I wrote in this thread years ago that the corporate tax should be zero. No one was saying that then, now I have Stanley Druckenmiller and Prof. Kotlikoff saying so. Taxes should be paid by shareholders at the time they receive a distribution. There should be no tax at the corporate level; we need to end double taxation; there should be no sub s distinction, no pass through. Whoever takes money out of an enterprise through salary or distribution should be taxed at regular income rates, taxed once. Money reinvested can have the tax deferred until it is distributed. This makes mute the idea of money trapped abroad, and it transforms notions of leverage in corporate structure and would revive activity to produce dividends in the corporate board room.
Should corporations pay tax?
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Politicians don't care about "fair taxation", or "fair anything else". All they care about is getting (1) more money, and (2) more power.
Hell, Bernie Sanders advocates a "90% top tax bracket". What's fair or justifiable about that?
Hell, Bernie Sanders advocates a "90% top tax bracket". What's fair or justifiable about that?
That's already the case, albeit you take somewhat of a hit on investing in something that has to be depreciated vice capitalized. In fact removing corporate taxes disincentivizes reinvestment in the company, because the way the tax code exists now you are able to defer paying taxes by reinvesting.
That is not the case now. C-Corps pay tax on earnings, whether they reinvest it or not. They may avoid paying dividends and they may leverage a purchase back shares instead and in addition to a dividend which would reduce dividend tax paid, and of course much C-Corp stock is owned by pensions and in non taxed accounts. Making the corp tax zero makes leverage a wasteful expense and removes the inventive to leverage up to reduce tax....In case of Sub S all income is taxed whether it is distributed or not...so reinvested earnings is absolutely after tax. Zero Corporate makes the C-Corp/S-Corp distinction unnecessary, it also removes the who basis for territorial tax and offshore earnings. You would have less leveraged corps investing more profit back into the business and more active BODs demanding operating earnings and free cash to invest and pay dividends. You lower the individual rate to reasonable flat rate and you will have a boom of inbound U.S. investment and capital spending on plant and equipment, you will have to reform immigration to fill the job explosion, wages will go up.
So either you or the CPA for my C corp are wrong. Which do you think it is? If I know my business will have $100,000 in revenue this year and I invest in hiring an extra employee for $100,000, my taxable income is $0. Same if I invest those revenues in a new widget maker that costs $100,000 (assuming I can capitalize it). Only if I don't reinvest my revenue does it become profit, which is taxable. So take away corporate tax, and you take away my incentive to defer taxes by reinvesting. This is how I actually think about reinvesting my revenue, as an actual owner of a C-Corp. Anecdotally it appears to me to also be the way the vast majority of my fellow CEO's think about it. If you run a C corp and think differently I'd be genuinely interested to hear your viewpoint?
Look Sig, I don't think you understand me. I don't what you told your CPA about what I said. Let me deal with what you just said. You said that if you see you will have a profit, you can figure out how to create an expense that will avoid a profit. Understand when I am talking about profits...I am assuming the year is over and you have filed your tax return. Avoiding profits is not what I am talking about. If you run a business not to make a tax profit I bet you own all the stock. I have run C-Corps, S-Corps, Investment Partnerships and LLC's; I have run U.S. corps and foreign corps. I ran some partnerships to generate losses and create carried interest for my self and investors in the 1980's...The S&L crises wiped out my interest. I learned then that you should run a business to make a profit, get paid in current time, and structure to pay no more tax than you have to.
To reiterate, if your C-Corp reports a profit you must pay a tax; you do not have to pay a dividend, you can reinvest the after tax profit instead of paying a dividend. If you run an S-Corp you do not pay corporate tax but you report the taxable income of your business on the shareholder's individual tax returns, and they pay the tax on those earnings at their individual income tax rate, whether or not you distribute the money for them to pay the tax. If you reinvest the earnings, don't distribute income to shareholders, then they have to pay the tax anyway with whatever resources they have. S-Corps cannot avoid the tax on dividends by not making a dividend.
I am suggesting that with a zero corp tax, the double taxation of dividends disappears, and the utility of electing an S-Corp also disappears...there would only be corps, not C forms and S forms. I am suggesting further that taxes only be levied on funds distributed. In that way a Corp, C or S, could reinvest retained earnings from operations at the end of the year, as they report their year end return, and defer any tax until they make a distribution or sell the business or take some other action that would be a distribution. I would suggest further, that there would be a need to enforce the 'excess profits tax' which has been a part of the tax code since the 1950's but is little used. That law says you cannot retain earnings unless you have a qualified purpose to retain earnings that you must report. This would avoid just accruing cash in the corp to avoid paying a tax on distribution to shareholders.
I hope that is more clear, if not, I will answer any questions.
To reiterate, if your C-Corp reports a profit you must pay a tax; you do not have to pay a dividend, you can reinvest the after tax profit instead of paying a dividend. If you run an S-Corp you do not pay corporate tax but you report the taxable income of your business on the shareholder's individual tax returns, and they pay the tax on those earnings at their individual income tax rate, whether or not you distribute the money for them to pay the tax. If you reinvest the earnings, don't distribute income to shareholders, then they have to pay the tax anyway with whatever resources they have. S-Corps cannot avoid the tax on dividends by not making a dividend.
I am suggesting that with a zero corp tax, the double taxation of dividends disappears, and the utility of electing an S-Corp also disappears...there would only be corps, not C forms and S forms. I am suggesting further that taxes only be levied on funds distributed. In that way a Corp, C or S, could reinvest retained earnings from operations at the end of the year, as they report their year end return, and defer any tax until they make a distribution or sell the business or take some other action that would be a distribution. I would suggest further, that there would be a need to enforce the 'excess profits tax' which has been a part of the tax code since the 1950's but is little used. That law says you cannot retain earnings unless you have a qualified purpose to retain earnings that you must report. This would avoid just accruing cash in the corp to avoid paying a tax on distribution to shareholders.
I hope that is more clear, if not, I will answer any questions.
It seems we're disagreeing only about if a corporation should invest their revenue in growing their business before the end of the year or after the end of the year. And I guess if the people running corporations are intelligent enough to know what their tax bill will be under a variety of scenarios long before the year is over and they've filed their taxes. Most well run corporations can forecast their revenue reasonbly well and invest their revenue before it becomes taxable "profit", especially with intelligent use of debt. Every fast growing startup, which is where most of my experience lies tries to do this and their investors would be upset if they didn't. Maybe a retailer has a blockbuster Christmas and wasn't smart enough to set up a July fiscal year end so they end up with some unexpected profit they pay taxes on, but that kind of thing is on the margin of the greater economy. And of course a big mature dividend paying company isn't going to reinvest no matter the tax code, really by definition if they're giving cash back to shareholders instead of investing it.
One thing we probably both agree on is accelerated depreciation or the ability to capitalize all expenses, as that is the rub in trying to reinvest current year's revenue if you are in an industry where you grow by buying long lived assets vice investing in people.
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With all due respect Sig, its not a difference of opinion about using profits before the year is over or after. The fact is that it is not a profit, it is not a correct use of the word 'profit', the word 'profit' does not have meaning, until the year is over and you close your books. You are not talking about profit in your response to me and I am talking about 'profit' according to the actual meaning of the word. You are talking about not making a 'profit', avoidance of profit as a tax strategy.
I don't want to continue arguing with you; I don't want to negotiate on a whole new vocabulary from the mind of Sig; ideas are challenging enough to discuss without having to do a whole semantics preamble to agree how to talk. You are not using the words in the way that a CPA or a Lawyer would normally understand them, and the way the that statutes would define them.
I have no problem with what you are doing to avoid making a profit; that is not my business; it is beside the point that I am talking about, but you should not confuse what you are doing and what I am saying; the meaning of words matter, if you make up meanings for my words that are not the standard definition then you will not understand what I am saying.
What you suggest doing during the course of a year is responsive to tax policy in an indirect and idiosyncratic way but it has nothing to do with the policy discussion I was articulating.
I don't want to continue arguing with you; I don't want to negotiate on a whole new vocabulary from the mind of Sig; ideas are challenging enough to discuss without having to do a whole semantics preamble to agree how to talk. You are not using the words in the way that a CPA or a Lawyer would normally understand them, and the way the that statutes would define them.
I have no problem with what you are doing to avoid making a profit; that is not my business; it is beside the point that I am talking about, but you should not confuse what you are doing and what I am saying; the meaning of words matter, if you make up meanings for my words that are not the standard definition then you will not understand what I am saying.
What you suggest doing during the course of a year is responsive to tax policy in an indirect and idiosyncratic way but it has nothing to do with the policy discussion I was articulating.
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I used the word profit very carefully in exactly the way a CPA or tax attorney would, and used the term revenue otherwise, look at the posts. Its absolutely relevant in a discussion about tax policy to point out that current tax policy drives growing C corps to reinvest "revenue" before it magically becomes "profit" at the end of a fiscal year and is taxed. And to point out that most decently well run C corps could avoid paying tax on "profit" by simply reinvesting excess "revenue" before the end of their fiscal year instead of after when it becomes "profit". With the exception of those hit hard with long depreciation schedules. So fix the depreciation part of the tax code and you're 90% of the way toward incentivizing reinvestment like you want, without trying to radically rewrite tax code with the huge upheaval and myriad unintended consequences that would accompany such a change even if lawmakers weren't being influenced by special interests. The question is more why its so important to book this "profit" if you intend (or want to incetivize) companies to immediately reinvest the money? When they could just reinvest the revenue as they earn it which wouldn't change the impact of the reinvestment on the company's enterprise value at all.