[rayiner]

A flat-tax based on gross income would be unworkable. Wal-Mart has an operating income of $27 billion on $476 billion in revenues. A 5% flat-tax on gross would wipe out almost all of their profit. Apple, in comparison, has $52 billion in operating income on $182 billion in revenues. A 5% tax on their gross would leave them paying less than what they pay today.

I recommend that everyone read up on the basic mechanics of the U.S. income tax: http://www.amazon.com/Chirelstein-Zelenaks-Taxation-Concepts... (this book is very approachable, and quite short). Things that seem like "creativity" if you're not actually thinking, actually fall out from the mathematics of what you're trying to tax: gains in wealth over time. Things that seem like unnecessary complexity arise naturally in response to the challenge of sampling a continuous function (the value of assets) at discrete points (yearly, or at the time of sale).

The bones of the tax code are pretty elegant. It's complex, but it's complex because accounting is itself very complex. But nobody argues that the complexity of GAAP is a form of corporate welfare. Yes, there's nonsensical cruft layered on top in the form of tax breaks, but those are actually pretty simple in comparison.

[humanrebar]

Your main point is that there will be winners and losers no matter the tax system. That's a given. There is a point to be made that an abrupt and radical change in the tax code would be a net negative, but I don't think anyone is arguing for that.

If a tax code becomes simpler and some businesses are no longer viable, why should I care? So Wal-Mart doesn't make sense anymore? So iPhones should be more profitable than they are now? I'm not sure why I should care about that.

[rayiner]

It's not a choice between two arbitrary systems with different winners and losers. It's a choice between one system that makes sense (taxing net income), and another system that's mathematically and rationally indefensible (taxing gross income).

It's the classic programmer's dilemma: do you implement the complex algorithm that gets the right answer, or the simple one that gets the wrong answer?

[humanrebar]

I still don't buy your logic. How is a transaction tax (sales tax) practically different than a gross income tax?

I'm all for simpler algorithms, but assuming that's our goal, I'm not sure all this discussion about income taxes isn't starting from the wrong point. We should be looking for taxes that are relatively easier to enforce, like property taxes.

EDIT: Yeah, I looked it up: http://en.wikipedia.org/wiki/Gross_receipts_tax

There's drawbacks to that sort of scheme, but it's certainly feasible. After all, individuals pay taxes on their adjusted gross revenue (income).

[rayiner]

One is a tax on consumption, the other is a tax on income. One is applied to only the final sale, while the other applies at every sale in a production chain. One can never result in a company owing more tax than it makes in profit, the other can. Note that sales taxes that do apply at every step of the production chain (VAT taxes), have the same problem of computing net versus gross: the tax is applied to the difference in value between the outputs and inputs at each step.

Yes, one way to avoid the complexity of implementing a proper income tax is to tax something other than income. But there are reasons we tax income rather than consumption or property. Consumption taxes are regressive--poor people carry more of the overall tax burden. Property taxes have the undesirable characteristic that they often require you to pay money you don't have in cash. Just because your house doubles in value doesn't mean you have the cash to pay double the property taxes on it. Except in certain cases involving inheritance or gifts, income taxes don't force you to sell property that increases in value just to pay the tax on it. Also, with property taxes you run into complexity in defining "property." You'll either draw arbitrary lines (land is property, but stock isn't), and distort the economy as people invest more in untaxable property, or run into trouble valuating intangible property like stock ownership and IPR.

There's a reason why every developed nation has settled on income taxes. The basic principle is something people can get behind. The existence of society and government helps you gain wealth, so it seems reasonable to people to tax a percentage of that gain in wealth. Moreover, people keep track of changes to wealth even without the tax regime (modern accounting predates the modern income tax by centuries), which makes income taxes relatively easier to administer.

[humanrebar]

Do you care to address the interesting part of what I linked?

  A gross receipts tax is similar to a sales tax, but it
  is levied on the seller of goods or service consumers.

...I'm thinking this is a distinction without a difference, which is really my point. They're both transaction taxes. And a fair gross income tax rate would probably be set lower than a fair tax on profits since the amount of taxes paid per business should probably be roughly the same, at least on average.

Will some low-profit and no-profit businesses have problems? Sure, but I'm not sure why they shouldn't have to contribute to the general fund just like all the other businesses. If their business models aren't sustainable while paying taxes, I'm not sure why I should be upset. What we have now is overly complex (deducting losses from previous years) and amounts to a subsidy for losing money.

[tptacek]

He did address the gross receipts tax. There's an immense difference between a sales tax and a gross receipts tax: sales taxes happen at final sale, and gross receipts taxes apply to every transaction.

The gross receipt tax distorts the economy: it rewards firms that integrate every step of their production rather than focusing on their comparative advantage. The railroad that owns its own steel mill is tax-advantaged over the one that buys steel. That policy is inefficient: the economy should reward the most competitive steel mill, rather than insuring that the largest consumers of steel are more or less required to operate their own crappy mills.

Here's a more immediate example: imagine a tax policy that essentially fined Dropbox for not owning its own chip fab, and forced it to compete with huge companies like Apple that did.

Wal-Mart versus Apple is a bad example, because the two companies are in radically different lines of business. Instead, imagine a tax policy that fined Whole Foods, which sources the goods it sells from a variety of different vendors, while rewarding Safeway. And, of course, the point Rayiner was making was that turnover taxes penalize all of direct-to-consumer-retail; it doesn't just pick Target instead of Wal-Mart, but rather penalizes companies that rely on logistics and distribution at all.

[rayiner]

I'll address this point since it hasn't been:

> What we have now is overly complex (deducting losses from previous years) and amounts to a subsidy for losing money.

Say company A makes $10m in year 1, loses $10m in year 2, and makes $20m in year 3. Net gain in wealth = $20m. Say company 2 makes $10m in years 1 and 2, and breaks even in year 3. Also has a net gain of $20m.

Say the tax rate is 20%. In any sane tax system, both companies will pay $4m in taxes over three years. So how do you handle the loss for company 1? Does the IRS write them a check in year 2 for $2m? If not, company A pays $6m in taxes over three years, versus $4m for company B.

Loss carry-forwards are not a "subsidy for losing money." They're a mechanism for getting the right answer integrating a continuous function at discrete intervals, without allowing for negative tax due. Your solution to the complexity is to just punt and give the wrong answer.

[harryh]

When you're talking about "low-profit" businesses you're talking about every single retail establishment from Amazon to Walmart to your neighborhood hardware store to every single restaurant you've ever been to.

I think you'd be pretty upset if all of those businesses closed their doors due to a massive tax increase.

[charlesdm]

That's quite an ignorant answer.

At the basic level, corporations should be able to operate and turn a profit, regardless of whether they're low or high margin. That shouldn't even matter in a discussion, since both high and low margin businesses create jobs, and are a good thing for the economy. Some businesses just need bigger scale, but that doesn't make them worse businesses.

Yes, they're avoiding taxes, but a lot of these companies are still highly profitable without the tax avoidance aspect of it. That's just the 'icing on the cake', and I'm pretty sure if they didn't, some (activist) shareholder could probably force them to do so. This is the world we live in. In the end, tax is just another corporate expense.

This tax problem can't be solved without significant international cooperation, and I'm a big fan of simplifying the tax code of countries globally.

[humanrebar]

> At the basic level, corporations should be able to operate and turn a profit, regardless of whether they're low or high margin.

Nobody has a right to the profits they are accustomed to. Buggy whip manufacturers have no right to make a living. And businesses that require exotic tax exemptions to exist might fall in the same category. Again, I think it's more fair to gradually phase out current tax schemes and phase in new ones so the economy isn't shocked by a massive rule change, but I don't see why any business has the right to broadly fix the current tax rules in place forever.

And, at the end of the day, any tax increases will be (and are) passed on to end consumers. It's not as if gas stations go out of business because their expenses go up (oil prices, credit card fees, etc.). They raise and lower their prices to accommodate price changes. And longer term, they adjust their business models as well.

All that being said, I don't even really care about gross vs. net taxation. I just believe this line of thinking doesn't add up.

[tptacek]

The comment you're responding to is appealing to efficiency, not to entitlement and proprietary rights to profits. The problem with turnover taxes is that they're inefficient, not that they're immoral.