[PurpleBoxDragon]

>Over a reasonable horizon, you weren't profitable.

The average worker isn't allowed to do that even when they lose money in a given year. Why is it so naturally assumed to be acceptable for a business to do it? Maybe the time is to just remove the loopholes in general from both business and personal income taxes.

[OrwellianChild]

If the average worker has any stock or index fund investments, that worker absolutely can take advantage of this (in the U.S.). It's called tax-loss harvesting - worth reading about here [1].

[1] https://www.madfientist.com/tax-loss-harvesting/

[codexon]

You can only harvest $3000 in losses per year if you have more capital losses than capital gains.

That is laughably small.

And you can't deduct the losses from your other income while you can as a business.

[laurencerowe]

There is no limit to the amount of capital losses carried over (i.e. harvested) year to year. These must first be applied against any capital gains (no limit AFAIK.) The $3000 limit applies to the annual amount of capital losses that may be written off against other income.

Example, in year 1 you have a $15,000 net capital loss. You write off the maximum $3,000 of this against your other income, carrying over a $12,000 capital loss. In year 2 you have a $10,000 net capital gain, this is offset against your carried over loss leaving $2,000 to write off against your income.

[anigbrowl]

There is no good reason investment income should be privileged over income from labor.

[smsm42]

One of the reasons why it makes sense to have different rules for investment income is investment income tax (at least if you're investing in a corporative stock) is a double tax - the corporation you invest in is taxed on its profit (so your income from it is less than it would be) and then your income from it is taxed again. It kinda makes sense that parts of the double tax would be less than the single one.

Of course, there's a political component of it too - taxes are always political, and are used to promote or suppress certain actions. I guess the government does want to promote long-term investment and thus defines lower tax rates for this activity.

[JamesBarney]

This is only true of dividends. But I don't think it wasn't true of stock buybacks.

Also there is plenty of business income that is not double taxed because it isn't run through a C Corp.

Then in regards to incentives. We already have interest rates to adjust the knobs of investment versus consumption. Capital gains is just a way to make the tax system less progressive.

[blumenko]

Stock buybacks come from profits which are taxed, and those who sell the shares back to the company also have to pay capital gains tax. And S corp income is taxed at personal income rates, not capital gains rates (except for some ridiculous 20% rebates in some situations in the new tax law (but is still higher than capital gains)).

[JamesBarney]

You're right. I had a brain fart forgetting that buybacks are taxed as profit.

[esrauch]

There's no reason the government wants to promote long-term investment over income-producing labor, is there?

[smsm42]

There is. Basic level of labor is almost always there - people have to work to earn the living (even if you go into crime, you still have to work - maybe you pay taxes to different people and do different things, but you still have to do stuff to earn your money).

However, once you earned enough money, beyond subsistence level, you have a choice - you can spend it all on consumption, or you can defer some of the consumption, or give up a part of it, as an investment, in hope that this would increase your consumption abilities in the future, or you ability to retire, etc. Modern economy would not work without investment - you need massive upfront spending to lift off something like Netflix of the ground, before it starts being profitable.

This investment is, ultimately, financed by people who chose investment over consumption (might be one very rich person, or tens of thousands of not so rich people giving their money to the bank, which in turn loans it to the entrepreneurs, or likely a mix of both). Ensuring this choice remains a viable and attractive one is something that the government would definitely have an incentive to support.

[anigbrowl]

This is predicted on the unstated assumption that everyone starts out from about the same place and subsequently people make a variety of different choices. It ignores the effect of inheritance or the costs of increasingly binomial wealth distribution.

[zdragnar]

Labor doesn't necessarily generate income. Factory workers are an up-front cost converting one set of resources into another. No income is realized until that second set of resources (i.e. products) are actually sold.

Also, realize that the government does promote both labor and investments, just through different means. Lowering taxes isn't going to affect how a fully employed individual produces labor; they are trading their time for money. Lowering taxes on investment will promote more investments, since the money for those investments have already been taxed, and since the trade of investments is money-now for money-later, taxes have a much more significant influence over the extent to which someone will invest in a business. Someone fully invested in other things (non-stock commodities, etc) might move some of their investments into businesses instead.

[anigbrowl]

I'm all for simplifying the tax structure but one kind of income should not be privileged over another.

[OrwellianChild]

At risk of bottoming out on the threaded replies, I'd be interested in talking through how that would work...

Let's say you wanted to give income from labor the same benefits as (negative) income from investments that lost money... How would you do that?

Say I earn a healthy $250K/year at my W-2 job. If I buy a large house with the proceeds from my job, have I incurred a loss? How about if I eat out at an expensive restaurant every night, spending my entire paycheck. Do I get to avoid taxes by keeping my lifestyle expensive?

[chrischen]

Regarding a house it would be considered an asset, similar to buying stock.

That being said a corporatiom is not a person, and cannot eat a fancy dinner, so much of their profit can only become reinvested back into paying people who ultimately get taxed for eating fancy dinners.

[kamarg]

Aren't similar expenses be used by businesses? Bought an expensive building or paid for all your sales people to take clients out for dinner and drinks.

[anigbrowl]

Let's say you wanted to give income from labor the same benefits as (negative) income from investments that lost money... How would you do that?

I am not all that sure about carrying forward investment losses, and as you are aware some expenses are deductible while some are not. While eating a fancy restaurant is strictly optional, spending on medical of educational costs are quite different.

In general I think if someone investigates the edge cases first (eg looking at the second-order effect like carrying deductions on negative income) that's a sign of not wanting to look at the larger picture.

[OrwellianChild]

From your edge-case comment, it sounds like you'd prefer that losses from business income not roll over, rather than making rollovers accessible to individuals. I was approaching it the other way - trying to see if there was a reasonable way to credit individuals with a "P&L" view of their finances that could cross multiple years.

As you indicated above, so much of our personal expenses are "discretionary" in the sense that we could increase or lower them by choice. That's exactly the difference between business investment spending (required to produce the revenue that's taxed) vs. personal income/spending, which is based strongly on preferences. Hard to justify taxing frugal individuals more than lavish spenders just because they save a larger percentage of their income...

[crgwbr]

From a purely theoretical standpoint, I’m terribly curious what would happen if we incentivized spending like that. I’m sure it’d be terrible in the long run, but it’d also have definite macroeconomic stimulus effects.

[redblacktree]

How about if we start with deducting my expenses for commuting to the office? $0.58 per mile would add up to about $2,900/year for my commute.

[objektif]

How is eating at an expensive restaurant a worse decision than say investing in Blue Apron? What are we trying to prove here?

[prostoalex]

During low-inflation years - no.

The lenient rates were introduced during high-inflation years. If somebody was pursuing a long-term project spanning over several years (let's say, building a new apartment complex), high punitive tax rates at liquidity time (let's say, 5 years down the road) combined with decreased buying would obliterate any real profitability.

The 12-month cut-off window, though, seems completely arbitrary.

The argument is kinda moot anyways, as capital gains are completely voluntary - one sells when they want to sell. If they don't want to sell, but need liquidity, they can access a bunch of asset-backed loans (HELOCs, PALs, cashout refinance, etc.) Ken Fisher in his book "Debunkery" (and I'm sure the data exists elsewhere) shows how total revenue figures collected by US government do not change over decades, regardless of the actual capital gains rates.

[ericd]

This is a very interesting point. It seems to me that we should tax capital gains at normal income rates, but only after adjusting the cost basis for inflation. It’s a little insane that we pay tax on the inflation adjustments for TIPs and other supposedly inflation neutral instruments, which all but guarantees that they lose money every year.

[prostoalex]

Yes, incorporating inflation sets the stage for increasing the capital-gains tax.

I am not sure what the counter-argument to that is, but one thing I can think of is increased complexity of a tax return for an average joe investor, who bought and sold a few funds in his portfolio. Opponents will also likely point that an official measure - CPI - can be manipulated for political purposes.

[ericd]

Hm yeah. I'd say that CPI is already manipulated for political purposes. Not sure if this would exacerbate it.

[Spivak]

I think if you could separate out your income into business and personal expenses then I think you have a case for that kind of tax policy since you would be 'investing in yourself' but the current tax system covers a lot of that with deductions.

[anonymous5133]

lol yes there is. If investment income is taxed at 50% (top federal bracket + top state income tax rate) then who in their right mind is going to risk their capital? lol, I know I absolutely wouldn't.

[memmcgee]

Then what would you do with all your capital? Sit on it? I highly doubt it. You'd either spend it (which is good) or invest it because 50% of more money is still more money.

[dlp211]

That is not how marginal tax rates work. I'm also completely fine moving to an inflation based basis system if capital gets the same tax treatment as labor.

[anigbrowl]

If investment income is taxed at 50%

Love it when people shoot down proposals I never made

[MetalGuru]

Tax-loss harvesting is different than carrying losses from previous years forward. And in the case of tax-loss harvesting, the company wouldn't be realizing massive profits for that year because said profits would be offset by investment losses.

[ramshorns]

The average worker probably doesn't have any investments and is losing money by having more expenses than income.

[clebio]

The very fact that parent comment is getting downvoted shows what a bubble this (the HN) community is. If you think the average US working-class person is able to save, let alone have investments, I'd love to see some data to back that up.

[gameswithgo]

>If the average worker has any stock or index fund investment

we don't

[andrewla]

Business taxes and personal taxes are different. Businesses pay taxes on income, while individuals pay taxes on revenue.

The differences are significant enough that any sort of parallel like this does not hold a lot of value. Yes, it might make sense to disallow this for corporations, but the justification seems reasonable -- it's not a loophole that allows corporations to take home huge amounts of money without paying taxes, it just allows them to deal with time horizons longer than one year. As it is, a gain in the second half of the first month of the year can be offset by a loss in the first half of the first month of the year, just because of reporting frequency.

[AlexTWithBeard]

Individuals pay taxes on income as well.

Professional expenses are usually deductible, but most of W2 people (including myself) don't have too much to deduct.

[andrewla]

I guess I should have said "businesses pay taxes on profit" instead of "income". Any expenditures that can be reasonably said to work towards the operation of the business are deductible. For individuals that is clearly not the case; things like paying for food to eat, rent, medical expenses (generally), or purchases of cars, etc., are explicitly excluded.

[objektif]

Individuals pay taxes on their own income.

[Stratoscope]

From 1964 to 1986, individuals were allowed to average their income over five years. (Or was it four?)

Now only farmers and fishermen are allowed to do this, and some retirees who receive a lump sum retirement plan distribution.

[nsxwolf]

What do you mean by "lose money"? There are plenty of kinds of losses that the average worker might incur that would offset their income tax. It could be a capital loss on an investment. It could be casualty losses from theft or a fire.

[MetalGuru]

Casualty losses are tax deductible? That seems like it would be hard to verify if you got audited.

[Bedon292]

Yes, hurricanes are a big one as well. However this is un-reimbursed losses only. So if you have a large deductible, or you insurance subtracts depreciation from your payment. Then you can take a loss on just that part. But yes, need receipts and all that stuff to prove the loss.

100k house, 30k in damage, 20k insurance check. You can take 10k in losses.

*Also note, I am not a CPA, consult one. This is my current understand trying to deal with a town house I own in NC that was damaged this year.

[a-priori]

I don't know about American taxes, but at least in Canada individuals can do this for capital gains / losses.

If you have investments that produce losses one year, you can carry those losses forward to cancel out capital gains in following years and reduce your tax payable.

[lorenzhs]

In Germany, if you have less taxable income than tax deductions, you can carry that loss forward, too. It's a rare case, though, but it can save you several thousand when pursuing a second degree.

[a-priori]

Very interesting. This feels like one small baby step away from a negative income tax scheme where you'd receive that difference immediately, rather than having to wait until you make more income in a later year.

[el_cujo]

This is how it works in America as well.

[MetalGuru]

But the max per year is $3k, which is garbage.

[refurb]

$3k max to offset other income. There is no limit to offset capital gains.

[MetalGuru]

Even when carried forward?

[throwaway190102]

Individual workers are allowed to do this. In the form of deductions for various types of expenses such as medical and various other deductions.

But it means something different to make a wage and to make a profit. There are definitely loopholes to close in our busted tax system, I agree with that 100%. While we are at it we should eliminate all subsidies for various types of carved out businesses from oil to corn. But Characterizing loss calculations as a loophole I don't think is correct. If I'm not mistaken most corporate tax schemes in the rest of the world use similar concepts, it's a fairly basic accounting concept.

[int_19h]

> But it means something different to make a wage and to make a profit.

Why? Other than "because our tax law says so"?

[anonymous5133]

The reason it is like that is because the United States wants to encourage business activity in this country, so they make businesses have preferential tax systems.

but I agree with your overall statements - the rates and tax system for personal individuals is ridiculous and it gets worse the more income you make. For me personally, I intentionally took a demotion (and pay cut) because it isn't worth the sacrifices you have to do to get the higher salary. More stress, more responsibility, more extra unpaid overtime you have to work, more headaches etc. SIGNIFICANTLY MORE. Then what is the reward for all this extra headaches....you get 50% of the pay raise. So I said forget about it. The extra money isn't worth it if you only keep 50%.

[AlexTWithBeard]

An average worker has few job-related expenses.

[pbhjpbhj]

A lot of workers need a vehicle (or season pass on public transport), need a different location for their dwelling - both of these amount to a pretty hefty addition to a workers costs.

[AlexTWithBeard]

Commuting is deductible - up to a certain extent: https://www.theharrisongrouponline.com/services/section-132-...

[isostatic]

In the UK it's determined that people commute not to get to work, but instead so they can live at a location that isn't near work.

I suspect that a change to this rule would cost the Exchequer a good £20b a year plus. As a home worker I wouldn't be impressed by that.

[int_19h]

Everything that is necessary for a human to function is job-related expenses for somebody who is working. We just choose to not recognize it as such.

[AlexTWithBeard]

Correct. That's what the standard deduction is for.

[njarboe]

A huge amount of tax code complications and unfairness is due to the fact that companies get taxed on profit while people are taxed on income. People then try and have their spending done by their companies instead of personally. Mostly this is only possible for wealthy people.

We should really tax companies on income to eliminate this unfixable situation. Fiddling with the tax code will not work. Personally, I would like this problem solved by a national land tax and the permanent elimination of the income tax by constitutional amendment. People trading with each other is a win/win situation. We should encourage that, not tax it.

[prostoalex]

Average (or even above-average) W-2 worker - no, a self-employed individual or a single-person LLC - yes.

[ralala]

Because this rule is necessary for businesses to be able to invest on long term goals.

[spikels]

How does the average worker make a loss? People are not going to be working for negative wages. Only investors or business make loses.

[chongli]

Why is it so naturally assumed to be acceptable for a business to do it?

Because a business isn't a person. Taxing a business is taking real money away from payrolls, money that would get taxed again anyway once it was paid out.

Corporate income tax only makes sense when you look at it as a barrier to entry for competition in the marketplace. Big companies like Netflix know how to avoid taxes. Small companies don't. Thus corporate income taxes help to protect big companies from disruption by small ones.

[kelnos]

The actions that most companies took after the corporate tax cuts were passed proved that taxing a business does not in fact take money away from payroll. When you give that money back to businesses, they either bank it, do share buybacks, increase their dividends, and occasionally re-invest in capital expenditures or give some employees a pitiful one-time bonus that in no way reflects the magnitude of the tax break they've been given.

[deeviant]

Except a large portion of revenue does not go to workers, but to shareholders, who pay far less taxes then those who strain their backs in creating said revenue.

[chongli]

Lots of people love to throw around the word "shareholders" like it's a pejorative. The word seems to carry connotations of greedy old Uncle Scrooge, Uncle Pennybags, or some spoiled Saudi Prince. That's a highly distorted view.

Lots of "shareholders" are people's retirement funds, pensions, and the like. When those funds finally pay out, they get taxed as income just like for everybody else.

[celtain]

Even including stocks owned through retirement and pension funds, 84% of stocks are owned by the wealthiest 10% of Americans, and roughly half of all households have exactly $0 invested in the market.

Saying that Uncle Scrooge and his buddies own all the stocks is not much worse than implying that normal people own a significant share of the market through their retirement accounts.

[objektif]

Most stocks hold by Americans are owned by the top 10%. Unfortunately this libertarian trickle down fantasy of trickle down economics is not correct.

[Spivak]

This is a stupid argument. Say we have 100 people in our economy, 90 of them $50k, 9 of them make $200k, and 1 person makes 1 million. Everyone invests 10% of their income in 'stoks' which cost $5/each.

Each of the 90 people invest $5k and have 1000 stoks.

Each of the 9 people invest $20k and have 4000 stoks.

The millionaire invests $100k and has 20,000 stoks.

The top 10% have 99.96% of the stoks.

It would be weird if the richest people didn't own most of the stocks. It doesn't necessarily mean there's a problem.

[FireBeyond]

Except it's not 10%, or 1%. It's stats like "3 hedge fund makers make more than 140,000 teachers". The problem isn't disparity, it's the absolute mind boggling nature of it.

[objektif]

So you don’t see the problem in your little example?

[spullara]

For companies like Netflix that don't pay dividends, none of it is going to shareholders.

[AjithAntony]

All of a corporations actions are to create shareholder value. Retaining earnings and investment in growth does that too. If it wasn't you'd get some activist investors rallying for a takeover.

The underlying issue seems to be whether it is ethical for a business owner to make money.

[e1g]

Except for outliers like Apple, it is atypical for shareholders to get more of revenues than the workers.

Payroll, benefits, offices, etc are easily >50% of revenue in virtually all ventures (including diamond trade and definitely your favourite tech unicorn)

[andrepd]

[citation needed]

[throwaway190102]

No, The only portion of revenue that goes to shareholders would be that of profits, and Netflix doesn't pay dividends so none of that money goes to shareholders. It goes to capital re-ivestment, or the workers in the form of bonuses and the like. The sharholders in a company like netflix only make money when the companies shares become more highly valued (usually from that profit re-investment).

Also implicit in this statement I think, is the assumption that shareholders don't provide as much value to the business, or perhaps the economy writ large. Arguably the investors at least initially play a more crucial role than any employee no mater how back-breaking their work because without starting capital most businesses don't even get started in the first place. But in general all aspects of the business contribute to success, Shareholders, employees, and executive. I don't think moralizing one class over another is useful to this sort of conversation.

[JDiculous]

> Taxing a business is taking real money away from payrolls

By that same logic, taxing personal income is akin to taking money away from the goods/services/investments that that person would've spent that foregone income.

There's nothing special about businesses that warrants them special privileges.

[Spivak]

The special privilege is that a business is a group of people all of which get taxed individually.

Money goes into the business, gets taxed, and then goes to employees and taxed again or to shareholders as profits and taxed again.

Why tax twice?

[AlexTWithBeard]

Taxing a business is taking real money away from payrolls

Correct me if I'm wrong, but I think payroll expenses are not a part of profit, so no double taxation here.

[pathseeker]

>Correct me if I'm wrong, but I think payroll expenses are not a part of profit, so no double taxation here.

The point is that any money that exits a corporation gets taxed again somewhere.

So if a company does really well one year and makes a profit, it gets taxed on that profit even if it keeps it in the bank. Then they use that remaining profit to pay payroll next year and then employees or owners get taxed again.

[throwaway190102]

I don't think that's quite how that works.

But your point on double-taxation is certainly valid in some contexts.

[shimms]

Some jurisdictions (Australia) have input credits that offset tax already paid on dividends. If a company has paid 30% tax on a profit and distributes dividends to shareholders, the individual pays tax on it at their marginal tax rate less the tax already paid by the company (fully franked dividend).

Franking credits minimise the double taxation issue in these instances.

[AlexTWithBeard]

Will never happen in the US: too reasonable.

[pathseeker]

It is exactly how it works. Apple has been taxed on the profits that make up their giant cash balance. Once that is paid out to investors through dividends or to employees through payrolls, it will get taxed again.

[throwaway190102]

You're right about dividends, but payroll comes out before profit calculations.

[JDiculous]

Sales tax is a double-tax. So what?

[anonymous5133]

Double taxation is unethical.

[dlp211]

Double taxation is generally a bad idea. What you think is double taxation is not.

Double taxation is the concept where a dollar could, in theory, be taxed at over 100% from the aggregation of taxes owed on it. There are to my knowledge only two real examples of double taxation in America. The first happens due to the new cap on SALT deductions. The second is with regards to FICA taxes.

[throwaway190102]

You are correct. Payroll is part of expenses.

Oversimplified:

Profit = $Revenue - $Expenses

Tax = $profit % $Tax_rate

[nikanj]

Citizens United v FEC disagrees with you.