ethical tax loopholes?

[sol]

...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.

When I first read that article, part of me was furious.  Marty's comments above seem to suggest he would be totally okay with this kind of thing, and in fact, I'm planning something not too terribly different by converting my 401k funds to my Roth IRA in chunks below the income tax threshhold, also effectively avoiding paying taxes.  The difference is that I'm dealing in relatively small sums and using the tax code as it applies to everyone, not hiring lobbyists to preserve a loophole that only benefits that ultrawealthy and exacerbates the income inequality that is otherwise at the center of all modern social problems.

What do you think?  Is it always ethical to utilize tax loopholes for personal gain, regardless of the harm done in doing so?  Would you take a $1000 tax credit for murdering somebody?

[Cheddar Stacker]

Not always ethical, but hard to pass up in most cases. I also plan to do what you suggested (the 401K to Roth thing, not the murder thing) but I do have a problem with someone paying a lawyer/lobbyist $1M to avoid paying $10M in taxes. However, I also disagree with the entire idea of the estate tax so it's hard for me to rip someone for trying to avoid it.

Like everything in life it's tough to find the line. Why is it right for me to look down on the guy collecting unemployment, disability, welfare, or food stamps if he truly needs them, while I intend to avoid paying tax after FIRE via the Roth ladder, just so I can retire earlier with a higher safety margin? Am I not turning my back on the most vulnerable in our society?

Why is it socially acceptable for a man to marry a woman, but until June 2013 it wasn't legal, and still isn't always socially acceptable for a man to marry a man? Why do I instantly "look down" upon a man with multiple wives before really thinking about why I do this? Maybe it is okay, and we as a society just haven't realized it yet.

A bit off topic there, but my point is that right and wrong, ethical vs. not ethical, is a very tough thing to call most of the time. In regards to the estate tax avoidance/evasion though, I don't like the advantage the ultra weathly have to manipulate the system, so I'm against the unfair advantage. I hope I anwered your question rather than creating two more.

[msilenus]

I share your anger, but I direct it at Congress for not changing the law to foreclose on those avoidance strategies.  What's a loophole and what's a tax break is entirely a question of how you want to load your diction.  Personally, I place the line between ethical and unethical at the place where avoidance turns into evasion.

In other words: http://www.ookoodook.com/store/media/t-shirts/DontHateTheCharacterLarge.jpg

Write your Congresscritter.  They love reading letters.  Deficit reduction is hot these days, and it sounds like empowering the IRS to claw back trust transfers for large estates would be an easy way to sock away an extra few billion a year.

[arebelspy]

Doesn't bother me personally.  Article doesn't make me angry or anything.

As far as ethically, it depends on what you view as someone's obligation to society.

If you think we have a strong obligation to give away 40% or whatever to society upon death, it's unethical.

If we don't have that obligation, it's not.

(An ethical obligation, I ought to note here, is not created or removed by a law.  So don't argue about their legal obligation, especially since they are doing it legally.)

Do we have that ethical obligation?  I'd wager most would feel the anger at the article, because it's "someone else" but if asked the question in a different context ("Do we have an ethical obligation to give away 40% of our wealth on death") many would say no.

[Spork]

I don't even have a tiny little bitty problem with it.  If anything here makes me mad it is that the system is so damned complicated in the first place.  It is hard to game a simple system... and it's hard for congress to sidestep what is actually being charged if there is a single simple tax and not 10 different taxes and 20 different fees.  (Simple is not necessarily "flat"... it can be as progressive or regressive as you please.)

The "loophole for the rich" is really just dependent on your definition of rich.  Poor people that are renting will say the same thing about the middle class getting artificially low interest rates on loans and mortgage/property tax deductions on houses.

Like ARS... I don't personally feel an obligation of some arbitrary percentage of my earnings -- often to be spent on things I don't agree with.

[TheDude]

I minimize my taxes and I expect everyone else too. I do expect you do play within the rules as the IRS and congress set forth.

I do think its unfortunate that our tax system is so complicated. I wish we could simplify the tax system I also think we should have an inheritance tax and not an estate tax. That would help encourage people to split their money upon death.

[Jamesqf]

Would you take a $1000 tax credit for murdering somebody?

Depends on who :-)

But to the original question, turn it around, and ask whether it's ethical for the government to try to take such large sums - far more than they could ever expect to receive in services - from people?

[sol]

I do expect you do play within the rules as the IRS and congress set forth.

That article points out that the IRS hates this loophole.   They challenged it in court and lost.  This is a process devised by crooked lawyers that we can't get rid of because the people it benefits have expensive lobbyists.  Congress passed an estate tax, that's the current law.  Then a clever lawyer found a loophole that let's rich people (and only rich people) not follow the law, and people here are defending that as if that's what Congress wanted.

I don't personally feel an obligation of some arbitrary percentage of my earnings -- often to be spent on things I don't agree with.

This line of reasoning could equally be applied to all forms of tax evasion.  Not supporting everything your government does not mean you get to withhold your taxes.

My point:  your personal feelings have no bearing on your tax obligation.  Your elected representatives have enacted tax laws that you agree to follow by virtue of participating in our society.  How you feel about it isn't relevant.

ask whether it's ethical for the government to try to take such large sums - far more than they could ever expect to receive in services - from people?

I've yet to grasp why people can logically hold this position, and several people here have espoused it.  Here's my take on it, paraphrased into an Obama sound bite on Fox News:  "you didn't build that." 

Suggesting that the government is "taking" from individuals more than it can provide in services ignores the fact that such vast sums of wealth are only possible because government provides the stable system in which such prosperity is possible.  If you don't like government intrusion into your life, please move to Somalia.  If you want to get filthy rich in America, accept the costs of supporting American society as part of the deal.  Think of it like paying protection money to the mob, if you like, but realize it's part of the cost of doing business here.

[Richard3]

Ethical loopholes are something of an oxymoron.

The point of a system of ethics is that you act in accordance with certain defined values whether or not there are opportunities not to. Ethics are internal rules, laws are external rules. If something is ethical and legal, it's fine, if something is unethical and illegal it's easy to avoid. The two problem areas are unethical but legal (everyone else is doing it) and ethical but illegal (doing the right thing is hard).

For example if a person has decided to have the value "I don't steal" then they don't steal, not even if their neighbour leaves the window open and has a really nice TV.

It gets more complicated in real life because the tax system in most countries is horrendously broken and rigged in favour of big business and the rich. So if a person has the value "I pay my fair amount of tax" then using all the loopholes they can may be ethical if they decide that 35% of their income is not a fair amount and they should only pay 10%.

But who decides what a loophole is? The word suggests an opportunity that requires some effort to exploit and possibly only exists by accident. I would suggest that if your strategy is deliberately written into the law (use a 401k to avoid paying tax on this year's income) then it's ethical and if it relies on exploiting the wording of a law or the interaction of multiple laws (like putting your house into a family trust and claiming it's a farm because you have a vegetable patch and nobody specified a minimum size for farms) then it's not ethical.

But ethics, as I said earlier, are internal rules. You set them yourself. You can not legislate ethics. So if you decide something is ethical, then it is, although it may mean that other people think you're a scumbag (avoiding this is now a question about other people's ethics) and or that you're breaking the law.

Sorry, that wound up being a cop-out answer.

[Spork]

I've yet to grasp why people can logically hold this position, and several people here have espoused it.  Here's my take on it, paraphrased into an Obama sound bite on Fox News:  "you didn't build that." 

Suggesting that the government is "taking" from individuals more than it can provide in services ignores the fact that such vast sums of wealth are only possible because government provides the stable system in which such prosperity is possible.  If you don't like government intrusion into your life, please move to Somalia.  If you want to get filthy rich in America, accept the costs of supporting American society as part of the deal.  Think of it like paying protection money to the mob, if you like, but realize it's part of the cost of doing business here.

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. 

[abhe8]

i don't see how following the current tax law as written is unethical?

that said, it is a very complete tax law. even more so for those who earn more money and from a variety of income streams. i begrudge them not that they pay good money to avail themselves of the professional opinions and services of attornies and cpas and the like.

i would also say that "rich" is quite the relative term. many would say those of you all here on MMM funneling your money into 401ks are part of those "hiding their money to prevent paying taxes on it."

but, like i said, i see nothing wrong or unethical with following the current tax code to the letter.

[chasesfish]

Yeah, I have a problem with it.  This is an entire industry of smart people generating economic waste.  The whole idea that someone should pay taxes a second time on after tax savings upon death is mortally and ethically wrong.  Then there are thousands of bankers and lawyers who earn fees to plan around something that shouldn't be law inn the first place.

[sol]

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.

The only strawman I see here is your assertion that we have an "over invasive" government.  Most of the world sees America as the land of the free.  Russia is invasive.  China is invasive.  America is still the figurative wild west when it comes to personal liberties.

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.

What?  The fact that you're passing it on is EXACTLY what necessitates taxation.  It's income passing to a new person, no different than when a business cuts you paycheck or Vanguard cuts you a dividend check.  Anytime an individual has income there is taxation.  Gambling winnings are taxed.  Large gifts are taxed.  Property transactions are taxed. 

This oft-repeated argument that the money "has already been taxed" shows a fundamental misunderstanding of how economics works.  Money is always moving around in circles.  If we only taxed each dollar once, none of us would ever be paying taxes ever again.  Taxes are designed to take a cut of all economic activity, and transferring ownership of assets counts as economic activity in every book imaginable.

Some times I think half of this board has never read an economic textbook, or has formed their opinions based solely on cable news, and it makes me a sad panda.

[Spork]

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.

The only strawman I see here is your assertion that we have an "over invasive" government.  Most of the world sees America as the land of the free.  Russia is invasive.  China is invasive.  America is still the figurative wild west when it comes to personal liberties.

There seriously are scales.  Things are still not all or nothing.  Is NSA recording of every electronic transaction overly invasive?  Sure.  Let's call that a 3 on a scale of 1-10.  Let's call China a 9.7.   

It still doesn't make us Somalia if we back off just a wee bit.

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.

What?  The fact that you're passing it on is EXACTLY what necessitates taxation.  It's income passing to a new person, no different than when a business cuts you paycheck or Vanguard cuts you a dividend check.  Anytime an individual has income there is taxation.  Gambling winnings are taxed.  Large gifts are taxed.  Property transactions are taxed. 

This oft-repeated argument that the money "has already been taxed" shows a fundamental misunderstanding of how economics works.  Money is always moving around in circles.  If we only taxed each dollar once, none of us would ever be paying taxes ever again.  Taxes are designed to take a cut of all economic activity, and transferring ownership of assets counts as economic activity in every book imaginable.

Some times I think half of this board has never read an economic textbook, or has formed their opinions based solely on cable news, and it makes me a sad panda.

I'll just ignore the insults because they don't help have a reasonable discussion.

So, I'm not a fan of taxation in general, though I'm rational enough to understand some amount will be required to provide even a minimal amount of services.  Maybe my hangup here is almost semantics.  In the case of gift taxes and estate taxes (because they're sort of the same thing) I guess I get hung up on the fact that the giver is the taxed entity.  Maybe that's dumb, but having the giver be taxed twice with the receiver taxed not-at-all seems bassackward.  (And yeah, it's likely the tax would be higher if taxed on the receiving end.)

[Jamesqf]

That article points out that the IRS hates this loophole.   They challenged it in court and lost.  This is a process devised by crooked lawyers that we can't get rid of because the people it benefits have expensive lobbyists.  Congress passed an estate tax, that's the current law.  Then a clever lawyer found a loophole that let's rich people (and only rich people) not follow the law, and people here are defending that as if that's what Congress wanted.

If it is a legal loophole, upheld by the courts, then the people using it are by definition following the law.  The lawyer(s) who found the loophole are no more crooked than any other lawyers.

And perhaps I'm belaboring the obvious here (though the point seems to have escaped you), but the fact that only rich people take advantage of the loophole is an unavoidable consequence of the fact that only rich people are subject to the estate tax.

This line of reasoning could equally be applied to all forms of tax evasion.  Not supporting everything your government does not mean you get to withhold your taxes.

But as others have pointed out, we are not asking what is legal, but what is ethical.  They are distinct sets, overlapping only by accident.

If you don't like government intrusion into your life, please move to Somalia.

Now why would I do that?  Just because the people within geographic area known as Somalia aren't playing the nation-state game, with one government supposedly running everything within the lines in the sand drawn by western colonial powers, doesn't mean it's an anarchist's utopia.  On the contrary: it has far more government than the US, interferring far more directly (and brutally) in people's lives. 

[Joel]

Didn't the limit for gifts being exempt from estate tax just get raised to a significantly higher number?

Since the tax system is so complex, people would be foolish to not follow it and save themselves as much money as possible.

[sol]

Since the tax system is so complex, people would be foolish to not follow it and save themselves as much money as possible.

Are there really no ethical concerns about exploiting tax law?  Would you take a tax deduction for drowning a puppy?  How about a special low tax rate, akin to LTCG, on money you stole from a wealthy widow with dementia by identity theft?

As James pointed out above, ethical activities and legal activities are not necessarily overlapping sets.  And under current law, there are more than a few things that I consider blatantly unethical.  I'm surprised that the apparently unanimous consent here is that you should do anything and everything you can get away with, regardless of whether or not it aligns with your beliefs about right and wrong. 

Methinks the forum has become so focused on penny pinching that many here have lost sight of the reasons they are saving money.  I thought we were saving money so that we could live lives in accordance with our beliefs and preferences.  What have you accomplished if your blind pursuit of dollars has blinded you to that goal?

[msilenus]

I don't think anyone would claim that a tax break can make a depraved act moral.  Forming a trust is not depraved.

[sol]

I don't think anyone would claim that a tax break can make a depraved act moral.  Forming a trust is not depraved.

How about hiring a team of lawyers to create and defend a tax loophole that only applies to the super wealthy?  Lobbying Congress to protect your tax haven?

And besides, I didn't ask if anyone thought that tax law could make immoral things legal, I asked if anyone here would refuse a technically legal tax break on moral grounds.  Because the feeling I'm getting is that everyone here is saying "take anything and everything you can get" and "if it's technically legal then it MUST be okay" and I feel like both of those statements are notably void of virtue.

[arebelspy]

Since the tax system is so complex, people would be foolish to not follow it and save themselves as much money as possible.

Are there really no ethical concerns about exploiting tax law?  Would you take a tax deduction for drowning a puppy?  How about a special low tax rate, akin to LTCG, on money you stole from a wealthy widow with dementia by identity theft?

As James pointed out above, ethical activities and legal activities are not necessarily overlapping sets.  And under current law, there are more than a few things that I consider blatantly unethical.  I'm surprised that the apparently unanimous consent here is that you should do anything and everything you can get away with, regardless of whether or not it aligns with your beliefs about right and wrong. 

Methinks the forum has become so focused on penny pinching that many here have lost sight of the reasons they are saving money.  I thought we were saving money so that we could live lives in accordance with our beliefs and preferences.  What have you accomplished if your blind pursuit of dollars has blinded you to that goal?

I don't think the discussion here leads to that conclusion at all.

I agree that ethical and legal activities don't overlap.  So if there was a tax break for, say, committing adultery (in the interest of increasing the population) or killing your newborn (in the interest of population control), I wouldn't do either. 

This example is neither.  It's a tax break for forming a trust.  That's not inherently unethical, IMO.

Avoiding taxes to some extent might or might not be; as I said earlier, it depends on what you view as your obligation to society.  Is it your obligation to pay as much as possible?  (Ought I drive a gas guzzler so I can contribute more via the gas tax?) As little as you can get away with?

That's the core question, no one, I believe, is arguing for doing immoral things to get tax breaks. The question of whether or not it's moral is still up in the air, and is dependent on what you owe to society in terms of paying taxes.

[arebelspy]

And besides, I didn't ask if anyone thought that tax law could make immoral things legal, I asked if anyone here would refuse a technically legal tax break on moral grounds.  Because the feeling I'm getting is that everyone here is saying "take anything and everything you can get" and "if it's technically legal then it MUST be okay" and I feel like both of those statements are notably void of virtue.

I would.  And yes, I agree with your final statement.

How about hiring a team of lawyers to create and defend a tax loophole that only applies to the super wealthy?  Lobbying Congress to protect your tax haven?

Special laws for select advantaged people is, in a democracy, immoral, IMO.  So I would not do this, personally.  The question is naturally raised though, of which tax breaks I do take advantage of (say, a child credit in the future) falls under that.  I agree, it is a mortal question one ought to reflect on.

[davisgang90]

For all the class warriors out there, cool your outrage, the richest 10% of Americans still pay 70% of the taxes, even with all the evil lawyers and loopholes.  The real benefit of the loopholes is more time for the rich to drown puppies.

http://money.cnn.com/2013/03/12/news/economy/rich-taxes/

[Joel]

I think the estate tax is unethical. Therefore, if someone tries to minimize the amount of estate tax that they are required to pay, I applaud them.

[brand new stash]

I think it is completely and totally ethical to use all legal means of shifting funds to reduce your tax liabilities, and honestly you would be dumb not to do so.  That it only makes financial sense over a certain level doesn't change the underlying ethics. 

The examples of "would you take a tax deduction for killing someone/drowning a puppy/etc" are not reasonable comparisons.  Shifting money between funds isn't an immoral or unethical act in itself...while killing someone is immoral and unethical in itself. 

[Eric]

For all the class warriors out there, cool your outrage, the richest 10% of Americans still pay 70% of the taxes, even with all the evil lawyers and loopholes.  The real benefit of the loopholes is more time for the rich to drown puppies.

http://money.cnn.com/2013/03/12/news/economy/rich-taxes/

Which doesn't mean much without stating what percent of the income they earn.  From your article:

When factoring in state and local taxes, the top 10% pay just under half the tab. And when calculating tax burden as a percent of income, the tax code is even less progressive. The top 10% paid an average of 30% of their income in local, state, and federal taxes in 2011, said McIntyre. That's not much different than the 25% percent paid by the middle class.

So our tax code is hardly progressive at all.  It's not functioning as designed, and one of the major reasons are the loopholes that are only accessible to the richest taxpayers.

[Jamesqf]

Are there really no ethical concerns about exploiting tax law?  Would you take a tax deduction for drowning a puppy?

If I were the sort of person who'd drown a puppy, sure.  The unethical act is the drowning, not getting a tax break.

[simonsez]

the richest 10% of Americans still pay 70% of the taxes, even with all the evil lawyers and loopholes.

Ok….  Is there some way of telling if this is what would be expected? less than? more than?  I'll give you that it is a figure that makes one reflect on things related to income/economics but I don't think it is relevant to this topic of the estate tax and ethical loopholes unless there is more context of the figure in a relative manner.

[Poorman]

Are there really no ethical concerns about exploiting tax law?  Would you take a tax deduction for drowning a puppy?

If I were the sort of person who'd drown a puppy, sure.  The unethical act is the drowning, not getting a tax break.

Taking a tax break by itself is not unethical.  If your morals allow you to kill animals (as many hunters and anglers do for sport), then why would they prevent you from taking a tax break for doing so?  (Oh puppy's are a protected class now are they?)

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.

[marty998]

Sol, I'm sorry for not responding earlier to your post at the top of the page. Sometimes I'm lucky and see them straight aways, other times by the time Sydney wakes up a thread has generally moved on so I usually miss opportunities to engage in a discussion.

I don't have an answer to what is a "fair share of tax". To me, tax is the price you pay for living in a civilised society. But again the trillion dollar question is, what is a fair share?

FWIW I pay the tax that I am legally obligated to pay, the cost of trying to minimise my tax with various structures would be more than any savings I would get. Ethics are a whole other kettle of fish (what is ethical is a question with 7 billion answers depending on who you talk to).

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.

Yes I agree. I am an accountant who works for a MNC. Our Company could engage in aggressive tax planning - but we don't because it is an unacceptable reputational risk. We pay what we are required to pay and our risk appetite for pushing the boundaries of tax law is very conservative.

There's a interesting discussion underway globally between governments as to how and where you tax companies that use high amounts of IP and intangibles to generate their profits (apple, google etc).

Google paid $75,000 tax in Australia last year. How? Each time I click an ad, revenue is paid to a company in Ireland. Is it legal? Yes. Is it fair? What is fair. Is it just? hmmm.

[davisgang90]

I get the distinct impression that if 10% of Americans paid 100% of taxes you'd still have people asking about their effective tax rate and if they really paid enough.

[Eric]

I get the distinct impression that if 10% of Americans paid 100% of taxes you'd still have people asking about their effective tax rate and if they really paid enough.

Why?  I don't see any posts like that.

[davisgang90]

I get the distinct impression that if 10% of Americans paid 100% of taxes you'd still have people asking about their effective tax rate and if they really paid enough.

Why?  I don't see any posts like that.

Try this one. 

Which doesn't mean much without stating what percent of the income they earn.

[Eric]

So you think that income tax shouldn't be based off of income?  That's going to be a pretty tough sell.

[davisgang90]

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!

[Eric]

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!

I agree that should be changed as well.  Maybe something like the 1st million is taxed at the capital gains rate.  Over 1 million is at the regular income rate.  That'd be pretty simple.

[Joel]

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?

[davisgang90]

Because if investments are taxed at a lower rate they have a higher realized rate of return making them more desirable...

[Joel]

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.

[CDP45]

Should we question what the taxed money is used for? Don't we have an ethical responsibility to deprive thieves of access to our property? Is it unethical to lock our doors? Should we not avoid dark alleys? 

[Jamesqf]

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?

Google paid $75,000 tax in Australia last year. How? Each time I click an ad, revenue is paid to a company in Ireland. Is it legal? Yes. Is it fair? What is fair. Is it just? hmmm.

But why should Google pay any tax in Australia?  Do they have offices/facilities there?

[sol]

But why should Google pay any tax in Australia?  Do they have offices/facilities there?

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

You pay tax where your money is made, not where it is spent.  Well okay, sometimes you pay tax where it is spent, too.

[marty998]

Google paid $75,000 tax in Australia last year. How? Each time I click an ad, revenue is paid to a company in Ireland. Is it legal? Yes. Is it fair? What is fair. Is it just? hmmm.

But why should Google pay any tax in Australia?  Do they have offices/facilities there?

Yep they do, as an example they have an office on prime real estate on the Sydney harbour foreshore. Their employees pay tax in Australia obviously, but the Company "fixes" it's taxable income by literally transferring several hundred million in "royalties" to various Dutch and Irish subsidiaries.

Apple has a much bigger footprint here, but does largely the same thing, sending royalties to low tax havens and generating deductions to bring their Aus taxable income down to nil or losses.

[chasesfish]

Sol - I've been seeing your posts for a while and I know you're smart, but I will argue with you that a generational transfer of assets is not income. 

Our current system exempts all transfers up to a certain dollar amount from any taxes, then levies a massive, flat tax on assets once the estate is above a certain dollar amount.  This has created a massive industry of lawyers and bankers making fees off estate planning and trusts.  There's a massive lobbying to keep the estate tax in its general form.

I am actually for a complete repeal of the estate tax, but remove any concept of step-up basis or tax-free transfer of gains.  The transfer of the asset is not income, but the difference in value when the asset is sold is income.  I don't think estate size should matter:  If someone's parents bought a house for $200,000, then its worth $500,000 at the time the estate sells it, why is that entire $300,000 of income exempt if its under a certain threashold?  If mom and dad sold it, they would owe the taxes (assuming its not a primary residence, another interesting tax break)  Its a revenue neutral to revenue positive solution with a lot more equality, but it doesn't make politicians feel all warm and fuzzy for "soaking the rich".  We were actually really close to this system when the estate tax was going to be "eliminated" one year.

On another note, please remember that tax breaks or tax rules only become "loopholes" when applied to a financially successful individual or corporation.  The 10% most successful individuals/families now pay 70% of income taxes in this country.(http://money.cnn.com/2013/03/12/news/economy/rich-taxes/)

I'm think I'm more on the libertarian side of this issue than the liberal side, so we may have to agree to disagree on this issue.

[COMO]

I think this an argument that has no end. Taxes at this point are complex enough that a line is difficult to draw. I struggled with this having our first child on the way in may. Adding a child will allow me a deduction to pay less in taxes however at the same time by draw on the goods provided by the government will increase. Is it unethical for me to give less yet ask for more.

[iris lily]

I think this an argument that has no end. Taxes at this point are complex enough that a line is difficult to draw. I struggled with this having our first child on the way in may. Adding a child will allow me a deduction to pay less in taxes however at the same time by draw on the goods provided by the government will increase. Is it unethical for me to give less yet ask for more.

Well, like someone said upthread, you are doing what the government wants you to do: producing citizens for tomorrow, citizens to pay your Social Security benefit.

[Joel]

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.

[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.