Note to term, "tax avoidance". "Tax evasion" is illegal, but there are plenty of legal ways to avoid tax, many of which I'm not aware of myself, but will be grateful for anyone willing to share.
And that's a big part of it - people don't share the knowledge - it's "insider" knowledge, and you aren't in the club. The fewer that know, the more money those who do, can make.
1) Having your own company is more risky as opposed to a Permanent employee role in the government's eyes, hence more opportunities to pay less taxes
2) Companies are far more likely to work towards creating employment than individuals working for companies, benefiting the economy
3) Dividend income is taxed at a reduced bracket to stimulate investment, regardless whether you're investing in your own company or getting dividends from a large public corporation by being a shareholder
10 years of filing corporate taxes, having every accountant follow this practice, and an official audit with no complaints shows the Canadian Revenue Agency has no issues with this system.
Sure, they don't teach you it at school, because most people at school won't start their own companies.
2) You're recommending that we defraud our federal government in your original post.
Just stop.
Those are just few of the tax avoidance schemes that come to light - which it should be noted are not necessarily illegal. The reality is that the rich and famous are involved in these schemes - earning big money and paying less tax than hard working, honest men.
The government doesn't take the necessary steps to put an end to these kinds of schemes in any haste - probably because they're involved in many themselves, along with their friends. If everyone was doing it, the schemes would be closed. I therefore recommend everyone do it, when legal.
My linking to the article wasn't just to point out these specific schemes, but more to just highlight the scope of tax avoidance/evasion. There are many loopholes that get abused, some get fixed, although not always in a timely manner.
People are led to believe that the richest pay ~40-50% in tax, or whatnot depending on where you are - but that couldn't be further from the truth - they generally pay less (as a percentage of their total earnings) than the middle or working classes.
You know, when these bankers pay themselves a $9 million tax free bonus at the end of the year - are they defrauding the government?
Work it out, say a banker is on a nice $1m salary, which he pays 50% in tax, but pays zero tax on his fat $9 million bonus.
1) Top marginal tax rate is 35%.
2) Bonuses are taxed as income as well.
3) The rich pay the majority of taxes. (http://www.usatoday.com/money/perfi/taxes/story/2011-09-20/b...)
The world isn't out to screw you.
1) Perhaps you missed the part where I said IRS only applies to US? Tax rates do differ in different countries, if you weren't aware. That's one of the major tax avoidance methods - do what you can offshore, wherever you benefit by paying less.
2) Again, depends where you are. While all bonuses may not be tax free, they are usually taxed differently to income tax anyway - such that less tax is paid. Why do you think people pay bonuses rather than just increasing salaries?
3) I wasn't claiming otherwise - my claim is that the rich don't aren't paying more as a proportion of their total earnings, which is what is claimed to be the case by the system.
Whether the world is out to screw you or not I'd debate. It's more like the world is out to get as rich as possible, and you get screwed as a side effect.
If you live in the US and you make money, you owe US taxes on the money, regardless of where the company is.
2) Again, depends where you are. While all bonuses may not be tax free, they are usually taxed differently to income tax anyway - such that less tax is paid. Why do you think people pay bonuses rather than just increasing salaries?
As others have pointed out, bonuses in the US are taxed as ordinary income, and they're taxed at the same rate or higher (!) than ordinary income in the EU. Take a quick Google trip through a search of "banker tax EU" to come up with some real doom and gloom there.
3) I wasn't claiming otherwise - my claim is that the rich don't aren't paying more as a proportion of their total earnings, which is what is claimed to be the case by the system.
This is simple. Rich people have more long-term capital gains and less ordinary income. It is 100% not because of bonuses.
Bonuses are income. They are taxed as ordinary income (or the equivalent of ordinary income in E.U. nations). Bonuses are not given lower rates; if anything, certain types of bonuses are subject to higher rates than ordinary income. Companies pay bonuses because bonuses are discretionary, while salaries are contractual. In other words, giving a bonus one year does not commit them to paying the bonus again the following year.
Falsely allocating dividends, using offshore tax accounts are what big companies are actively doing, and many getting away with it. And yes, these include your favorite tech companies and such. (http://www.ibtimes.com/articles/334737/20120429/apple-avoid-...)
The banking secrecy in some countries is the real enabler of tax evasion though - because corporations can simply fudge the numbers to reduce the tax bill.
Almost everything you wrote is false. Not all bonuses are income, they may or may not be taxed, they may or may not be subject to higher taxation than ordinary income. You have a very US-centric view of the world.
Distributing profit as dividends is "falsely allocating income" if you are not paying yourself a reasonable salary, to the extent that you have redirected salary income to dividend income. Once you do this, it is no longer up to you to decide what a "reasonable salary" is. The IRS (or the local tax authority, if not in the US) will decide that number.
Most forms of bonuses are income in: 1) the US, Canada, China, Australia, the UK, France, Spain, and India. There are various exceptions, but the general rule in the nations where most people conduct business is that bonuses are income. As income, bonuses are taxed at the same rate as income is ordinarily taxed in those nations. In some nations, certain types of bonuses are subject to a higher rate of tax than the ordinary income rates. If bonuses were not taxed, or were taxed at lower rates, most income would be paid out as bonuses.
You shouldn't do that, it's not permissible under current tax rules… IRS requires that officer shareholders be paid a reasonable salary, and if you're making enough money to pay dividends, minimum wage will be hard to justify as "reasonable." I'm not sure how paying bonuses will help with tax avoidance as those are taxable like regular wage income.