Taxation....How To Do It?

[Revoltingest]

Sure. But the key word is "productive."

I'm a liberal, so for me, the word "productive" does not mean any venture that makes money for you and your investors.

"Productive" means that your venture follows the rule of law in spirit and in letter, it has no reasonably negative impact on human rights or the environment, pays reasonably living wages to any employee used in the venture, does not capitalize on the poor's effort or lack of education, and though not required . . . it would be nice if the venture actually contributed something valuable to the human experience.

If the "productive"venture does none of those things, I have no trouble whatsoever with disincentives.

That's probably one way our perspectives are quite different.

I think we're pretty similar on what "productive" means.
(I consciously chose the word that word over "profitable".)
Remember that I'm a liberal too, albeit the old fashioned classical kind.
(Note that I find RF's definition of "classical liberal" to be bogus.)

 

[sun rise]

All income should be taxed with no deductions for anything. That would allow the rates to be set low enough to not be a burden. It would also make the system very simple. Otherwise you inevitably get into a high rate complex mess as we have now. Allowing deductions for losses means that we'll continue having an army of accountants turning everything in sight into a loss for tax purposes. And that applies to corporations as well as individuals. Otherwise individuals who have to pay tax on income are at a disadvantage from corporations which don't have to pay.

 

[9-10ths_Penguin]

The argument over Trumps big loss a couple decades ago
involves some assumptions which aren't being addressed.
This thread isn't about Pubs v Dems or Trump v Hillary or the election.
Those topics may come up, but should remain incidental.
It's about Americastanian taxation in general.

Some questions......
Should taxpayers be able to deduct losses from their income?

Legitimate business losses and expenses required to earn an income (e.g. tradesperson's tools), yes. I'm not interested in subsidizing someone's hobbies.

Should capital losses be deductable from not just capital gains, but also ordinary income?

No. The loss was incurred with the hope of future capital gain. Let the loss offset the gain.

And if employment income is taxed at a different rate from capital gains, then absolutely not. In that situation, allowing taxpayers to use capital losses to offset ordinary income would result in bizarre behaviour to minimize taxes.

Should losses exceeding income in the year incurred be allowed to be carried forward to future years?

Yes... though if there are more losses than gains for a prolonged period of time, this raises the question of whether the activity was actually done with the expectation of profit.

Should taxpayers have to pay income tax on loans they've defaulted on? (Currently, they must.)

That would make it income, so I don't see why not... although I can see there being a question as to whether the government should get priority over other creditors.

 

[9-10ths_Penguin]

Are you arguing that these changes justify double taxation of corporations?

I think that the term "double taxation" is a red herring, because amount of revenue isn't the issue. For any given amount of total revenue, it can either be gathered at a small number of points in larger chunks, or at more points in smaller chunks.

The question of whether corporations should be taxed is really about whether corporate taxes provide a useful policy tool. If they don't, then sure: eliminate them and replace the revenue with increases in personal income taxes. But do they or don't they?

 

[Revoltingest]

Legitimate business losses and expenses required to earn an income (e.g. tradesperson's tools), yes. I'm not interested in subsidizing someone's hobbies.

I'm not addressing phony tax dodges, eg, deducting one's collection of Hawaiian shirts.

And if employment income is taxed at a different rate from capital gains, then absolutely not. In that situation, allowing taxpayers to use capital losses to offset ordinary income would result in bizarre behaviour to minimize taxes.

Parenthetical aside....
I favor treating capital gains the same as ordinary income, but adjusted for the lower value of currency in the year profit is realized.
This prevents government from taxing us on income which doesn't exist.

Yes... though if there are more losses than gains for a prolonged period of time, this raises the question of whether the activity was actually done with the expectation of profit.

The IRS already casts a jaundiced eye at business which can't make a profit in 5 years.
Some, eg, Amazon, are legit though.

That would make it income, so I don't see why not... although I can see there being a question as to whether the government should get priority over other creditors.

Is it income or a reduction in basis?
From an accounting standpoint, I say the latter is more accurate.
But consider the practical & fairness aspects of this....
A person who defaulted on a loan is typically a person in financial trouble.
When the sublithic coprolites hit the fan, this is an inopportune time for gov to collect a big tax bill.
It also prevents the debtor from renegotiating & reorganizing their affairs.
By reducing basis, the tax liability is postponed until there is a profit on sale.
Then, payment is feasible for the debtor, & government collects more.

I've personally seen how US tax policy has horribly inhibited recovery.
Borrowers in trouble are hindered by the fed's "greed" to soak the borrower immediately.
So borrowers go bankrupt instead.
I've seen it happen.
I narrowly avoided it.

 

[Revoltingest]

I think that the term "double taxation" is a red herring....

You're wrong.
They're taxed upon their net income before they disburse any of it to shareholders.
And when the shareholders receive dividends, they pay tax on these.
It exists.
It results in a high rate of taxation on this kind of income.

.....because amount of revenue isn't the issue.

I agree that this isn't an issue.
Could it be the rare "meta red herring"?

For any given amount of total revenue, it can either be gathered at a small number of points in larger chunks, or at more points in smaller chunks.

There's no reason to do that though.
It just adds complexity, & obscures from the public the fact that we're taxed more than they think.
Smoke & mirrors.

The question of whether corporations should be taxed is really about whether corporate taxes provide a useful policy tool. If they don't, then sure: eliminate them and replace the revenue with increases in personal income taxes. But do they or don't they?

I favor setting tax rates at whatever level are necessary.
Hidden taxes should be eliminated, & incorporated in ordinary income taxes.
The necessary increase in the latter wouldn't be an overall increased in tax burden.

 

[9-10ths_Penguin]

I'm not addressing phony tax dodges, eg, deducting one's collection of Hawaiian shirts.

Just trying to be clear. You just said "losses". I wanted to make sure we're talking about the same kind of losses.

The IRS already casts a jaundiced eye at business which can't make a profit in 5 years.
Some, eg, Amazon, are legit though.

And some might be legit (for tax purposes anyway) even if they never have a hope of making money.

There was a case here in Canada a while back that clarified some of our rules about what counts as claimable expenses; a group of transit bus drivers in Toronto decided to go into a side business, pooled their savings, and bought a low-rise apartment building. The building ended up being a money pit and they lost their shirts.

When they claimed their business losses, they were denied by Revenue Canada on the grounds that the building was such an obviously bad investment that the bus drivers didn't have a reasonable expectation of profit.

They appealed and the decision was overturned. The judge ruled that the tax law's test was about intent behind the investment, not business acumen, and that an apartment building isn't the sort of thing someone buys for fun.

Is it income or a reduction in basis?
From an accounting standpoint, I say the latter is more accurate.

Reduction in basis of what? All you said was "loan"; are we assuming that it's necessarily some sort of secured loan?

But consider the practical & fairness aspects of this....
A person who defaulted on a loan is typically a person in financial trouble.
When the sublithic coprolites hit the fan, this is an inopportune time for gov to collect a big tax bill.
It also prevents the debtor from renegotiating & reorganizing their affairs.
By reducing basis, the tax liability is postponed until there is a profit on sale.

... if there's a specific asset tied to the debt. If the lone was just, say, a general line of credit, what asset sale would trigger the taxes?

Then, payment is feasible for the debtor, & government collects more.

I've personally seen how US tax policy has horribly inhibited recovery.
Borrowers in trouble are hindered by the fed's "greed" to soak the borrower immediately.
So borrowers go bankrupt instead.
I've seen it happen.
I narrowly avoided it.

Wait - if the debtor repays the money, then it wasn't income for the debtor. I was thinking of loans where there's no hope of repayment. If some sort of alternative arrangement can be made with the creditor, then it should certainly be taken into account.

 

[Wirey]

There was a case here in Canada a while back that clarified some of our rules about what counts as claimable expenses; a group of transit bus drivers in Toronto decided to go into a side business, pooled their savings, and bought a low-rise apartment building.

If I was driving a bus in Toronto I'd buy a bottle of whiskey and a gun.

 

[Revoltingest]

Just trying to be clear. You just said "losses". I wanted to make sure we're talking about the same kind of losses.

You man discern a them from some examples.....
- Amalgamated Penguin Products lost $2,000,000 in 2015 when expenses exceeded income.
- You bought a property for 10,000,000 2 years ago, but it caught fire & was destroyed. You didn't buy insurance, so you were uncompensated.
- You loaned $8,000,000 to your brother-in-law to start a new restaurant chain. It folded in 6 months, & he's uncollectible.

And some might be legit (for tax purposes anyway) even if they never have a hope of making money.

If there's no hope of making money, then it sounds like a non-profit corporation.

There was a case here in Canada a while back that clarified some of our rules about what counts as claimable expenses; a group of transit bus drivers in Toronto decided to go into a side business, pooled their savings, and bought a low-rise apartment building. The building ended up being a money pit and they lost their shirts.
When they claimed their business losses, they were denied by Revenue Canada on the grounds that the building was such an obviously bad investment that the bus drivers didn't have a reasonable expectation of profit.
They appealed and the decision was overturned. The judge ruled that the tax law's test was about intent behind the investment, not business acumen, and that an apartment building isn't the sort of thing someone buys for fun.

Real estate is indeed fraught with dangers.

Reduction in basis of what? All you said was "loan"; are we assuming that it's necessarily some sort of secured loan?

"Basis" is an accounting term for how much one has invested in an asset.
Simply said, it equals.....
Purchase price + Acquisition costs - Depreciation deductions taken - Income from portions sold off

... if there's a specific asset tied to the debt. If the lone was just, say, a general line of credit, what asset sale would trigger the taxes?

When an asset is pledged as security for a loan, the lender typically requires the loan be paid off as a condition of releasing the lien on the asset.

Wait - if the debtor repays the money, then it wasn't income for the debtor. I was thinking of loans where there's no hope of repayment. If some sort of alternative arrangement can be made with the creditor, then it should certainly be taken into account.

The IRS treats any forgiveness of principal (& often accrued interest) as income for the debtor.
The lender is required to notify the IRS of this by form 1099.
If one has credit card debt which the company declares a bad debt, then this is taxable income for the debtor.
The IRS always takes its cut of people's misfortunes....except for some homeonwer exceptions.

 

[Sapiens]

I will believe that corporations are people when they take one out and hang it by the neck until dead.

 

[beenherebeforeagain]

Actually, limited liability in the USA starts in 1855.
https://en.wikipedia.org/wiki/Limited_Liability_Act_1855
But historically, the concept is much older, Americastan having lagged behind Europe.

Do you object to limited liability?

You believe that their right to free speech was created out of thin air, but there is a long legal tradition of such free speech.
Consider that unions, non-profits, & even the DNC itself are corporations.
Would you argue that government has the right to silence them?

Are you arguing that these changes justify double taxation of corporations?

1) Yes, in many ways I object to the way limited liability allows responsibility for actions to be so diffused that essentially no one is held responsible for actions of corporate entities, and often, that responsibility is converted solely into dollars and cents. It goes along with the idea that it is wrong for individuals and corporations to externalize their costs onto society without penalty.

2) What part of the following statement of my position is not clear: corporate entities of any kind ARE NOT and SHOULD NOT BE CONSIDERED PERSONS, and are potentially evil and need to be tightly regulated (or as I would prefer, prevented from existing in the first place). For profit businesses, units of government, unions, nonprofits, political parties, churches...is it a large group of people organized for one or more specific purposes? Then it is not a person, and ALL the members of it should be held responsible for ALL the actions of the group (along with doing away with the unfounded differentiation between "capital" and "labor" and so forth). There is then no right of the group/organization to have its own separate voice from the individual members (especially when many/most of the members may have no role in deciding how the voice of the organization is to be used).

3) Taxation should be organized so that it treats all in the same category the same way. Since I would prefer there to not be corporate organizations (beyond a very small number of individuals), "corporations" would have very limited rights and duties, and the individuals who make them up would have full joint and several responsibility for the activities of the group, and each would therefore pay their share of taxes on their personal share of the activities. How exactly that should be assessed is another conversation.

 

[David1967]

Could you name the "loopholes"?

I oppose taxing corporations.
All income is passed to the shareholder, who pay income tax upon dividends.
To have corporations pay an income tax is double taxation.

Very informative Rev. Many people do not know this. I have a small corporation. Whatever profit the corporation makes (unfortunately not much this year) , is added to my personal income and I pay taxes on it. So, in actuality corporations are already taxed. The cry of, "let's tax the corporations", is nothing more than a campaign slogan that appeals to those who don't understand how it works.

 

[David1967]

Loopholes are ways people with tax knowledge know how to reduce their tax burden. The laws are typically written by republicans in congress. The majority of Americans aren't familiar with this, which is why tax attorneys exist. But most people can't afford those either. Corporations and the wealthy hire people to do their taxes with this knowledge.
My family does the same thing.

I read an article a few weeks ago on, I believe it was msn news, about the net worth of all the individuals in the house and Senate. It really is as I heard it once described, a millionaires (and billionaires) club. Both Democrats and Republicans. It was a bit disheartening. IMHO and by the evidence I see coming out of there, I have this sneaky suspicion that the vast majority of them are working to keep their own self interests secure while feeding one liners to the gullible masses come election time. I saw a ridiculous demonstration of this in the first presidential debate. Two people desperately trying to convince us that they are likable, trustworthy and fit to be president. Big fail from both.

 

[Revoltingest]

1) Yes, in many ways I object to the way limited liability allows responsibility for actions to be so diffused that essentially no one is held responsible for actions of corporate entities, and often, that responsibility is converted solely into dollars and cents. It goes along with the idea that it is wrong for individuals and corporations to externalize their costs onto society without penalty.

Everything involves trade-offs.
Limited liability makes it easier to organize & finance ventures because investors know that
they don't risk everything they own if things go wrong. Without it, who would buy GM, Tesla
or Chrysler stock if they were personally liable for losses or accidents?
I wouldn't.
You might want to see more punishment of stockholders for corporate actions, but this threat
would dampen economic activity, & drive companies overseas.
Penalties do get levied against corporations for wrongdoing. We see it regularly in the news.
And individuals working for corporations can be prosecuted for illegal acts.

2) What part of the following statement of my position is not clear: corporate entities of any kind ARE NOT and SHOULD NOT BE CONSIDERED PERSONS, and are potentially evil and need to be tightly regulated (or as I would prefer, prevented from existing in the first place).

You're clear.
But I disagree with your understanding of corporate personhood.
It is not about corporations being a "person" exactly as you & I are.
(I assume you're not a bot.)
It never has been that, & the USSC has not ruled that they are "persons" in the same sense of the word as individual people.
They function as persons in limited ways.
They....
- May speak.
- May sue & be sued in court.
- Are taxable entities.
- May execute contracts.
If they couldn't do these things, they couldn't function.
This is not the same as a real person, who may....
- Marry
- Vote
You're attacking an equivalence between individual people & corporations which simply does not exist.
As for being evil, anyone can be....corporations, people, governments.
Neither are inherently good or evil.
Illegality should be prevented & prosecuted wherever it occurs.

For profit businesses, units of government, unions, nonprofits, political parties, churches...is it a large group of people organized for one or more specific purposes? Then it is not a person, and ALL the members of it should be held responsible for ALL the actions of the group (along with doing away with the unfounded differentiation between "capital" and "labor" and so forth). There is then no right of the group/organization to have its own separate voice from the individual members (especially when many/most of the members may have no role in deciding how the voice of the organization is to be used).

Your understanding of "person" differs from mine & the USSC's.
The controversy you claim just doesn't exist.
What leftish types really object to (without fully understanding it) is that corporations may use money for political speech.
But would you deny the Democratic National Convention (a corporation) this right?

3) Taxation should be organized so that it treats all in the same category the same way. Since I would prefer there to not be corporate organizations (beyond a very small number of individuals), "corporations" would have very limited rights and duties, and the individuals who make them up would have full joint and several responsibility for the activities of the group, and each would therefore pay their share of taxes on their personal share of the activities. How exactly that should be assessed is another conversation.

Corporate income is different from personal income.
A corporation ultimately passes income to the people who own shares, & they pay tax upon it.
The same is true for general partnerships, limited liability partnerships, & professional corporations.
To treat them all as taxpaying entities would be absurd, & this double taxation would have adverse economic consequences.
It would be much like having a head of household pay income tax, & then having each child pay income tax on their support.

Do you own any PCs or LLCs?
If so, then why did you choose that form of ownership?
If not, then wherefrom comes your understanding of their workings?

 

[Revoltingest]

Very informative Rev. Many people do not know this. I have a small corporation. Whatever profit the corporation makes (unfortunately not much this year) , is added to my personal income and I pay taxes on it. So, in actuality corporations are already taxed. The cry of, "let's tax the corporations", is nothing more than a campaign slogan that appeals to those who don't understand how it works.

I once had a corporation for an engineering consulting company.
But these days I only have limited liability companies.
It's simpler this way, & works well for real estate.

I notice that people who spend their lives as someone's employee will never see
the complexities we face. They're vulnerable to Hollywood stereotypes & pandering
politicians who want to sell them a self serving simplistic & inaccurate picture of reality.
(Note: I'm not accusing anyone here of this failing. This thread attracts the smart ones.)
My hope for this thread is that we challenge that view, & consider how taxation does
& should work.

 

[suncowiam]

The argument over Trumps big loss a couple decades ago
involves some assumptions which aren't being addressed.
This thread isn't about Pubs v Dems or Trump v Hillary or the election.
Those topics may come up, but should remain incidental.
It's about Americastanian taxation in general.

Some questions......
Should taxpayers be able to deduct losses from their income?
Should capital losses be deductable from not just capital gains, but also ordinary income?
Should losses exceeding income in the year incurred be allowed to be carried forward to future years?
Should taxpayers have to pay income tax on loans they've defaulted on? (Currently, they must.)

I say yes yes yes yes yes, uhhh yes yes.

Folks complain so much about their own taxes but when another person finds a way to pay less, then it immediately becomes wrong.

Damned if you do, damned if you don't.

 

[beenherebeforeagain]

Everything involves trade-offs.
Limited liability makes it easier to organize & finance ventures.
Without it, who would buy GM stock if they were personally liable for losses or accidents?
I wouldn't.
You might want to see more punishment of stockholders for corporate actions, but this threat
would dampen economic activity, & drive companies overseas.
Penalties do get levied against corporations for wrongdoing. We see it regularly in the news.

You're clear.
But I disagree with your understanding of corporate personhood.
It is not about corporations being a "person" as you & I are.
(I assume you're not a bot.)
It never has been that, & the USSC has not ruled that they are "persons" in the same sense of the word as individual people.
They function as persons in limited ways....
- They may speak.
- They may sue & be sued in court.
- They are taxable entities.
This is not the same as a real person, who may....
- Marry
- Vote
You're attacking an equivalence between individual people & corporations which simply does not exist.
As for being evil, anyone can be....corporations, people, governments.
Neither are inherently good or evil.
Illegality should be prevented & prosecuted wherever it occurs.

Your understanding of "person" differs from mine & the USSC's.
The controversy you claim just doesn't exist.

Corporate income is different from personal income.
A corporation ultimately passes income to the people who own shares, & they pay tax upon it.
The same is true for general partnerships, limited liability partnerships, & professional corporations.
To treat them all as taxpaying entities would be absurd, & would have adverse economic consequences.

Do you own any PCs or LLCs?
If so, then why did you choose that form of ownership?
If not, then wherefrom comes your understanding of their workings?

You are regaling me with rationales for a set of beliefs and practices that exist, but that I find at a basic level to be wrong.

Of course corporations are not persons in the same sense as you and I. That still doesn't make them right, or a good thing. And limited liability is simply a way for wealth to protect itself from the damages it causes through its corporate persons. Sure, such organizations can be punished after the fact for wrongdoing--if caught and if successfully prosecuted--whereas it is always less expensive and more beneficial to prevent damage before it happens rather than to clean up after.

If people (and corporations) had to face ALL of the potential and actual costs (as well as reap the potential and actual benefits) of their actions, they would make very different economic decisions, and I don't think that's a bad thing. Limited liability encourages damaging choices that have to be absorbed by others--damaging to the environment, damaging to the majority of the population, damaging to social relations...

I disagree at a very fundamental level with society and what it has done--not just the West, and not just modern--which structures social relations so that it gives a handful of individuals rights of control over resources that can then be used for personal or selective enrichment without regard for the inevitable negative effect on others. This has been going on for thousands of years; just because it's the way we've "always" done things doesn't mean it is right, or the way we SHOULD be doing things.

Certainly, our current system has allowed billions to have goods and services unimagined by those who lived before--but, by creating corporate individuals and shielding both them and their owners from much of the costs of their operations, we have massively disrupted the environment, caused death and illness for billions of individual humans (as well as all other living things), and while a small portion of the human population enjoys the benefits of increased wealth--myself included--the majority have not.

Because people don't have to face the costs as well as the benefits of their decisions, we have 7+ on the way to 10 billion people on the planet, most of whom live in dire poverty and will all their lives, as will their children, with ecosystems that are less and less capable of providing for us, much less all the other species on the planet.

 

[Revoltingest]

You are regaling me with rationales for a set of beliefs and practices that exist, but that I find at a basic level to be wrong.

Of course corporations are not persons in the same sense as you and I. That still doesn't make them right, or a good thing. And limited liability is simply a way for wealth to protect itself from the damages it causes through its corporate persons. Sure, such organizations can be punished after the fact for wrongdoing--if caught and if successfully prosecuted--whereas it is always less expensive and more beneficial to prevent damage before it happens rather than to clean up after.

If people (and corporations) had to face ALL of the potential and actual costs (as well as reap the potential and actual benefits) of their actions, they would make very different economic decisions, and I don't think that's a bad thing. Limited liability encourages damaging choices that have to be absorbed by others--damaging to the environment, damaging to the majority of the population, damaging to social relations...

I disagree at a very fundamental level with society and what it has done--not just the West, and not just modern--which structures social relations so that it gives a handful of individuals rights of control over resources that can then be used for personal or selective enrichment without regard for the inevitable negative effect on others. This has been going on for thousands of years; just because it's the way we've "always" done things doesn't mean it is right, or the way we SHOULD be doing things.

Certainly, our current system has allowed billions to have goods and services unimagined by those who lived before--but, by creating corporate individuals and shielding both them and their owners from much of the costs of their operations, we have massively disrupted the environment, caused death and illness for billions of individual humans (as well as all other living things), and while a small portion of the human population enjoys the benefits of increased wealth--myself included--the majority have not.

Because people don't have to face the costs as well as the benefits of their decisions, we have 7+ on the way to 10 billion people on the planet, most of whom live in dire poverty and will all their lives, as will their children, with ecosystems that are less and less capable of providing for us, much less all the other species on the planet.

You do get credit for recognizing the trade-offs of limited liability v government's ability to punish people for wrongs committed by others.
I don't say you're wrong.
I just prefer a less authoritarian economic system.

 

[beenherebeforeagain]

You do get credit for recognizing the trade-offs of limited liability v government's ability to punish people for wrongs committed by others.
I don't say you're wrong.
I just prefer a less authoritarian economic system.

Under my preferred system, there will be no entity consisting of more than a hundred or so people, and "system" consisting of more than a few thousand people, operating on a scale of no more than a few thousand square miles. Don't know if you can call egalitarian democracy on that scale "authoritarian," but that would be another discussion.

 

[9-10ths_Penguin]

If there's no hope of making money, then it sounds like a non-profit corporation.

As one of my friends likes to point out, there'sa difference between non-profit and not-for-profit.

"Basis" is an accounting term for how much one has invested in an asset.
Simply said, it equals.....
Purchase price + Acquisition costs - Depreciation deductions taken - Income from portions sold off

But in the case of an unsecured loan, what's the asset? For the taxpayer, the debt is a liability. Are you talking about the cash that was received as the loan principle?

When an asset is pledged as security for a loan, the lender typically requires the loan be paid off as a condition of releasing the lien on the asset.

But is that the asset you're talking about when you say that the sale of the asset should be the trigger for taxation? That's what I'm trying to get at.

And what about unsecured debt that doesn't have any relation to a specific item, like credit card debt? What's the trigger for taxation then?

The IRS treats any forgiveness of principal (& often accrued interest) as income for the debtor.
The lender is required to notify the IRS of this by form 1099.
If one has credit card debt which the company declares a bad debt, then this is taxable income for the debtor.
The IRS always takes its cut of people's misfortunes....except for some homeonwer exceptions.

It sounds like we're muddying two issues here. Recognizing the forgiven debt as income doesn't necessarily mean collecting right away. I have no issue with the IRS allowing payment plans when it would create a hardship to make the person pay the tax owing in full right away.