Personal Tax vs Business Tax and Trickle Down Theory

[Atreus21]

So there was something very interesting that came up in the "fair share" thread, and that frequently comes up in tax policy discussions, that I think deserves a separate discussion.

Almost any time Democrats start talking about raising taxes on rich individuals, Republicans respond by saying that will hurt "job creators" and then talking about small businesses. Ignoring for the moment the validity of Democrats claim that the rich need to pay their "fair share", or the logic behind trickle down economics in the first place; it always seemed to me that Republicans were responding with a total non sequitur...one that almost always goes unchallenged.

The trouble I'm having here is that Democrats are usually talking about PERSONAL income taxes. With a few exceptions, that tax applies to totally separate funds from those used to run a business and employ people. Raising personal income taxes on those in higher income brackets shouldn't have an obvious effect on a business's ability to hire people, since we're almost always talking about different pools of money. It might make a difference if we're talking about a personal gardener or housekeeper for a wealthier person, but I get the feeling that's not what Republicans mean here.

While it's true that those in the higher income tax brackets often have hiring power in their business, whether they hire someone or not wouldn't seem to greatly depend on their own personal tax rate. Even if supply side economics was a valid theory, it wouldn't seem to apply when we're talking about personal income tax rates.

I think an obvious compromise here that should satisfy both sides (in theory) would be to raise personal income tax rates on the rich while lowering those on businesses. This gives a good supply side boost to the tax rates of actual employers, while hopefully balancing revenue. Plus it's harder to dodge with overseas outsourcing. It's easy for Dell to operate a call center in India, I doubt Micheal Dell is going to move to Mumbai to avoid having his personal income taxed.

But personal income taxes, especially of the federal variety, were shown to be a category in which the very richest did pay their fair share.

 

[Atreus21]

Rain, here is the real truth the rich Republicans on here would never admit to.

No matter what valid argument you come up with those with deep pockets have acquired "power" in their in minds and they don't like giving up any of the money they have accumulated because they feel it is an attack on that "power" they climbed up to.

Here is a good example that I'm sure many of you have seen personally.

A co-worker you have been working side by side with for many years all of a sudden gets a promotion. Instantly within hours of that "elevation in power" they become instant asshole towards you.

They no longer shit the same way you do.

How do you possibly live with all that envy?

 

[Atreus21]

I came across a fairly radical idea elsewhere, on that seems to make a lot of sense, at least on the surface. Eliminate corporate taxes entirely, tax dividends and capital gains as normal income in a progressive fashion.

I have no idea why that's considered radical. It seems like a good idea to me. Income is income, by whatever source.

 

[ElFenix]

I came across a fairly radical idea elsewhere, on that seems to make a lot of sense, at least on the surface. Eliminate corporate taxes entirely, tax dividends and capital gains as normal income in a progressive fashion.

i've been saying basically this for years. no credit, eh?

 

[woolfe9999]

So I looked around a bit, and I'm having trouble finding stats on S-corp vs C-corp employment. The vast majority of stats of small businesses I can find seem based on size/revenue. I used to work for a publicly traded company that almost fits the SBA/IRS definition of "small business", and it sure as hell isn't an S-corp. Now it's possible that it is an exception, but the importance of small businesses seems greatly dependent on an unclear definition.

I'm not an expert on S-corp taxes, but it sounds like the taxes are applied on net income in any case. Which means the effect of income tax rates on their hiring would be a bit less obvious in any case.

I don't have macro statistics at my fingertips, but I work at a law firm with a department that incorporates businesses. Essentially all of our clients are small businesses. Without exception, we either form LLC's or S-corps for them. It is essentially negligence to allow businesses of that size to be C-corps. So I think Fern is basically correct here.

 

[TheAdvocate]

I'm a big proponent of the idea of just taxing personal incomes, HOWEVER, no matter how you structure the tax code, the rich will game the system simply because 1) they tend to be better educated about these things; 2) they can afford to hire the experts to do so, and 3) their wealth in general usually opens up options not available to average joes (old school tax shelters, etc).

That said, I like the idea of eliminating income distinctions, but there is strong opposition among the ultra-rish passive earners, the ones whose lobbyists actually write legislation, against this, as it would represent the largest effective rate reversal we've seen in decades (partly created because this same group has lobbied to have the lowest effective tax rates amongst earners above the povert line in recent history as well).

I do like the idea of encouraging businesses to invest and relocate here because they will not be taxed, however this is just more trickle down - unlikely that all of the savings will be passed on to consumers or that it will create any more jobs. And on the income side, you'll see a whole lot more distribution vehicles among shareholders, and expensing of personal use items (hosues, cars, helicopters, whatever they can get away with) on the C Corp level.

Cliffs: it's a game. It's rigged, and the riggers will beat the system everytime, regardless of what you do. The middle class carries the tax burden in this country, as a % of income, and they probably always will.

 

[TheAdvocate]

I don't have macro statistics at my fingertips, but I work at a law firm with a department that incorporates businesses. Essentially all of our clients are small businesses. Without exception, we either form LLC's or S-corps for them. It is essentially negligence to allow businesses of that size to be C-corps. So I think Fern is basically correct here.

which is why you'd have to reform the tax code so as to not catch all those small entities.

 

[werepossum]

I came across a fairly radical idea elsewhere, on that seems to make a lot of sense, at least on the surface. Eliminate corporate taxes entirely, tax dividends and capital gains as normal income in a progressive fashion.

It alters the whole perception of offshore subsidiaries and holding money offshore to avoid taxes. The whole flimflam of cheating the IRS to supposedly benefit stockholders would cease to exist. Holding out on the IRS is one thing, and holding out on stockholders is entirely another. Stockholders want their money, and paying higher taxes on it would only make them clamor for more. What's currently seen as good for business would become bad for business virtually overnight, and would likely increase govt revenues at the same time. Corporations would bring their headquarters back home as fast as possible, fold foreign subsidiaries created for tax purposes back into the mother company very quickly, as well.

Changes to corporate & personal income taxes would need to be simultaneous, of course, if govt revenues were to be maintained or enhanced.

I haven't considered all the angles, of course- I'm no financial expert- but I kinda like it.

I like this idea very much, although some very complicated things would be dividend money going into mutual funds and the like. And we would need a tax on money taken out of the country, so that foreign corporations and individuals don't get their money tax free. But it solves a lot of problems, including the moral issue of being taxed less if your money works to earn your living than if you work to earn your living.

Excellent explanations as usual, Fern, thanks.

 

[Fern]

And again, while this is true raising taxes means pulling money out of the small business (durr) you are not pulling any money out that was intended to be used in business expenses.

You know this.

How can you possibly say that?

Fern

 

[JS80]

How can you possibly say that?

Fern

He's a liberal, he knows all.

 

[werepossum]

Its true. in fact raising their taxes would increase spending in the business as they would want to write off more profits in the way of investment and or jobs.

This is how I operate. The more I invest in my own business the less I can be taxed personally. I dont get a "paycheck". I just get what is left over. By incentives thru taxes I spend on my business. This will only increase the MORE you tax the rich. It will increase money velocity. As it stand now most people can pull cash from their operations without investing in them as much as they could.

What we want to have (ideally in my mind) is a hot potato situation with the money supply. Nobody wants to be holding it in the end. You do this until you can cash out BIG. Reach for the stars.

This can go either way. If you are trying to become wealthy (i.e. increase your net worth) or to achieve some specific business goal that requires a certain level of capitalization, then it makes a lot of sense to take out as little money as possible. That doesn't necessarily mean that those businesses will spend more if their rates are raised; since the government is leaving them less of each dollar, they will be able to save money more slowly, so they might spend less now to build a nest egg against hard times or for a specific project. Even if government leaves them less of each dollar earned, better to spend less and invest less now than to need to save later and be unable to do so in time. If for instance you need $1 million investment cash to build an appropriate $3 million building for the business you now operate from rented property, you have to save that money a year at a time. But it would still make more sense to save your money toward that building, even if government takes a bigger bite from your yearly savings, than to buy new computers or machinery every year, or hire new people, just to avoid paying taxes on that money. You might be saving money on taxes, but you'll never own your own building that way.

The other side of the coin are those people who want a certain lifestyle or return on investment from their businesses. These people will likely look at things like work force reduction, outsourcing, and reductions in spending to maintain the after tax income they now receive. I've seen several of these people really get hurt in this economy, people with great incomes but far too leveraged. One guy was a company president before being RIFed; he had a great house in an expensive close-in subdivision, another great lake front house in a VERY expensive subdivision ten minutes from his main house, and a mountain cabin, none paid for. Just because people have high incomes doesn't mean they don't do stupid things with their money.

I still favor the plan, but there are very few things in life that are black and white, all good or all bad. Everything government does has winners and losers, including doing nothing.

 

[JSt0rm]

How can you possibly say that?

Fern

If I buy something for my business I write it off.

You are not taxing this money so any investment money is still there.

He's a liberal, he knows all.

It doesnt take rocket science to figure this shit out. Taxes for businesses should be set up to get them to SPEND money. You ignore this because it doesnt fit your ideology but it makes perfect sense considering we are all humans.

 

[werepossum]

If I buy something for my business I write it off.

You are not taxing this money so any investment money is still there.



It doesnt take rocket science to figure this shit out. Taxes for businesses should be set up to get them to SPEND money. You ignore this because it doesnt fit your ideology but it makes perfect sense considering we are all humans.

WTF? Taxes for businesses should be set up to get them to create wealth, not spend money. If spending money was the key to prosperity, government could merely take all the money and spend it, and North Korea would be the happiest place on Earth.

 

[ElFenix]

If I buy something for my business I write it off.

You are not taxing this money so any investment money is still there.



It doesnt take rocket science to figure this shit out. Taxes for businesses should be set up to get them to SPEND money. You ignore this because it doesnt fit your ideology but it makes perfect sense considering we are all humans.

http://www.youtube.com/watch?v=rCZRqH7sRyA

 

[GroundedSailor]

The call center is maybe a bad example, and I should probably have left it off. But my understanding is that a business can play a lot of "foreign subsidy" type tricks to ensure that the US C corporation has relatively little income to be taxed.

That's because the US is the only country in the Universe that tries to tax you on income not made in the home country. This creates an incentive for companies to source revenue to these foreign countries paying taxes in THOSE countries and reducing the tax liability here at home. The law says they only pay taxes when the money is repatriated back to the US, so companies will leave the funds offshore. This is one of the unintended consequences of poor tax laws in the US.

Not true. At a personal level, there are many countries that tax you on your 'global income'. Australia, Canada, UK come to mind. There are some exceptions and exemptions made, for e.g., UK give exemptions to those who normally do not live in UK and to seafarers.

The US allows businesses to defer overseas income and not pay tax on them, but as a private citizen you & are are not allowed to do so.


..

 

[Screech]

Without getting into the nitty-gritty definitions of various types of taxation.....

The ideas behind cutting personal taxes leading to job creation, especially as a recession fighting measure, has always seemed to me to have some issues. To explain via example:

Let us assume a company is in the black until a recession hits. Suddenly, demand for its product/service has decreased. The owner/CEO/board/ whatever decides to cut 20% of its workforce since they are no longer necessary and indeed are losing the company money by their continued employment.

At this point, assume washington passes a tax cut on personal income. The owners/employers now have, say, $500,000 to spend as they please.

Will this cause them to rehire those employees who have been fired? In this case, I see no reason the answer is anything other than "no". Why not? Because the actual reasons behind their being laid off have not changed. A business employs people under the assumption that their employment leads to the business making money via its product/service. If their employment was losing the business money before the tax cut, their employment would still be losing the business money after the tax cut (with some very slight exceptions, ie, giving blowjobs in back alleys to congressmen in washington, etc), so there isn't any actual reason that the extra money in the hands of the employer would actually cause them to rethink their hiring/employment scheme -- at least not that I can see in this simple example.

At this point, seeing that nothing has actually been changed, the tax refund that has been dished out is put in an offshore bank account while america goes further into debt. Hellz yeah!

 

[Craig234]

I'm a big proponent of the idea of just taxing personal incomes, HOWEVER, no matter how you structure the tax code, the rich will game the system simply because 1) they tend to be better educated about these things; 2) they can afford to hire the experts to do so, and 3) their wealth in general usually opens up options not available to average joes (old school tax shelters, etc).

That said, I like the idea of eliminating income distinctions, but there is strong opposition among the ultra-rish passive earners, the ones whose lobbyists actually write legislation, against this, as it would represent the largest effective rate reversal we've seen in decades (partly created because this same group has lobbied to have the lowest effective tax rates amongst earners above the povert line in recent history as well).

I do like the idea of encouraging businesses to invest and relocate here because they will not be taxed, however this is just more trickle down - unlikely that all of the savings will be passed on to consumers or that it will create any more jobs. And on the income side, you'll see a whole lot more distribution vehicles among shareholders, and expensing of personal use items (hosues, cars, helicopters, whatever they can get away with) on the C Corp level.

Cliffs: it's a game. It's rigged, and the riggers will beat the system everytime, regardless of what you do. The middle class carries the tax burden in this country, as a % of income, and they probably always will.

Forget item 1 above - #2 is correct.

But you exaggerate the problem.

In the liberal presidential era, starting with FDR, the concentration of wealth actually decreased a lot, until it started going back up after Reagan. It can be done.

 

[Craig234]

i've been saying basically this for years. no credit, eh?

I've seen a liberal economist advocate that as well.

I'm open to it - but not the 'eliminate corporate taxes' by itself.

 

[Fern]

Without getting into the nitty-gritty definitions of various types of taxation.....

The ideas behind cutting personal taxes leading to job creation, especially as a recession fighting measure, has always seemed to me to have some issues. To explain via example:

Let us assume a company is in the black until a recession hits. Suddenly, demand for its product/service has decreased. The owner/CEO/board/ whatever decides to cut 20% of its workforce since they are no longer necessary and indeed are losing the company money by their continued employment.

At this point, assume washington passes a tax cut on personal income. The owners/employers now have, say, $500,000 to spend as they please.

Will this cause them to rehire those employees who have been fired? In this case, I see no reason the answer is anything other than "no". Why not? Because the actual reasons behind their being laid off have not changed. A business employs people under the assumption that their employment leads to the business making money via its product/service. If their employment was losing the business money before the tax cut, their employment would still be losing the business money after the tax cut (with some very slight exceptions, ie, giving blowjobs in back alleys to congressmen in washington, etc), so there isn't any actual reason that the extra money in the hands of the employer would actually cause them to rethink their hiring/employment scheme -- at least not that I can see in this simple example.

At this point, seeing that nothing has actually been changed, the tax refund that has been dished out is put in an offshore bank account while america goes further into debt. Hellz yeah!

This is a good example of the argument that we see here in P&N about 99.999% of the time against the 'cut taxes and increase employment' argument.

I am not currently advocating cutting taxes to increase jobs (excepting our top corporate rate, I don't think having the highest corporate tax rate in the world in conducive to good economic policy). But I think this argument misstates, or misses the point, of the 'tax cutters' argument.

Their main argument is not "cut taxes so the business owner has more money and that extra money will magically compel him to hire people to spend it on'.

I believe their main argument is "cut taxes so (almost) everyone has more money and will buy more things. With everybody buying more things, demand will increase and businesses will need to hire more people'. I.e., cut taxes to stimulate demand by the populace.

These two versions are significantly different.

Fern

 

[Rainsford]

I don't have macro statistics at my fingertips, but I work at a law firm with a department that incorporates businesses. Essentially all of our clients are small businesses. Without exception, we either form LLC's or S-corps for them. It is essentially negligence to allow businesses of that size to be C-corps. So I think Fern is basically correct here.

I definitely believe you, my question was more whether what most people think of as a "small business" is the definition being used when people talk about what percentage of Americans are employed by "small businesses". I can't find stats one way or another, but I suspect that the latter instance includes a much more generous definition of "small business"...but of course I could be wrong.

I'm also interested in whether or not S-corps and LLCs are directly affected by personal income tax rates. Clearly that's the basic rate they pay, but it's a rate on profits, not gross income...and that's not counting what I'm sure are deductions an S-corp or LLC would get that do not apply to income I make as, say, part of my salary at a large company.

 

[Rainsford]

But personal income taxes, especially of the federal variety, were shown to be a category in which the very richest did pay their fair share.

Well that's why I'm not really talking about the "fair share" argument, and why I think Democrats in general should stop using that language. It requires that the concept of a "fair share" be easily defined and the final authority in tax rate discussions.

I'm not sure I agree with either of those statements. Proponents of the idea call a flat tax rate "fair" since everyone pays the same percentage. But if I make $500k per year and you make $50k, I would still pay 10x the amount of taxes you do, and I almost certainly don't receive 10x the benefits from the services my taxes pay for. I don't get to drive 10x as fast on public roads, or have 10x the firemen come to my house if I have a fire. So even a flat tax isn't really "fair". On the other hand, I do benefit enormously from living in the country, so maybe 10x the tax amount is "fair" after all. And hey, I can afford my tax rate easier than you can, so maybe a higher rate would be "fair" in the sense of equal burden. It's easy to argue all sides of the issue, IMO.

The other point is whether "fair" is really relevant. Sure, we'd like the system to be as fair as possible...but is that really the primary goal we should have?

 

[Fern]

-snip-
In the liberal presidential era, starting with FDR, the concentration of wealth actually decreased a lot, until it started going back up after Reagan. It can be done.

Concentration of wealth is a result of technological changes.

Cable TV came into being under Reagan, Almost suddenly people who were paid an average amount of income began making huge $'s. See professional athletes, newscasters, TV actors and guys hawking the latest chopper/slicer for your kitchen.

Thereafter, we saw the rise of Intel/Windows and the internet and people like Bill Gates, Meg whats-her-face, and the Facebook guy make billions in a very short period of time.

The vast majority of these people were not rich before, and in some cases from some pretty poor households.

Before these technological changes dancing around singing "pants on the ground" may have gotten you a few quarters on the street. Now you can get on TV and make some real money.

'Content' is worth money. Content distributed nation-wide, or world-wide, is worth a fortune. And it's only because of technological changes beginning under Reagan that we could begin such a massive distribution of content.

And the only way to stop that using govt policy is confiscatory taxation, and that would be a terrible mistake. Now, we can stop the creation of dynasties but that would require we go back to a real estate tax (which I'm in favor of).

Fern

 

[Fern]

-snip-
The other point is whether "fair" is really relevant. Sure, we'd like the system to be as fair as possible...but is that really the primary goal we should have?

This country operates under a system called "voluntary compliance". Even the IRS will readily admit that when people perceive the system to be unfair we have trouble with them declaring and paying taxes.

It's in our best interest that we have as many people as possible believing our system is fair, so for practical reasons is should it be a primary goal.

Fern

 

[JSt0rm]

WTF? Taxes for businesses should be set up to get them to create wealth, not spend money. If spending money was the key to prosperity, government could merely take all the money and spend it, and North Korea would be the happiest place on Earth.

You want to reward money velocity. Why does this not make sense to you?

 

[JSt0rm]

http://www.youtube.com/watch?v=rCZRqH7sRyA

Yes write offs are good. W2 guy can't really do it though. I have a lot of things I can purchase that make me more marketable in my field. When I make money I fold it right back into those same things that increase my marketability. It's a positive feedback loop and I'm also keep the money pumping thru the economy. Dumb fucks like were possum seem to think the economy works by having some people amass huge amounts of treasure and then begin to sit on it. That's the last thing you want to happen to the money supply.