The taxation philosophy of the US and Canada (and I assume everywhere else) allows losses in one year to be applied to profits in preceding or future years, and so allows corporations to receive income tax rebates for those years with losses. This is philosophically justified in that your taxes over a 5 year period should be the same if your total net profit over the 5 years was the same.
While the tax code does try to prevent the length of time that losses can be allowed to be carried back, and tries to keep some of the income taxes corporation pay through other codes, the fact that tax losses are transferable/sellable to other companies upon bankruptcy, means that, since all corporations eventually go bankrupt, all income taxes paid by them are eventually refunded to some corporation.
2. If all countries have the same corporate tax rate, there will be more investment at a 90% tax rate than at a 0% tax rate,
assuming that tax rebates for losses are quick convenient and accessible. Under both tax rates, an obviously profitable investment will be undertaken. It is risky, inherently uncertain investments that will be undertaken at a high tax rate and not at a low tax rate.
Consider an investment opportunity that with 60% chance will double in one year, and a 40% chance will lose all of its value. The expected return is 20%. Company A0 lives in a 0% taxation world, and company B90 in a 90% taxed world. If there is unlimited investment possible, then A0 investing $100K will make or lose as much after tax as B90 if it invested $1M. If B90 loses $1M, they get a 900K rebate from government. If they win $1M, they keep 100k after tax. B90 creates 10x the investment and economic activity that A0 does.
Consider if both companies only have 100K total capital. A0 would never rationally invest it all on this investment because it faces bankruptcy if it fails. B90 only risks 10k when investing $100k. If we add into the world, banks with the same taxation rate as the company,
- company A0 can only afford to borrow $45K@10% and invest $50K of its own funds if it is forced to be able to repay the bank even if it loses. If it wins, it earns $90,500, while it loses $99500 the other 40% of the time. A $14500 expected gain, but still 40% chance of (near) bankruptcy.
- B90 can afford to borrow $900K@10% and invest none of its funds. If it wins, it earns $810K before tax, $81K after tax. While it loses 990K before tax, 99K after tax the other 40% of the time. A $9K expected gain.
While the expected gain is a bit better for A0, keep in mind that 9x the economic activity is created by B90, and the returns from unused funds by both companies were not include. Also, the bank in both cases has no risk, and makes 20x more money pretax by lending to B90 and 2x more after tax. The bank makes as much lending at 5% to B90 as it does at 10% to A0. In a 90% taxed world, all loans/investments are inherently 10x less risky.
Putting a real world face on the above investment, let's say it involves hiring an engineer or scientist to design something useful for his corporate masters at a $100k annual salary. 40% chance he will come up with nothing, and 60% chance he will come up with something worth on average double his salary. A0 is risking its entire company by hiring one engineer. B90 can take advantage of diversification and hire up to 10 engineers for the same after tax cost and risk. The expectation is that 4 engineers will fail, and 6 engineers will succeed. Most importantly, the risk that all 10 will fail, and cause bankruptcy, is only 0.01% (bankruptcy defined as losing $100K, since if all engineers fail, B90 would receive $900k tax rebate). Both A0 and B90 still have the same expected after tax return. Because of diversification, B90 can still afford to hire extra engineers even if the 9th and 10th engineer only have a 51% chance of success.
The other real world impact of high tax rates on investment is that for B90 all investments and expenses cost 1/10th what they do for A0. B90 can buy nicer computers, more or nicer company cars, hire someone's idiot nephew, and generally be nice to members of the organization, because being nice costs 1/10th what it does for A0. A0 has to cut costs to the bone, and invest in only sure things, because it pays full price for everything.
The headline of this section included the assumption of uniform tax rates in all nations. This requirement is eliminated by natural taxation policies discussed below, but the reason that the assumption is necessary is that if companies A0 and B90 were owned by the same multinational, then through accounting tricks, it would make all of its profits in A0 and all of its losses/expenses in B90.
Taxation is neither waste nor theft
Combining the previous 2 sections, despite the net 0 lifetime taxes paid by corporations, a 90% tax rate will not only provide the same after tax profit to companies, but with a 40% net personal tax, will also generate a social fund of $180k (on $200k pretax profit for B90) + $400K (on personal income taxes paid by engineers). A total of $580K. In addition to creating 10 good jobs, that social surplus could be distributed to the population giving them more power to afford B90's products and thus increase its sales and profits.
value and waste
When a billionaire gives $1000 to 1 Million people, value is created for the entire society. If the society had only 2 buisnesses: food distribution and yacht sales, then because 1M people are able to purchase more food, it will increase sales and profits for the food industy, and thus create more potential customers for the yacht salesman than if he were to only rely on the initial billionaire. Money is never wasted when it is transferred to someone else.
There are 3 important kinds of waste
- waste of people's time: When you hire someone to dig a hole and then refill it, you gained no value, and wasted his time. If you gifted him the money without requiring work, he could have been learning, entertained, or working for someone else for additional money. Wasting people's time is the least important kind of waste because there is usually slack in the labour force, and the most likely alternative scenario to wasting someone's time is that he would have wasted his own time.
- waste of money's time: Any money that is not spent or invested is wasted for the time that it is not. Savings, though a personal necessity at some level, is a waste if the savings level could be made non-necessary. Waste of money's time is a very serious waste, because if money is spent and invested more, increasing its velocity, then more people's time can be used in activities that receive that money.
- waste of resources: Transforming a lump of iron into a car does not waste the iron because the car is generally considered more valuable/useful, and it can always be recycled back into a lump of iron. Building and rebuilding homes in an area where hurricanes will knock them down regularly is wasteful of building materials and people's time. Transportation tends to be wasteful of energy, especially non renewable fuels. War wastes people's time and resources to destroy resources and people.
Value can be defined as creating happiness or things people want, and reducing waste. The concept of net value and net waste can be comparable to net profit, in that we can hope that any waste incurred in creating value is less than the value created.
Taxes are not waste
While the transfer of money is never waste, some spending can be. Useless programs waste people's time and war is a larger waste. But it is the spending and not the taxation that is wasteful. Since redistribution of wealth towards the poor always creates value by reducing money's waste of time (increases total spending), and any useless programs involved in filtering who is eligible to receive funds can be eliminated, and the funds distributed equally to everyone who asks (or just everyone) instead, there exists at least one use of taxation that cannot be waste, and so any waste on the process is entirely attributable to spending choices.
Income Taxes are not theft
Success can be based on hard work, showing up, and practiced talent, but always involves luck. Sometimes, luck is the main factor for success. Health, parents, asset performance, marriage, insurance, timing, and showing up are all luck based factors that will influence success. Progressive taxation is an entirely fair system to distribute wealth from the lucky to the unlucky. If society was a gambling game, or like in the corporate taxation example above, every game participant would accept taxation rules without objection. If they wanted to play with more risk, they would simply have to bet more.
One of the most pernicious, but little understood thefts, by society and government is inter-generational theft in terms of both social debt, and retirement safety nets that exist for the current generation of seniors, but will be taken away from future generations due to crushing past debt, an aging population, and a self-interested voting block naturally more concerned with preserving their own entitlements than caring for the sustainability of civilization after thier deaths.
Despite the existence of social programs that are wasteful or program structures that are thievish, it is the spending that is wasteful or thievish, and not the taxation. All tax revenue distributed back to the public through spending, will be returned to businesses who will be able to continue supporting existing employees, and hire new ones. When tax funds are spent right away rather than saved for future retirees, money's time is not wasted, and it is returned more quickly for the benefit of taxpayers and the poor. Basic income entitlements are thus less wasteful than properly funded retirement entitlement programs.
Sales taxes can be considered theft or wasteful because they are regressive and waste money's time by discouraging spending.
Natural taxation as a basis for cooperation among neighbouring societies
Natural tax policies focus on preventing the waste of money's time, but also solve issues with globalization and having a prosperous high taxes society along side low taxed societies. Key features:
- Taxation based on cashflow: Cash inflows (revenues) are taxed in the jurisdiction they are earned (in importing country). Cash outflows (expenses) are a tax deduction in the home jurisdiction.
- Your nation's exporters can receive large tax rebates, while much of your nation's tax collections come from firms you import from.
- Investment inflows (loans/ share purchases) into a corporation are taxable if not spent by the corporation within a time limit, and result in a tax credit (but not refund) for the investor.
- Investment outflows (interest and dividends) are tax deductible by the corporation, and the investor pays a non-refundable 10% tax on such investment income in his home jurisdiction, and pays an income/corporate tax on the remainder in the business's jurisdiction. Similar tax transactions occur on gains or losses from the investment.
- Personal income tax deductions include reinvestment of all investment income, and (re)investment of up to 70% of all employment and business income. Any withdrawals from investment accounts, or loans received, are counted as income. Allowable investments include providing 0% interest loans to family members or personal service providers, so individuals can shelter and split up to 70% of all employment, business income and investment withdrawals
Natural taxation achieves social goals and several eliminations of wastes
- The tax deductibility of dividends to businesses likely results in them paying no taxes, and encourages them to pay back their investors. This reduces the waste of money's time by circulating corporate cash hordes back into the economy.
- Social tax revenue becomes a combination of 10% of investment income + a progressive consumption tax
- The ease of income splitting and obtaining personal services in a tax sheltered manner would increase demand for such labour intensive occupations, and so reduce the waste of labour's time, increasing employment, labour force participation, and wages
- If all people are in an income tax bracket that is lower than the corporate tax rate, or if there is a fixed tax rate on investment income that is lower than the corporate rate, then paying dividends for companies always reduces the overall tax burden to shareholders. The availability of many high (dividend) yielding investments increases the income stability, and reduces risk, of investment portfolios. Stability of investment income reduces the waste of money's time because additional savings (as investment portfolio) are less necessary if existing savings/investments are reliable.
- Simplifying income splitting leads to more income equality. The tax deductibility of personal services leads to those services in the official, rather than underground, economy, and result in taxes paid by the personal service providers.
- Even if there are high marginal tax rates for personal income, natural tax policies don't discourage working "hard" for one year, because of the ease with which to shelter income (through investment deduction) to use in future years.
- While all corporations that pay no dividends will pay net 0% income taxes in their lifetimes, Natural cashflow taxation allows society to extract non-refundable taxes on dividends and imports. Though exports are a drain on the tax pool, they are a net cash inflow into the society available to be spent within the society.
Economic justification of taxes without government programs
So, even if the only government programs are tax collection/enforcement, and the distribution of tax revenue as a cash social dividend (equal distribution to all citizens), natural taxation creates economic activity and less income disparity independently of the usefulness or wastefulness of any other government function or program.
If you're looking for Natural Taxation, I urge you to read Thomas Shearman's wise book on the topic.ReplyDelete
Natural Public Revenue which doesn't take from anyone that which he created, but captures for public use that which the community creates.
Shearman proposed land tax as a unique social revenue source. His justification for its fairness is good, however, it would be incredibly disruptive.Delete
For example, if a property tax bill that is currently $2k went up to $10k, you could argue that for homeowners that save $8k in income taxes would not have their home affordability affected, but when you look at it from rental equivalent properties, then either renters would have to be charged significantly more, or property values would have to substantially decrease in order to justify their value to rental income ratios.
Both options would be too disruptive. The first, essentially makes it a huge "tax"/cost of living increase on renters, the 2nd would destroy wealth and bank loan values, and likely fail to economically justify building costs.
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