Wednesday, January 25, 2012

Don't like Corporate Taxes? Then Un-incorporate!

MITT ROMNEY: "One of the reasons why we have a lower tax rate on capital gains is because capital gains are also being taxed at the corporate level. So as businesses earn profits, that’s taxed at 35 percent, then as they distribute those profits as dividends, that’s taxed at 15 percent more. So, all total, the tax rate is really closer to 45 or 50 percent."

Mendacious talking point, the first: “double-taxation.”

We don’t tax “funds” in this country, we tax transactions. If a company turns a profit on its transactions, it pays taxes on that profit. When it pays money out to investors as dividends, or when investors sell stock at a profit, those transactions are also taxed. No transaction is taxed twice.

Mendacious talking point, the second: that 35 percent tax rate.

That’s the top corporate tax rate on the books, but because businesses take advantage of all manner of loopholes, the effective rate – what they actually pay — is actually far lower. It’s a classic conservative talking-point that we have the highest corporate tax rate in the world, but the reality is that we collect less in corporate taxes than most developed countries. Studies of some of the biggest companies have shown their effective tax rates to be, on average, less than half of what’s on the books.

And the sleight-of-hand: Bain Capital is a Limited Liability Company (LLC). This is what’s known as a “pass-through” structure, meaning that the company pays zero in corporate income taxes – the partners’ shares are taxed as income or losses on their personal returns, and in this case, most of the gains are investment income taxed at 15 percent.

In other words, even if we bought the “double-taxation” nonsense and the 35 percent rate, his talking-point still wouldn’t be true.

Mitt Romney (like most of the top 1%) is completely out of touch with middle America. Look at the evidence:

  • he bet another candidate $10,000 without a second thought;
  • he said $374,000 in speaking fees was "not very much";
  • he demolished a $12 million beach-front mansion to build another one 4 times bigger;
  • he claimed he was "unemployed" in a ham-handed attempt to identify with the 30 million Americans who can't find work,
  • and he said at one time that he too feared getting a "pink slip".

Romney is a caricature of a tin-eared Wall Street exec who refuses to see (or admit to) how the tax system is rigged in his favor, and instead blames all our country's problems on the poor. Mitt's own tax plan would LOWER his tax rate even further. That's just plain nuts!

And why would an American citizen need to keep cash in a Swiss bank or in the Cayman Islands, unless they were breaking the law and evading taxes? I suppose for some people, $259 million just isn't nearly enough.

President Barack Obama used his State of the Union address to call for a new minimum effective tax rate for millionaires and billionaires. "Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes," Obama told a joint session of Congress Tuesday night.

"In fact, if you're earning a million dollars a year, you shouldn't get special tax subsidies or deductions. On the other hand, if you make under $250,000 a year, like 98 percent of American families, your taxes shouldn't go up." 

One radical right-wing corporate sympathizer wrote to me today regarding my post on Mitt Romney's taxes, "What kind of socialist rant is this? The tax code specifies that capital gains are taxed at 15%. It should be ZERO! The money has already been taxed. The fact is that some decided to invest their money while others spend it. The problems are not that Washington doesn't have enough revenue, the problem is that they spend too much."

First of all, there is nothing "socialist" about taxing higher wage earners a little more than the poor and middle-class. America has had a progressive tax system for over a century.

That radical right-wing corporate sympathizer was referring to the myth of "double taxation", and was only was spewing the same old Republican and Tea Party propaganda that I had once been indoctrinated with...before I researched the facts and saw the light.

There's no such thing as "double taxation" on corporate executives, and these CEOs and their tax attorneys know very well that's true...they know better than anyone.

My hourly wage is taxed in my paycheck, so then, why should I ever pay another tax on these earnings ever again? My union pension, 401k plan, and my Roth IRA is taxed as "regular income" when I withdrawal funds, so why aren't I allowed to pay a lower tax rate like Mitt Romney? Why should I have to pay any tax at all?

The term "double taxation" was a term that corporations lobbied for in congress to have it included in the U.S. tax code to mislead and confuse common citizens (those who are not engaged in "free market" enterprise) to have it appear as though it was somehow an unfair form of tax on corporate entities.

And the largest corporations have also benefited greatly through crony capitalism, the exact opposite of a true "free market" system, of which the Tea Party claims they totally support.

The profits that are generated from a business that is "incorporated" and publicly traded on the stock market don't go directly into the shareholder's pockets at the end of ever year. They reside in the company's common treasury to be used to operate the business.

Corporate company capital (not personal capital) is used to acquire commodities and services necessary to run the business to churn a profit...or to acquire other companies in mergers and acquisitions. Sometimes profits may be used for research and development when they're not getting it for free from the taxpayers. The profits are taxed before executive pay and dividends are allocated to individuals for their personal use. Corporate capital is being taxed, not personal capital.

A portion of company profits might go into an executive "bonus pool" and/or be allocated for corporate executive's stock options (in lieu of, or in conjunction to, a base cash salary/wage for executive compensation). When they "cash out" financial instruments such as stock options, they pay a 15% tax for capital gains on their stock shares (taxed as personal capital/income).

Company profits also are used to expand operations (capital investment) and can receive tax credits. Company profits also are used to pay it's hourly or salaried employees, who are paid in regular payroll wages. Their employee's wages are taxed for federal income tax and FICA taxes - deducted on behalf of the IRS. And this is also exempt from corporate taxes.

Company profits from corporate income can be used to buy a corporate jet. Personal income that corporate executives earn from capital gains and dividends (acquired through stock options) can also be used to buy a personal private jet.

The corporation is then taxed after all deductions (and tax loopholes), and then pays an "effective" corporate tax rate to the IRS to help pay for all the infrastructure, the courts, and the security that they enjoy for the operation of their business in this country. Businesses don't survive, grow, and prosper in a vacuum -- they need us too.

In 1909 Congress levied a 1% corporate tax on net corporate incomes of more than $5,000.

During the 1950's this tax rate was over 50%, did we then live in a "socialist" country when a Republican and 4-Star General was our sitting president? Google Dwight. D. Eisenhower.

The current maximum tax rate for a U.S. corporation is 35%, but the average "effective" tax rate that's actually paid by the largest U.S. corporations on the Forbes Global 2000 over the past 25 years has averaged about 18% (in China it's 25%).

After corporate taxes, the CEOs are taxed at 15% on their vested stock options (which could be in the millions of dollars, and is their personal income), and they are only taxed at 35% if they receive salaried wages of over $375,000 year (minus their personal deductions). But the middle-class is taxed at 25% on their personal incomes.

You've heard of the AIG CEO getting paid $1 a year for a base salary, because this would have been taxed as "regular income", not at the lower rate as "capital gains" if he was being paid in stocks and earning dividends.

Corporations and LLCs (limited liability companies) are both separate legal entities (business structures) that also enjoy many certain protections under the law, and very important benefits. Most people form a legal business structure to safeguard their personal assets.

Incorporating, or forming a Limited Liability Company (LLC), allows them to conduct their business without worrying that they might lose their home, their car, or their personal savings -- because any business liability, such as a lawsuit for wrong-doing or negligence (Republicans want "tort reform" so corporations can't be sued at all, or only be held accountable with very low caps put in place on any liability).

Corporations and LLCs allow owners (CEOs, shareholders, etc) to separate and protect their personal assets. Owners have also enjoyed limited liability for business debts and obligations. This way bankruptcy and/or "bailouts" work out very well for them whenever they need to restructure burdensome debt or dissolve labor contracts. The CEOs (and shareholders, which are usually one and the same) are exempt from any personal financial risk at all. They have the best of both worlds...less personal risk while enjoying lower personal tax breaks.

Corporations and LLCs also have "perpetual existence" and continue to exist, even if ownership or management changes. (Although, the Republicans and the Supreme Court believe "corporations" are real people.) Sole proprietorships and partnerships usually just end if an owner dies or leaves the business.

Corporations and LLCs also have a lot of tax flexibility. Example: The United States allows a foreign tax credit by which taxes paid to foreign countries can be offset against U.S. tax liability attributable to foreign income.

Though profit and loss typically pass through* an LLC and get reported on the personal income tax returns of owners, an LLC can also elect to be taxed as a corporation. Likewise, a corporation can avoid the so-called  double taxation* of corporate profits and dividends by electing Subchapter S* tax status.

  • Deductions - Corporations and LLCs have deductible expenses. They may deduct normal business expenses, like salaries, before they allocate income to owners.
  • Pass-through taxation - Rather than tax the income of the entity, taxation is "passed through" to the individual shareholders in S Corporations (and LLCs). Income or losses are declared on their individual tax returns.
  • Double taxation - Double taxation refers to corporate and shareholder taxes. Corporations must pay taxes on their earnings. Individual shareholders must also pay taxes on any dividends they receive.
  • Stock options:
    • Incentive stock options (ISOs) - Pay for "performance" in which the employee is able to defer taxation until the shares bought with the option are sold. The company does not receive a tax deduction for this type of option.
    • Nonqualified stock options (NSOs) in which the employee must pay income tax on the 'spread' between the value of the stock and the amount paid for the option. The company may receive a tax deduction on the 'spread'.
  • Subchapter S tax - S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.

To qualify for S corporation status, the corporation must meet the following requirements:

  • Be a domestic corporation
  • Have only allowable shareholders
    • including individuals, certain trust, and estates and
    • may not include partnerships, corporations or non-resident alien shareholders
  • Have no more than 100 shareholders
  • Have one class of stock
  • Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

Small business entrepreneur vs. large corporate CEO

Should a CEO of a big oil company only have to pay a 15% tax rate on a $5 million salary, while the owner of a small business has to pay a 35% tax rate on a salary over $380,000? (And Social Security taxes are capped in each of those cases on their first $110,000 earned...whereas everybody else earning less than $110,000 a year pays Social Security taxes on 100% of their wages.)

A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation. Then the owners would pay either a regular income tax or a self-employment tax, based on the current tax brackets for gross income.

How many people do you know that own a mom-and-pop business are "free-market entrepreneurs", live in a mansion, fly to Washington D.C. in a private jet to receive a multi-billion government hand-out, and only have to pay a 15% tax rate on their personal income taxes?

All small business owners that I know pay the 35% tax rate.

I get bored with all those radical right-wing corporate sympathizers that whine and complain without ever presenting any facts. And besides...

...if a corporation no longer wants to pay corporate taxes, then they can just un-incorporate. It's as simple as that.

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  1. I forgot to add: In 1969 Republican President Richard Nixon raised the capital gains tax from 28 per cent to 49 per cent. Was he a "socialist" too?

    And when capital gains taxes are lower than corporate taxes, that just encourages businesses to pump their profits into the CEO's pockets, rather than hiring workers and reinvesting in our country.

  2. After John Kerry, Mitt Romney at 13.9 percent, paid the lowest tax rate of any recent presidential candidate.

    George W. Bush paid $3.8 million in taxes, or 20.55 percent.

    John Kerry's overall rate is so low -- lower than Romney's, in fact -- because his return is getting lumped together with that of his (wealthy) wife, Teresa Heinz, who had a lot of investment income. On his own, Kerry paid 22.9 percent in federal taxes in 2003 on his $395,338 salary, which included Senate income plus the sale of a 17th-century Dutch painting.

    The Obamas seemed to pay more in taxes than any candidate in recent memory. In 2006, Barack Obama's income was $991,296 and he paid $277,431 in taxes, or 27.9 percent.

    In 2006, John McCain had $358,414 in income and paid 33.8 percent of that in taxes.

  3. Read more about this at Jared Bernstein's post - "Just Passing Through"