Why do we tax businesses at all?

[Bowfinger]

Originally posted by: Fern
[ ... ]
Taxing the company also is regressive. The little guy owning shares helps pay the wealthy guys tax. I can demonstrate this mathematically if need be. ...

Please do, or at least expalin the basic rationale behind the theory. It's a novel claim I've never heard before.

 

[JACKDRUID]

Originally posted by: PaperclipGod
Wouldn't a tax system which only taxes luxury items and doesn't tax stuff like groceries, gas, and income make more sense? i.e., if you want things that a middle-class person cannot afford (or rarely afford), then you must pay a tax for that right.

Because government is actually a business to promote businesses, which will then create jobs for people; it creates/maintains infrastructures (roads, lights, electricity) required for businesses to happen, and therefore it needs money.

people who are able to buy things are always considered a luxery...
our country is actually socialism for the bottom feeders... for homeless people with absolutely no money, they could actually survive on staying in shelters and waiting in line for food...you could also wait in line for food as necessity to feed, no tax, but it would cost you time.

by keeping homeless people feed, we reduce the likeliness of them robbing/killing/rioting you for food and money, therefore increase your/your business' safety.

 

[Fern]

Originally posted by: Bowfinger

Originally posted by: Fern
[ ... ]
Taxing the company also is regressive. The little guy owning shares helps pay the wealthy guys tax. I can demonstrate this mathematically if need be. ...

Please do, or at least expalin the basic rationale behind the theory. It's a novel claim I've never heard before.

OK:

Cliffs/rationale:

The "common' tax burden shared by both at the corporate level has a tendancy to 'average' the tax rates for the two resulting in the corporate level tax having a regressive effect.

Example:

Corp tax rate is 35%

High income person tax rate is 35%

Lower income person tax rate is 15%

Corp net profit, before taxes is $100
Income Tax is $35
Net profit after tax that can be distributed is $65

For purposes of the illustration let's say high income person and low income person each own 50% of the company's stock.

High income person receives dividend of $32.5 (1/2 of $65). Income tax of 35% on $32.50 is $11.38. This leaves a net of $21.12 after tax in the high income person's hands.

Low income, same calcs as above but his/her lower rate, has tax of $4.88, leaving $27.62 in their hands.

Tax burden of each with a corporate income tax in place:

High Income person: share of earnings before corporate tax was $50. After tax was only $32.5.

So they bore corporate tax of $17.5, plus their personal tax of $11.38 for a total tax burden on their share of the $50 in net income in the amount of $28.88

Same as above for low income person: Total tax of $22.38

Ratio of tax burden between high income and low: 22.38/ 28.88 = 77.49%

Tax burden to each if no corporate level -income tax:

High income person pays 35% on the $50 - total tax is $17.50 (leaving them $32.50)

Low income person pays 15% on $50 - total tax is $7.50 (leaving them $42.50)

Ratio of tax burden between high income and low: $7.5/17.5 = 42.86%

The 77.49% means the low income and high income person are paying much the same in tax as compared to the 42.86%. I.e., corporate level tax substanially diminishes the progessivity built in to the current tax brackets.

(You can do the ratio on the net amount the two hold in after-tax cash too)

Note: The reason the amount of net after tax money is different (or you could say the total amount of taxes is different) is because of the effects of double taxation in the first math example

Obviously, you can eliminate the averaging/regressive effect of the corporate level taxation and still maintain the same amount of overall tax for the government.

Fern

 

[Bowfinger]

Originally posted by: Fern
Cliffs/rationale:
[ clipped ]

Got it, that makes sense. In essence, a low-income shareholder is pushed into the company's (presumably) higher tax bracket for his share of the company's profits. Lots of real world variables, potentially plus and minus, but I agree with the premise. I've never seen it before. Thanks.

 

[Fern]

Originally posted by: Bowfinger
-snip-
Thanks.

:thumbsup:

 

[PaperclipGod]

Ahhh... I think I'm starting to understand this a bit better. Thanks to those of you patient enough to keep trying to explain it to me! I'm dead tired atm, but I'll look at this s'more tomorrow.