Wednesday, November 28, 2012

Corporate Tax Simplification

I've talked before about how the major reason taxes are considered unfair is that we tax income, not wealth.  Income is always a much more dynamic and changeable term than wealth.

A single, 21 adult with no kids, healthy parents making $125,000/year is wealthy.

A divorced and remarried 45 man, making $125,000/year, paying alimony and child support, with two kids from his first marriage and a set of twin newborns, who is also supporting his aging mother, while he is undergoing cancer treatment is POOR.  And worried about what's going to happen if he dies and can't support 4 kids, his mom, and current wife (let alone the ex.)

But if they had different salaries and both have exactly one million dollars in assets, then both are probably wealthy (barring either of them having the wealth from sudden good fortune).  This is in large part because wealth tends to vanish quickly if income is not sufficient to maintain it.

The tax code is complicated in part because of these kinds of issues.  Their are tons of rules and regulations dealing with alimony, child support payments, marriage rules, and health payments for elderly parents.

The world is not a simple place, and no simplified tax code (for people) could be fair.   This is the main reason why individual income taxes are so complicated and  also the main reasons why trying to simplify them is not always a good idea.

Another reason why the tax code is so complicated is that we often like to use it to encourage good behavior.  We lower your taxes if you buy a home, go green, pay for education, employ more people, etc. etc. etc.   

We do this to keep government SMALL.   That is, instead of having the government buy solar panels, we let people do it and give them a tax deduction.  In both cases, the solar panels get bought.   In effect, we are trying to out source the administration of the government program.  As government is all about administration, this should be a huge savings.

Except... people try to cheat on their taxes.  As such, we need to check the deductions. So we replace administering of the government program with administering the tax code. Worse, the new administrators are accountants, not specially trained in all the programs.

As we outsourced more and more of the government's administration to taxpayers (and the IRS), it also started annoying the crap out of the taxpayers.   No one likes to be treated as cheap labor. If you are wealthy, you can pay an accountant to do that administration work, and if you earn enough money, you might make a profit (i.e. make more money from the tax deductions then you paid the accountant).  If you are poor, then chances are the payment from the government exceed your hourly wage, so it is worth it.   But there are a bunch of people in the middle that do their own taxes and who just get angry about having to fill out complicated math tests for less money than their yearly salary.

Could we get rid of some of the individual based tax  adjustments?  Sure.   But not all of them and the big ones can't be cut without major issues (Fair warning, I live in a tax heavy state and own a nice home - I might have to sell it if some moron got rid of the mortgage tax deduction entirely). 

But.... corporate taxes are slightly different.  Corporations don't get married or divorced.  They don't have children or elderly parents.   They don't pay alimony or child support.  They are not home makers.  More importantly, capitalism is all about letting corporations die.  No extraordinary means to keep companies alive.  If they catch the corporate equivalent of cancer, they die.  They also already have an accountant.  He get's paid the same for his tax work as anything else. 

Most importantly, quite frankly, we don't have to be fair to corporations.  If they die, it's not as big a deal.

There is a difference between large corporations and small corporations - how many people they hire.  I can easily see giving a slightly different, lower tax rate for small corporations.  This would have to be done in such away so as not to let a large corporation create a small US subsidiary to earn the profit, while the work is done by a larger related entity.  Big corporations tend to have extra ways they can avoid paying taxes.  Things like the "No Sale Sale", "The Double Irish", among many others. 

But aside from this, the only reason to give corporations large deductions is to outsource government work.   But corporations LIKE THIS.  They make a profit over it.  That assumes of course that they are profitable and thus owe taxes.  If they are unprofitable they don't gain from taxes.

In effect, we end up helping the companies that don't need the help and hurting the companies

I say we should simplify the corporate tax codes.  Rip out all the corporate tax deductions, create  equivalent government programs for those we think are worthy, cancel the ones we don't like.

Note doing this will in all likelihood increase  government spending somewhat, as I do not think

But honestly, because of international shenanigans like the Double Irish, I am not sure an income tax is the right way to go at all.  I have previously discussed a wealth tax.  a Wealth Tax is a tax based on how much you own, not how much you make.  For public corporations, that is pretty easy to figure out, it's called the Market Value  (total shares times price per share).  Oh, we can talk about book value and other methods but honestly, those are side issues.    It's harder to implement for private corporations, but not impossible.  You can always do the "Value it at whatever you want, but by law if someone offers to buy it at that price, you have to sell it, or re-value it and pay back-taxes for the past 10 years" trick.

If it were up to me, I'd probably change the tax rules.  Even if you don't want to use wealth taxes for individuals, you can easily do it for corporations.  A solid 3% of the value each six months works well.   If you want to help out small corporations, you can always put in a one year delay. That is, at the end of 2012 you pay taxes based on your value at the end of 2011.  That way new companies don't pay taxes the first year.    If the company is growing, you pay less money each year than your real value and the taxes are known ahead of time.  Put in a rule so that if you declare bankruptcy you don't pay taxes for the next two six-month periods (equivalent of starting a new corporation).

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