ethical tax loopholes?

[Jamesqf]

Arguably, google should pay tax in Australia because google is generating revenue in Australia, from Australian citizens, using Australian infrastructure.

Nope.  Let's simplify things a bit, and say Google has all its servers in Silicon Valley.  Then Google is generating all its revenue in SV, because that is where the work is taking place.  All that's going to & from Australia is a stream of bytes, indistingishable (externally) from any other byte stream.

And indeed, there's really no sure way for Google to tell where its search queries are coming from.

[fodder69]

If capital gains were not taxed at a lower rate, how would investing ever be encouraged?

I have to speak to this, you do know that capital gains taxes are at a historic low, right? That they have been as high 29% even in the 90s. So the argument that a higher tax slows investment is a little overwrought. The returns are still higher investing with a higher CG tax rate than if you had stuffed it in your mattress.

[marty998]

Arguably, google should pay tax in Australia because google is generating revenue in Australia, from Australian citizens, using Australian infrastructure.

Nope.  Let's simplify things a bit, and say Google has all its servers in Silicon Valley.  Then Google is generating all its revenue in SV, because that is where the work is taking place.  All that's going to & from Australia is a stream of bytes, indistingishable (externally) from any other byte stream.

And indeed, there's really no sure way for Google to tell where its search queries are coming from.

But then why does it have staff in Australia? A business here that is deliberately set up to incur only costs and no revenues falls foul of numerous non-commercial loss rules.

Governments everywhere have transfer pricing rules to *try* to prevent this, which force MNC's to adopt TP rules such as cost+10%, value add or dividing up global revenue in proportion to costs. But there is a very wide open gate as to how this can be done.

Thus you have lots of cash strapped governments complaining profusely about erosion of their tax bases.

Oh and google knows exactly where search queries are coming from. Why do you think when I type google.com I get redirected to google.com.au and get a link to only return searches from Australia?

[Joel]

If capital gains were not taxed at a lower rate, how would investing ever be encouraged?

I have to speak to this, you do know that capital gains taxes are at a historic low, right? That they have been as high 29% even in the 90s. So the argument that a higher tax slows investment is a little overwrought. The returns are still higher investing with a higher CG tax rate than if you had stuffed it in your mattress.

I know that I would make more money investing than leaving my money under my mattress. But as a whole, the economy and it's people are more likely to invest if the capital gains rate is low. May or may not be right, but that's why it is low.

[Undecided]

Your general point is fine, but isn't responsive to the question about the relative rates on cap gains and ordinary income. Contributing to a tax deductible IRA, buying a house "to get" the mortgage interest deduction, etc., reflect possible choices that can be influenced by offering a tax advantage. The relationship on the rates between capital gains and ordinary income doesn't have that influence because (with the possible exception of carried interest) taxpayers can't substitute their labor for capital investing or vice versa.

It's not about either investing or working. If the tax rate for investments is the same as ordinary income, it is less appealing. Providing a low tax rate on capital gains provides an incentive for people to invest their money. It's simple really. The question is should I invest my money or not? If earnings are taxed at 15% instead of 35%, I would likely invest more. That's why it's setup that way.

That has nothing to do with the relationship of the capital gains rate being lower than the ordinary income rate, which is what I had responded to and asked about.

[marty998]

I have a problem with differential tax treatments, IMO tax acts should not make a distinction between capital gains and income. The logical conclusion is always that the economy will try to shift profits to whatever is taxed less, in your case capital, which is not entirely dissimilar to Australia.

Capital gains here are taxed at 50% of marginal tax rates if the asset disposed of has been held for more than 365 days.

Cost base inflation indexation was abolished a decade ago, but as a sop to all the people crying foul the government instituted a 50% discount.

For example let's say your $100,000 investment in 1987 has grown to $650,000 today. The nominal gain
is $550,000 but the argument is that a lot of it is inflation. So you used to be able to index the $100k up based on CPI numbers published by the tax office. Nowadays you cut the $550k in half and add $275k to your taxable income, and pay tax at the marginal rate.

A lot of money is spent on tax accountants by small businesses to keep profits within a business structure so when "retirement" comes an owner can dispose of the business and exit with a 50% CG tax concession PLUS a further 25% "small business retirement" concession i.e. 75% of the profit on disposal could be tax free if structured correctly.

Governments generally have a specific intention when they design legislation. But there are always unintended effects both with short term and long term consequences.

[Joel]

Undecided, I answered your question already.

See quoted post below:

davisgang answered it how I would.

The tax system is setup to encourage the masses to do things that the government wants them to do.

The government wants people to buy houses, i.e. mortgage interest deduction.

The government wants people to contribute to their retirement, i.e. 401ks, IRAs, retirement savings credits.

The government wants people to invest in businesses, i.e. qualified dividends and long term capital gains.

The government wants to make sure everyone pays their fair share, i.e. alternative minimum tax, income limits for IRA deductions, phaseouts for itemized deductions, and so forth.

Taxes are complicated, but it's all setup so that the government can help to push the masses to do what it wants them to do.

Your general point is fine, but isn't responsive to the question about the relative rates on cap gains and ordinary income. Contributing to a tax deductible IRA, buying a house "to get" the mortgage interest deduction, etc., reflect possible choices that can be influenced by offering a tax advantage. The relationship on the rates between capital gains and ordinary income doesn't have that influence because (with the possible exception of carried interest) taxpayers can't substitute their labor for capital investing or vice versa.

It's not about either investing or working. If the tax rate for investments is the same as ordinary income, it is less appealing. Providing a low tax rate on capital gains provides an incentive for people to invest their money. It's simple really. The question is should I invest my money or not? If earnings are taxed at 15% instead of 35%, I would likely invest more. That's why it's setup that way.

[Undecided]

Undecided, I answered your question already.

See quoted post below:

I saw that, but it's in no way responsive to my question. All you're saying is that (you assume) lower capital gains rates encourage greater investing, other things being equal. Great; that's a popular view, despite the challenge of finding compelling evidence. But I get that. The statement I asked about involved a claim that it was important that capital gains rates be lower than ordinary income rates. I'm still waiting for an explanation. Consider a scenario in which capital gains are taxed at 15% and income is ordinary taxed at 35%---why would investing be more attractive in that scenario than in a scenario in which capital gains are taxed at 15% and ordinary income is taxed at 15%?

[Joel]

Undecided, I answered your question already.

See quoted post below:

I saw that, but it's in no way responsive to my question. All you're saying is that (you assume) lower capital gains rates encourage greater investing, other things being equal. Great; that's a popular view, despite the challenge of finding compelling evidence. But I get that. The statement I asked about involved a claim that it was important that capital gains rates be lower than ordinary income rates. I'm still waiting for an explanation. Consider a scenario in which capital gains are taxed at 15% and income is ordinary taxed at 35%---why would investing be more attractive in that scenario than in a scenario in which capital gains are taxed at 15% and ordinary income is taxed at 15%?

That's not the point though. Your ordinary income tax rate is fixed. Let's say 35%. Under which scenario are you more likely to invest? When those earnings are taxed at 35% or at 15%? That's why the government allows for long term capital gains to be taxed at a lower rate than normal income.

[Undecided]

I saw that, but it's in no way responsive to my question. All you're saying is that (you assume) lower capital gains rates encourage greater investing, other things being equal. Great; that's a popular view, despite the challenge of finding compelling evidence. But I get that. The statement I asked about involved a claim that it was important that capital gains rates be lower than ordinary income rates. I'm still waiting for an explanation. Consider a scenario in which capital gains are taxed at 15% and income is ordinary taxed at 35%---why would investing be more attractive in that scenario than in a scenario in which capital gains are taxed at 15% and ordinary income is taxed at 15%?

That's not the point though. Your ordinary income tax rate is fixed. Let's say 35%. Under which scenario are you more likely to invest? When those earnings are taxed at 35% or at 15%? That's why the government allows for long term capital gains to be taxed at a lower rate than normal income.

I'm not sure how it's "not the point," given that it was your claim that it is important that the capital gains rate be lower than the ordinary income tax rate that prompted my initial question. If you're now saying that the relationship of the capital gains rate and the ordinary income rate is irrelevant, I couldn't agree more. But read the exchange that prompted my question; I've bolded certain text to help you see why I asked the question I did.

Personally, I'd like to see the Fair Tax enacted, but I know that is an impossibility.  Imagine a tax based on consumption, how Mustachian.

One of the main reasons the "rich" don't pay a high percentage rate is because much of their income is in capital gains, which are taxed at a lower rate than regular income.  Another one of those nasty loopholes!

If capital gains were not taxed at a lower rate, how would investing ever be encouraged?

Regarding your revised claim, that "low" capital gains taxes are important in encouraging investment, that's heavily disputed. See, e.g., http://www.washingtonpost.com/blogs/wonkblog/post/do-low-taxes-on-capital-gains-spur-growth-not-necessarily/2012/01/19/gIQAJZ4yAQ_blog.html

[Joel]

Would you be more likely to invest money if the earnings are taxed at a discounted rate (15%) or at your normal rate (35%)? In theory, you would expect people to invest more if you can save on taxes by investing. That is all that I was saying.

I was not arguing that the rate on investments should be that much lower than normal income, but I certainly think it should be lower.

I haven't done the research to determine what I think the exact rate should be. I was merely saying the tax code is written to get the citizens to do things that the government wants them to do. One of those things is to make investments.

[Undecided]

Would you be more likely to invest money if the earnings are taxed at a discounted rate (15%) or at your normal rate (35%)? In theory, you would expect people to invest more if you can save on taxes by investing. That is all that I was saying.

I was not arguing that the rate on investments should be that much lower than normal income, but I certainly think it should be lower.

I haven't done the research to determine what I think the exact rate should be. I was merely saying the tax code is written to get the citizens to do things that the government wants them to do. One of those things is to make investments.

Makes no sense. The relationship of the capital gains rate to the ordinary income rate should have no bearing on my decision to invest capital. Setting the capital gains rate to achieve the "purpose" you propose is largely independent of setting ordinary income rates. I'm done with that point.

As for your view of what tax rate manipulation is meant to encourage, I suppose that given the very high estate tax rate over the threshold, we have to assume the government is trying to discourage the wealthy from dying.

The capital gains rate is at least as much about the very wealthy getting the lowest rate that doesn't lead to revolt as it is about "encouraging" investment. There's far more a shortage of specific worthwhile investments than there is a shortage of generally willing capital.

[Joel]

I suppose the wealthy could invest their dollars in another country's investments and pay taxes there. You have to encourage investments and provide preferential tax treatment on investments, otherwise investments might go elsewhere.

I'm by no means rich. But the capital gains tax rate is something that is available to everyone, not just the rich. Of course, we can whine and moan about the rich being rich, but they are paying a huge share of their money in taxes as well.

[Undecided]

I suppose the wealthy could invest their dollars in another country's investments and pay taxes there. You have to encourage investments and provide preferential tax treatment on investments, otherwise investments might go elsewhere.

I'm by no means rich. But the capital gains tax rate is something that is available to everyone, not just the rich. Of course, we can whine and moan about the rich being rich, but they are paying a huge share of their money in taxes as well.

US residents are taxed on worldwide income, so that an investment is targeted abroad doesn't really matter (except to the extent that one also pays foreign taxes that may be credited against US taxes, or where there's a specific tax treaty in place). The fact that the capital gains rate applies equally to all is irrelevant to who its primary beneficiaries are---that is, the wealthy for whom it's a worthwhile piece of territory to defend. Why not a more progressive capital gains tax structure?

[Joel]

Could one wealthy person not move somewhere besides the U.S. and invest all of its money in investments there? Yes.

I'm not saying how the current tax system is setup is the best. But, the tax system is setup to encourage its citizens to do what the government wants them to do. That includes making investments.

[Undecided]

Could one wealthy person not move somewhere besides the U.S. and invest all of its money in investments there? Yes.

I'm not saying how the current tax system is setup is the best. But, the tax system is setup to encourage its citizens to do what the government wants them to do. That includes making investments.

Yes, if they acquired an other citizenship and gave up their US citizenship and paid an "exit" tax, they could do that.... From what I've read, that happens very rarely, but more often now, with US capital gains rates at a historic low.

You have a very optimistic view of what motivates our government's policies, I'll give you that. Like Sol said earlier, I'm surprised by how accepting this community is of current tax policy (generally, not saying everyone's ok with every detail).

[chasesfish]

 Yes, if they acquired an other citizenship and gave up their US citizenship and paid an "exit" tax, they could do that.... From what I've read, that happens very rarely, but more often now, with US capital gains rates at a historic low.

You have a very optimistic view of what motivates our government's policies, I'll give you that. Like Sol said earlier, I'm surprised by how accepting this community is of current tax policy (generally, not saying everyone's ok with every detail).
[/quote]

I would say most people's views on here are more agnostic towards government tax policy than accepting.  I am very libertarian and I used to get fired up about it, especially when Republicans had complete control for six years and only succeeded in making the system more progressive, removed massive numbers of people off the income tax rolls, and failed to control spending and making the system more complicated.  On tax policy, they proved to me that they're only a little less bad than the other side based on my beliefs.  At this point, I only generally want to get fired up over things in life that are controllable.

Regarding capital gains tax treatment and whether or not that's really a break for the investor depends on the asset class.  Its very favorable if you're a direct investor in real estate.  Its really not favorable if your investment is a domestic stock, which is already a C-Corp paying 35%-40% of its earnings out in taxes each year.  This creates gains in its book value (which is after-tax capital), a partial driver of stock price.  Then you turn around and pay a second tax when you sell your stock, who's value is a combination of book value and its multiple above book value.  I have the same issue with taxes on dividends, whose slightly less bad double taxation is the only nice hangover from the otherwise disastrous tax policies of the last 14 years.

Remember, corporations don't pay taxes.  Its the shareholder's capital that is being taxed.  Mr Buffet sometimes struggles with this, he says his tax rate is lower, which is true.  At the same time, he owns 15% of Berkshire Hathaway, which paid $6.9 billion in taxes in 2012.  His share of that is $1.03 billion.   

[fodder69]

Its really not favorable if your investment is a domestic stock, which is already a C-Corp paying 35%-40% of its earnings out in taxes each year.

The corporate tax rate is 35% but the effective tax rate is at 12.1% at this point. Some corporations pay a lot more than others and my guess would be BH is one that does not jump through the hoops to reduce its tax bill since Mr Buffet seems to want to be a good corporate citizen.

[chasesfish]

Its really not favorable if your investment is a domestic stock, which is already a C-Corp paying 35%-40% of its earnings out in taxes each year.

The corporate tax rate is 35% but the effective tax rate is at 12.1% at this point. Some corporations pay a lot more than others and my guess would be BH is one that does not jump through the hoops to reduce its tax bill since Mr Buffet seems to want to be a good corporate citizen.

Its actually just a function of the industries that Berkshire generally invests in.  Banks, Rail, Domestic Insurance, Domestic retailers, and Utilities all generally pay the US marginal rates because they're steadily profitably and don't have the international business in other jurisdictions without the higher corporate rates.   The number your quoting includes the all inclusive rate for multinationals
(think Tech, Oil, Beverage), which earn large amounts of income overseas that they don't bring home due to expropriation taxes.  This has nothing to do with BH and "hoops", all companies and individuals should pay the lowest amount of taxes legally required. 

The bigger issue issue at hand is having a tax system that's very different than other countries, which have much higher individual rates, an embedded consumption tax and lower corporate rates.   The US wants to be more progressive in its tax system than these other countries, allowing half the individuals in this country to be exempt from federal income tax.   Other countries claim to care about the middle class, then hammer them with a 20% VAT tax on top of everything else, drastically cutting into their social mobility.

The biggest example of this issue is Apple:  They sell a lot overseas where they have lower corporate taxes, then load up all their expenses in the US jurisdiction where they pay all the expensive programmers, developers, engineers, marketing, and corporate staff.  This makes the "domestic" corporation not very profitable and all the overseas subsidiaries very profitable.

Its a very tangled web built on sometimes good intentions, sometimes massive lobbying, and sometimes career lawyers with no sense of money or economics.

[CDP45]

No one wants to question what all these dollars are being used for? Are most assuming taxes are ethically spent?

[Poorman]

The unethical thing is employing accounting trickery to exploit a gray area in the law and then using high-powered lawyers to get it legitimized by the court.

But again, why is that the least bit unethical?

Well, call me old-fashioned but I believe paying the taxes that government intended you to pay is the ethical thing to do.  Looking for what you can get away with without getting into trouble, constitutes unethical behavior.

On a small scale, you could look at a real estate investor as an example.  There are a ton of gray areas even at this small level, but many RE investors choose to be "aggressive" with their taxes because they know, chances are, it won't trigger an audit.  If an investor deducts more expenses than they should and justifies it by saying "the law is unclear", then it's unethical.  Even if they hire the best tax lawyer in town to defend it in court and win, it's still unethical.  The reason is they acted out of self-interest rather than according to the intention of the tax code, swayed by the fact that they could probably get away with it.

For a large corporation, hiring a team of aggressive accountants and high-powered lawyers is the same thing on a larger scale because their purpose is to exploit the weaknesses in the tax law.

[Chuck]

Not a single fuck is given.

My only ethical obligation is to uphold my legal obligations. All else is subjective. If I have no legal obligation to pay xyz tax, then I will do the rational thing and not pay the tax.

[arebelspy]

My only ethical obligation is to uphold my legal obligations.

..really?  So if rape was legal, go nuts?

Can't say I agree there.

[Undecided]

My only ethical obligation is to uphold my legal obligations.

..really?  So if rape was legal, go nuts?

Can't say I agree there.

I don't think you even need to use that extreme an example. Engaging in the level of consumption and pollution causation inherent in a typical American middle-class lifestyle seems to be perceived by many here as unethical, but it's clearly totally legal. Does Chuck feel no obligation to the rest of the planet or the future to keep the consequences of his lifestyle in check, notwithstanding his lifestyle may be perfectly legal?

[arebelspy]

My only ethical obligation is to uphold my legal obligations.

..really?  So if rape was legal, go nuts?

Can't say I agree there.

I don't think you even need to use that extreme an example. Engaging in the level of consumption and pollution causation inherent in a typical American middle-class lifestyle seems to be perceived by many here as unethical, but it's clearly totally legal. Does Chuck feel no obligation to the rest of the planet or the future to keep the consequences of his lifestyle in check, notwithstanding his lifestyle may be perfectly legal?

I personally don't feel a strong obligation that way, so I wouldn't use that as an example.  I'm a Mustachian for practical reasons, not ethical ones.  I do feel an obligation not to rape people, however.

Either way though, the point remains the same: legality and ethics often overlap, but not absolutely so.

There are things that are legal but unethical, there are things that are ethical but illegal.  For most people.

I'm curious if Chuck really does feel though that "[his] only ethical obligation is to uphold [his] legal obligations," because that's a pretty extreme stance to take.

[marty998]

No disrespect but that rape comparison is ridiculous, and probably so too the global environment one.

Chucks comment is quite obviously on tax obligations. Far be it me to infer what Chuck's personal beliefs are on anything but it's pretty clear to me he intended to only talk about his ethical obligations with regards to tax, even if it doesn't literally come across that way.

[arebelspy]

No disrespect but that rape comparison is ridiculous, and probably so too the global environment one.

Chucks comment is quite obviously on tax obligations. Far be it me to infer what Chuck's personal beliefs are on anything but it's pretty clear to me he intended to only talk about his ethical obligations with regards to tax, even if it doesn't literally come across that way.

I disagree.  You seem to be reading into it your own personal philosophy.  His exact post was:

Not a single fuck is given.

My only ethical obligation is to uphold my legal obligations. All else is subjective. If I have no legal obligation to pay xyz tax, then I will do the rational thing and not pay the tax.

Read those two underlined sentences.

That, to me, reads as moral nihilism - nothing is unethical, things are just illegal.

How do you interpret that post within an alternate ethical framework?

[Jamesqf]

I don't think you even need to use that extreme an example. Engaging in the level of consumption and pollution causation inherent in a typical American middle-class lifestyle seems to be perceived by many here as unethical, but it's clearly totally legal.

Problem here is that you have a triad of motivations.  Is it legal?  Is it ethical?  And is it enjoyable?  So if rape, the consumerist lifestyle, or a number of other things were both legal (under laws that vary with time & place) and ethical (by my personal standards), I still might not do them.

[arebelspy]

Is it legal?  Is it ethical?  And is it enjoyable?  So if rape, the consumerist lifestyle, or a number of other things were both legal (under laws that vary with time & place) and ethical (by my personal standards), I still might not do them.

Good point.  I think owning an SUV is legal and ethical, but I wouldn't do it.

[Chuck]

My only ethical obligation is to uphold my legal obligations.

..really?  So if rape was legal, go nuts?

Can't say I agree there.

I was only speaking of finances. Assault, theft and slavery are all absolutely immoral.

If there is not a human victim of an action that could be described as enslavement, assault or theft, then it is fair game morally speaking.

I'm Objectivist, not Nihilist.

[foobar]

The assumption that the money has been taxed is often faulty. For example out of gates 70 billion, how much of it was ever taxes. Not much. It was (and is) microsoft stock with a cost basis of 0.

If you feel Somalia is a straw man, suggest places with lower taxes than the US with similiar levels of business development. There are not very many. You need infrastructure for business to grow and the debate comes on who should pay for it.

Personally I find it amazing how people get so upset about rolling back taxes (not even all the way) to where they were in the 1990s. The world didn't end then and I doubt it will this time. 

And yeah the estate tax loopholes are beyond annoying. If you live in a state that also has a tax, it gets insane. Some like NJ still have 675k limits so even "middle" class people end up have to pay lawyers a bunch of cash to avoid paying taxes.

I've heard the Somalia argument a lot.  But that is more than a little bit of a straw man.  To suggest that the only logical alternative to an over invasive/over spendy government  is a lawless anarchy is some really big all-or-nothing thinking.

Remember, too, that the estate tax from the original article is a tax on money that has (presumably) been earned legally and taxed already.  The fact that you're passing it along shouldn't necessitate a new round of taxation.

[rockstache]

...if a loophole exists it then by all means go for it.

Until the legislators close it then it is perfectly legal to take advantage of it. If people have a problem with that then they should vote for someone who will fix it.

Marty's comment in that threat made me think of the recent Bloomberg article about the tax loopholes that the wealthiest Americans use to shield their vast estates from the estate tax.  The summary:  they hire lawyers to rapidly churn assets through a series of trust funds, effectively transferring hundreds of millions of dollars to their heirs without paying Uncle Sam a single penny, escaping the usual 40% estate tax on large estates and depriving the US Treasury of something like a hundred billion dollars per generation.

I don't think it's unethical at all. I see it in the same way as if I hired a tax pro to get the largest refund I could, knowing that they will catch some things that I might not, just on a larger scale.