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Comment by frebord | Hacker News Reader

Can someone explain to me why businesses pay any tax at all. It makes no sense to me that we want to restrict the flow of money through a business. Maybe we could tax cash holdings of a company, but why would you tax any income that ultimately goes to expansion, shareholders, employees?

People see these "tax evading" corporations as so evil, but why? Do they really even remotely understand what is going on? I suspect they don't. Or maybe I don't get it.

Edit: Maybe what I fail to realize is that income for a company is essentially what I'm thinking of as cash holdings, anything else would be an expense that would be deductible?

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Income that goes towards expansion (read op-ex like salaries, or cap-ex like infrastructure) is not taxed, it is "tax deductible".

Income that doesn't go towards economic activity (salaries, expansion) but goes back to profit does get taxed - mostly because dividends and capital gains are so much harder to tax for the ultra-rich due to loopholes on offshore tax residence, inheritance tax uplifts, trusts/foundations. The alternative would be to tax dividends and capital gains worldwide at income tax rates -- a great idea but impossible to implement against the resistance of every US millionaire and billionaire (also operationally quite difficult).

Tax evasion is evil morally because every dollar they don't pay, others have to pay so they are stealing money from millions of other people. The legal kind of tax evasion is called "tax avoidance" instead, it is still morally wrong if loopholes are created and exploited in a very obvious fashion for the sole reason of avoiding to give back to the society that enabled the profit. For some reason the US and many other countries don't have General Anti-Avoidance Rules where bad-faith tax avoidance structures can be outlawed.

>Tax evasion is evil morally because every dollar they don't pay, others have to pay

You mean the government makes others pay (unless the government just wants to go into debt, as it usually does).

>give back to the society that enabled the profit

Most government expenditure (see: military spending unnecessary for national defense) does jack shit for your economic productivity.

Gross income isn't taxed, but profits are.

However, I do agree that the annual basis of corporate taxation creates odd incentives - if on December 31st a company finishes the year with $10 million in cash, and on January 1st they spend $9 million, they will still pay tax on the $10 million, while if they spent it just a few hours before, they would have just paid tax on $1 million.

Estonia's corporate tax system seems more sensible to me; profits are untaxed until distributed to shareholders, therefore a company can accumulate as much as needed for more long-term spending.

The $9 million in spending will be deducted for the year's taxation period of course, but that leads to the situation of the company paying say, $3 million in tax one year, then $0 in tax for the next period, which seems similar to Netflix's case as per the article.

That's not how this works.

You pay taxes on what you earn, not on your cash balance. The company will always pay taxes on the $10 million, regardless of when it spends the $9.

Also GAAP taxes are different from cash taxes paid to the IRS.

Business expenses are deductible. For example, if you are a reseller, you can spend before the end of the year to increase your inventory (and decrease your profits for that year).

Only operating expenses, but in any case you will pay more next year.

What you describe only works for cash basis taxpayers. Public companies are all accrual basis taxpayers. Under accrual accounting increasing your inventory affects the financial statements as follows: * Balance sheet: decreases cash/cash equivalents entry and increases the inventory balance sheet entry (in equal amounts), resulting in no change to net assets or equity * Income statement: no effect * Cash flow statement: will show up as a change to inventory, reducing operating cash flow and total cash flow

That's absolutely false, otherwise all low-margin businesses would go bankrupt from taxation, and Netflix would have paid taxes on their profits in the above article.

If a business paid no taxes, then you would have business developed that do nothing other than put money to work and they would never pay taxes on their gains at all. They would become glorified savings accounts to delay taxes on realized gains indefinitely.

I believe the argument is that by taxing companies, you can broaden the tax base beyond individuals which theoretically will let you lower the tax rates on individuals while maintaining or increasing the amount of taxes that you take in.

In part because shareholders only pay capital gains on their stock as opposed to income taxes

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