You Can't Engineer Around Taxes(blogs.law.harvard.edu)
blogs.law.harvard.edu
You Can't Engineer Around Taxes
http://blogs.law.harvard.edu/philg/2012/06/09/you-cant-engineer-around-tax-rates/
70 comments
That effective tax rate of 12% is not by design, though. It is due to loopholes that have been thoroughly exploited. A big one being foreign profits are not taxed until it enters the country, so many companies now take their income outside the US and keep it there. So, I would say the tax system was more...hustled around than it was engineered around.
This should be closed. Corporations should pay US income taxes on foreign retained earnings or other changes in equity.
Yes, but it was meant to prevent double taxation, so unfortunately it's not as simple as just revoking it.
My view is just that increases in equity of firms held overseas, where the US firm holds a controlling share (i.e. greater than 50% of voting shares) should be subject to taxes as corporate income taxes. It also neatly avoids the problem of double taxation on the basis of dividend payments. Dividend payments would be deducted for overseas holdings before taxes, meaning that the dividend payment gets taxed as income but so does the post-dividend retained earnings. For overseas holdings of less than a controlling share it seems to me that whatever rules exist for capital gains would apply. If that's not enough offer a tax credit equal to foreign taxes paid.
I also think our approach to capital gains needs to be rethought. I understand why taxing capital gains as straight income is undesirable especially where the middle class is involved and where gains off home sales may be a factor. However, I wonder if a better option would be to allow capital gains to be folded into income going forward, amortized for the period of time the asset was held. So if you live in your home for 10 years and sell it at a capital gain of $500000, then you would add $50k to your reported income for the next 10 years following the sale. This would also privilege retirement accounts because at some point the amortization period would exceed life expectancy.
This would neatly address the issue of the super-wealthy paying a lower tax rate than the middle class, while continuing to favor retirement-oriented and long-held assets.
I also think our approach to capital gains needs to be rethought. I understand why taxing capital gains as straight income is undesirable especially where the middle class is involved and where gains off home sales may be a factor. However, I wonder if a better option would be to allow capital gains to be folded into income going forward, amortized for the period of time the asset was held. So if you live in your home for 10 years and sell it at a capital gain of $500000, then you would add $50k to your reported income for the next 10 years following the sale. This would also privilege retirement accounts because at some point the amortization period would exceed life expectancy.
This would neatly address the issue of the super-wealthy paying a lower tax rate than the middle class, while continuing to favor retirement-oriented and long-held assets.
"The U.S. has the second-highest statutory corporate income tax rate in the developed world. Despite anecdotes regarding a few companies that exploit the dubious carve-outs in the tax code to minimize their tax liabilities, the results of 13 unique studies of the effective tax rate on corporate investment across the globe show that the average U.S. effective corporate tax rate, like the statutory rate, is nearly the highest in the world."
"The most recent studies show that the average effective corporate tax rate for corporations headquartered in the U.S. is roughly 27 percent, while the average of other nations is about 20 percent. The effective average rate for new investment in the U.S. is roughly 29.8 percent, 7.4 point above worldwide competition."
http://taxfoundation.org/article/us-corporations-suffer-high...
"The most recent studies show that the average effective corporate tax rate for corporations headquartered in the U.S. is roughly 27 percent, while the average of other nations is about 20 percent. The effective average rate for new investment in the U.S. is roughly 29.8 percent, 7.4 point above worldwide competition."
http://taxfoundation.org/article/us-corporations-suffer-high...
So I think the concept here is that nations are in competition with each other to attract businesses by undercutting each other on "price" (i.e. tax rates). If true, does this mean that corporations, as the buyers in this "market", are beginning to dictate prices?
I can see how some science fiction writers (Neal Stephenson comes to mind) have extrapolated this trend to futures where corporations supplant nations and governments as the dominant political entity.
I can see how some science fiction writers (Neal Stephenson comes to mind) have extrapolated this trend to futures where corporations supplant nations and governments as the dominant political entity.
To an extent, this happens withing larger nations and federated economic blocks such as the United States and the EU. Businesses that have mobility will move to where they have more favorable conditions. Automobile manufacturing in the US has been shifting southward (mainly to lower labor costs), companies incorporate in tax-favorable states such as Delaware and Nevada, insurance companies operate as an entirely different entity in the state of New York to avoid encumbering the rest of their business with New York's insurance regulations.
Yes, that certainly occurs, but then the question becomes whether this increased choice for companies due to globalization makes it a buyer's market, forcing the sellers (states and countries) to lower their prices (corporate taxes and such) to the point of eventually going bankrupt, leaving the corporations a the dominant organizing force of civilization as some sci-fi authors have predicted. (Obviously this would take probably hundreds of years to happen in reality, on contrast to the sci-fi stories which are frequently "near-future".)
Perhaps the simplest and fairest tax scheme is:
1) a VAT (10-25%). Mandate that it be built-in to prices (c.f. pre-deduction of income taxes)
2) an annual wealth tax (1-3% of household net worth)
(note: total federal US tax receipts are ~$2T; a 20% VAT and a 2% w.t. would generate ~$1.1T each)
Eliminate:
- all income taxes
- all cap gains
- all corporate taxation
- all inheritance taxes.
Use laws to prevent "wealth flight". Be flexible to make sure that gentrification doesn't lead retirees to lose their home. Strictly enforce disclosure of assets. Use assessors and insurance data to discourage noncompliance.
This policy incentivizes (and rewards) work, investing, and wealth creation, and penalizes decadent leisure and letting assets lie fallow.
In any true meritocracy, the deservedly wealthy can earn far more than the wealth tax (+ inflation) in return on capital, and any entrepreneur should be far happier to be taxed on the end-result of having wealth than on the work they performed to get it. The simplicity of a wealth tax consolidates and smooths issues of income volatility, depreciation, carry-overs, etc. etc.
1) a VAT (10-25%). Mandate that it be built-in to prices (c.f. pre-deduction of income taxes)
2) an annual wealth tax (1-3% of household net worth)
(note: total federal US tax receipts are ~$2T; a 20% VAT and a 2% w.t. would generate ~$1.1T each)
Eliminate:
- all income taxes
- all cap gains
- all corporate taxation
- all inheritance taxes.
Use laws to prevent "wealth flight". Be flexible to make sure that gentrification doesn't lead retirees to lose their home. Strictly enforce disclosure of assets. Use assessors and insurance data to discourage noncompliance.
This policy incentivizes (and rewards) work, investing, and wealth creation, and penalizes decadent leisure and letting assets lie fallow.
In any true meritocracy, the deservedly wealthy can earn far more than the wealth tax (+ inflation) in return on capital, and any entrepreneur should be far happier to be taxed on the end-result of having wealth than on the work they performed to get it. The simplicity of a wealth tax consolidates and smooths issues of income volatility, depreciation, carry-overs, etc. etc.
That won't work. Watch the trends in the states regarding "streamlined" sales tax to see the problem (ok, maybe it's "streamlined" for legislators because they don't define tax categories). Also I have done enough sales tax compliance work in other countries to have stories you won't believe.
For example this one is pre-HST in Ontario, CA and so I don't know if it changed when HST was accepted, but before HST, the question of whether provincial sales tax (PST) was applied to a muffin you buy at a coffee shop depended on what else you purchased and some other factors. The rules were as follows:
If the muffin is not individually wrapped and you buy fewer than six then it is taxable if and only if the subtotal of the muffin and any other prepared foods and beverages purchased is greater than $4 Canadian.
On the other hand, if the muffin is individually wrapped, then it is always subject to PST.... unless the customer also purchases another item of prepared food or drink and the subtotal is less than $4 Canadian.
Here's the problem as I see it:
We all have to file income taxes. Only businesses have to file VAT. What this means in political terms is that if you annoy the population enough regarding filing, they will vote out folks in office and vote in people promising to simplify things (see Reagan-era income tax simplification).
On the other VAT and sales tax are only reported by businesses. You still have all the incentives to make policy by controlling tax rates. However most people don't fill out the returns. Moreover big businesses can afford to do whatever they need to in order to fill out the returns, but smaller businesses will struggle. I will say that in my experience very few small brick-and-mortar businesses that do delivery of goods even make any attempt at being compliant with "streamlined" sales tax laws (where typically you have to report per tax jurisdiction goods are delivered to). Consequently it becomes another formal barrier to entry, another regulation that small businesses ignore because they have to, and another one that allows governments to adopt a "show me the man and I'll find you the crime" approach.
Sales taxes tend towards greater complexity than personal income taxes.
Additionally if you mandate that VAT is built into the prices, you create a perfect way of hiding that complexity from the average voter.
Hence I see that as a very, very bad idea.
For example this one is pre-HST in Ontario, CA and so I don't know if it changed when HST was accepted, but before HST, the question of whether provincial sales tax (PST) was applied to a muffin you buy at a coffee shop depended on what else you purchased and some other factors. The rules were as follows:
If the muffin is not individually wrapped and you buy fewer than six then it is taxable if and only if the subtotal of the muffin and any other prepared foods and beverages purchased is greater than $4 Canadian.
On the other hand, if the muffin is individually wrapped, then it is always subject to PST.... unless the customer also purchases another item of prepared food or drink and the subtotal is less than $4 Canadian.
Here's the problem as I see it:
We all have to file income taxes. Only businesses have to file VAT. What this means in political terms is that if you annoy the population enough regarding filing, they will vote out folks in office and vote in people promising to simplify things (see Reagan-era income tax simplification).
On the other VAT and sales tax are only reported by businesses. You still have all the incentives to make policy by controlling tax rates. However most people don't fill out the returns. Moreover big businesses can afford to do whatever they need to in order to fill out the returns, but smaller businesses will struggle. I will say that in my experience very few small brick-and-mortar businesses that do delivery of goods even make any attempt at being compliant with "streamlined" sales tax laws (where typically you have to report per tax jurisdiction goods are delivered to). Consequently it becomes another formal barrier to entry, another regulation that small businesses ignore because they have to, and another one that allows governments to adopt a "show me the man and I'll find you the crime" approach.
Sales taxes tend towards greater complexity than personal income taxes.
Additionally if you mandate that VAT is built into the prices, you create a perfect way of hiding that complexity from the average voter.
Hence I see that as a very, very bad idea.
You seem to be saying that, with VAT, the devil is in the details, not that it is necessarily bad. The fact that many countries use a VAT, and it works fine (with much higher compliance than income taxes, e.g.), suggests that it's possible to implement VATs better.
Note that a VAT works differently from a sales tax, in that the retailer is strongly motivated to comply, because they get a refund for everything they have paid for the incoming goods.
Note that a VAT works differently from a sales tax, in that the retailer is strongly motivated to comply, because they get a refund for everything they have paid for the incoming goods.
Economists do widely (universally?) agree that VATs have the lowest inefficiency (deadweight loss) of any form of taxation, and are thus the most efficient (not necessarily most fair, which isn't an economic question. You can solve a lot of the fairness/regressivity issues with VAT through some kind of blanket, potentially refundable per capita credit).
I dislike VATs philosophically due to the massive data they collect and turn over to the government, and how they open up a lot of activities to regulation, but in practice, they do seem to be a superior option.
I dislike VATs philosophically due to the massive data they collect and turn over to the government, and how they open up a lot of activities to regulation, but in practice, they do seem to be a superior option.
I don't think that is fair.
Inheritance tax should be 100%. Why should a person be rich just because their parents were rich? What about the people without rich parents?
How about:
The only taxes are:
1) VAT X%
2) 100% inheritance tax.
3) No capital or dividend tax.
4) A "basic salary" of a fixed X dollars to every individual.
5) Inflation of 1-3% a year via increase in monetary supply. (This is the wealth tax).
1. X depends on how much energy consumed for product/service; this is the carbon tax.
2. If you don't want to give all your money to the government when you die - just donate it to a charity not related to any of your relatives. Your children will not be left with nothing. See 4.
3. Encourages people to work and save for passive income for a better than minimum living conditions, as there will not always be jobs available.
4. The salary should be the bare minimum to live on. This takes care of social welfare. It'll be needed as technology increases and unskilled people have no ability to find jobs.
Inheritance tax should be 100%. Why should a person be rich just because their parents were rich? What about the people without rich parents?
How about:
The only taxes are:
1) VAT X%
2) 100% inheritance tax.
3) No capital or dividend tax.
4) A "basic salary" of a fixed X dollars to every individual.
5) Inflation of 1-3% a year via increase in monetary supply. (This is the wealth tax).
1. X depends on how much energy consumed for product/service; this is the carbon tax.
2. If you don't want to give all your money to the government when you die - just donate it to a charity not related to any of your relatives. Your children will not be left with nothing. See 4.
3. Encourages people to work and save for passive income for a better than minimum living conditions, as there will not always be jobs available.
4. The salary should be the bare minimum to live on. This takes care of social welfare. It'll be needed as technology increases and unskilled people have no ability to find jobs.
I am against inheritance taxes because they privilege corporate ownership above individual ownership. Corporations never die, so they never have to pay these taxes. Small family farmers OTOH... well they will be extinct under such a plan within a generation or two.
What I'd like to see is a 100% exemption from inheritance taxes for productive land and property (family owned businesses, business assets, office space for family or individually owned business and land contained thereon, farmland, etc), and a tax on income derived from renting out land and housing (this is designed to make it harder to make money from buying up housing to rent, and thus tilting the balance towards home ownership rather than renting). It would also help tilt the balance from corporate ownership to individual ownership of productive assets.
What I'd like to see is a 100% exemption from inheritance taxes for productive land and property (family owned businesses, business assets, office space for family or individually owned business and land contained thereon, farmland, etc), and a tax on income derived from renting out land and housing (this is designed to make it harder to make money from buying up housing to rent, and thus tilting the balance towards home ownership rather than renting). It would also help tilt the balance from corporate ownership to individual ownership of productive assets.
" Corporations never die, so they never have to pay these taxes. Small family farmers OTOH... well they will be extinct under such a plan within a generation or two."
Good point, didn't think of that.
Good point, didn't think of that.
Instead of complex rules about what assets are exempt, I'd favor just a significant blanket exemption sufficient to cover small-time farmers and small businessmen. Say, no inheritance tax on the first $10m in assets, a small rate on $10m-$100m, and quite high rates thereafter. And eliminate all these shenanigans with trusts.
My rule is simple. If you can show that the property is tied to producing things either for a sole proprietorship or a family-run business (in any form), then it's exempt. I don't think the burden of proof needs to be very high. The key thing though is that mere rental businesses would not be. Land, capital, and means of production employed in production would be.
> Why should a person be rich just because their parents were rich?
That's the problem with many policies and tax schemes. Their goal is not to make us better off but to manipulate or enforce someone's vision of fairness, often just thinly disguised envy.
Which in turn leads to all kinds of exceptions for politicians' pet projects, tax breaks for selected industries and just plain corruption.
Also, inflation is a wealth tax only on those whose wealth is in dollars.
That's the problem with many policies and tax schemes. Their goal is not to make us better off but to manipulate or enforce someone's vision of fairness, often just thinly disguised envy.
Which in turn leads to all kinds of exceptions for politicians' pet projects, tax breaks for selected industries and just plain corruption.
Also, inflation is a wealth tax only on those whose wealth is in dollars.
I have much sympathy with the argument that inheritance tax should be 100% because rich parents shouldn't confer an entitlement to wealth. But it seems to me that this simply wouldn't work because (1) people will be very strongly motivated to get around it (because "help your children" is a really, really strong human drive and presumably always will be) and (2) it will be very hard to make that very difficult (because, e.g., it means you have to impose severe restrictions on gifts, you might have to have retroactive confiscation of gifts years after they're given if the giver dies, etc. And because it really can't be that hard to conceal part of your estate, or find indirect ways to benefit your children, if you're strongly enough motivated to do so).
I think it's almost certain that the effect of trying to impose a 100% inheritance tax would be that the rich-and-dishonest would find ways to get around most of it, and the poor-and-honest would get screwed even worse than they already do.
I think it's almost certain that the effect of trying to impose a 100% inheritance tax would be that the rich-and-dishonest would find ways to get around most of it, and the poor-and-honest would get screwed even worse than they already do.
I think some of those problems could be mitigated if we focused less on relatively low levels of wealth, and more on very large ones. To me, the fact that someone can inherit $10m and live a life of leisure without working for it is sort of meh, I guess it's not fair in a sense, but it's difficult to do much about, as you say, and overall is not a huge problem.
On the other hand, someone inheriting $10b can do more than just live a life of leisure: that kind of multi-generational concentration of wealth significantly changes societies, producing quasi-aristocratic families that have oversized influence, and really damaging any sort of pretense to an egalitarian society with a level playing field (something Thomas Jefferson, for example, was very worried about).
So imo inheritance taxes should be mostly aimed at very large fortunes and trusts, stuff in the $100m+ range, not $5m inheritances. Other benefits are that a large exemption would avoid causing problems for inheritance of family businesses, and greatly reduce the number of people affected (which in turn should reduce administrative expenses).
On the other hand, someone inheriting $10b can do more than just live a life of leisure: that kind of multi-generational concentration of wealth significantly changes societies, producing quasi-aristocratic families that have oversized influence, and really damaging any sort of pretense to an egalitarian society with a level playing field (something Thomas Jefferson, for example, was very worried about).
So imo inheritance taxes should be mostly aimed at very large fortunes and trusts, stuff in the $100m+ range, not $5m inheritances. Other benefits are that a large exemption would avoid causing problems for inheritance of family businesses, and greatly reduce the number of people affected (which in turn should reduce administrative expenses).
I agree that inheritance is bad (for society AND for the recipients), but I think a lot of the issue could be addressed through social pressure to donate much of a fortune past a certain level on death (or irrevocably donate it while alive, retaining control, as a trust). Failing that, a 25-50% inheritance tax probably works, although without the free step up in basis in the current code.
Welfare is important, but I'm treating it as a separate issue here.
Beyond the issue of privileging corporations, a 100% inheritance tax leads to a bunch of strange behavior (with trusts, etc.), and doesn't handle well the possibility of people living a very, very long time.
By taxing wealth at 2% yearly, in combination with inflation, irresponsible/prodigal children will soon be out of money if they don't create value with their assets.
Furthermore, by using inflation as the "wealth tax", people are motivated to put their money into assets that match inflation (e.g. real estate) without necessarily making productive use of those assets.
Beyond the issue of privileging corporations, a 100% inheritance tax leads to a bunch of strange behavior (with trusts, etc.), and doesn't handle well the possibility of people living a very, very long time.
By taxing wealth at 2% yearly, in combination with inflation, irresponsible/prodigal children will soon be out of money if they don't create value with their assets.
Furthermore, by using inflation as the "wealth tax", people are motivated to put their money into assets that match inflation (e.g. real estate) without necessarily making productive use of those assets.
Communism, Limited Edition, 2.0
Make any tax 100% and nobody will pay it. Tax is not a penalty for being rich (or whatever).
Make any tax 100% and nobody will pay it. Tax is not a penalty for being rich (or whatever).
This is the part that really confuses me. You only have to run a business --any business-- for a few quarters to understand the negative impact that taxation and over-regulation can have on the decisions you make, the risks you take, your ability to compete and how quickly you can grow.
You really don't need a study from Harvard to get data on this. If you don't get it because of a lack of business experience, go talk to your local high-school-educated baker, mechanic or gas-station owner for a quick round-down.
The evidence is overwhelming. Yet, we keep dicking around and supporting policies, politicians and people who somehow think they can violate the laws of physics and make things better by shafting everyone with more taxes.
When are we going to learn and act? When it is too late?
I owned a manufacturing business for nearly a decade. We designed and assembled electronics, embedded systems, FPGA's, lots of code. Hell, we even had a full-blown CNC shop with the latest equipment. As an engineer it was fun to go to the office. As a business person, it was painful.
Example: One day this guy from the County of Los Angeles Business Property Tax department shows up in our industrial area going from door to door. The guy comes into our office and informs us that he was there to confirm how much we owned in business property taxes. I told him that we leased the 10,000 square foot building. We didn't own it. He then says: "Do you own desks, computers, tools, machinery, fax machines, chairs...?". Sure. "Well, you have to pay the County of L.A. taxes on these and other items". The only thing that I could say to him was "You have to be fucking joking! I have to pay you taxes on my desks and chairs, forever? Why?"
Think I am making this up? Here:
http://lacountypropertytax.com/portal/contactus/ppa.aspx
Being in manufacturing during the last several years has been a very painful experience. The supply chain is royally fucked. A lot of what you have to source you just can't get in the US any more. More an more suppliers are closing their doors every day. It's painful, difficult and you are getting killed by product coming from China.
I won't go into the details that led to my decision to abandon hardware/electronics manufacturing. I, ultimately, decided that it was a far better idea to transform into a software-only enterprise and move away from making real physical goods.
Because what we made involved everything from electronics, FPGA's, embedded, web and workstation software it really wasn't too difficult to shed the hardware portion of things and stick to software. I pains me because I love making things, but we, in the US, have somehow managed to FUBAR our system to such an extent that people like me have to say "fuck it" and move on.
If you continue voting for policies that promote higher taxation and regulation, more government involvement and government programs you are going to get exactly the country you are voting for: A third world mess with rats jumping ship faster than humans. Mark my words. Think about it.
What cracks me up is that you guys are arguing percentages and technicalities. Coming from my side of the table reading this would be funny if it wasn't so tragic. Go make something. Then come back and re-read your comments to see what they sound like.
You really don't need a study from Harvard to get data on this. If you don't get it because of a lack of business experience, go talk to your local high-school-educated baker, mechanic or gas-station owner for a quick round-down.
The evidence is overwhelming. Yet, we keep dicking around and supporting policies, politicians and people who somehow think they can violate the laws of physics and make things better by shafting everyone with more taxes.
When are we going to learn and act? When it is too late?
I owned a manufacturing business for nearly a decade. We designed and assembled electronics, embedded systems, FPGA's, lots of code. Hell, we even had a full-blown CNC shop with the latest equipment. As an engineer it was fun to go to the office. As a business person, it was painful.
Example: One day this guy from the County of Los Angeles Business Property Tax department shows up in our industrial area going from door to door. The guy comes into our office and informs us that he was there to confirm how much we owned in business property taxes. I told him that we leased the 10,000 square foot building. We didn't own it. He then says: "Do you own desks, computers, tools, machinery, fax machines, chairs...?". Sure. "Well, you have to pay the County of L.A. taxes on these and other items". The only thing that I could say to him was "You have to be fucking joking! I have to pay you taxes on my desks and chairs, forever? Why?"
Think I am making this up? Here:
http://lacountypropertytax.com/portal/contactus/ppa.aspx
Being in manufacturing during the last several years has been a very painful experience. The supply chain is royally fucked. A lot of what you have to source you just can't get in the US any more. More an more suppliers are closing their doors every day. It's painful, difficult and you are getting killed by product coming from China.
I won't go into the details that led to my decision to abandon hardware/electronics manufacturing. I, ultimately, decided that it was a far better idea to transform into a software-only enterprise and move away from making real physical goods.
Because what we made involved everything from electronics, FPGA's, embedded, web and workstation software it really wasn't too difficult to shed the hardware portion of things and stick to software. I pains me because I love making things, but we, in the US, have somehow managed to FUBAR our system to such an extent that people like me have to say "fuck it" and move on.
If you continue voting for policies that promote higher taxation and regulation, more government involvement and government programs you are going to get exactly the country you are voting for: A third world mess with rats jumping ship faster than humans. Mark my words. Think about it.
What cracks me up is that you guys are arguing percentages and technicalities. Coming from my side of the table reading this would be funny if it wasn't so tragic. Go make something. Then come back and re-read your comments to see what they sound like.
I think though that overregulation is a bigger issue than taxation. The fact is that income taxes only tax against profits, though excise taxes can be a bigger deal (think gallonage taxes on liquor produced) because those increase your overall cost.
There are two problems with overregulation though. The first is that it is a up-front cost that keeps on coming up day in and day out. It's not like an income tax that hits your profits. It's more like an excise tax on goods produced. Overregulation is a drag on the economy. It is a drag that makes it harder to break even. It is a drag that makes it harder to do anything. It's a bigger issue than income tax rates.
But it's even worse than excise tax rates. Regulatory compliance is something that takes resources. The more resources you have the easier it is. Consequently over-regulation protects big players by raising huge barriers to entry.
And at least in a country like China, if the system is unworkable a whispers in ears and envelopes of cash probably go a long ways towards making the system workable..... Over here we have a slightly different approach. We pay a professional class of people large rates, and, as in places like China, they then represent our cause to various officials. It's a question as to whether you hire an "agent" or whether you hire a "lawyer." Apparently one counts as corruption and arguably bribery while the other does not.
There are two problems with overregulation though. The first is that it is a up-front cost that keeps on coming up day in and day out. It's not like an income tax that hits your profits. It's more like an excise tax on goods produced. Overregulation is a drag on the economy. It is a drag that makes it harder to break even. It is a drag that makes it harder to do anything. It's a bigger issue than income tax rates.
But it's even worse than excise tax rates. Regulatory compliance is something that takes resources. The more resources you have the easier it is. Consequently over-regulation protects big players by raising huge barriers to entry.
And at least in a country like China, if the system is unworkable a whispers in ears and envelopes of cash probably go a long ways towards making the system workable..... Over here we have a slightly different approach. We pay a professional class of people large rates, and, as in places like China, they then represent our cause to various officials. It's a question as to whether you hire an "agent" or whether you hire a "lawyer." Apparently one counts as corruption and arguably bribery while the other does not.
I do not know enough to disagree with you on your main point, but I do have a few nits.
You really don't need a study from Harvard to get data on this. If you don't get it because of a lack of business experience, go talk to your local high-school-educated baker, mechanic or gas-station owner for a quick round-down.
Talking to your local high-school-educated baker is not science. We confidently believe a great deal of things that are untrue, and getting it confirmed with science is valuable. In hindsight, it's usually easy to be unsurprised by a scientific result.
Can you imagine possible circumstances that would lead you to confidently believe taxation and regulation to be the cause of many businesses' failure even if it were untrue?
The evidence is overwhelming. Yet, we keep dicking around and supporting policies, politicians and people who somehow think they can violate the laws of physics and make things better by shafting everyone with more taxes.
I would love to believe this, since that would be a good argument to have less taxes. However, as your only evidence, you offer an example of absurd property taxation on desks and chairs.
Such taxes cost a business in legal, accounting, and administration fees, in addition to the tax itself, and it costs tax money to operate the government bureau to oversee all of this. All this looks to be a blatant example of government inefficiency.
However, every country in the world, at least every democracy, suffers from such problems. At one point or another, the politicians have to trade political capital to push for the policies really important to them, their funders and their voter base, and less than ideal compromises do get made.
I believe that taxation is inherently inefficient and I would like to see as little of it as possible. And I also believe that some functions of government are useful to society at large. A balance must be struck. This balance will include inefficiencies that come with running a political society.
Given that a balance must be struck, it is possible that the optimal level of taxation would be higher than now. I do not know how to judge it - I have no basis for that. I would like to see the evidence that shows where that balance must lie. I find it otherwise unsurprising to see business owners arguing for lower corporate tax.
You really don't need a study from Harvard to get data on this. If you don't get it because of a lack of business experience, go talk to your local high-school-educated baker, mechanic or gas-station owner for a quick round-down.
Talking to your local high-school-educated baker is not science. We confidently believe a great deal of things that are untrue, and getting it confirmed with science is valuable. In hindsight, it's usually easy to be unsurprised by a scientific result.
Can you imagine possible circumstances that would lead you to confidently believe taxation and regulation to be the cause of many businesses' failure even if it were untrue?
The evidence is overwhelming. Yet, we keep dicking around and supporting policies, politicians and people who somehow think they can violate the laws of physics and make things better by shafting everyone with more taxes.
I would love to believe this, since that would be a good argument to have less taxes. However, as your only evidence, you offer an example of absurd property taxation on desks and chairs.
Such taxes cost a business in legal, accounting, and administration fees, in addition to the tax itself, and it costs tax money to operate the government bureau to oversee all of this. All this looks to be a blatant example of government inefficiency.
However, every country in the world, at least every democracy, suffers from such problems. At one point or another, the politicians have to trade political capital to push for the policies really important to them, their funders and their voter base, and less than ideal compromises do get made.
I believe that taxation is inherently inefficient and I would like to see as little of it as possible. And I also believe that some functions of government are useful to society at large. A balance must be struck. This balance will include inefficiencies that come with running a political society.
Given that a balance must be struck, it is possible that the optimal level of taxation would be higher than now. I do not know how to judge it - I have no basis for that. I would like to see the evidence that shows where that balance must lie. I find it otherwise unsurprising to see business owners arguing for lower corporate tax.
> Talking to your local high-school-educated baker is not science. We confidently believe a great deal of things that are untrue, and getting it confirmed with science is valuable. In hindsight, it's usually easy to be unsurprised by a scientific result.
He's not talking about science per se, but the insane level of rules and regulations you've got to put up with as a business owner -- especially in California. In other words, my interpretation of the GP's remark is that you can get at least an order of magnitude measurement of the pain-in-the-ass/cost factor, which is likely several orders of magnitude higher than what you think it is if you haven't owned a business that has enough revenue to put you on the radar.
The bias on HN is probably more towards software (where we can all 1099 each other) and not so much towards manufacturing (which is a major compliance pain). When you're dealing with manufacturing, things are different. You're dealing the EDD, FTB, INS and IRS (from an employee compliance standpoint), then you're also dealing with OSHA and the EPA and all their arcane rules and enforcers that hit you with $15k fines if you use dishsoap incorrectly. Then, on top of all of that you're paying a 35% tax rate.
Honestly, I'm surprised manufacturing has lasted as long as it has in the US.
> Given that a balance must be struck, it is possible that the optimal level of taxation would be higher than now. I do not know how to judge it - I have no basis for that. I would like to see the evidence that shows where that balance must lie.
Well, you could read the article :) We have a control group (the US) and the test groups (Germany, China) are far outperforming us.
He's not talking about science per se, but the insane level of rules and regulations you've got to put up with as a business owner -- especially in California. In other words, my interpretation of the GP's remark is that you can get at least an order of magnitude measurement of the pain-in-the-ass/cost factor, which is likely several orders of magnitude higher than what you think it is if you haven't owned a business that has enough revenue to put you on the radar.
The bias on HN is probably more towards software (where we can all 1099 each other) and not so much towards manufacturing (which is a major compliance pain). When you're dealing with manufacturing, things are different. You're dealing the EDD, FTB, INS and IRS (from an employee compliance standpoint), then you're also dealing with OSHA and the EPA and all their arcane rules and enforcers that hit you with $15k fines if you use dishsoap incorrectly. Then, on top of all of that you're paying a 35% tax rate.
Honestly, I'm surprised manufacturing has lasted as long as it has in the US.
> Given that a balance must be struck, it is possible that the optimal level of taxation would be higher than now. I do not know how to judge it - I have no basis for that. I would like to see the evidence that shows where that balance must lie.
Well, you could read the article :) We have a control group (the US) and the test groups (Germany, China) are far outperforming us.
Germany is interesting as a control, because its overall tax rates are much higher than in the U.S.--- 41% of GDP for Germany, versus only 27% of GDP (at all levels of government) for the USA. But its corporate tax rate is lower, because it gets most of its tax revenue from personal income taxes and VAT.
If we wanted the American tax system to become like Germany's, the steps would look roughly like: 1. significantly lower corporate tax rates; 2. nearly double personal income tax rates; 3. institute a federal VAT.
But you don't end up with the German economic model if you do only #1...
If we wanted the American tax system to become like Germany's, the steps would look roughly like: 1. significantly lower corporate tax rates; 2. nearly double personal income tax rates; 3. institute a federal VAT.
But you don't end up with the German economic model if you do only #1...
"1. significantly lower corporate tax rates"
This harmed the cities in Germany a lot and increased their debt.
It's kind of a contradiction if Germany should be the economic guide, but it's cities can't pay for their public baths anymore.
This harmed the cities in Germany a lot and increased their debt.
It's kind of a contradiction if Germany should be the economic guide, but it's cities can't pay for their public baths anymore.
Well, this is the thing about science -- if you want to, you can go observe the real world, and see how things actually are :)
Which may not produce results you like; lack of taxation/regulation does not, empirically, correlate with strong economies, strong businesses and high standards of living. In fact, rather the opposite; it is precisely those places which have the least regulation/taxation that tend to be the "third world messes" you warn against.
Which may not produce results you like; lack of taxation/regulation does not, empirically, correlate with strong economies, strong businesses and high standards of living. In fact, rather the opposite; it is precisely those places which have the least regulation/taxation that tend to be the "third world messes" you warn against.
If you're talking the complete lack of taxes, then sure, but there have been very few actual examples of that.
One of which was the USA, which almost completely lacked taxes for the fastest period of its growth, most of the 19th century. Look up the average tax haul in relation to GDP for the US during the 19th century. The US relied heavily on tariffs instead of personal or corporate income taxes or sales taxes.
Low taxes combined with strong property rights & a strong judicial have proven to produce spectacular economic booms.
The US from 1800 to 1970, modern Singapore, and modern Hong Kong for example.
Estonia's substantial economic growth after liberalization post USSR, and ditto Ireland's big economic boom after slashing its corporate taxes (doubled their per capita income in a mere 15 years, passing Britain).
Sweden has seen a significant boom after massively cutting taxes in the last few decades.
New Zealand ditto. New Zealand boomed with their tax cutting programs:
"New Zealand went through a major program of tax reform in the 1980s. The top marginal rate of income tax was reduced from 66% to 33% (increased to 39% in April 2000, 38% in April 2009 and 33% on 1 October 2010) and corporate income tax rate from 48% to 33% (reduced to 30% in 2008 and to 28% on 1 October 2010)."
One of which was the USA, which almost completely lacked taxes for the fastest period of its growth, most of the 19th century. Look up the average tax haul in relation to GDP for the US during the 19th century. The US relied heavily on tariffs instead of personal or corporate income taxes or sales taxes.
Low taxes combined with strong property rights & a strong judicial have proven to produce spectacular economic booms.
The US from 1800 to 1970, modern Singapore, and modern Hong Kong for example.
Estonia's substantial economic growth after liberalization post USSR, and ditto Ireland's big economic boom after slashing its corporate taxes (doubled their per capita income in a mere 15 years, passing Britain).
Sweden has seen a significant boom after massively cutting taxes in the last few decades.
New Zealand ditto. New Zealand boomed with their tax cutting programs:
"New Zealand went through a major program of tax reform in the 1980s. The top marginal rate of income tax was reduced from 66% to 33% (increased to 39% in April 2000, 38% in April 2009 and 33% on 1 October 2010) and corporate income tax rate from 48% to 33% (reduced to 30% in 2008 and to 28% on 1 October 2010)."
> Sweden has seen a significant boom after massively cutting taxes in the last few decades.
Sweden also saw a huge boom while massively raising their taxes post-WW2! And its cuts were, overall, from the highest taxes in the world, to the... 2nd-highest taxes in the world, now just barely losing out to Denmark by 1% of GDP. The correlations seem pretty complex.
In Europe, I don't see any real causal connection between tax rates and strength of the economy. If anything, there appears to be a bit of a causal connection in the opposite direction: weaker, less-developed countries have lower tax rates in order to try to lure businesses from better-developed countries. By percentage of GDP, these are the five highest-tax EU countries: Denmark, Sweden, Belgium, France, Norway. The five lowest-tax are: Lithuania, Romania, Switzerland, Latvia, Ireland.
And Germany, which has probably the strongest business sector in Europe, is towards the top; at 41% of GDP taxation, closer to Denmark's 49% than Lithuania's 21% (or the USA's 27%). Its high-tax but pro-market "social market economy" seems to be pretty successful overall.
Sweden also saw a huge boom while massively raising their taxes post-WW2! And its cuts were, overall, from the highest taxes in the world, to the... 2nd-highest taxes in the world, now just barely losing out to Denmark by 1% of GDP. The correlations seem pretty complex.
In Europe, I don't see any real causal connection between tax rates and strength of the economy. If anything, there appears to be a bit of a causal connection in the opposite direction: weaker, less-developed countries have lower tax rates in order to try to lure businesses from better-developed countries. By percentage of GDP, these are the five highest-tax EU countries: Denmark, Sweden, Belgium, France, Norway. The five lowest-tax are: Lithuania, Romania, Switzerland, Latvia, Ireland.
And Germany, which has probably the strongest business sector in Europe, is towards the top; at 41% of GDP taxation, closer to Denmark's 49% than Lithuania's 21% (or the USA's 27%). Its high-tax but pro-market "social market economy" seems to be pretty successful overall.
At the risk of invoking Godwin's, any analysis of post-WW2 Sweden has to account for them being one of the few European countries that emerged from that conflict with its industrial base intact, which it managed by hedging its bets on who the victor would be.
http://en.wikipedia.org/wiki/Sweden_during_World_War_II
http://en.wikipedia.org/wiki/Sweden_during_World_War_II
I'm from Lithuania. The problem with percentage of GDP using for all the European countries is not very good measure. Some taxes are indeed small in Lithuania (e.g. profit tax is 15% in Lithuania and 5% for small companies) but some taxes are really big (e.g. I'm giving away 42% of my salary to government). Small salaries and shadow economy in Eastern Europe might explain why percentage of GDP looks so well but we shouldn't be used as example of small taxation (because we are not).
We are smart, we are really good working, but be ready to pay a lot of taxes if you want to establish company here. While you don't need to pay bribes at least if you are doing everything legally :)
We are smart, we are really good working, but be ready to pay a lot of taxes if you want to establish company here. While you don't need to pay bribes at least if you are doing everything legally :)
And yet you're failing at a key scientific principle, which is looking for alternative hypotheses to explain what you're seeing :)
Many of the commonly-cited examples tend to pick situations which are amenable to lots of explanations. To take your example of the early US: was it low taxes and light regulation? Was it the presence of massive amounts of land and natural resources essentially free for the taking (once the natives had been suitably subdued)? Was it the jump from agrarian to industrial economy? How much of a role was played by the lack of regulation on things like owning other people and forcing them to work for you?
Similarly, it's difficult to work only from short-term examples; Ireland had a great boom, yes, but they also got a real-estate bubble and a banking crisis -- both of which are pretty clearly related in some way to the tax/regulation situation -- and that's not so great for the long-term.
It's also important to consider the historical context. Rapid industrialization has almost always resulted in massive growth, for example, but at unimaginable human cost. Whether we look at starvation and accidental and deliberate deaths as a result of a five-year plan or the Great Leap Forward, or starvation and accidental and deliberate deaths during the Western industrial revolution, we find that this growth is not always a uniformly good thing. Yet, when approaching from a framework that values only numbers like GDP, we don't see those costs.
If you want a scientific approach, you have to be considering all of these things, and more :)
Many of the commonly-cited examples tend to pick situations which are amenable to lots of explanations. To take your example of the early US: was it low taxes and light regulation? Was it the presence of massive amounts of land and natural resources essentially free for the taking (once the natives had been suitably subdued)? Was it the jump from agrarian to industrial economy? How much of a role was played by the lack of regulation on things like owning other people and forcing them to work for you?
Similarly, it's difficult to work only from short-term examples; Ireland had a great boom, yes, but they also got a real-estate bubble and a banking crisis -- both of which are pretty clearly related in some way to the tax/regulation situation -- and that's not so great for the long-term.
It's also important to consider the historical context. Rapid industrialization has almost always resulted in massive growth, for example, but at unimaginable human cost. Whether we look at starvation and accidental and deliberate deaths as a result of a five-year plan or the Great Leap Forward, or starvation and accidental and deliberate deaths during the Western industrial revolution, we find that this growth is not always a uniformly good thing. Yet, when approaching from a framework that values only numbers like GDP, we don't see those costs.
If you want a scientific approach, you have to be considering all of these things, and more :)
The US was not an economic power until after the Civil War, or in other words, roughly only the last two decades of the 1800s, which coincided with major technological advances such as the development of the steamship and the cotton gin. The first two decades of the 1900s coincided with a major bust cycle which did not end until after the passage of the first income tax. The US had marginal tax rates as high as 90% during the post-WWII boom. During the boom of the 1990s, tax rates were higher than they were during the Reagan or Bush II eras.
Sweden, at roughly 9.5 million people, is smaller than most major US cities, let alone metropolitan areas. It simply does not have the sort of expenses that a large nation must deal with. Further, as others have noted, Sweden's industrial base was not damaged in WWII, allowing it to avoid the type of spending that most other European nations had to deal with.
Ireland's boom resulted in an even larger bust. The key driver of the boom was reduced regulations which led to rampant overspeculation by financial institutions (i.e., essentially the same thing that happened with the U.S. mortgage market).
Estonia's economic boom is the result of the discovery and exploitation of massive oil shale reserves. Unlike most oil-producing nations, Estonia is not requiring extractors to compensate, clean up, or otherwise mitigate the environmental damage.
Singapore has increased taxes several times since 2003, with minimal effects to its growing GDP. Hong Kong has also increased taxes regularly, to pay for vastly expanded government services.
Sweden, at roughly 9.5 million people, is smaller than most major US cities, let alone metropolitan areas. It simply does not have the sort of expenses that a large nation must deal with. Further, as others have noted, Sweden's industrial base was not damaged in WWII, allowing it to avoid the type of spending that most other European nations had to deal with.
Ireland's boom resulted in an even larger bust. The key driver of the boom was reduced regulations which led to rampant overspeculation by financial institutions (i.e., essentially the same thing that happened with the U.S. mortgage market).
Estonia's economic boom is the result of the discovery and exploitation of massive oil shale reserves. Unlike most oil-producing nations, Estonia is not requiring extractors to compensate, clean up, or otherwise mitigate the environmental damage.
Singapore has increased taxes several times since 2003, with minimal effects to its growing GDP. Hong Kong has also increased taxes regularly, to pay for vastly expanded government services.
I also have very similar experience and opinion, I was in design, manufacture, distribution for about 10 years, biggest pain in the arse you can imagine, even though moderately successful I too chucked it all in and am glade I did. I'm also now into software only. Software is hard too. Very hard, competition is tough, but it's so powerful, if your in a good niche you can really change the playing field.
Another argument against what you are saying here is that when you look at the Eastern vs Western Roman empires, the Eastern Empire had more progressive tax policies, and was more effective at imposing and collecting taxes on the wealthy than the Western Empire was. As a result the tax base in the Western Empire was very narrow, and this contributed to its collapse (at the time the Goths overran, the Western Empire was collecting less in taxes than the Eastern Empire was spending on defence).
The relationship between taxes and prosperity is a complex one, but if we go by that example, it seems that an active policy of reducing concentration of wealth is the best way to ensure common defence and joint prosperity.
The relationship between taxes and prosperity is a complex one, but if we go by that example, it seems that an active policy of reducing concentration of wealth is the best way to ensure common defence and joint prosperity.
That is a tax that never made sense to me. I know they do it because it is easy to quantify equipment but once you start taxing the means of production all you get is less production and less means of production to tax.
While I'd say I'm quite libertarian, I don't see how this affects a startup all that much, at least directly.
1) Corporate income tax is a (slightly progressive) tax on profits. Most tech startups aren't immediately profitable (nor are most businesses), and even then, profits are relatively low as a percentage of total revenue, especially early on.
2) Higher taxes do prevent capital accumulation/formation, but that's more an effect of personal income taxes. A rich consultant/engineer/etc. paying 40% income taxes (state+fed) plus inflated cost of living, making $150k/yr, won't realistically be able to save the $100k/yr he would potentially otherwise be able to. Being able to use your work to accumulate capital, then invest that capital in starting a business, is key for income mobility. At least in tech the cost in capital of starting new businesses is falling dramatically, so $5-10k in savings to the business, plus a low personal burn rate, is probably enough.
3) Capital gains rates are generally low enough that they don't substantially disincent investment.
4) The overseas earnings repatriation issue is an issue, but most large and international US corporations are sitting on huge amounts of capital both inside AND outside the US. The low interest rate environment makes issuing US bonds to fund US operations, while sitting on huge amounts of international pre-tax cash, also an option.
In short, taxes are an issue, but definitely not the low hanging fruit. There are many regulatory issues to fix first, and systemic problems with the economy (it's absurd that we have 10-40% unemployment and underemployment, while at the same time we can't hire anywhere near enough qualified engineers -- THAT is the big structural defect which 100% of the society's effort should be going to fix.)
1) Corporate income tax is a (slightly progressive) tax on profits. Most tech startups aren't immediately profitable (nor are most businesses), and even then, profits are relatively low as a percentage of total revenue, especially early on.
2) Higher taxes do prevent capital accumulation/formation, but that's more an effect of personal income taxes. A rich consultant/engineer/etc. paying 40% income taxes (state+fed) plus inflated cost of living, making $150k/yr, won't realistically be able to save the $100k/yr he would potentially otherwise be able to. Being able to use your work to accumulate capital, then invest that capital in starting a business, is key for income mobility. At least in tech the cost in capital of starting new businesses is falling dramatically, so $5-10k in savings to the business, plus a low personal burn rate, is probably enough.
3) Capital gains rates are generally low enough that they don't substantially disincent investment.
4) The overseas earnings repatriation issue is an issue, but most large and international US corporations are sitting on huge amounts of capital both inside AND outside the US. The low interest rate environment makes issuing US bonds to fund US operations, while sitting on huge amounts of international pre-tax cash, also an option.
In short, taxes are an issue, but definitely not the low hanging fruit. There are many regulatory issues to fix first, and systemic problems with the economy (it's absurd that we have 10-40% unemployment and underemployment, while at the same time we can't hire anywhere near enough qualified engineers -- THAT is the big structural defect which 100% of the society's effort should be going to fix.)
The same was true of Raspberry Pi, in that the complete item got taxed once if made completely in China, whereas to assemble it in the UK would've resulted in them being taxed more on separate components pushing the price up.
It really is utterly stupid.
It really is utterly stupid.
That's insane import taxes rather than corporation tax. It is good to incorporate in London, (and Dublin, of course), and as long as you don't actually try to make anything in Britain and just ship it all in when it's done, then everything's fine. Meanwhile, the country falls to shit cos less and less people know how to do anything.
VAT is imposed only once, albeit at multiple levels in smaller amounts. In effect, the VAT is a more hasslesome sales/services tax.
Imported items are subject to higher VAT, but usually only once...if importation was a way to avoid VAT, the EU would not have any manufacturing facilities at all because it would always be cheaper to manufacture in Asia.
Imported items are subject to higher VAT, but usually only once...if importation was a way to avoid VAT, the EU would not have any manufacturing facilities at all because it would always be cheaper to manufacture in Asia.
VAT is different to import duties. There will be a customs duty to pay on imported goods over a certain value (as well as VAT (chargeable to the end user, rather than each person in the chain.))
VAT (and import VAT) are easy enough - there's a few different rates so as long as you're careful describing the goods it's okay.
But customs duty is complex. Each item has a commodity code, and that code has its rate of duty. There are 14,000 different commodity codes.
(http://www.hmrc.gov.uk/customs/tax-and-duty.htm)
VAT (and import VAT) are easy enough - there's a few different rates so as long as you're careful describing the goods it's okay.
But customs duty is complex. Each item has a commodity code, and that code has its rate of duty. There are 14,000 different commodity codes.
(http://www.hmrc.gov.uk/customs/tax-and-duty.htm)
I wouldn't say VAT is that easy, for instance I'm in the UK but if I sell enough into Germany then I'm obliged to register for VAT in Germany, and the same again for each of the other EU states.
Then there is additional paperwork to fill for every EU sale, each needs the customers VAT number and if it is wrong the paperwork gets rejected.
Then there is additional paperwork to fill for every EU sale, each needs the customers VAT number and if it is wrong the paperwork gets rejected.
VAT is "easy" in the sense that it is easy to figure out, but it is difficult in the sense that the administrative burdensome exceeds the burden associated with a sales tax by many orders of magnitude.
I've heard in some countries, it's cheaper to buy a cordless drill with a battery pack, then the battery pack alone, because batteries have a huge duty, but cordless drills (even including batteries) aren't.
The linked article is inaccurate. While the US has the highest base corporate tax rate, it has the lowest effective corporate tax rate of any major nation.
The US favors a deduction/credit-based system for lowering taxes. Manufacturing and research deductions/credits are especially generous. Ultimately, service-based businesses pay the highest effective rates, but few properly advised service businesses pay a 35% effective rate. (For example, choose a tax entity other than a corporation unless you have a compelling reason for being a corporation.)
It is very possible to engineer around taxes. This is what I and others in my field do for a living.
The US favors a deduction/credit-based system for lowering taxes. Manufacturing and research deductions/credits are especially generous. Ultimately, service-based businesses pay the highest effective rates, but few properly advised service businesses pay a 35% effective rate. (For example, choose a tax entity other than a corporation unless you have a compelling reason for being a corporation.)
It is very possible to engineer around taxes. This is what I and others in my field do for a living.
Nothing against your chosen profession, but a system in which businesses need to worry about planning and optimising their taxes rather than focusing on their weath-creating activities is flawed.
BTW I live in Brazil, where we have big problems with both the tax rates and the byzantine complexity. Companies spend thousands of man-hours doing taxes.
Again, once you are in such a system, specializing in giving tax advice is a decent, honest way to make a living. But it's a bad system to begin with.
I think the article's point (maybe poorly expressed) is that having a bad tax system cripples the economy so much, that it has to be addressed in any serious effort to increase competitiveness. That's what can't be engineered around.
BTW I live in Brazil, where we have big problems with both the tax rates and the byzantine complexity. Companies spend thousands of man-hours doing taxes.
Again, once you are in such a system, specializing in giving tax advice is a decent, honest way to make a living. But it's a bad system to begin with.
I think the article's point (maybe poorly expressed) is that having a bad tax system cripples the economy so much, that it has to be addressed in any serious effort to increase competitiveness. That's what can't be engineered around.
I could say the same thing about the need to select proper platforms and technologies for scaling a website or SaaS (i.e,. AWS, database choice, even language choice)..."A system in which people need to worry about planning and optimizing their technology platform for future expectations rather than just building something that works from the ge-go is flawed."
But that's not the way tech works. And that's not the way tax works either. If you are a small fry, the tax burden (or savings) will not be large enough to matter (because as a corporation, you get taxed on net income, i.e., profits). Affording a tax lawyer to "game" the tax system won't be necessary until you are at the scale where you are already pulling in serious profits.
Ultimately, people tend to vastly overestimate (or underestimate) the difficulty of activities outside of their profession.
But that's not the way tech works. And that's not the way tax works either. If you are a small fry, the tax burden (or savings) will not be large enough to matter (because as a corporation, you get taxed on net income, i.e., profits). Affording a tax lawyer to "game" the tax system won't be necessary until you are at the scale where you are already pulling in serious profits.
Ultimately, people tend to vastly overestimate (or underestimate) the difficulty of activities outside of their profession.
I don't necessarily disagree with your point, but your analogy is severely flawed. Nothing forces taxes to be complicated, its not some sort of inherent property of taxes -- and in fact regardless of where people stand on whether taxes should be higher or lower, I rarely find someone who disagrees that taxes are too complicated in the US. The people who seem happiest with the status quo are precisely the ones whose employment relies on it (no offense).
I'm really surprised you'd then compare this situation to choosing between different available techs: it has nothing in common except "being hard". This is a legitimate expense from a natural consequence of invention: there are going to be several options with different trade-offs. You act as if Amazon is doing you a disservice by providing you with another option. Unlike the tax world, if there was a way to simplify this choice, everyone in the industry would immediately jump on board. You don't have to take my word for it, its the pattern we've been seeing from the beginning of technology. Making and scaling website today is vastly simpler than 10, 15, and 20 years ago. Can you say the same for taxes? Or have taxes become increasingly harder to deal with as time progresses? Many aspects of running a website that required experts yesterday are completely automated today.
In other words, the cost of "choosing a platform" is justified because there is no workaround and it is not an artificial position that you have been placed in. On the other hand, you have not proven that there is no alternative to a convoluted tax system that requires tax experts -- and furthermore it is not even clear what the benefits of a convoluted tax system even are. BTW, I am not taking a position on this, I am simply pointing out that that is the correct attack vector: explaining why this system that requires tax experts is necessary vs saying "Sure it is hard, but many other things are also hard."
EDIT: Added last sentence.
I'm really surprised you'd then compare this situation to choosing between different available techs: it has nothing in common except "being hard". This is a legitimate expense from a natural consequence of invention: there are going to be several options with different trade-offs. You act as if Amazon is doing you a disservice by providing you with another option. Unlike the tax world, if there was a way to simplify this choice, everyone in the industry would immediately jump on board. You don't have to take my word for it, its the pattern we've been seeing from the beginning of technology. Making and scaling website today is vastly simpler than 10, 15, and 20 years ago. Can you say the same for taxes? Or have taxes become increasingly harder to deal with as time progresses? Many aspects of running a website that required experts yesterday are completely automated today.
In other words, the cost of "choosing a platform" is justified because there is no workaround and it is not an artificial position that you have been placed in. On the other hand, you have not proven that there is no alternative to a convoluted tax system that requires tax experts -- and furthermore it is not even clear what the benefits of a convoluted tax system even are. BTW, I am not taking a position on this, I am simply pointing out that that is the correct attack vector: explaining why this system that requires tax experts is necessary vs saying "Sure it is hard, but many other things are also hard."
EDIT: Added last sentence.
Nothing forces taxes to be complicated, its not some sort of inherent property of taxes --
I think it very well might be. At least with how everyone actually utilize taxes. After all, government routinely utilize taxes (or rebates) as incentives to create desired outcomes.
You want more businesses moving into your area? Change the taxes. You want more home-owners? Change the taxes. You want more money for education? Change the taxes.
That's how you arrive at complex tax codes. It goes well beyond income taxes as well. You want a simple income tax? Fine, but I'm going to use sales taxes, road tolls, and a whole host of other mechanisms to get the desired behavior.
So it may not be an inherent property of taxes, but I'm not sure those things can ever really be separated.
I think it very well might be. At least with how everyone actually utilize taxes. After all, government routinely utilize taxes (or rebates) as incentives to create desired outcomes.
You want more businesses moving into your area? Change the taxes. You want more home-owners? Change the taxes. You want more money for education? Change the taxes.
That's how you arrive at complex tax codes. It goes well beyond income taxes as well. You want a simple income tax? Fine, but I'm going to use sales taxes, road tolls, and a whole host of other mechanisms to get the desired behavior.
So it may not be an inherent property of taxes, but I'm not sure those things can ever really be separated.
Since we're drawing weird analogies with technology platforms anyways,
Refactor refactor refactor. Sure, tech companies have the grand luxury of having fewer stakeholders to be accountable to, but surely it's possible to refactor, refine, and reduce the tax code every so often?
Refactor refactor refactor. Sure, tech companies have the grand luxury of having fewer stakeholders to be accountable to, but surely it's possible to refactor, refine, and reduce the tax code every so often?
The problem is getting the politicians to give up their favorite features in the process of removing these bugs. ;-)
Indeed.
To drag the analogy further, the politicians are being engineers of the tax code when they should really be its product owners. Should politicians really be responsible for the minutiae of how many numbers to put where, or should they simply give higher-level directives, such as "incentivize alternative energy"?
To drag the analogy further, the politicians are being engineers of the tax code when they should really be its product owners. Should politicians really be responsible for the minutiae of how many numbers to put where, or should they simply give higher-level directives, such as "incentivize alternative energy"?
I think something does force taxes to be complicated though and that is the fact that taxes are a useful tool of public policy and it is often one of the easiest ones to use. For example the federal government in the US can enact income and excise taxes to accomplish things that are otherwise outside the general powers of our federal government, such as heavily restricting machine gun ownership.
I think as soon as taxes become a political tool, or a tool of public policy the question isn't whether they will become complicated but rather how complicated they will become. The floor here seems to me to be based on the willingness of the average voter to put up with the complexity vs the desire to see their public policy goals enacted.
I think that these play out in two ways:
1) Local taxes tend towards less complexity than taxes which are national.
2) Taxes which everyone reports tend towards less complexity than taxes which few people report. Consider the current trends in state sales tax reporting vs trends in state income tax reporting...... There's no question that sales tax reporting on average is more complex now than income tax on a state level, and that its becoming more complex faster.
I think as soon as taxes become a political tool, or a tool of public policy the question isn't whether they will become complicated but rather how complicated they will become. The floor here seems to me to be based on the willingness of the average voter to put up with the complexity vs the desire to see their public policy goals enacted.
I think that these play out in two ways:
1) Local taxes tend towards less complexity than taxes which are national.
2) Taxes which everyone reports tend towards less complexity than taxes which few people report. Consider the current trends in state sales tax reporting vs trends in state income tax reporting...... There's no question that sales tax reporting on average is more complex now than income tax on a state level, and that its becoming more complex faster.
The alternative to a convoluted tax system which treats everyone fairly (analyzed in the context of each individual provision, not overall) is a simple tax system which treats everyone equally poorly.
Taxes are like C: a low-level language for effecting systemic policy. Under the U.S. Constitution, it is one of the primary vehicles through which Congress can enact national policy (the Commerce Clause generally being the other). If you do not need low-level access to the "hardware" of society, you use something other than taxes, but recognize that attempting national policy will be incredibly more complex and/or inefficient than using the proper "language."
In this sense, it is obvious why tax systems get more complicated: they take on more functions over time. This is the same reason that operating systems (also written in C) get larger and more complicated over time.
Taxes are like C: a low-level language for effecting systemic policy. Under the U.S. Constitution, it is one of the primary vehicles through which Congress can enact national policy (the Commerce Clause generally being the other). If you do not need low-level access to the "hardware" of society, you use something other than taxes, but recognize that attempting national policy will be incredibly more complex and/or inefficient than using the proper "language."
In this sense, it is obvious why tax systems get more complicated: they take on more functions over time. This is the same reason that operating systems (also written in C) get larger and more complicated over time.
That's kind of the problem. Once you can pay for the tax engineering, great, but you have to get to critical mass first, and having a credit/deduction based system instead of an overall flat rate prevents small players from getting there.
Or they could just visit the IRS website. There are taxpayer-friendly guides for understanding the tax system. The NOLO series also has good advice. Alternatively, spending about $1000 on tax advice from an accountant or tax lawyer could pay for itself in weeks. Taxes aren't due until the following year. If you can't afford to pay for basic tax advice after a year, you are either (a) undercapitalized or (b) lack traction and need to pivot.
Also, the reason the US uses a deduction/credit system is that it is (politically) easier to balance credits and deductions (which effect fewer taxpayers) than to balance an alteration to the base rate that affects everyone.
Also, the reason the US uses a deduction/credit system is that it is (politically) easier to balance credits and deductions (which effect fewer taxpayers) than to balance an alteration to the base rate that affects everyone.
It's more IRS enforcement risk, you can interpret something incorrectly and the IRS will penalize you with usually crazy penalties.
"it has the lowest effective corporate tax rate of any major nation"
Can you provide a source on that? I'd love to see a good list.
Can you provide a source on that? I'd love to see a good list.
Sure! Let me google that for you. The first couple of links have your answer.
http://lmgtfy.com/?q=corporate+tax+rate+by+country
http://lmgtfy.com/?q=corporate+tax+rate+by+country
Dude, are you serious? Did you read anything before making that reply?
An outlandish claim regarding EFFECTIVE tax rate was made without any citations. Your snarky link does nothing to resolve the claim. A similar search for "effective corporate tax rate by country" also provides no evidence to defend rprasad's claim. Adventureful dug up quotes with sources fully debunking the claim in question.
An outlandish claim regarding EFFECTIVE tax rate was made without any citations. Your snarky link does nothing to resolve the claim. A similar search for "effective corporate tax rate by country" also provides no evidence to defend rprasad's claim. Adventureful dug up quotes with sources fully debunking the claim in question.
You have access to the same internet the rest of us do. I'm happy to find some resources, like a wiki page with relevant links, but obviously there's a limit to how much research you can expect strangers to do for you.
I will try to help though: http://lmgtfy.com/?q=effective+tax+rate+by+country
The first link brings up this report (which shows the US effective tax rate towards the top): http://businessroundtable.org/uploads/studies-reports/downlo...
Is that the kind of info you're looking for? If not, maybe you could share the citations that you've dug up and enlighten the rest of us?
I will try to help though: http://lmgtfy.com/?q=effective+tax+rate+by+country
The first link brings up this report (which shows the US effective tax rate towards the top): http://businessroundtable.org/uploads/studies-reports/downlo...
Is that the kind of info you're looking for? If not, maybe you could share the citations that you've dug up and enlighten the rest of us?
http://www.bloomberg.com/news/2011-04-14/u-s-companies-pay-w...
"The tax rate for the largest U.S. companies between 2006 and 2009 was 27.7 percent, compared with a non-U.S. average of 19.5 percent, according to the study released today. Companies based in Japan, Morocco, Italy, Indonesia and Germany faced higher tax rates. Excluding the U.S., companies based in industrialized countries had an average rate of 22.6 percent. "
"A March 31 report by the Congressional Research Service, using different methodology, found that the U.S. had an effective corporate tax rate of 27.1 percent in 2008. Other industrialized countries had an average 27.7 percent effective rate, using a weighted approach that adjusted for the size of the economy, and a 23.3 percent rate with an unweighted approach. "
The rest of the world has been competitively lowering corporate taxes (Sweden, once considered a socialist bastion, has a 26% corporate tax rate for example and is discussing lowering it to 20%).
http://blog.american.com/wp-content/uploads/2012/02/022212ha...
And what's very important is how much the bottom 97% of US firms pay, as companies like GE dodging billions in taxes massively skews the results for small businesses who can't dodge like that.
To be a small business in the US and get socked with a 40% combined income tax rate is paralyzing.
"The tax rate for the largest U.S. companies between 2006 and 2009 was 27.7 percent, compared with a non-U.S. average of 19.5 percent, according to the study released today. Companies based in Japan, Morocco, Italy, Indonesia and Germany faced higher tax rates. Excluding the U.S., companies based in industrialized countries had an average rate of 22.6 percent. "
"A March 31 report by the Congressional Research Service, using different methodology, found that the U.S. had an effective corporate tax rate of 27.1 percent in 2008. Other industrialized countries had an average 27.7 percent effective rate, using a weighted approach that adjusted for the size of the economy, and a 23.3 percent rate with an unweighted approach. "
The rest of the world has been competitively lowering corporate taxes (Sweden, once considered a socialist bastion, has a 26% corporate tax rate for example and is discussing lowering it to 20%).
http://blog.american.com/wp-content/uploads/2012/02/022212ha...
And what's very important is how much the bottom 97% of US firms pay, as companies like GE dodging billions in taxes massively skews the results for small businesses who can't dodge like that.
To be a small business in the US and get socked with a 40% combined income tax rate is paralyzing.
The 12.1% effective tax rate being claimed in multiple posts here is a temporary number due to a one time tax break for 2010 and 2011 that will expire. After which the effective US corporate tax rate will skyrocket back up to around 25% to 26% or so. And it's worth noting, it's a front loaded expensing, versus expensing over a period of years, so that 12.1% is completely deceiving.
"In 2010 and 2011, companies were allowed to deduct the full cost of the purchases of new equipment, while normally these costs would be expensed over several years. In 2012, this deduction will go down to 50% and be eliminated altogether thereafter, causing the effective tax rate to return to roughly the 25.6% average effective tax rate corporations paid since the late 1980s, according to CBO forecasts."
http://business.time.com/2012/02/06/the-corporate-tax-rate-i...
"In 2010 and 2011, companies were allowed to deduct the full cost of the purchases of new equipment, while normally these costs would be expensed over several years. In 2012, this deduction will go down to 50% and be eliminated altogether thereafter, causing the effective tax rate to return to roughly the 25.6% average effective tax rate corporations paid since the late 1980s, according to CBO forecasts."
http://business.time.com/2012/02/06/the-corporate-tax-rate-i...
My father started a small roofing business in 1980, selling it just recently to an employee; that tax break was absolutely crucial to getting work going again. Luckily, my father's now-sold business had the bankroll to take full advantage of it. The credit others needed wasn't trivial to come by.
Just to clarify, I wasn't arguing for or against the expensing tax adjustment break (nor whether it was a benefit to the economy). I was pointing out that the claimed 12.1% effective tax rate isn't an accurate representation of corporate taxation in the US.
Yep, I know, just chiming in with some relevant experience.
So I would argue that the title of the article is false, and in aggregate US corporations have engineered around taxes. Alternatively, you could say that they haven't engineered around anything, and the system is operating as designed, it's just that you can't characterize its behavior by a single number.
EDIT: To make the point more explicit, OP says the US is losing business to China because of China's 15% corporate tax rate, and yet that rate is higher than the effective tax rate in the US. Perhaps there's an argument to be made that US taxes really are higher, but the evidence cited in this article isn't it.
[1] http://online.wsj.com/article/SB1000142405297020466220457719...