Human beings cannot do the equivalent. Spend the entirety of your 20s making very little money because you are investing in growth and then make $800k as an orthopedic surgeon at age 30, and you’ll pay the top marginal rate. You don’t get to go back and use all the unused 24% bracket income from prior years. You also can’t deduct the interest on the loans you took to finance that growth.

They can to some extent, actually... See IRS publication Publication 536, "Net Operating Losses (NOLs) for Individuals, Estates, and Trusts".

> Spend the entirety of your 20s making very little money because you are investing in growth

To actually do the equivalent you would need to spend your 20s _losing_ money. And if you do (in the NOL sense per publication 536) then you can in fact keep rolling the losses forward to offset future income until the losses are exhausted.

Now one issue is that things like medical school tuition are not considered "losses" for individuals. So in that sense there is a definite asymmetry here.

But businesses can't "go back and use all the unused 24% bracket", not least because US federal corporate income tax does not have brackets. What they can do is that _if_ they have negative taxable income (i.e. revenues - deductible expenses is negative) then they can roll the "unused" part of the deduction into future years to offset future revenues, which is exactly how NOL works for individuals. The primary difference between businesses and individuals here is in what counts as "deductible expense". The business definition is much wider in general, not just for purposes of NOL.

> You also can’t deduct the interest on the loans you took to finance that growth.

Well, you can until you start making that $800k/year. And only up to a limit, etc. Just like so many other things in the personal tax code, there's an income phaseout and a cap for student loan interest deductions...

As I said above, corporation have a much larger set of things that are considered deductible against revenue to determine taxable income. Starting with the fact that corporations are generally taxed on "profit" while people are generally taxed on "income", which is closer to "revenue" in general.

That’s not really an equivalent, though.

These companies aren’t simply giving up opportunity cost. They’re spending real money on real R&D expenditures. In software, that R&D expenditure is largely wages for developers like us.

The tax code gives companies benefits for spending this R&D money because we want to encourage them to make the R&D investment even if it comes at a loss (to the company, the employees still gain wages) for several years. We need to think long and hard about changing incentive structures in ways that reduce incentives for companies to invest in R&D and spend money on paying people.

Deducting every cost associated with a job would be a huge tax benefit that simply doesn’t apply to people. It’s one of the ways that referring to tax burdens based on income as defined by the tax code is misleading.

The initial cost would be tax deductible and could rollover across multiple years, therefore in effect the principle is deductible even if the specific payments aren’t. The way the deduction actually works is actually better than simply deducting principle payments from the loan due to time value of money.

The issue with accelerated depreciation is it’s a subsidy. The government is paying interest on it’s debt so companies can defer tax payments, that’s directly costing actual taxpayers money. Further, communism has already been tried and it’s a bad idea, we really don’t want central planning as part of the tax code because it’s a bad idea. Subsides for industry X over industry Y has all the same issues.

No, if a company buys say land they can’t deduct anything because land retains value until the point of sale. The same is true buying stock or other items that maintain value over time. The general rule is something is a deductible expense at the point of destruction or sale not purchase.

Depreciation is therefore an acceleration of that process. Companies for example used printing presses for a hundred years meanwhile during much of that time the actual value increased above it’s purchase price due to inflation. It’s surprisingly common for companies to sell something for a profit that they have already fully deprecated.

> I don’t understand the point you are making on communism

All specific tax exemptions for business are communist in nature because they replace market forces with government choices. It’s very obvious in the case of farm subsidies for example, but it’s a generalizable rule that government subsidies reduce market efficiency by incentivizing inefficiency.

As to depreciation being an exception that’s what it means when you change the baseline rules of a system with new rules. By default you take the deduction on sale, depreciation means you can take deduction early. It’s literally called “Modified Accelerated Cost Recovery System (MACRS)” the entire point of it is to speed things up rather than as you suggest slow anything down. Thus removing depreciation from the tax code and companies would need to wait years or even decades or deduct these costs from their profits. Thus as I said before it’s a hand out which happens to be built into the tax code.

The day it falls down it stops being useful, the day before that you have full use and therefore value of the building.

Or as I said several posts ago: “The general rule is something is a deductible expense at the point of destruction or sale not purchase.” Sure, it burned in a fire fine assuming you don’t have insurance then it’s a loss at that point.

Really equipment is generally binary either it works or it’s broken, unless you’re selling it then it’s exactly as useful on day 2854 as 2855. Worse, well maintained equipment lasts far beyond the accelerated depreciation benchmarks used. Anything not thrown away the day it’s theoretical value hit’s zero is unambiguously a subsidy, but so is anything with scrap value etc. But, as I clearly demonstrated the idea of depreciation it’s self was created as a subsidy.

> Accelerated depreciation means you pay less tax and have more money at the start of a project when it is needed and pay more to the government later when it has stabilized.

People say stuff like this, yet hopefully suggesting the government hands out zero interest loans to group X raises red flags. Depreciation is a subsidy in effect a zero interest loan and that in and of it’s self is a problem. Opportunity cost is a huge deal and trying to ignore that is why central planning fails.

Initially the company, though audits and penalties help keep them honest.

> accelerated depreciation is a big factor in determining whether projects occur

And clearly that’s a problem. Just as government farm subsidies waste money growing excess food accelerated depreciation causes significant economic waste.

> CPA

Ahh, there’s your problem a CPA has nothing to do with economic issues. This is an economic and thus a policy issue but you’re trying to argue based on the existing law rather than the underlying reality. I don’t expect you to get a in depth education on the topic, but if you’re interested I can recommended some good books to get you started.

But to summarize a huge body of work, the broken window fallacy demonstrates that economic activity isn’t inherently beneficial. Maximum efficiency isn’t equivalent to maximum GDP etc. As such policies that increase economic activity can be and generally are detrimental.

Expenses such as:

1. Rent 2. Marketing 3. Equipment 4. Student loans 5. Malpractice insurance 6. Billing service, unless they want to do this themselves 7. Staff

All these expenses can be written off until the business is established and profitable.

Some can. Those with assets to depreciate, for example.

Frankly, the whole corporate tax debate seems manufactured to obscure the top personal tax bracket being about $500,000. Raise corporate taxes and you tax everyone with shares. That hits the rich, sure [1], but it also hits every pension fund and middle class saver. And if the corporate tax rate goes up instead of a $1mm, $2mm, $4mm and $8mm tax bracket being created, everyone at the top comes out ahead.

[1] Screw with the tax code for companies, legal fictions, enough and they’ll magically start moving. Then it’s a game of whack-a-mole. People are much less likely to change their way of life in response to tax codes; this is well documented.

There is so much politically motivated misinformation going around on social media - it's really concerning.

Also, apply taxes (and corresponding benefit eligibility) equivalent to payroll/self-employment taxes to that income.

At the same time, allow corporations to expense disbursements: you are taxing individual income fairly, corporate tax just is a tool to prevent indefinite tax-free deferral of income.

Yes it does.

OTOH, it doesn't make sense to not have a means of spreading out irregular income by recognizing it for tax purposes over several years in advance of realization if it can be anticipated, or deferring it over several years otherwise, in a progressive tax system. Which is why you should provide that, too (it applies to some subset of LTCG, especially that earned by the middle class, if taxing LTCG as income, but it would apply to lots of non-capital income, too—the income pattern for say, a novelist eho sends several years writing each book thar is a hit isn’t flat or steadily growing year-to-year, but spiky, and ir should be possible to smooth it for tax purposes.)

You don’t have to structurally preference capital income to deal with the fact that, as is true for other income, some capital income is the result of processes that the taxpayer can’t expect the same realized gain from year-to-year.

so let me rephrase my statement about capital gains. it doesn't make sense to treat LTCG as income unless we first make significant changes to the way we assess income tax in the first place. obviously this would be a lot more complicated. imo the existing cap gain rules is a somewhat reasonable solution for a tax system that mostly looks at each year in isolation. the 15% rate is really not much of a concession to a retirement saver who has held a lot of those assets for decades and has experienced meaningful inflation. but the whole system leaves a lot to be desired.

I disagree. LTCG as income without smoothing makes exactly as much sense as taxing regular income without smoothing does.

Yes, there’s a strong case for smoothing. There’s, independently, a strong case for not structurally favoring capital income and not structurally disfavoring labor income. While it is desirable to address both of those (and doing so simultaneously would be a good idea since there is no conflict), there is no dependency between them.

(Likewise, indexing capital asset basis values for inflation is a third thing that there is a good case for, but neither of the other two things depends on it to be a good idea; I’d oppose furthering the favoring of capital by doing it without first taxing capital income as income, though.)

> obviously this would be a lot more complicated.

Smoothing doesn’t have to add significant complication. The essence can boil down to:

(1) a taxpayer may freely recognize any amount of as-yet-unrealized income for tax purposes in any tax year and pay appropriate income tax on it. Any amount of the unused balance may be freely applied to reduce taxable income in any future year to no less than $0 (with one exception, see below.) Unused balances are indexed for inflation.

(2) a taxpayer may defer to the following year recognition of any amount of income over the greater of the top of the lowest marginal rate bracket or prior year taxable income (after applying any deferrals or advance recognition), with thr caveat that no more than 90% of any previously-deferred income may be deferred again.

(3) In final taxes after death, all remaining advance/deferred amounts are applied, with negative taxable income resulting in a refund calculated by applying the minimum marginal rate to the balance.

> Yes, there’s a strong case for smoothing. There’s, independently, a strong case for not structurally favoring capital income and not structurally disfavoring labor income. While it is desirable to address both of those (and doing so simultaneously would be a good idea since there is no conflict), there is no dependency between them.

in theory yes, in practice no. the current system treats the common case where wages slowly increase pretty well. people with highly variable income get screwed, but it's much more common to get a yearly 2-5% salary bump.

in contrast, assets are much more likely to be sold in chunks. I haven't realized any capital gains over $100 in the last five years. but soon I will have to liquidate a large portion of my holdings for a down payment on a house. having those gains taxed at my highest marginal rate would be far worse than the fact that I can't smooth out my yearly raises. it would almost double my taxable income for the year.

aside from that, I agree with what you wrote. I would certainly vote for your solution.

I should also note that even our current tax code admits that the setup with marginal taxes we have is kind of insane. See "Schedule J: Income Averaging for Farmers and Fishermen" which allows those occupations to do exactly what you suggest: average income over multiple years for tax purposes (can average with the previous 3 years). Why only farmers and fishermen? And why do you not get to do the averaging for AMT purposes? That's back to the "insane" part....

LTCG is simply any capital asset held for longer than 365 days. It makes perfect sense to tax gains on assets held for a year or two.

Moreover, capital assets include real estate and other items that appreciate faster than inflation. It absolutely makes sense to tax those assets, since those assets are generally not held for productive use. (See, for example, all the empty storefronts in NYC. Those properties are held with an eye toward making money on the eventual sale of the building without regard to ongoing income; the finances work out as long as incoming cash flow from rents in other units covers debt service payments.)

Indeed, not taxing long-term capital gains would be the biggest subsidy to the wealthy that the world has ever seen. It would encourage the wealthy to acquire assets en masse, hold them without use for long periods, and then sell them at appreciated and untaxed values despite having done nothing to earn the appreciated value.

unfortunately I don't write tax law. maybe I could get the tax prep companies to lobby on my behalf.

That would also incentivize companies to pay dividends, which I think is good for various reasons.

That’s not Biden’s plan. Biden’s plan is to limit the tax preference for capital gains by setting the top rate for LTCG equal to the top rate he has proposed for income taxes, with the top LTCG rate kicking in at $1 million+, while the same rate for normal income would at ~$400K.

> On the other hand, it disincentivizes long term investing.

Even if we assume an actual elimination of the preference, it would only “disincentivize” long teem investing to the same extent that taxes on normal income disincentivize income-producing activities generally, and still less than the even higher taxes on labor income (thanks to payroll/self-employment taxes) discourage labor and its employment.

And yes, I generally agree with your last paragraph. But that said, it is worth noting that taxes on normal income do discourage people from making money. (I'm not saying this to support a reduction in income tax, just as an interesting note.) So I think it is worthwhile to consider incentives. For example, income at x%, short term cap gains at x+10% and long term cap gains at x-5%.

Of course, if you really want to go all the way regarding fairness and incentives, you'll tend towards entirely different systems (Georgism, for example)

If you spent your 20s conducting losing trades in the stock market, you accumulate capital gains losses that you can only apply $3,000 per year against your regular income. If at age 30 you made $800,000 in capital gains you are able to apply all those unused losses against those gains.

So "human beings" aren't much different.

To some extent this is made up for with the standard deduction and various other deductions, but you can’t carry it forward if you made less than the standard deduction, even if you actually are spending more than you make.

The idea of carrying forward losses is unintuitive to most people because we mostly don’t get to do that.

Business expenses are almost always only the costs of actually generating revenues. Thats why there are strict limits on travel & entertainment deductions. Of course there are always exceptions, does the company need that private jet? But their accountants have to justify private jets, etc to ensure the company doesn't face tax fraud charges.

It leads to bad headlines when companies claim a bunch of loss carryforwards, but it actually is a fair practice. The other thing to keep in mind is that losses are only paid out in refunds when you actually pay tax. Company B does not earn $30 back from the government for losing money in year 1, it instead gets money back once it starts making profit.

Note that at least in Canada, these rules apply to all types of income, not just business income, although losses on employment income basically never happen.

Here’s another example of where it could help. Take two men, one earns $75k/year (let’s say inflation adjusted) for thirty years as a bus driver. The other plays in the NFL for 1 year makes $2MM and thereafter only makes $250k over the next twenty five years. They’ve made the same amount of money over their lifetimes but the second man paid much higher taxes.

it makes sense that companies are taxed differently than individuals. corporate revenues and assets ultimately end up in the pockets of real people, either as wages or capital gains.

that said, I do think you make a good point about income tax. it would be more fair if there were some smoothing over time. another example of someone who might get screwed is a contractor with highly variable income. if I make $75k every year, and you oscillate back and forth between $25k and $125k, you pay a lot more income tax for no real reason.

But only some of those real people are subject to the jurisdiction of the country taxing the corporation. So while some corporate income is subject to double taxation some is not.

> the real difference here is there are no marginal brackets for taxes paid by a company.

Companies can smear revenue out over time to optimize the taxes they face. People cannot. The marginal part is orthogonal.

Someone doing that will normally do it within the confines of an LLC by convention (because it almost always implies a business). But you could do it with investing, too. In either case you need not be a megacorp.

There are also income tax offsets for education, provided your tax bracket isn't too high.

Like someone getting a $150k student loan to go to college and/or post-college education?

The point of the thread is that the two are essentially the same in practice (investing current monetary influxes towards future revenues) but the tax law differences favor one over the other.

It's not black and white, of course, and I'm not an accountant, so my knowledge is limited and most likely filled with holes and misunderstandings. But I imagine there's also a matter of scale that's at play here, with tax laws meant to make things easier on small, privately owned businesses in their early years, having unintended consequences to the benefit of companies already behemoth in size investing in getting even bigger. Bigger in ways only made possible in the new digital, globalized world.

Only up to some low limit. Netflix can deduct unlimited interest.

Many businesses were hit by this interest limitation in 2018 and 2019. There are dozens of articles from major tax firms about it. Yes, a business can carryforward their unused interest to a future year in which they have spare income to apply it. But that means they have to have sufficient profits and reduced loans in order to take advantage of their interest expenses. If a business is unprofitable, churn loans, or increases its debt load, the business effectively loses out on a lot of the benefit of most of its interest expense.

i'd just also reiterate that all this rigamarole is not worth it (for the generally claimed increase in productivity and investment), and we should just simplify and equalize individual and corporate tax law.

+Depending on a lot of details

The difference is few people start with financing that allows them to amass large investable sums without showing a cash income early in life. That’s because companies can raise VC and sell equity while we (rightly, of course) banned the equivalent practice for people.

I don’t understand why we want to equate rules for companies to rules for individuals? People say “it’s not fair”?

Who’s going to employ people? The government can’t produce your salary, companies do that.

Btw, many countries should regulate companies more IMO, but that’s not to say companies shouldn’t be encouraged to grow and prosper.

Of course companies and individuals should have different rules and of course tax should be one of them. Help companies start and grow and salaries will be paid to people.

It’s the workers doing that produce the real value, not a rich person holding capital they’ll only spend on us if we capitulate.

Why do we need the age old tale of a shared ephemeral store like religion and fiat finance when we see those things become monopolized and gamed by the previous generation every time?

We need to believe one old person is literally worth 100x the average person?

Who does that benefit?

In the US that number might be even higher [0] (99% percent according to that article but we’d have to cross check what “small business” means in this context).

Your rhetoric seems to imply that all companies are owned and managed by greedy monopoly-esque despots wearing a penguin suit and smoking a cigar, but reality just doesn’t follow.

You should also consider the alternative. Where is wealth generated if not through companies? Is it the government? In this scheme, the government is the company and covers 100% of business. How’s a government different than the closed board of a monopolic company? Or are they just “the good ones” and therefore somehow immune to produce injustice? To me, as you can probably tell, this notion is naive at best.

I have no issues with taxing the super rich a lot more. I don’t think anyone needs to be worth USD 185 Billion. However, I’m not sour about it and don’t believe a “revolution” is the only solution. Far from it. We’ve dealt with this before: it’s about regulation and policy. Very incremental.

IMHO what makes fairness is a social ladder. As long as there’s a way for the willing, there’s fairness. Any immigrant will tell you as much.

[0] https://www.fundera.com/blog/small-business-employment-and-g...

None of us owe servitude to old debts, contracts, wives tales, sonnets, limericks, hymns, poems, stories.

When the world changes it does so because society decides there are different words to better represent its goals.

Laws are no longer based upon the words of Gods. The rich are not Gods. They don’t represent meritorious effort when they’re inheriting and being gifted wealth with no strings (see Trump admin and covid payouts, it’s still happening under Biden; he’s just less gaudy.)

Why not just logistical distribution of materials to boost communal health, etc.

The masses are already used to only being able afford a vacation every X months. Working off a home for X years.

Why do we still enable a minority to shrug off the same responsibility in deference to old contracts none of us are legally obligated to mind?

I’m disputing our implementation that favors minority capture of collective effort.

Why do I need to be a “company”?

We already have a system of collective effort called “government”.

Why another layer of abstraction?

Why must they run on grandpa’s fiscal beliefs, and previously brokered debt servicing and network effects?

Corporations and small businesses already do this

> It’s the workers doing that produce the real value, not a rich person holding capital they’ll only spend on us if we capitulate.

Yes, but the worker is fungible. The capital holder was entrusted with the money and risk. Workers have little risk, they can walk away from a company at any time. The capital holder is stuck.

> Why do we need the age old tale of a shared ephemeral store like religion and fiat finance when we see those things become monopolized and gamed by the previous generation every time?

What is the alternative? It isn't communism or socialism, both have failed numerous times before.

Also, you're posting on a board for capitalists. YC literally bets capital on moonshots to get a return on investment.

> We need to believe one old person is literally worth 100x the average person?

If the old person, had the capital and took the risk, then yes financial value is higher. In terms of being a person, no, they both go in the same box at the end.

> Who does that benefit?

Society. Jobs created a new economy by introducing the iPhone. YC gambles on new companies that benefit society. The phone in your pocket, the internet and computer you use employees tons of people. More than any government jobs program could.

Plus there is the fairness issue. Corporations are just groups of people working together. So why does a single surgeon not get to be treated as the economic growth engine she is, but two surgeons can incorporate and get special treatment?

This is an apples and oranges comparison at best. If companies were treated exactly as individuals in this case, I don’t think many companies would survive. With less of the pie to go around, that’s effectively fewer jobs and less wealth created for people who work at these companies.

And in your example you could also use student loan repayments for taxable income reductions in the same manor. Only the interest, but that is the same a business not being able to deduct capital investment.

With the assumption that we are treating debt like income for the individual, except that individuals do not report that as other income.

The whole point, is corporations get the benefits of both, and the downside of neither. They have liability and tax advantages that people don't have, yet they also have tremendous politic power as if acting with personal free speech (citizens united)

Please do not spread disinformation. This is some Qanon level bs.

https://www.irs.gov/taxtopics/tc409

It’s not like individuals don’t have mechanisms to save on taxes.

Yes, individuals can save on taxes, but can most of us get an effective tax rate of 1%? And, many of the common deductions (mortgage interest, charitable deductions, tuition) all have caps. I don't believe there's a cap on a corporation carrying forward losses from year to year.

There was a 20-year cap on corporations carrying forward losses.I had clients that actually timed-out on using carried-forward losses because they had insufficient profits to use their losses against. However, since 2017, losses can be carried forward indefinitely, but in any given year may only offset up to 80% of taxable income. (As a result of the CARES Act, losses between 2018 and 2021 are not subject to the 80% limitation.)

There are section 382 limitations on losses of acquired companies. (In a nutshell, the idea is to discourage a company from being acquired so that the acquirer can use those losses to offset their own taxable profits.)

There are other limitations on loss carrying as well but they tend to be pretty esoteric.

Yes, individuals can save on taxes, but can most of us get an effective tax rate of 1%?

Yes, you can get a 0% (combined tax rate) as an individual if your income is primarily municipal bonds or other tax-free government bonds, even before taking into account deductions. And wage-earners can get single-digit combined tax rates if they are below the poverty line (the exact threshold varies from state to state).

When you want to tax high-income people at a higher rate, have the courage and forthrightness to simply raise their rate; don't do it via the backdoor complexity of phaseouts.

Acquired intangible assets must be amortized (aka depreciation for things that don't physically exist) over 15 years, not immediately (some intangibles can be amortized over a 3-5 year time frame). And self-developed intangible assets cannot be amortized at all.

A company that isn't profitable means every dollar that flows into the company flows out. It flows out to other companies, to payroll, to R&D, to charities. That's where the real economic engine is -- money flowing, investment happening.

And plenty of taxes come from it, too.

Companies pay taxes when they start hoarding profits instead of investing them. That's a good thing.

I'd argue that these are also "good things". There's a reason corporate income taxes aren't tremendously popular among economists (even many economists on the left). Companies are capable of deciding how much cash to keep on their balance sheet, and any government nudges via tax policy are probably introducing some distortions. If we want to tax piles of stagnant wealth, we should tax the wealth directly: estate taxes and land value taxes don't introduce many distortions. If we want to tax companies, we should look at VATs (which are relatively non-distortionary), or perhaps heavy pigouvian taxes to offset negative externalities (e.g. a carbon tax).

Netflix has been around for 20+ years

Should we only tax companies that are collapsing ?

What is the value of the software engineering services Amazon US provide to Amazon UK, maintaining amazon.co.uk? Because, rationally, that's an expense of the UK company.

How much in the Starbucks brand worth? How do you distinguish a franchise from a subsidiary? If Starbucks split in two, with Starbucks Corporation maintaining only the trademarks and associated IP, and sold all the actual stores it owns to a second company Coffee Shop Corporation which started off as a franchise (and there exist franchised Starbucks stores today), which then paid licensing fees to the franchisor, would that be any different?

Like, there's definitely questions to be had about international accounting, but some of the complexity is because national subsidiaries rarely operate in isolation, and valuing much of what they get from their parent organisation is exceptionally hard.

The very, very easy solution is for every corporate entity to be taxed on revenue in each jurisdiction. E.g. if I am in the UK and I spend £4 on a coffee in Starbucks then their legal entity in the UK now owes the taxman £0.40 (for example). How they pay their operating costs and internally transfer the remainder of £3.60 to their parent company is up to them.

VAT is passed “through” a company, I mean for this to be charged to the company on what is normally considered income. Essentially, since corporations are supposedly people, they can pay income tax like people.

A revenue tax disproportionately hits low-margin industries, which typically account for a disproportionate amount of expenditure of low-income households, which is likely a bad thing.

Can u give an example for this? Especially in the context on a large, growing tech firm.

I understand the basic stuff like accelerated depreciation, location arbitrage, etc

If the tax paid is found to be unfair by the jury, the company gets nationalised with no compensation to shareholders. The government could re-privatize it by auctioning it off again.