11 votes

Hollywood accounting

5 comments

  1. [4]
    skybrian
    Link
    The same basic move is also a way to shift profits between countries to get a lower tax rate. Expenses can be charged to a subsidiary in a country with low taxes. If it's an intellectual property...

    The same basic move is also a way to shift profits between countries to get a lower tax rate. Expenses can be charged to a subsidiary in a country with low taxes. If it's an intellectual property expense then it doesn't require importing anything physical.

    It's also how private equity can buy a business and remove money from it, by charging expenses to another entity that they control. If the company goes bankrupt, the money is already gone.

    And it's also how criminals can remove money from a fraudulent business. They charge high expenses to the business (for example, their own salaries), and since they control the business, it goes along with it.

    The flexibility about what counts as a business expense is why some people say that a VAT is better than an income tax. There are fewer expenses that can be deducted from a VAT, so taxes are collected even if the company spends its profits in efforts to increase market share, as is common in growing tech firms.

    4 votes
    1. [3]
      papasquat
      Link Parent
      The problem with VAT (or any sales tax) is that they're inherently regressive. A poor person will always spend a much larger proportion of their income on sales taxes than a rich person, because...

      The problem with VAT (or any sales tax) is that they're inherently regressive. A poor person will always spend a much larger proportion of their income on sales taxes than a rich person, because rich people can afford to invest and save their money. Simplifying the tax code, by greatly reducing or eliminating deductions, doing away with business taxes in general, and adopting a much more progressive income and capital gains tax scale in the US are possible solutions to that. The problem with corporate taxes is that corporations aren't people; there's no limit to the amount of corporations you can be apart of, and there's no limit to the amount of people a corporation can be apart of. It's also very easy to move assets around inside of a corporation. This lets you do all kinds of creative things like detailed in the article.

      It's much harder to do that kind of stuff as an individual, and as most countries tax individuals based on where they reside, it's much harder to do the shell game of moving your tax burden around too.

      4 votes
      1. [2]
        skybrian
        Link Parent
        One could argue that any tax on business is potentially regressive, because the money comes out of revenue, all of which came from customers. This could result in higher prices? But in practice,...

        One could argue that any tax on business is potentially regressive, because the money comes out of revenue, all of which came from customers. This could result in higher prices? But in practice, tax incidence is complicated. How much higher taxes leads to higher prices (versus lower margins) depends on the competitive situation and how much money a company is willing to lose temporarily.

        It seems like there's a continuum between something like an income tax and something like a VAT tax, depending on which expenses the business can write off. Maybe if advertising expenses couldn't be written off, we would see less advertising?

        2 votes
        1. papasquat
          Link Parent
          Yeah, honestly the idea that things can be written off on taxes in general is a flawed idea that opens the tax code up to a whole lot of loopholes. If an individual is taking in a billion a year,...

          Yeah, honestly the idea that things can be written off on taxes in general is a flawed idea that opens the tax code up to a whole lot of loopholes.
          If an individual is taking in a billion a year, it shouldn't matter that they spent $750 million on starting a new business. That was ultimately their choice.

          The argument is that we can use writeoffs to incentivize behaviors that we approve of; the trouble is that most of the behaviors we approve of are already incentivized by the promise of money. People don't start real, actual businesses for tax credits, they do it because they think the business is a good investment and they'll make more money off of it.

          I can see the argument for things like sin taxes; that is, taxing a product or service that is generally harmful to society and charging only the people who use those products or services to pay for their negative externalities; ie; tax cigarettes enough to pay for the increased healthcare costs, tax alcohol to pay for the costs of dealing with domestic abuse and drunk driving, make heroin legal, but tax it enough that it pays for the increased policing, rehab, and so forth.

          The problem with tax incentives is that it often pits governments against each other in a race to the bottom. One state offers amazon tax credits to sweeten a deal to put a warehouse in their borders, so other states need to respond and give them more lucrative deals. That kind of stuff benefits no one except the obscenely wealthy shareholders of these companies, and if it was illegal at the federal level I think we'd all be better off.

          So much of the tax code is pure politics. Telling people "You can write off your mortgage and not pay any taxes on your house!" is sexier and more appealing to most middle class people than "We're bumping the fourth tax bracket up to $100k", even though the latter may result in a lower tax burden. People really don't look into this stuff much, and tax incentives are very, very easy to get people to vote for if it benefits them.

          A personal income and wealth tax, with all of the loopholes, tax credits, incentives and so on closed that follows an exponential curve which approaches 100% at the highest level seems like the simplest, hardest to exploit, and most fair solution to me. You make 100k a year, maybe you'll only pay 18ish percent of your income to taxes. You make 1m a year, you're looking at more like 40%, you make 1b, you're closer to 75%, and if you make 10b in a year, you're paying 95% or so.

          The argument against this from liberals and conservatives is that it removes the profit incentive from billionaires, which on one hand, it doesn't. Making more money will still always result in taking home more money, it's just that for every additional dollar you make if you're making that much, you'll only take home a cent or so. Is that worth it? Probably to some people, especially if a 2% bump in your stock price would result in you taking home an addition 2 million or whatever per year, even after taxes.
          Secondly, would removing the profit incentive from the richest people that humanity has ever produced really be such a bad thing? If they were unable to ever significantly increase their wealth beyond what they currently have, maybe they'd run their companies in a less exploitative way (ignoring the literal trillions they'd spend to try to reverse the tax policies, but that's a whole other issue).

          2 votes