Imagine if a household was only taxed on the money they managed to put away in savings and could count housing expenses, food expenses, education costs, healthcare, entertainment, vacations, vehicle purchases, etc. 100% against their income.
That's what the standard/itemized deduction is supposed to represent. The problem is that we obviously can't let you deduct everything, because if you can deduct everything there would be nothing to tax, aside from savings. And you really don't want to tax savings because savings (also known as "investment") is what makes the modern economy possible.
I most certainly cannot deduct housing, food, entertainment, vacations, or large purchases.
> The problem is that we obviously can't let you deduct everything, because if you can deduct everything there would be nothing to tax, aside from savings.
This is the point the parent poster is making. We say that it's ok for corporations to deduct everything, but not the people? Why are we ok with that?
>This is the point the parent poster is making. We say that it's ok for corporations to deduct everything, but not the people? Why are we ok with that?
Because companies, to some approximation, are pass-through entities, so it doesn't make sense to tax them. Most of the stuff you buy are for own use/consumption. Food is an obvious one, but so are movie tickets TV and last year's European vacation. Companies don't do any of that. It doesn't need food, movie tickets, or European vacations. It might buy flight tickets for its employees to go on sales trips or whatever, but it's not for the company itself. Moreover if you're buying stuff for business purposes (eg. you're a contractor and need a flight ticket to go meet your client), you can deduct it too.
More practically, taxing revenue or not allowing companies to deduct expenses would heavily encourage vertical integration. A vertically integrated widget factory will only have to pay such a tax once, but a widget factory that buys its sheet metal from a foundry, which gets its ores from a miner will have to pay the tax 3 times. That's bad for the economy because it discourages specialization and division of labor, which is basically the other pillar of the modern economy.
> Companies don't do any of that. It doesn't need food, movie tickets, or European vacations.
And yet they sure seem to cater a lot of lunches and dinners, pick up the costs for large corporate events, pay for suites at event venues, and fly executives around the world in private jets.
>pay for suites at event venues, and fly executives around the world in private jets.
If it's for legitimate corporate purposes, I don't see the issue, because as a contractor you can do the same deduction. And while I'm sure there's some non-zero amount of improper expensing going on, the amount relative to income taxes paid by the employee makes this a non-issue in practicality. The IRS has better things to worry about than grilling a company on whether some executive's 1 week stay at a $500/night hotel (tax value: $3500) was a proper expense or not, when the executive makes $500k+ TC.
$500.00 a night is $182,500.00 per year. That’s 20% of comp. What “better thing” does the IRS have to do? I don’t disagree with you that the IRS has limited time and resources and should maximize their impact but comparing a nightly expense with annual income doesn’t make that case.
> That's what the standard/itemized deduction is supposed to represent.
If they wanted you to deduct housing costs they'd just let you deduct housing costs. Instead they play games about mortgage interest deductions because they want to incentivize certain kinds of living arrangements over others and give handouts to some voters but not others.
I agree the idea of only having households pay taxes on savings is pretty much untenable with existing revenue structures and would be disencentivizing things we want to incentivize. Just pointing out how corporate taxes just seem pretty absurd from what households pay in comparison.
Let's imagine two groups of people. One group gets a bonus and takes that money to go on a cruise. Easily 30%+ of that money gets taken by income taxes (including FICA). The other group gets their company to just pay for them to go on that cruise as a team building exercise/corporate summit/planning meeting/whatever you want to call it. That's negative taxes in the end, the cost of the business operating, it's a cost that offsets revenues. Good luck getting that audited and declared taxable.
> Instead they play games about mortgage interest deductions because they want to incentivize certain kinds of living arrangements over others and give handouts to some voters but not others.
Your "they" is doing a lot of work here.
In reality, this system isn't top-down; it's bottom-up. Influential groups of voters (corporations, sure, but also just various stripes of "rich people" — and even upper-middle-class people at the municipal level) go out and lobby their local and regional representatives to get exceptions carved out for them (and, mostly coincidentally, people like them.)
The voters who don't get handouts are the ones who have no political influence.
(Fun fact: our current situation with capital-gains taxes, was an attempt to "rationalize" a system that was previously similarly cronyist in shape. It used to be that there were particular exceptions carved out for investment classes A and B and C that rich-and-influential people invested in, and none carved out for your regular Joe. People got mad, and the government's solution — rather than removing the carve-outs — was to just make them equally accessible to everyone.)
>That's negative taxes in the end, the cost of the business operating, it's a cost that offsets revenues. Good luck getting that audited and declared taxable.
How is that negative taxes? At best it's tax free, but calling it negative tax (because it's lower than the alternative?) is double-counting. Moreover AFAIK this sort of tax evasion mostly happens at the small business level (eg. a plumber buying a pickup truck and then using it to go to the grocery store and pick up his kids from soccer practice), but it doesn't really happen at the corporate level because 1) such spending will almost be in contravention of corporate governance policies and be flagged by auditors and 2) you need so many people in on the conspiracy that it's impossible to keep a lid on it. Plenty of companies get flak for their subsidiaries in tax havens, but I'm not aware of any serious allegations of corporate tax evasion by the way of fringe benefits.
Unironically yes. The reason people want taxes on profits is they think large, powerful companies are a threat... but if you think that, why tax money that large, powerful companies don't waste?
The other reason is to tax the rich, but you can do that by simply taxing the rich directly. If we fear powerful companies, we can put some sort of scaling size tax on the largest ones.
A lot of companies are essentially on the welfare of their investors, who may or may not be stupid. Many companies purposefully do not turn a profit, because they're aiming to cheat the market and sell at a loss to push competitors out. A lot of very successful companies operate or have operated this way, and it's incredibly dangerous for the market. It causes the erosion of small businesses and further promotes monopolization. We can try to disincentive that by saying, "hey, you don't want to turn a profit, that's fine, but you still have to pay up".
This is part of the reason why if you look around America today it's going to be 99% big corporate players dominating markets and 1% small businesses barely staying afloat.
> We can try to disincentive that by saying, "hey, you don't want to turn a profit, that's fine, but you still have to pay up".
That doesn't make any sense. You're saying, instead of consumers getting lower prices, they should pay more and that money should go towards taxes. That means, essentially, that you're asking the consumers to pay taxes.
What you're describing is predatory pricing. People have mixed views on that, but if you want to address it, then address it directly. Taxing revenue is a strange, roundabout way of doing it that is going to harm a ton of non-predatory businesses without actually changing the market dynamics of predatory pricing -- because your taxes will be affecting the non-predatory companies even more! Since they, by definition, charge more money and therefore will be paying more taxes on the greater revenue.
The problem is that our current tax system incentivizes the kind of venture-capital fueled market manipulation we see. Companies actively try to optimize for the lowest amount of profit, similarly to how the ultra-wealthy try to optimize for the lowest income.
We have some methods to address predatory pricing but I think it's obvious they pretty much don't work on any scale that matters. When I look around the modern US, I see the least amount of successful small businesses I've ever seen in my lifetime. We're living in a corporate hellscape, and more and more business look to rent-seeking anti-consumerist behavior.
> The problem is that our current tax system incentivizes the kind of venture-capital fueled market manipulation we see.
It really doesn't at all. It's quite neutral in that regard.
> Companies actively try to optimize for the lowest amount of profit
This is self-evidently false. Companies actively optimize for the greatest total profit, considering the net present value of future profits. This does mean delaying profits if reinvesting them is expected to yield growth. This is desirable.
> We have some methods to address predatory pricing but I think it's obvious they pretty much don't work on any scale that matters.
Honestly it hasn't been a major policy priority. They could absolutely work if implemented, but not everyone agrees it's a problem that needs solving. Many people consider it to be hostile to a free market. I'm not taking sides here.
> When I look around the modern US, I see the least amount of successful small businesses I've ever seen in my lifetime.
The major culprit here is technology and economies of scale. The tax code has some quirks, but it is essentially irrelevant here. Even if predatory pricing accelerates the demise of some small businesses, they weren't going to last much longer anyways. Which is why predatory pricing isn't actually nearly as common as many people think, and why it's not always viewed as a problem. E.g. Uber and Lyft engaged in it for years, but traditional taxis are still in business. Small businesses have been disappearing because they simply don't have economies of scale. Their products cost more so people don't go there. It's that simple. Nothing to do with the tax code.
Yes! That's the VC funded model - money injection while you burn cash and run on losses until you're big enough for a huge return. Which incentivises all sorts of bad behaviours. Same with Hollywood accounting. Just tax a bit less on revenue.
Most of my health expenses, sure. Not necessarily all of them, unless I play games and live within allowed limits of tax advantaged savings accounts which might just eat my money at the end of the year.
My vacations, car payments, food expenses, and housing expenses are absolutely not able to be written off. One part of my housing expenses may be able to be written off, but not anywhere near all of them. Some education expenses, but not nearly all. I get $5k of untaxed income for childcare for the year. How many weeks do you think $5k covers for two kids?
A way to cover some medical expenses. Not necessarily all. And once again, only if I play games with weird savings accounts rules. If I put money into either of these accounts it's expensive to take out, if possible at all. And with FSAs one needs to essentially guess what their healthcare costs will be and risk losing it at the end of the year if unused.
