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Mon Sep 1, 2014, 10:23 PM

FYI, raising or lowering corporate tax rates doesn't actually change tax revenues much

I'm not sure why corporations are moving overseas exactly (more free cash? less risk? lower regulations?), but it's unlikely due to them wanting to pay less in taxes. There is already a great system for corporations to not have to pay any taxes here in US. It's called bonds. If you are a corporation that is making tons of profits in a low corporate tax environment, you take those profits and pass them out to your stock-holding investors in the form of dividends (literal redistribution of corporate profits). If corporate tax rates go up, you issue high interest bonds (borrow money from investors at high interest), and then give out those exact same profits to your bond holding investors in the form on payments on interest on bonds. That "loan" interest is tax deductible, so if the proportion of bonds sold and interest on those bonds is calculated right, your profits after interest deductions will be exactly the same even with the new higher corporate tax rate.

Back in business school we actually had this exact scenario as a question on our exam: You have a hypothetical corporation with a certain amount of outstanding stock and profit, in a country with a certain percent corporate stock (the exam gave actual figures). The corporation's income and expenses are structured in such a way that its profits are zero (income - expenses = 0). The government of the country increases the corporate tax rate to a new higher tax rate. The market rate on corporate bonds is X (whatever interest rate bonds generally get on the market). Calculate the amount of bonds that this corporation will have to sell at the market rate to bring its corporate profit back down to zero (after adding payments on bond interest as corporate expenses, counted against income).

So, in the end, corporation's profits are still zero, investors are still earning the same amount of money (just in bond interest payments instead of stock dividend payments), and the only thing that raising or lowering a corporate tax rate does is determine how safe or risky corporations are overall (more bonds sold = more outstanding debt = more risk for the corporation should the economy turn sour).


Just thought you guys would like to know.

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Reply FYI, raising or lowering corporate tax rates doesn't actually change tax revenues much (Original post)
Rassah Sep 2014 OP
Hoyt Sep 2014 #1
onecaliberal Sep 2014 #2
Rassah Sep 2014 #3
onecaliberal Sep 2014 #4

Response to Rassah (Original post)

Mon Sep 1, 2014, 10:41 PM

1. I'd rather have dividend payments, the tax rate is roughly half of bond interest payments.

Assuming one is in higher tax bracket.

And the increase in bond debt might decrease stock value.

Of course, if the company isn't doing well, you are more likely to receive interest payments in short-run.

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Response to Rassah (Original post)

Mon Sep 1, 2014, 10:42 PM

2. Close the loopholes so they actually pay

Something instead of making billions in profit, paying zero in taxes and getting refunds.

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Response to onecaliberal (Reply #2)

Tue Sep 2, 2014, 12:37 PM

3. They sorta do though

Since corporate profits are technically stock owner profits (profits investors and those saving for retirement earn in the form of increased stock price, stock dividends, and bond payments), those stock owners pay taxes on their investment gains. At 10% it's not as much as payroll tax, but is close, since taxes on someone earning about $50k end up being close to 15% to 20% after deductions. So actually forcing corporate taxes means that the money earned will be taxed once on the corporation itself, and then again on the people who own stock in that corporation. That's the double-taxation thing. And although a lot of people are pushing for closing loopholes to force corporations to pay taxes, I don't think a lot of people in Washington, or the economists that advise them, would approve of that, since much of that profit actually ends up in people's pensions and 401k's. You don't want to "tax grandma," do you?

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Response to Rassah (Reply #3)

Tue Sep 2, 2014, 04:19 PM

4. No I do not. However,

I want corporation to pay their share. They certainly don't pay nearly enough.

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