[rayiner]

This is an excellent article. The key takeaway starts here:

> I know what you’re thinking. You want a simple tax code that raises a bunch of money by closing the loopholes. Many people think this because they think that taxing income is simple, so “loopholes” must be illicit backdoors placed in the tax code at the behest of greedy corporations.

> And to be sure, the tax code contains plenty of senseless giveaways to corporations. But these are small beer. Most of the “loopholes” that we argue about are not a result of congressional pandering, or even sharp lawyers who bend sensible rules. They’re an artifact of the fact that calculating corporate income is really hard.

I realized this when I was taking an introductory course in federal income tax, and trying to figure out the effect of different depreciation schedules. There's a neat logic to the income tax, including complex concepts like depreciation.[1] Yet, things that are simple to state as an equation are quite complex to implement in practice. For example, things like loss carry-forwards arise from trying to tax a continuous parameter (changes in wealth over time), in discrete, annual time-steps.

I disagree with people who think corporate taxes are "double taxation" or anything like that. Taxing corporations falls naturally out of treating them as distinct legal persons. A corporation's income is treated, and taxed, distinctly from shareholders' income for the same reason a corporations legal liabilities are treated distinctly from shareholders' liabilities. It's just the flip side of the coin.

That said, while corporate make sense within the logic of the tax code, in practice they are probably more trouble than they are worth, and create bad incentives for companies to relocate their operations out of the U.S.

[1] I recommend http://www.amazon.com/Chirelsteins-Federal-Income-Taxation-S... for a very approachable introduction to the topic. Don't be scared off by the page-count: it's big type on paperback pages.

[jacques_chester]

> I disagree with people who think corporate taxes are "double taxation" or anything like that.

Australia has dividend imputation because of this argument. When you receive dividends from shares you own, the tax paid by the company is offset from your own personal income with "franking credits".

So along with a different capital gains framework, the net upshot is that Australian shareholders are quite happy to take dividends, thankyou. Which means companies can focus more on running things at a profit and less on trying to pump up the stock price any way, any how.

The downside is that Australia has a higher headline corporate tax rate than a lot of countries. An argument is sometimes made that we could significantly lower it (as in by double digits) without imputation.

(This is of course not financial advice and I am not an accountant, lawyer, planner or even a dog on the internet).

[bedhead]

The US corporate income tax rate is the highest in the world - literally. If it was something more in-line with other developed nations, call it 20%, I don't think you'd see the current wave of inversions and no one would make a big deal about it. But here we are, 35% and people have finally had enough. I wouldn't eliminate the corporate tax, but I also think that 35% is idiotic and now we're finally seeing corporations vote with their feet.

[kintamanimatt]

It appears to be the second highest[0], second only to the UAE's 55%! The global average appears to be about 23.57%.

KPMG state that the US corporate income tax is approximately 40% with the following reasoning:

"The marginal federal corporate income tax rate on the highest income bracket of corporations (currently above USD 18,333,333) is 35%. State and local governments may also impose income taxes ranging from 0% to 12%, the top marginal rates averaging approximately 7.5%. A corporation may deduct its state and local income tax expense when computing its federal taxable income, generally resulting in a net effective rate of approximately 40%. The effective rate may vary significantly depending on the locality in which a corporation conducts business. The United States also has a parallel alternative minimum tax (AMT) system, which is generally characterized by a lower tax rate (20%) but a broader tax base."

[0] http://www.kpmg.com/global/en/services/tax/tax-tools-and-res...

[judk]

Note that the corporate income tax is on profit, not revenue. Personal income tax is on revenue, minus some limited deductions.

Money reinvested or paid to employees is not taxed. Furthermore, corporations pay no sales or income tax on value added inside the corporation for the benefit of the corporation, unlike if the corporation were split into several independent companies.

[lionhearted]

Tangent: UAE is actually effectively 0% corporate tax rate for most industries. From the notes on that KPMG link --

> Although in theory these emirate-level decrees impose tax on the income of all corporate entities, in practice tax is currently only enforced on foreign oil companies engaged in the exploration and production of oil and branches of foreign banks. Although the tax rate applicable to oil companies is generally 55% of operating profits, the amount of tax actually paid by such companies is based on a rate agreed in individual concessions between the company and the respective emirate. This rate can range between 55% and 85%. Branches of foreign banks are subject to tax at 20% of their profits under the banking tax decrees.

They're trying to attract industry to move there. It's kind of pricey for small businesses to take advantage of though, since incorporation (if I remember correctly) costs $7000 once + something like $4000 per year, requires renting office space in a special economic region, and likewise establishing personal tax residence there also requires some mildly expensive registration procedure or other. For someone with a small business making upper-middle class income, the basically-equivalent-to-effective tax rate would probably be somewhere from 10% to 40%, but those are mostly fixed fees that would fall when revenue/income goes up.

[bedhead]

Yes, this is true and I excluded it for a reason. UAE has no personal income tax, property tax, or capital gains taxes. My guess is that it all evens out and then some.

[jayd16]

I never understood the double taxation argument either. Even if I concede its double taxation, who cares? Its not a natural right to only be taxed once.

[scoofy]

I've always considered double taxation "paying for limited liability."

To be honest, it's worth paying for.

[roganp]

Well for one thing, it does not control for the differences in income of the stockholders. Each shareholder is taxed at the same rate per share held. Since it penalizes income coming from corporations (by taxing both the corporation and the dividend), it creates perverse incentives that cause some pretty unproductive behavior - like the hording of cash by all the tech giants.

[zaroth]

Companies exist for one purpose, to create shareholder value. Shareholder value / the net worth of a company is traditionally defined as the value of future cash distributions.

It's not a matter of taxing once or twice, it's simply a matter of how much taxes have to be paid before the owner(s) get the proceeds. A company's tax rate is effectively the percentage of the company owned by the government. Since corporate structure dramatically impacts the tax rate, founders are forced into playing the game, paying for more complex structures that legally reduce the tax rate, in order to retain a greater share of what we build.

Keep in mind, of the 6 million companies which have employees in the US, 5.9m of them have less than 100 employees, with total sales/receipts of $7.7 trillion, in 2008. That's just shy of a quarter of total U.S sales/receipts. [1]

It's a bit better now that dividends are taxed the same as capital gains, but unfortunately what should be the simplest / easiest / gold standard way of doing it -- the C Corp -- is still highly tax disadvantaged to other more complex forms, for the vast majority of businesses.

The tax code as it stands is a massive drag on productivity and growth. There's literally trillions of dollars of opportunity for improvement here through simplifying the code.

[1] - https://www.census.gov/econ/smallbus.html

[JoshTriplett]

"No taxation without representation". You get taxed twice, but only represented once. (If that.)

It seems completely reasonable for either individuals or companies that are large enough and mobile enough to relocate to shop around for a better value for the cost.

[judk]

Explain how being taxed once at 40% is better than being taxed twice at 20%.

And then explain how Limited Liability fits your theory -- profit without accountability for misdeeds.