But why tax corporations on income at all? All of that money will eventually be income for an actual person (employees, shareholders) who will be taxed on it, most likely at a rate above 24%. And don't forget that sales taxes and VATs exist.
Corporations don't exist, so they can't "pay" for the tax. With a corporate income tax, the incidence is out of policymakers' control and some percentage will fall on consumers. Just tax who you want to tax.
> All of that money will eventually be income for an actual person (employees, shareholders) who will be taxed on it, most likely at a rate above 24%.
No, it doesn't. The stuff that becomes employee income mostly isn't taxed as corporate income (its a deductible business expense). If it is distribute as dividends, its taxable to the recipient, but certainly that doesn't happen with all after tax corporate profits. Its very common for most investor returns to come as capital gains with the money retained/reinvested in the business.
How are they a tax dodge? The owners are taxed whenever they try to get cash from the business.
It’s like claiming a house is a tax dodge because the owner isn’t taxed every quarter in the increase in value. In both cases the owner gets taxed when gains are realized.
Corporate income is mostly a way to get incremental cash for govt. But the tax comes gets paid by stocks, effectively taxing pensions, 401ks, etc., without people thinking about it.
As a way to check it, there’s academic papers demonstrating every dollar held by a company is matched in market cap - company loses X in cash, market cap drops X.
So the company isn’t really paying - it’s shareholders that pay. They ultimately lost the value.
A corporation is a bunch of paper sitting in, most likely, Delaware. Those papers don't have a life of their own; they are owned by a group of people who also own all of the assets.
We pretend that the paper is a person in lots of contexts because it's a convenient fiction. But in this example, the paper very clearly isn't paying income tax.
Unfortunately, they do as far as the law is concerned. They have a right to own property - in perpetuity, which makes it an even more powerful right than flesh-and-blood humans have. They have a right to bring lawsuits. They have a right to influence our political process, thanks to Citizens United. They serve as an impenetrable shield between those owners and liability, and (thanks to those property rights) to a large extent taxation as well. Very little of this should be the case, but it is, and because corporations have this very substantial separate existence they should also be subject to tax.
Should? When this wasn’t the case economies sucked. When you can lose all your possessions if an investment you made fails, no one invested money.
There’d be no mortgages, no college loans, no car loans, and zero growth. The LLC is credited with allowing modern economies to happen since for the first time people were only liable for the portion invested, not their entire life assets.
Those countries slow to take it up demonstrably lagged economically.
Go read on the history of the LLC to see how it revolutionized the world.
I've read lots of the history, and it's uncivil to assume otherwise. Limited liability has its place, as a deal by which something gets done that neither the government (because of resources) or the private sector (because of risk) can do alone. The classic example is shipping canals. But those corporations were given time limited charters for specific purposes, and didn't have many of the rights since granted to corporations. You're playing an excluded middle when you assume that contempt for corporations as they exist today implies contempt for corporations in any form whatsoever. I for one would be fine with corporations in their original form, without the later extensions.
> When you can lose all your possessions if an investment you made fails
This is not about an investment failure in the sense of not getting the expected returns. It's about incurred liability. Why should individuals not in general be liable for the choices they make? Ever hear of moral hazard? Any exemptions, as with corporations in their original form, should be very limited and balanced by some public good.
> There’d be no mortgages, no college loans, no car loans, and zero growth.
That is simply not true. It's your claim, so you provide some evidence. Then I'll show what's wrong with it. Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
>Why should individuals not in general be liable for the choices they make?
To quote: "You're playing an excluded middle"
Investor invests in building. Lightning burns it down. Should that investor be legally liable for their entire worth, or just the value invested?
There is some medium ground between being liable without bound and not having any liability whatsoever. Limited Liability Corporations are just that - you can be held liable beyond the LLC if you do illegal things. But the limitation is to be liable for only the assets relevant to the business. This seems perfectly like a reasonable middle ground.
And it's listed often as one of the best inventions enabling a modern economy [2]."To the economist the
concept is essential, for without limited liability capital acquisition would be difficult indeed." [3] The historical evidence is that limited liability corporations enabled using excess capital far more efficiently than previously, which is why pretty much every country in the world has adopted it. It was clear early on that those countries not adopting it were falling behind economically.
>Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
Before limited liability, unlimited liability was the norm. If a merchant invested some of his profits in a ship, and the ship sank, then those with cargo on the ship could sue the merchant for all the merchant was worth, far surpassing the value the cargo was worth. This disincentivized merchants investing.
So yes, investors invest commensurate with the risk. If the risk goes up, they invest less. This was the norm. Excess capital was not being used for fear of losing not only that capital but all capital.
The Dutch invented limited liability in the 1600s in order to tap this unused capital. " The innovation in the case of the VOC was that the liability of not just the participanten but also of the bewindhebbers was limited to the paid-in capital (usually, bewindhebbers had unlimited liability). The VOC therefore was a limited liability company" [1]
This proved so successful economically that all neighboring nations adopted it soon thereafter, enabling a boom in shipping.
Now, back to mortgages, etc. Mortgages are lent by banks (more or less). Before limited liability, the bank was owned by one or more people, and they were liable for any business deals they got involved in that went wrong, and not just for the amount invested in the business, but for all their assets. If they lent a mortgage, and something was wrong, even by acts of God, then the bank and any shareholders could be sued for everything - their entire set of assets, their houses, and even their families houses.
If you don't see how this disincentivises investment or risk taking, then I don't know how else to explain it. I'm far more likely to invest $100 if I know I'll at most lost $100. If I'm possibly liable for $1,000,000, I'm not likely to ever invest that $100.
> Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
We agree on that. When the risks are tremendous, there will be less investment. And this is historical fact.
> Investor invests in building. Lightning burns it down.
False example. The owner of a warehouse (clearly what you mean even though you fail to specify) would in general not have been held liable for the value of others' goods that were lost. As no less than Rothbard pointed out, contracts alone could have excluded that liability, with no need for a corporate structure. Or the owner and/or investors could have purchased insurance, which also predates corporate structure by centuries. The introduction of a new legal entity, which has since been expanded to be equal (or superior to) natural persons under law, was unnecessary to secure the benefits of investment.
> Before limited liability, unlimited liability was the norm. If a merchant invested some of his profits in a ship, and the ship sank, then those with cargo on the ship could sue the merchant for all the merchant was worth, far surpassing the value the cargo was worth.
You just happened to pick an example that has been used to show why the corporate form was unnecessary.
"The corporate form emerged from economic arrangements that mirrored the concept of limited liability offered by modern corporations. One such arrangement was the commenda, a system developed in Eleventh Century Italy ... This arrangement allowed the passive partner to limit his or her liability of their investment"
Robert W. Hillman, Limited Liability in Historical Perspective
People were already investing, without corporations, in the eleventh century. As I said before, your claim was untrue.
> If I'm possibly liable for $1,000,000, I'm not likely to ever invest that $100.
That's why you would write a limitation into any contracts related to that investment, and/or buy insurance. Either could be overridden by acts of gross negligence (an illegal clause in a contract is void and insurance contracts have similar exceptions). If you're negligent or malicious, or authorize others to be negligent or malicious on your behalf, you damn well should be liable for a proportional share of damages which could exceed the value of investments. Hint: don't do things that harm other people and you'll have nothing to worry about. Did you look up "moral hazard" yet?
> People were already investing, without corporations, in the eleventh century. As I said before, your claim was untrue.
Yes, they did. But investing is not a binary, all or none event. You continually fail to address that less risk means more investment. You fail to address the fact, as quoted above, “ To the economist the concept is essential, for without limited liability capital acquisition would be difficult indeed.”
For someone claiming I fail to see a middle ground, you’re doing it repeatedly.
History shows limited liability spurred economic growth, which is why it’s used in likely every of the 200 plus countries. It’s why economists often list it as one of the greatest economic inventions of all time.
As to contracts, a LLC is a contract. As to gross negligence, it violates protections of the LLC. The contracts you argue for are a LLC.
Do you claim investment would be at the same level without limited liability?
> History shows limited liability spurred economic growth
Not even all forms of limited liability are equal, let alone all forms of corporate structure of which limited liability is only a part. To argue that all of the extensions to corporate personhood over the last 200 years are justified because of economic growth over the same time is not only to conflate different things but to confuse correlation with causation. That's where this discussion started - not with limited liability alone, but with corporate personhood in general, so I guess we can add the fallacy of composition to your trifecta. I refuse to engage with more such sophistry.
That's a good idea, since your contract argument simply reinvented limited liability. Also your black and white thinking is off: for example, I never argued about "all extensions are justified by economic growth," nor have I continually reduced positions to binary when they're clearly not. I think you're arguing against what you want me to write instead of what I've actually written.
OMG. Apple as well as other large companies are sitting on billions of dollars. In other words they are not paying reasonable taxes, nor are they spending the money so that it can or would be taxed.
The US government wrote the Section 482 tax regulations. Corporations followed the regulations the government wrote. The government provided tons of examples on how taxpayers could follow their rules in the tax guidelines.
I've spend hundreds of hours of my life reading the section 482 regs. Multinational companies need to comply with these. Never really understood the vilification of companies that are following the rules.
> Never really understood the vilification of companies that are following the rules.
Your statement is based on a false axiom. Much of the ire is at companies not following the rules. It's just really really hard to untangle all of the shells and subsidiaries and internal transfers of a modern medium-or-larger corporation, so even when they do get caught they end up paying pennies on the dollar of what they owe. Or nothing. Did you hear the news this week about a certain Mr. Trump, who paid zero taxes on hundreds of millions of dollars of forgiven loans (i.e. gifts)?
But hey, let's pretend for the sake of argument everyone does play by the rules. Does that make everything OK? Of course not. Those rules are a sociopolitical construct, and do you know who has an outsize influence on what those rules are? Why, the very same corporate "persons" they apply to! From lobbying to regulatory capture to the "revolving door" to outright graft, corporations use their assets to secure laws more favorable to them than any of us mere humans could get. And they make a great return on that investment. Several hundred percent minimum IIRC. Most of it's legal (true graft is only a tiny fraction of it) but that doesn't make it OK.
Imagine the process of assessing and collecting a tax from a single entity.
Now imagine the process of assessing and collecting taxes from 93,000 entities, including enforcing penalties for people who inadequately report or pay.
Not taxing corporations sounds controversial on the surface but is actually not a terrible idea in practice. Just push the taxes down to the employee and you could theoretically collect more taxes.
They're going to dodge it anyway so all you're doing is creating jobs in other jurisdictions by attempting to tax them.
Corporations don't exist, so they can't "pay" for the tax. With a corporate income tax, the incidence is out of policymakers' control and some percentage will fall on consumers. Just tax who you want to tax.