxes, but I'm not sure that as the only source of revenue it makes any sense
Make a tax code as simple as possible. So simple there is no room for interpretation.
They can suppress their 'profit' whichever way they want, they can't suppress their revenue in a given country.
The digital services tax is imposed at a rate of 3% on the gross revenues derived from digital activities of which French “users” are deemed to play a major role in value creation. The law not only affects digital companies but, more generally, digital business models.
https://home.kpmg/us/en/home/insights/2019/07/tnf-france-dig....
That rapidly turns into a disaster of consolidations and monopolies. You don't want that.
Think about the difference between big company $BIG selling you the consumer a million Widgets for 10^9 currency units, versus 26 small companies $a..$z each selling to the next in a long supply chain which results in a million Widgets.
In revenue taxation, big company $BIG pays 10^9∗$TAX_RATE.
Whereas the 26 small companies pay something more like 26∗10^9∗$TAX_RATE because each time a company pays the next company, that's revenue for the next company.
The difference in tax between those two scenarios is so enormous, that it would create enormous pressure for companies $a..$z to consolidate into a single company.
Repeat this across the entire economy, and you have enormous pressure to consolidate everything into as few companies as possible.
In short the market/regulatory environment should support disaggregated business as a first class citizen, mergers and vertical integration as a very second-class construct. To the tune of if you merge, you must maintain 3 sets of accounts. The original accounts separately, and a combined set. You must gain more capability or utility to create value for the public as the combined company than by being separate. The capacity to measure the utility amplification being facilitated through the extra set of books. As more companies are bought and merged, the audit workloads would increase very quickly. Failure to make a good case for why you should continue to run as a merged company kicks in an orderly spin-off of the previous acquisition to get operated by someone else. M&A's should not be one and done. This greatly complicates hostile takeovers, makes the business model by which large entrenched entities buy out and kill up and coming competitors, at best, a stalling tactic, but more often a worthless waste of time to the perpetrating company as much as it is to the public.
If you let M&A's have their cake (the capital assets of another company) while giving them the option to cut fat without insisting that they "compensate" the public for the decrease in competition, only one side will ever benefit, and it won't be the public.
They won't avoid it to get some minor edge.
They will avoid it because every company formation and financial advisor will point out that it's commercial suicide to start your own company in that environment, and that instead you should take your idea to an existing company which specialises in opening "nearly autonomous departments", for an instant 30% or so increases in post-tax income, or 30% edge over competition on prices, or 30% edge on salaries you can pay, for exactly the same kind of business. (30% representative of some countries not others... adjust for your locale).
The few real companies specialising in that would love your M&A and tax regulations, as they could take a few % of every small business' profits, and have some levers of control, effectively government mandated.
After that, the millions of small companies which already existed, who cannot consolidate due to your M&A restrictions, will gradually either go out of business due to competition, or find a way, though contracts, deeds etc, to transfer their activity into these "autonomous department" companies without actually merging. It's not uncommon to transfer some of a company's activity this way already, so that would just be scaling it up.
You can try restricting all of that, but it will be very difficult as you would have to do it restrict what sorts of things people can agree to in contracts in a very significant way, and in doing so, restrict what are currently effective business arrangements for some companies to make them less effective. That would be an enormous change to business culture, and I suspect even if you did restrict what can be agreed in private contract terms, alternative ways to transfer what gets done where would be found very quickly and easily.
But it didn't look to me like that's what the GP comment meant. I assumed they meant tax on revenue taken by each company. No need to account for expenses...
I'd hoped that would be obvious from my comment, but if not I hope I've clarified that now.
ps. It looks like other commenters here are confused about this language, and arguing over the semantics of what "tax on revenue" means.
VAT doesn't solve all tax fairness problems unfortunately, which is a shame because it's a fairly well administered system, and good at catching fraud.
There are good reasons why VAT is not the only tax on businesses. One of those reasons is that immediate revenue and expenses are a poor model of many business accounts. Accountants use more sophisticated models (there are professional standards they have to adhere to), and despite their quirks and loopholes, these are generally better, fairer, more representative models of the state and value of a business and the money flowing through it, and as a result, for most "ordinary" businesses (i.e. not international corps gaming the system heavily), that ends up making taxation fairer.
Someone mentioned using a higher rate for higher revenue. That suggests an example where the better models which incorporate time and stored value results in fairer, more appropriate taxation. If you have a higher sustained revenue, year on year, it makes sense to use the higher rate if that's the policy. But if you make zero in year $X and twice your normal in year $X+1, then back to normal in years $X+2..., all just because you had a big customer pay late for the first year, fairness says you ought to end up paying the appropriate tax rate for your steady normal in the long run, not twice as much tax thanks to your late-paying customer!
The accountants' model handles that just fine, as it says you earned the money fair and square in year $X even though you didn't get paid that year. And that's generally better for limiting tax avoidance too, because it reduces the ways in which co-operating companies can game the system by timing their payments to each other to cheat. (VAT doesn't show this problem because it's a fixed percentage, but it occurs with progressive taxes, meaning variable percentage.)
My current biggest gripe with taxation is that it's mostly paid in the countries where the corporation lives, not where the revenue is made. Facebook sells 10 mil worth of ads in France? Facebook should pay (some) taxes for the 10 mil in France.
It seemed like such a simple solution to the often complained about problem of multinationals shifting profits to tax havens, since it’s much easier to determine where revenue is from, but I almost never see it discussed when corporate taxes come up. I wonder if it will ever go anywhere.
For example, if you sell something before you have paid for it (this is very common), and then put the money from selling into a bank where it earns interest, and then withdraw that money and pay for the thing you sold:
You will have made sale_price - purchase_price + interest.
In a VAT system, you will pay VAT on sale_price - purchase_price (or your customer will, depending on how you sell things), but not on the extra interest you earned.
So that's already a loophole. You can game the tax system by selling things before you buy them and earning interest.
If you're smart enough, you might even sell things for exactly the same as you pay for them, and still make a profit due to the interest while you hold the money. You could get even smarter, and hold that money on behalf of your upstream supplier to withdraw when they need to spend it. Before you know it, you're paying zero VAT, and all your profit looks like interest.
But you have to pay an accountant to make sense of all these for you. The cost of the accountant isn't a direct cost of making the thing you're selling.
So that gives you the difference between gross profit (sales price minus costs associated with the thing you're selling) and net profit (what you have after paying for everything needed to run the business).
That's literally a tax on value added.
With a broad enough definition and inclusion of other, unrelated prices at that negative part, one can claim that in a time-frame of several years, both average to nearly the same. But that doesn't make them equal, and if you go read those tax-codes, you will discover the ones being discussed add to very different figures even on the long term.
I'll just add here another encouragement to go out and get an understanding of tax codes. Odds are they will be relevant for everybody that frequents here at some point on their lives, and odds are that if you don't know them, you'll only discover their relevance after the fact, when they have already caused you some problem.
No matter which company in the supply chain pays it!
With VAT, it's raised prices and shown on the receipt.
With other business taxes, it's raised prices and not shown on the receipt.
Customer pays either way.
Of course, competition and other factors also govern prices. It's not a given that changing business taxes always causes a business to change its prices by a related amount.
But that is the same for VAT and other business taxes too.
GP comment (me) points out that the proposed change is not a good idea.
P comment (riknox) points out we can always address that problem by doing what we currently do already (VAT).
I agree, we can solve the problem of the proposed change by continuing to do what we are already doing :-)
Ie, you buy through 1000 transactions, and you sell through 1500 transactions for a net total of +€5k within the country.
Tax that €5k, not the individual transactions.
Unless I'm missing something.
I'm still not seeing how it applies to the proposed example.
For instance, Google France makes 1bn euro in revenue, but purchases Google services from Google Ireland for 999mn, thus almost no profit and thus no tax. Google Ireland make 20bn but pay 19.99bn to Google Bermuda, which is the exclusive licensee of Google IP worldwide (even though the IP is almost exclusively produced in the US).
Taxing revenue means that these shenanigans do not reduce the tax paid in a particular country to zero.
That they would pay French taxes on that €1bn, and the French wouldn't care what they did after that.
I'm suddenly hit with the image of a child whining that having to do homework AND chores is too hard, and their parent telling them to suck it up.
Besides, tax revenue doesn't just disappear into some govt hole, it gets redistributed as services and grants and the like. The loss in operating revenue is likely made up in increased business. Your low margin goods get fked but people are more willing to purchase the higher margin value-adds.
With this thinking, you can very much say that tax revenue does just disappear into some hole. The effect of taxation in this thinking is that it applies brakes upon the accumulation of wealth and causes existing wealth to be worth more (via deflation). This is counteracted by the inflation from created wealth via govt spending.
A weird alternative to taxation could be to print more and more money without taxing any of it. This would be functionally a flat tax on all existing wealth in that fiat currency via inflation.
It doesn't just disappear into the misty fog of the central bank though. It goes onto some government ledger.
This ledger has some considerable effect. It greatly constrains what the government can spend.
If the ledger meant nothing, you would not see government needing to borrow via issuing bonds when it needs to spend more. The cost to government of borrowing goes up and down according to circumstances, and is outside of government's direct control.
In other words, all the parts are related, partly by design, and this strongly affects the consequences of issuing (or destroying) currency at the central bank to the point where it's not really meaningful to think of taxation as destroying currency.
If the government did issue enough currency to go on a spending spree, before long not only would inflation harm other parts of the economy, it would also find that the prices of its spending spree went up, so it would have to issue more, and...
Ultimately no matter how much currency it issues, there's a strong drag in real terms on how many things the government can obtain from others and cause others to do via commerce.
That limit on its spending power makes the ledger balance something much stronger than a hole into which tax disappears.
Most people operate on low margins economically, saving 5% of your paycheck would be an outstanding achievement for many.
Better to tax value adds than revenue, which is simply money flowing through the economy.
All these arguments about which country gets to collect a few percent tax, of a few percent profit, are dwarfed by this much larger slice. Which every country is free to adjust as they wish.
- Collection can be reduced by deducting VAT on company purchases, meaning the company only pays the difference between the VAT charged to the customer and the VAT they've incurred on purchases.
- It's regressive. It primarily affects poorer consumers since it is effectively a tax on the end user rather than the company.
- Some countries aren't free to set their own rates. For example, in the EU the standard rate cannot be set below 15% without first changing EU law (and convincing a majority of Member States to agree to do that) so it's not very competitive.
There's an argument that VAT is regressive but this isn't it. Who effectively pays (meaning economic incidence) is complicated. But sometimes it works out that poorer people pay a larger proportion of their income in VAT than do richer people. It seems entirely OK to have a mixture of regressive and progressive taxes.
And sure, not completely free within the EU, but the range of acceptable rates is pretty wide, maybe 17-27 exist today? I haven't done the numbers but France could surely raise an order of magnitude more money from VAT than they collect from corporate profits, if they wished.
VAT is definitely not a tax on profit, that's usually called "corporate tax" [2] which is a completely different thing.
https://www.amazon.com/Fine-Mess-Global-Simpler-Efficient/dp...
See ~26 minute into this interview for a more in depth proposal that makes a lot of sense. Separate collecting money and spending money. https://www.econtalk.org/john-cochrane-on-economic-growth-an...
This is not a problem, this is a benefit. If you separate tax collection from tax policy you are still able making economic and social policy via other tools.
Basically tax policy is a low bar to entry way to get the laws you want but in a lossy capacity. Instead of making something legal/illegal outright you can just make it "illegal unless you jump through hoops and/or pay money" or you can provide a tax incentive for something you like (easier to sell than a subsidy). This lets you get dumb policy that would otherwise never pass. Big business benefits from this by getting carve-outs that make them more money or by getting policy that lets them use scale to their advantage. The authoritarian upper middle class benefits from this by using tax policy to create a carrot/stick system to kinda sorta make the poors act the way they want. And of course the government and politicians benefits from the current system because it gives them influence and power.
So right now we've got big business, the top ~30% or so of society and politicians/the government benefiting from the status quo. In order to remove politics from taxes big business is going to have to pay more (or everyone else will have to pay less, an equally large pill for a lot of people to swallow), the upper middle class will have to lose a set of carrots/sticks to kick the poors around and the government will have to accept a net decrease in power. The only way to get these groups to accept this is to spend a century boiling the frog. I don't think we'll ever get simple tax policy overnight.
Especially because the way a lot of deductions end up working in practice is that you withhold the money from people in the first place and cash it out in the end of the year when you calculate your actual tax burden.
>It is more efficient to let people keep money than it is to take it from them and give it back
Direct subsidies in the form of tax credit don't incur any costs of moving money because no money are moved, but functionally it is almost the same.
Since you can’t control what other sovereign nations do all you can do is make laws restricting what companies that operate in tax havens can do in local jurisdictions. But they will of course lobby that you’re restricting freedom and hobbling your economy and take their HQs elsewhere.
I hate the derogatory use of "race to the bottom" since it's the reason why we have handheld computers in our pockets and 60 inch flat screen TVs that cost $300. Every company is "racing to the bottom" to provide as much value for the least cost as possible.
Part of my brain wishes that law would actually mean justice but somehow, if I trust only what I know, I cleary cannot judge, as you do, if finance engineering is good or bad.
I'd like to know what prevents you to choose if it's good or right (as person who have worked inside the business)
thx
Just as I don't have feelings about laws of physics, I don't have any feelings about economies of scale.
Lobbying is a bit different. Like most folks, the idea of 'lobbying' strikes me as wasteful/corrupt. But if you try to come up with a definition about what 'lobbying' is, and how you might try to restrict it, you realize that it is very difficult to do so without being underinclusive or overinclusive (or both!). So while I find the idea distasteful, I don't have any answers on how to 'fix' it.
- You clearly differentiate between opinion, observation and fact. - You don't try to find an easy answer.
Thanks. Comments like these make me come back and read on HN.
Are people aware what everyday lobbying is in it's most basic form? It's companies engaging their elected representatives on policy issues relevant to them.
So when the Obamacare bill was being written, the AMA (representing physicians) lobbied Congress to make sure their views were heard. Completely legitimate. Another example might be a crime bill where the ACLU lobbies Congress. Or the EFF lobbies Congress.
And the lobbying dollars that are spent aren't bundles of cash given to Congresspersons, it's dollar spent on lobby firms that have armies of experts who know how Congress works, who to talk to and how to craft an argument that resonates. That doesn't come cheap.
Now up to this point nothing illegal has happened. You could argue it's unfair that businesses (well, more accurately organizations) have better access to Congress than individual voters, but groups will always have more power than individuals (since they represent more voters). There is nothing to stop a group of voters from forming an organization to lobby Congress on a specific issue. Again, that's what the ACLU and EFF do.
It seems like most people see "the AMA spent $10M on lobbying last year" and picture lobbyists passing bags of cash to Congress. No, that's illegal and has been for a very long time.
Here are 3 rules that would stop lobbying overnight.
1- Make house of reps sole body to set tax law at federal lvl 2- tie reps in house to very specific, low pop counts. For ex, 1 rep district = 25,000. This would mean house would become gigantic. 3- randomize election outcomes. Swap winner of city treasurer with senate winner. Swap rep seat with state assemblyman. Every seat should have a high random chance of being swapped. If winner does not like position. We should even do this with presidency.
This solves federal level lobbying by taking (1) power into a (2) decentralized body and also (3) inserting downside for lobbyist.
Physicists can be wrong.
Economists can be wrong.
At some point technical nonsense becomes “imperfect people choosing.”
A fix might simply be change tax laws? Kind of like how the billionaires changed them to be less distributed.
But you don’t have feelings enough about economics being purposely wielded at scale to manipulate; let’s hope you’re still one of the privileged enough to be indifferent and comfortable in the future.
popcorn
Real-time meltdown of Pax Americana is pretty metal.
I mean, sure a physicist can be wrong, but if they are giving facts as are currently accepted by the community or even as they know them, it isn't an emotional statement of whether they agree. It is just that: Facts as we know them, to the best of our ability and not giving the commentary with it.
Economics are defined by humans.
They’re taught to each other by humans.
It’s all wrapped in how we treat each other at scale.
Separating the two is impossible except as a semantics game.
Try getting an admission like that out of an economist!
If you read between the lines, you can see that he understands that people have reservations (and probably he has chosen). He just chooses to explicitly not make a statement about it, and keep this a technical discussion.
In todays highly politicised society, this is (in my opinion) a sensible thing to do.
Further, financial engineering by itself is morally neutral. It can create abuses sure, but it can also reduce unnecessary costs so that a company can employ more people, offer goods and services to customers at lower prices, etc. Tax is just one piece of a much bigger puzzle and it can’t always easily be disentangled from other issues.
I’m reminded of the saying about porn, you might not be able to define it, but you know it when you see it. There are plenty of publicly discussed cases of pretty clear and egregious tax evasion, but not all efforts to limit tax liability are abuses. Some of them are responses to deliberate incentives put into the tax system to encourage specific behaviour.
If you want justice, you have to apply political leverage to steer power in its direction.
Law is also the UI for political self-interest. Unfortunately the same leverage principle applies. Which is why it's almost impossible to get real justice - including tax justice - in a plutocracy. The scales are tilted too heavily in the opposite direction.
The answer is to balance plutocracy with effective political organisation, but that's an incredibly hard problem to solve at all, never mind peacefully.
The second reason is that I don't believe people view money fractionally - I think they look at it absolutely. For me am million dollars is a lot of money. For Bill Gates though a million dollars is ... a lot of money. It doesn't matter that he's a billionaire he's still not going to throw around a million dollars the same way I'd throw around the same fraction of my wealth that a million is to him. He still recognizes the absolute value of that money and he can still see it's potential to make things happen in the world just as I can see what a hundred dollars (or whatever my fractional equivalent is) can do in the world.
You both need to stop speculating about Bill Gates.
Would you mind chatting about your expertise here? Do you think there is any feasible way of generalizing these tax avoidance structures so that Joe and Jane can reap some of those sweet sweet loophole benefits as well?
Mind you, most actually poor people have a low tax incidence in the first place due to progressive tax rates.
Could you elaborate, from your experience, what happened to these $$$? Do they sit in banks without being used or do they get get invested and recirculated in the economy?
Also, given that just about every function of the US govt has been privatised, what would the US govt spend this money on? Spend it on defence (and channel the money back to private defense entities)? Pay off trade deficit? I'm not aware of US budget break down on expenditure side so any pointer would be great.
IIRC defense is about 20% of the US federal budget. About 40% of that (ie 8% of total federal spending) is paid to staff. In some ways it's the largest redistributive program.
The trade deficit is private, it's an accounting summary between private importers and exporters. Nothing to "pay off".
What? I don't think so. If money is the only thing they care about, sure. But is it? Should it be? And if breaking the spirit of the law is fine, shouldn't breaking the letter of the law be fine as well? As long as the risk is low enough..
</rant>
Also things sure do look different when you are at the helm. If you decide your company should pay more in taxes the board will probably vote you out on your ass.
There's no law against breaking the spirit of the law. Breaking the spirit of the law will only get you tried in the court of public opinion. Breaking the letter will also go to a court of justice.
In some states the judges are quasi-politicians with an implied mandate to rule how they think the people want them to rule. In others the judiciary is a system for evaluating the law and they see they consider it their mandate to enforce the law exactly as written, especially when it gives the legislature and the public the middle finger because that's the incentive for those groups to write and demand good law.
This is why laws need to be crafted to not give companies the benefit of the doubt when it comes to acting in the best interest of society. Less because it is impossible for a company to be moral in a vacuum, but because if being immoral is allowed and advantageous inevitably the immoral company will out compete the moral one. (Of course it can be hard to agree on what moral is. Some say that taxes are immoral after all.)
The tax treaty document between the US and this country was over 100 pages long. When it came time to actually take the tax advantages on a return, we decided to figure out what the risks were of being audited and potential penalties. We engaged several tax experts to give their opinion.
What ensued was eye opening. We received wildly different opinions depending on the expert. The entire case hinged upon how one line in that 100+ page document could be interpreted. At the end of the day you are subject to the mercy of the IRS. For a large corporation, you may be able to afford the litigation (or avoid it all together as you could proactively play to the court of public opinion).
For us, we decided to fire the tax consultant and pay the tax. It was - for us - a very large sum, several million dollars.
Ultimately the “laws” are less like a set of rules and more a set of malleable guidelines. People who say, “oh I can just take whatever loopholes I’ve been given” don’t understand the sheer complexity and ambiguity of the tax code.
While I’m disappointed that we “lost” that money (one could argue it wasn’t ours to begin with), and disappointed that others are morally flexible enough or big enough to get away with it, I am left with the feeling that we did the right thing for the country as a whole. I am sad that more companies and individuals don’t consider that in their moral calculation.
Many larger orgs would just try to go for a causal firing, so they can block the employee from receiving unemployment. It doesn't even matter if they're an otherwise decent employee. We'll save money so lets just lie, basically. It's pretty crushing to the individual, and IMO this practice should be abolished.
This is totally anecdotal and plenty of small to medium businesses act shady, but it's interesting that things tend to get even shadier (lawful evil) as things scale up. Yet there's less at stake for the individual employees and more ability to "not be evil", without closing up shop.
I wonder if it's laziness or by design.
> While I’m disappointed that we “lost” that money (one could argue it wasn’t ours to begin with), and disappointed that others are morally flexible enough or big enough to get away with it, I am left with the feeling that we did the right thing for the country as a whole. I am sad that more companies and individuals don’t consider that in their moral calculation.
That's the thing: Moral should never come into play. If it does, that means the law wasn't written properly.
Some excerpts (it's a great, long piece. Read it all):
"In 2017, researchers estimated that fraud by America’s largest corporations cost Americans up to $360 billion annually between 1996 and 2004. That’s roughly two decades’ worth of street crime every single year."
"Even though auditing millionaires and billionaires is one of the most cost-effective government activities imaginable—an independent report estimated in 2014 that it yielded up to $4,545 in recovered revenue per hour of staff time—the IRS investigated the returns of just 3 percent of American millionaires in 2017."
"It is, as one of those high-priced lawyers might say, improbable that these demographic and economic facts exert no influence whatsoever on judges' rulings. In a 2012 review of sentencing data in Florida, researchers found that “high-status” white collar criminals, such as doctors scamming Medicaid, were 98.7 percent less likely to receive prison terms than welfare fraudsters. A 2015 study found that judges showed increasing mercy as fraud offenders moved up the income scale: Criminals who stole more than $400 million got sentences that were less than half of the minimum recommended by federal guidelines. Criminals who stole $5,000 or less served sentences well over the minimum."
"The only thing that consistently worked was to combine them— warnings from government agencies, surveillance of the worst actors, harsher punishments for repeat offenders and, yes, at the top of the ladder, criminal prosecutions for corporations that refused to shape up.
This is hardly some exotic, untested concept. When it comes to every other form of crime, law enforcement agencies are perfectly comfortable cracking down on offenses at every level. This is the country that invented three-strikes laws and “broken windows” policing. When it comes to street gangs and drug distribution networks, the criminal justice system has no problem simplifying complex criminal liability questions into four simple words: You should have known. "
There is a reason for that - said strict criminal liability is broken it just breaks single lives and horrifyingly can be ignored. But break an entire systems and that leads to instability.
Take a complex economy with byzatine rules - either you have selective enforcement and effectively a dictatorship with extra steps or it is applied mercilessly across the board. Given the added risk to investments unsurprisingly many would choose to get the hell out of there.
Really the answer should be to do away with strict liability bullcrap.
I know of one "gotcha" that works in my country at least: work for low / no wage but instead have loads of assets like stocks; dividend taxes are much lower than income taxes.
I could be wrong. I'm just reminded of people like the Google founders who humblebragged about only earning $1 / year in salary. They still became multi-billionaires off of stocks.
In my country, assets are taxed by a percentage of a percentage (they tax estimated return on investment, which is ridiculous if you only have a savings account that nowadays has either no interest or even negative interest). I think there should be an additional tax on any money or assets moving out of said investment account.
Because that's how rich people do it; they hardly pay any taxes because they have hardly any taxable income or assets. They put their house into a corporation or foundation, funnel any cash they need through various shell organizations and tax havens, etc.
It's not just that a corporation owns their house, it's that another corporation owns that corporation, and a holding company in the Cayman Islands with a nominee director who lives in a postbox owns everything, except the IP rights which are in Panama - this year. And personal spending goes through a credit card set up by their own personal offshore bank, which effectively makes it loan. Etc.
If there are enough shell companies you can decide your own tax payments, because you can hide everything you choose to hide. It's not that these networks can't be disassembled, it's that they can't be disassembled efficiently. It can literally take months or years of full-time auditing effort to trace all the relationships.
You then either rent the house from the trust for a minimal amount, or the trust lets you stay there rent-free as a guest. This is also how many of the wealthy get around inheritance tax. When you cash in your chips your will appoints your offspring/significant other as the primary beneficiary and the wheel keeps turning.
As with all things in life knowing the thing is often the hard part. Most of us don't know what questions to ask.
This is a common trick in the UK, or at least it was before the IR35 crackdown. Programmers, sportsmen, celebrities, even politicians and civil servants would run single-person companies and get their salaries paid to them. Then those companies in turn would pay them in dividends.
Only first 2k of dividends is tax free, then its 7.5% within the basic earnings band, and 32.5% in the higher band.
This is from funds that have already had 19% corporation tax applied to them.
Of course anything paid as dividends doesn't attract either employees or employers National Insurance so there's a saving there, and adding a spouse or partner as a director allows the income and dividends to be split so reducing tax.
Merging National Insurance into Income Tax is one way to start addressing the issue also simplifies administration work (for companies and government) but you'd get the political issue of tax increases on pensioners savings.
Fundamentally we need to start treating earned (salary) and un-earned (interest, dividends) income the same from a tax point of view
For income tax apart from the £2k(divi) and £500 (savings interest) allowances, it is already on the same basis.
One regulatory ideas I thought of was a salary cap on criminal defence attorneys (lawyers can make as much money as they want in civil law, but letting the wealthy hire a different league of lawyers in criminal cases is a huge distortion of justice). This is all more about actual crimes than violating the spirit of the law, but maybe the same could apply to tax law. (I feel like there must be a flaw with this, would be happy to hear what it is.)
(Wrote more about the book here: https://www.goodreads.com/review/show/3507224023)
If you want to go this way, you have to go for the full-fledged solution: either the defendant choses their attorney (at a capped price) or an attorney shall be selected at random among all attorneys registered with the bar and must take charge of the case, the only exception being if they have a valid conflict of interest in that case.
I think the imbalance is actually much worse in civil cases, which are disputes between people who ought to be peers. the fact that people have to give up their right to see an opponent in court because they can't afford counsel seems much worse than some rich people getting a better defense against the state.
Prosecuting you is cheap and easy. Prosecuting a multinational billion dollar company is expensive and difficult.
One of the reasons it's difficult is that they're not (usually) outright evading tax. They're avoiding tax. The law is what's written, but also how that's interpreted by the courts. Sometimes the courts have not yet decided how to interpret a bit of the written law, and so companies will continue to use those bits in interesting ways.
Finally, some places have a "light touch" approach to regulation and they use courts as a measure of last resort, for the worst offenders. Everyone else will be persuaded to change their tax affairs. One consequence of this is that courts only rule on the obvious stuff, and we don't build up case law for the gray areas that get used in tax avoidance schemes.
I agree it's baffling that we let them get away with it. In the UK we think there are between £30bn and £120bn in tax that's evaded, avoided, or uncollected.
Edit: Just for the record I'm against benefit fraud and tax evasion.
If we want the free market to work, business models need to be clear. We want people to see a successful business and say "hey, I can do that better". Part of that is transparent accounts, and part of that is transparent ownership.
Would also help againt some of the more egregious frauds we've seen in recent years. Some of them would have gotten caught if they'd just had more eyes on them, and you get more eyes if things are transparent.
The same standards do apply, the loopholes just don’t really exist down at a normal individual income level.
Calling it a “loophole” is a bit of a misnomer as well since it’s just the regular law. Being a subsidiary of another company is extremely common and isolating particular resources into subsidiaries with exclusive licensing/usage agreements for liability/accounting/ownership/management purposes is extremely common.
> These tax shenanigans would stop if laws were enforced.
Again, the laws are enforced. Tax avoidance schemes operate within the bounds of the law. It sounds like you’re confusing with “tax evasion”, which is illegal and is enforced.
This is because the tax system actually has 2 conflicting uses: (i) collect revenue for the gov't and (ii) create incentives/disincentives that are meant to push taxpayers in ways that are deemed beneficial, be it to the economy or to certain policy like environment, housing, etc.
If you drop (ii) you can end up with an extremely simple tax code as most of the tax code complexities deal with those incentives/disincentives.
So the question is: to what extent can you do away with (ii), or more generally with tax code complexity?
I don't think this is entirely correct. Even if there were no deductions and no other complexities, and the corporate income tax was simply based on "all revenue minus all costs", a company could still reduce or even eliminate its tax burden entirely by simply paying IP licensing costs to a different company located in a tax haven.
The original intention of corporations was to make more money for their owners and that is pretty much still the case. Chartering and regulation were introduced later, to curb the worst excesses of human greed. Arguably, this very discussion thread and the push by governments to curtail tax evasion is proof of that ongoing process.
There is no company that would just exist to forever eat money away from the public. Eventually they intend to pay the profits to a real person (either in money, or other benefits). Taxing that dividend or salary transaction might be simple enough to just work. And you have a real person to put to jail when the taxes were avoided.
Ingvar Kamprad net worth was "only" 3 billion $
That's about 25 billion $ lower than if he had unfettered access to all of IKEA's worth.
https://www.forbes.com/profile/ingvar-kamprad/
If you like how the company you built spends money more than how the state spends money, you're going to want your company to capture more money/worth without relinquishing it to the public. Another rationale could also be when you can give a stake in your company to your family, that way you won't ever have need to pay profits during your lifetime, since the company (which could be a charity) will actually work as a cross-generational fund.
Also, this works well with the ethos of some companies (like Amazon, allegedly) which reinvest a lot of their profits to cut margins/develop new products... And overall just tighten their hold on the market
Should a businesses goal not be to tighten their hold on the market? I’m pretty sure if I don’t, someone else will.
However, the owners of the company are humans that do not need to be constrained by those rules. Indeed, humans can hold other values higher - such as seeing that acting in the benefit of the entire society or even to benefit the entire planet is better than focusing on the best for a single corporation.
Pretend for a while that you are the majority owner of an internet company that preys on attention. You can capture the attention of millions, even billions of humans, and grow your vast empire. You can even become so successful that humans choose your product before the attention of other humans, choosing the dopamin kick from social media before real social interactions.
But...should you? Replacing the social interactions of an entire planet might make you rich today, but the price might be very high. Even your own offspring might suffer and perish in a world where social life has been replaced by hearts, thumbs up and endless scrolling.
That's a 2020 benefit to an entire society that arose from 25 years of effort to grow in a sustainable way.
So while you can get rid of corporate taxation, the tax treatment of natural persons at death means that folks could greatly reduce the amount of income realized during their lifetime.
This would mean that they essentially pay a "wealth tax" (interest on all their borrowed net worth, with probably a decent premium for the risk) to the bank.
> Then when the CEO dies, the loans are repaid out of the estate.
And at this point, income is raised out of the company and would become taxable. At least where I live, the estate of a natural person pays taxes for their income like a living natural person.
> the tax treatment of natural persons at death means that folks could greatly reduce the amount of income realized during their lifetime
But they'd still pay the taxes eventually. I don't see this as a huge issue. If the society can't wait to get their the taxes (IMHO a nation state should plan for timeframes longer than a single lifetime), they can use the same trick to get a loan from the bank with the future tax income as collateral.
Personally I don't think it is fair or likely healthy in the long term for the society to let vast majority of the income/wealth of wealthy and thus powerful people to go untaxed - even[1] if that income/wealth is not consumed.
[1] Actually it should be "especially if it is not consumed". In the old days there was a shortage of capital for investments indicated by relatively high interest rates. Nowadays there is shortage of consumption. But that to my understanding is a bit of a heterodox view, so I am just leaving it there.
But this is already happening even with the current system that attempts to tax company profits, isn't it? My point is that taxing the person instead of the company would enable taxing the wealthy. There are already quite severe restrictions of using company assets for your personal benefit, at least where I live that is taxable as income.
I should amend how I expressed the idea: I never meant that companies pay no tax at all, only that they'd pay no tax on profit (which can be hidden for the yearly checkpoint by creative accounting). That leaves all sorts of tax categories still available for use (land, transactions, resource usage), which are much harder to hide or deny. A company making profit would be involved in some activity that would be taxable through these. Money on a bank account is by itself a bad medium to store wealth, as it's generally subject to 1%~5% yearly inflation.
Whether wealth (aside from income/profit) of individuals or companies should be taxed is a different discussion. Many countries choose to tax wealth only when it's in form of land or constructed property.
One of my pet ideas is to stop taxing income/profits of limited liability companies completely. Instead make the the companies issue a certain percentage of their stock to the tax authorities annually. For public companies, Tax authorities just sell the shares in exchange. For private ones, the shares would be auctioned publicly.
Outcomes: - No negative tax cashflows to companies. Ever. - No need for creative tax accounting. Only ones left to fool with accounting are the owners of the companies. - Strong incentive to simplify corporate structures. Any company owned by a company would add to tax burden of the ultimate owners.
(For private companies, it might be nice to allow them to ask to postpone the auctions for e.g. 5 years if they want to keep the control of the company but are short of cash to buy the stock from the auction)
No company could be held privately in perpetuity. Taking ownership away is very different from taxing ownership.
In my model, either company can afford to buy back the stock from the auction thus keeping the company completely private, or then it does not, thus diluting current ownership.
(I personally would expect a tax rate of around 1% p.a in my model. If your company can't buy back 1% pa of its stock without needing to pay any other tax, I am not sure it is a healthy company)
Last, strongly ideologically, in my opinion limited liability is so massive benefit given to the owners by the society that I am not sure there is any reason to even have perpetual private limited companies. Either you grow up to public scrutiny of a publicly traded company or you do not succeed and die trying.
(But just to note, currently I am forced to pay tens of percentage points of my total salary as taxes.)
As for taxes, yes we all pay more. But we do not have our earning power attenuated each year because the government forces us to put ourselves on some incremental slave block.
At the end of it all, laws are enforced by the judiciary. The judiciary (similarly to politicians) are human people, and each individual's interpretation of what is law will vary.
Probably the biggest example of the difficulty of enforcement is the Irish Apple case[0]. The European Commission carried out a two-year investigation that found Apple avoided paying €13 billion in taxes to the Irish state. The Irish state rejected the Commission's findings and appealed the findings to the European General Court (EGC). And the EGC found in favour of the Irish state (and Apple).
Does this count as laws being enforced?
[0] https://en.wikipedia.org/wiki/EU_illegal_state_aid_case_agai...
I feel like if that's the case, then you shouldn't expect the US Government to participate in the enforcement of your patent. You licensed in some tax haven? Then adjudicate it in that same tax haven, we want no part of your disputes over it.
This is hugely impactful because the 'lost profits' method can generate much greater payouts than the 'reasonable royalty' method.
This isn't motivated by the sentiment you express, but it nonetheless illustrates that companies that are aggressive on taxes can end up getting bitten in other arenas.
Because the tax code is relatively simple for W2 employees. Not so much for corporations.
> "You're technically owned by an Irish company you invented to avoid taxes? Cool. The c-suite plus your accountants are going to prison for the next five years and we're seizing the X billion you actually owe plus a punitive fine."
It gets doubly complicated once you cross borders, because transferring assets like that might be legal under some treaty between country A and B.
Truth is, if society doesn't want these practices to be legal it has to write a tax code that doesn't make them legal.
This used to be a typical loophole but is being closed by the OECD, a lot of tax havens are now taxing royalties differently. 10 years ago after reading up on this, I've decided that it was only fair for me to read up and try the same methods. I didn't see why I should pay high taxes when the richest in my country didn't.
It's not overly difficult to do this completely legally (that's the difference between tax avoidance and tax evasion), it's not an issue of the laws being enforced, it's mostly that there are many countries in the world and some have an incentive to compete on tax law. So, you can do a lot while still being completely legal (it's easier though if you are willing to move and live in different countries and if you're not american but still possible otherwise).
In the last 5 years, the OECD has been fighting against this and forced a lot of tax havens to change their laws. From my read of the texts and has someone who has been impacted by this, it doesn't really make avoiding tax impossible just more expensive, meaning it's increasingly difficult and costly for a single person who is middle class like me to do it but still relatively easy for big corporations with an army of accountants to do it. I'm not sure that's really an improvement.
When the money flowing through a corporation actually makes someone rich, it becomes his personal income. It's not clear that corporations paying their own taxes is even a good idea vs. collecting the same revenue through higher marginal tax rates on the beneficial owners.
Even if a plane is already going from City A to City B for business purposes, if the CEO brings a spouse along for personal reasons, there can be reporting consequences. Of course, this only matters if the company is under sufficient scrutiny to actually report such details.
If you are interested in the details of this, Google "OECD BEPS transfer pricing"; it is quite a fascinating topic.
On a side note: The same updated guidelines, when misapplied by an aggressive tax authority, can cause all sorts of headaches for fully-distributed, fully remote companies, and the extent how this can cause trouble is underappreciated by the startup scene.
Your intuition is wrong. There are lots of small business people that expense everything and pay negligible tax if any.
Unless that income comes from qualified dividends or long-term capital gains. In this case, a married couple can have $24,400 a year in income AND $78,750 in investment income, TAX-FREE"
If you can get 78k$ yearly investment income from index funds, you already have a net worth of several million $, and you're thus already among the people that don't need to work (or you had some incredible luck for smaller investments)
*and have $5M+ in assets
Similarly limits on capital travel hampers both foreign investment and international business expansion as it gets "routed around".
IP expense transfers are the third piece and whatever was tried to do away with would result in giving up what the US already wins big on.
It isn't a problem of enforcement. Every last piece is policy of the loophole is policy working by design.
Long-story short, my bet is:
- Sales tax (VAT)
- Inflation
- UBI
Sales tax is far less gameable as it's linked to concrete economic activity. It also has the benefit of tracking the added value produced by an economy (it has the right properties as a tax). It has a problem though, it's regressive, see last point. Every economic activity should be included (e.g. stocks should have a VAT; you sell stock you collect VAT, you buy stocks, you pay VAT). Some progressiveness may be included by using different VAT rates for different products, to be done judiciously.
Inflation is a fantastic tax, very hard to game as it's quite pervasive and taxes the accumulation of capital so it tends to be distributive, anti-regressive. Cash sitting idle does nothing for the economy so disincentivizing it makes sense. This doesn't mean that inflation has to be high (the usual moderately low and positive that economists aim for may be reasonable), just that inflation should be seen as the taxation mechanism for the accumulation of capital. And we shouldn't reduce it to a single number for the entire economy but understand how inflation is evolving in the different parts of the economy to make sure monetary and fiscal policy are hitting the targets.
UBI, fixes the regressiveness of VAT. UBI is not too different from having a lowest tax-free income bracket or even negative-tax income bracket if you prefer to look at it that way. UBI can also help hit the right inflation rates in consumer products which we have been having great trouble achieving through conventional central bank policies.
I think this mix is far less gameable, tracks better the size of the economy, places the right incentives and disincentives and will survive better the ongoing economic transformations (good luck taxing income when most of the economic output is produced by computers).
My point is that the idle capital held in monetary form does nothing, so I want to disincentivize that to some extent. While I have nothing against that capital being available to an enterprise, they inject it back to the economy through their CapEx, R&D, income for employees, etc...
Potentially a company may also sit in vast piles of idle money (e.g. Apple), the value of the company will take into account the DCF and also the existing liquid reserves. In that case the liquid reserves will be progressively diluted by inflation and again, that's a desired outcome (in my view).
_Thomas Picketty has entered the chat_. History has shown that the rich are able to (easily) outpace inflation, while the poor (read: effectively ~95% of the planet) do not.
So I'm not too sure that is a desirable claim to make here.
UBI by itself is progressive, a simple flat UBI creates a progressive effective rate. You can tweak the numbers to obtain your desired target tax curve; increasing or decreasing UBI, having different VATs for different products. As John Von Neumann said, "with 3 parameters I can draw an elephant and with 4 I can make it wiggle its trunk". There is enough free parameters to make the taxation more or less progressive.
I'm not prescribing those details because I think there should be ample room for fine-tuning. What size government spending should have in an economy and how progressive should a tax system be are questions that different countries have answered differently and you find success and failure all across the spectrum. So I consider it a transversal issue.
My focus is on efficiency, resiliency to abuses/gameability and economic incentives.
My concern under a sales-tax only system is that politicians also like to be seen as aiding employment and a sales-tax only system does not seem as supportive of employment as today's system where employment expenses are offset in part by their tax deductibility. No one goes out and employs someone for $100 to save $20 on taxes (still -$80), but I still employ more people when it costs me $80 than when it costs me $100 to do so. In that regard a VAT is superior to a straight sales-tax.
https://www.propublica.org/article/ultrawealthy-taxes-irs-in...
These tax shenanigans would stop if laws were enforced.
Those who could enforce them have no interest to do so.
Seems like this is a bit on the difficult to enforce side. Incidentally, profit is what is taxed, so the easy way to avoid tax is to simply not be profitable. Individuals pay tax on all of our income from interest and employment so this difference always feels somewhat unfair. The very laws that allow companies to avoid paying income tax are usually created as incentives: do this (HQ in Ireland), and in trade, you get to pay less in tax. The C suite and lawyers are usually guilty of meticulously obeying the law, which really makes the whole thing feel even more unfair. Reality is that the system is working as coded, but there are bugs in the code.
These tax discounts should really be subsidies, and open to the public to view.
Proper accounting is where fairness starts.
The "corruption" is a feature, not a bug. If you truly want go get rid of the assymetry, then the answer is not more regulations and extractions, but less across the board. Fund the services without relying on taxes to income, not only will it be fair for you and mc.corp, it will also create efficient market incentives and eliminate the vectors for corruption when there is nothing to gain.
Concentration of power in congress is a feature, not a bug.
You can remove concentration of power and simply aee corruption/bribe/lobbying dissappear overnight
See my post above for how to do this with 3 simple laws
the laws are generally enforced the problem is various companies and nations working very hard to make sure that loopholes in the tax code are preserved.
My intuition is that if I personally came up with a cute "gotcha" like this where I wound up paying zero in taxes because of some loophole, I would go to prison. Why isn't the same standard applied to rich companies?
"You're technically owned by an Irish company you invented to avoid taxes? Cool. The c-suite plus your accountants are going to prison for the next five years and we're seizing the X billion you actually owe plus a punitive fine."
These tax shenanigans would stop if laws were enforced.