TurboTax Tim strikes back against the Dutch and Irish!

[ArmorPierce]

Krauser seems to miss that even though Ireland and Netherlands have lower corporate tax rates, their individual tax rates are significantly higher.

[Duckie]

As an example Obama is citing for what these laws are trying to prevent, 18,857 companies are based out of an office building called Ugland House, Gran Cayman, in the Cayman Isles. Actually inside the building is only one company: A law firm that helps companies base themselves in tax havens and avoid paying US taxes.

This is apparantly up 6,109 since 2007.

[Phantasee]

That's one thing I've never understood: there are so many easy ways to reduce the amount of corporate tax you have to pay, why does anyone actually care about the actual tax rate? I can take a friend out for dinner and a movie, and claim half of the bill as an expense (business lunch), I can claim all my automotive expenses (fuel, repairs, parts) as expenses, I can buy another vehicle and use that expense to offset my profits (and what else am I going to do with my profits? I'm the only shareholder, besides my mother and father). And that's just with a small family business. I'm quite sure big corporations have numerous other expenses and investment options open to them.

[D.Turtle]

Thats what this is all about.

Yes, the US has the 2nd highest corporate tax rate. But that is only what is written in the books. The effective tax rate is a lot lower because of the various loopholes that exist. These loopholes are important because of what Darth Wong wrote: You can declare large profits (and hence payout large dividends), and only pay very low taxes - this might not be good for the company (because you raise your short-term profits by not investing etc), but it is good for the stock prices of your company (and hence for the CEO and others who are "paid" bonuses through shares).

In end effect, this all comes back to the problem of how the stock market as is currently run: It provides incentives for short-term profits, and punishes long-term planning. The big car companies in the US, for example, fell prey to that very problem: They made a deal with the unions to provide large long-term benefits (guaranteed life-long health insurance, pensions and the like) in return for (among other things) not raising the wages so much. This meant that they had higher profits in the short-term, meaning higher stock prices, dividends and the like. In the long-term (as in, now) this is killing them.

Anything that lowers the benefits of these short-term profit maximization techniques (that are harmful in the long-term) is good.

[Darth Wong]

Krauser seems to miss that even though Ireland and Netherlands have lower corporate tax rates, their individual tax rates are significantly higher.

And don't forget the VAT, which is something like 20% on many goods and services.

[Master of Ossus]

That's one thing I've never understood: there are so many easy ways to reduce the amount of corporate tax you have to pay, why does anyone actually care about the actual tax rate?

Because it affects dividend payments.

I can take a friend out for dinner and a movie, and claim half of the bill as an expense (business lunch),

1. How is a broadly-held corporation going to do this with a substantial fraction of its profits? Shareholders can't do this unless they first have a declared dividend payment, and it would be extraordinarily impractical (and illegal) for directors or management to do so.
2. Actually, you can't unless there's a business purpose for dinner and a movie. That rules out benefiting shareholders. If management in a corporation tries to do this, they can provided that there is a bona fide business purpose for the lunch or dinner (and movie), but that eliminates the purpose to which you hold that. There are also, in any case, absolute limits on the size of the deduction you can claim for things like business lunches because they have a substantial personal aspect.

I can claim all my automotive expenses (fuel, repairs, parts) as expenses,

You cannot do this unless you use the automobile only for business purposes. And how is a broadly-held corporation going to do this? Even small corporations, if they tried to use such a scheme, would risk losing their limited liability benefits by doing so.

I can buy another vehicle and use that expense to offset my profits (and what else am I going to do with my profits? I'm the only shareholder, besides my mother and father).

Only if you first declare a dividend (in which case you pay taxes) or add the car as a corporate asset--which defeats the ability of a large corporation to use such a scheme.

And that's just with a small family business. I'm quite sure big corporations have numerous other expenses and investment options open to them.

You are clearly talking about a small S-Corporation. It is vastly more difficult for C-corporations to dodge corporate taxes, both because the rules are stricter with regards to them and because the government pays much closer attention to them. None of your schemes would work with broadly-held corporations, and many of them would be felonious if management or the directors of a larger corporation were to engage in this type of behavior.

[Master of Ossus]

Thats what this is all about.

Yes, the US has the 2nd highest corporate tax rate. But that is only what is written in the books. The effective tax rate is a lot lower because of the various loopholes that exist. These loopholes are important because of what Darth Wong wrote: You can declare large profits (and hence payout large dividends), and only pay very low taxes

How? Moreover, dividends are not the same as profits--dividends can exceed or be vastly smaller than profit/share.

- this might not be good for the company (because you raise your short-term profits by not investing etc), but it is good for the stock prices of your company (and hence for the CEO and others who are "paid" bonuses through shares).

What is good for the company is irrelevant: the purpose of a corporation is to benefit the shareholders, and raising the price of the stock is an effective way of doing so. I see nothing wrong with this.

[Darth Wong]

1. How is a broadly-held corporation going to do this with a substantial fraction of its profits?

Effortlessly. Simply give all of the employees a big year-end bonus to wipe out their profits and break even. This ain't rocket science.

There are a number of reasons why they won't do this, but you can't seriously tell me that it would be difficult to figure out how.

[aerius]

What is good for the company is irrelevant: the purpose of a corporation is to benefit the shareholders, and raising the price of the stock is an effective way of doing so. I see nothing wrong with this.

So WaMu paying shareholder dividends out of their capitalized interest account, and then continuing to pay out dividends when their cash account went to zero and their income went negative is a good thing? Cause all it did was help'em go bankrupt.

[ArmorPierce]

- this might not be good for the company (because you raise your short-term profits by not investing etc), but it is good for the stock prices of your company (and hence for the CEO and others who are "paid" bonuses through shares).

What is good for the company is irrelevant: the purpose of a corporation is to benefit the shareholders, and raising the price of the stock is an effective way of doing so. I see nothing wrong with this.

This is quite a ridiculous statement that you made here. A CEO doing something in order to temporarily inflate the price of the stocks so that he can get bonuses and cash in is options in no way benefits the shareholders unless they realize what is being done and takes advantage of the situation to sell their shares. For the long run, what is good for the company is what is good for the shareholders unless we only consider traders rather than investors in the company.

[J]

Yes, the US has the 2nd highest corporate tax rate. But that is only what is written in the books. The effective tax rate is a lot lower because of the various loopholes that exist. These loopholes are important because of what Darth Wong wrote: You can declare large profits (and hence payout large dividends), and only pay very low taxes

How? Moreover, dividends are not the same as profits--dividends can exceed or be vastly smaller than profit/share.

This is true, for instance several of the financials were still paying out large dividends despite suffering huge losses on their balance sheets.

What is good for the company is irrelevant: the purpose of a corporation is to benefit the shareholders, and raising the price of the stock is an effective way of doing so. I see nothing wrong with this.

This depends on the timeframe we're looking at. In the short term, the needs of the shareholders & company are often contradictory, and what benefits one will harm the other. For instance, playing balance sheet games to pump up share prices and pay dividends to the shareholders can destroy the company's cash account and medium to long term cashflow and viability, the shareholders benefit here & now but the company goes kaput a year or two down the road. The example of WaMu was brought up by my husband. In the long term the needs of both do align, for instance Exxon-Mobil holding a massive cash reserve and investing heavily in research & exploration which ensures the company will continue to be profitable and survive any economic condition short of a Mad Max apocalypse.

[Master of Ossus]

1. How is a broadly-held corporation going to do this with a substantial fraction of its profits?

Effortlessly. Simply give all of the employees a big year-end bonus to wipe out their profits and break even. This ain't rocket science.

There are a number of reasons why they won't do this, but you can't seriously tell me that it would be difficult to figure out how.

I don't think that works: the tax code for C-Corporations allows deductions for wages and salaries; not bonuses.

So WaMu paying shareholder dividends out of their capitalized interest account, and then continuing to pay out dividends when their cash account went to zero and their income went negative is a good thing? Cause all it did was help'em go bankrupt.

Touche. I didn't mention that once a corporation's equity drops to zero or below, the loyalty of management and the directors must shift to creditors.

This is quite a ridiculous statement that you made here. A CEO doing something in order to temporarily inflate the price of the stocks so that he can get bonuses and cash in is options in no way benefits the shareholders unless they realize what is being done and takes advantage of the situation to sell their shares. For the long run, what is good for the company is what is good for the shareholders unless we only consider traders rather than investors in the company.

But all investors then have the option of selling when the price rises. Moreover, what happens to the company is usually irrelevant for shareholders, too: many corporations have essentially dividended themselves out of existence because they recognized that their long-term prospects were poor and they wished to return their assets to the shareholders as that would be better for them (the company realizes that shareholders would receive higher returns in other investments and essentially ceased operations).

[ArmorPierce]

But all investors then have the option of selling when the price rises. Moreover, what happens to the company is usually irrelevant for shareholders, too: many corporations have essentially dividended themselves out of existence because they recognized that their long-term prospects were poor and they wished to return their assets to the shareholders as that would be better for them (the company realizes that shareholders would receive higher returns in other investments and essentially ceased operations).

Problem here is that if everyone realizes that the price is being intentionally inflated, it won't be inflated, or it will actually drop. Inflating stock prices relies on most people not realizing what's going on and they will not be able to take advantage of the situation and cash in. Even if they do sell their shares and reap the benefit, those that they sell it to are the new shareholders. Does management's responsibility of profits for the shareholders extend only to the original shareholders?

That said, nothing wrong with dividends, particularly if the company is in its maturity or decline phase and there isn't much place to reinvest the money to increase growth.

[D.Turtle]

How? Moreover, dividends are not the same as profits--dividends can exceed or be vastly smaller than profit/share.

Yeah, I didn't think that one through all that much.

But don't you think there is something wrong if a company pays out more in dividends than it made profit? Or pays out dividends if it is actually losing money?

What is good for the company is irrelevant: the purpose of a corporation is to benefit the shareholders, and raising the price of the stock is an effective way of doing so. I see nothing wrong with this.

Well, here we think quite differently, as I see everything wrong with this. The very idea of harming your company in order to make larger personal profits is an idea absolutely repugnant to me. After all, this sort of thinking is what got the world into the mess it is in now.

But then I guess this is part of the idea of neo-classical economics, that the best for a society is achieved through having everyone doing everything they can to get the most for themselves - an idea so absolutely, stunningly, obviously wrong, it is hard for me to understand how anyone can take it seriously. The only way I can try to understand people believing such utter bullshit is if they use it in order to comfort themselves that their obviously damaging greed is somehow doing good.

[Darth Wong]

1. How is a broadly-held corporation going to do this with a substantial fraction of its profits?

Effortlessly. Simply give all of the employees a big year-end bonus to wipe out their profits and break even. This ain't rocket science.

There are a number of reasons why they won't do this, but you can't seriously tell me that it would be difficult to figure out how.

I don't think that works: the tax code for C-Corporations allows deductions for wages and salaries; not bonuses.

Employee bonuses have special tax treatment? Every time I've ever gotten a bonus, it was simply paid as salary, albeit an unusually large paycheque for that month. In every way, it was treated identically to any other kind of salary.

Perhaps you're talking about executive bonuses, which are often apportioned out in creative ways to help the CEO avoid the kind of taxes that the little people pay. To which I would point out that I was not talking about those kinds of bonuses.

[Master of Ossus]

Yeah, I didn't think that one through all that much.

But don't you think there is something wrong if a company pays out more in dividends than it made profit? Or pays out dividends if it is actually losing money?

It depends on the circumstances, but it's often precisely the right thing to do. It's an underused management tool, IMO. What would you have a company do once it's clear that shareholders could receive higher returns from outside investments? Would you refuse to pay dividends because the company had lost money? That's precisely the original problem! If a company has no prospects of regaining profitability it should certainly pay dividends to return money to the shareholders (taking into account tax law, of course).

Well, here we think quite differently, as I see everything wrong with this. The very idea of harming your company in order to make larger personal profits is an idea absolutely repugnant to me. After all, this sort of thinking is what got the world into the mess it is in now.

Evidence?

But then I guess this is part of the idea of neo-classical economics, that the best for a society is achieved through having everyone doing everything they can to get the most for themselves - an idea so absolutely, stunningly, obviously wrong, it is hard for me to understand how anyone can take it seriously. The only way I can try to understand people believing such utter bullshit is if they use it in order to comfort themselves that their obviously damaging greed is somehow doing good.

You're simply strawmanning, at this point. The lesson of neoclassical economics is to align the incentives of agents with those of their principals to achieve efficient results.

[Master of Ossus]

Employee bonuses have special tax treatment? Every time I've ever gotten a bonus, it was simply paid as salary, albeit an unusually large paycheque for that month. In every way, it was treated identically to any other kind of salary.

I'm not sure: the tax code only allows a deduction for "wages and salaries," and a bonus isn't typically referred to as a "salary."

Perhaps you're talking about executive bonuses, which are often apportioned out in creative ways to help the CEO avoid the kind of taxes that the little people pay. To which I would point out that I was not talking about those kinds of bonuses.

Well, what about my dad, who used to get the same "performance shares" as top-management at AT&T (albeit not anywhere near as many). In what sense were those part of his wages?

[Darth Wong]

Employee bonuses have special tax treatment? Every time I've ever gotten a bonus, it was simply paid as salary, albeit an unusually large paycheque for that month. In every way, it was treated identically to any other kind of salary.

I'm not sure: the tax code only allows a deduction for "wages and salaries," and a bonus isn't typically referred to as a "salary."

Why not, if it's paid from payroll?

Perhaps you're talking about executive bonuses, which are often apportioned out in creative ways to help the CEO avoid the kind of taxes that the little people pay. To which I would point out that I was not talking about those kinds of bonuses.

Well, what about my dad, who used to get the same "performance shares" as top-management at AT&T (albeit not anywhere near as many). In what sense were those part of his wages?

Since when are bonuses always paid in the form of shares? Most bonuses are simply paid as dollars and cents, ie- "a $700 bonus will be paid to all employees this Christmas". And we're talking about profit-reducing options for corporations, remember? Obviously, if they want to get rid of $X of profit, they would pay it out as money, not shares.

[Master of Ossus]

Why not, if it's paid from payroll?

Because a wage is defined as an hourly rate at which a worker is paid for doing a particular job, and a salary is an annual rate that the employee negotiates with the company. Neither aligns well with a bonus.

Since when are bonuses always paid in the form of shares? Most bonuses are simply paid as dollars and cents, ie- "a $700 bonus will be paid to all employees this Christmas". And we're talking about profit-reducing options for corporations, remember? Obviously, if they want to get rid of $X of profit, they would pay it out as money, not shares.

A performance share isn't stock: it's a statement that you as an employee are entitled to a certain percentage of the total company's net profits at some time. It is not similar to stock in that it's value is explicitly tied with the profits of the company and in that it does not entitle the employee to an equity stake in the company.

[D.Turtle]

It depends on the circumstances, but it's often precisely the right thing to do. It's an underused management tool, IMO. What would you have a company do once it's clear that shareholders could receive higher returns from outside investments? Would you refuse to pay dividends because the company had lost money? That's precisely the original problem! If a company has no prospects of regaining profitability it should certainly pay dividends to return money to the shareholders (taking into account tax law, of course).

Well, its obvious that I see dividends quite differently from you. I see dividends as something that a company pays out when it has grown pretty much as far as it can (or wants) to get. Up until that point, the company is better of if it reinvests the profits they have into themselves in order to grow the company etc. Once that is no longer necessary, it can start paying out dividends to its stockholders, because they will get more value from that than by the company investing the money.

Well, here we think quite differently, as I see everything wrong with this. The very idea of harming your company in order to make larger personal profits is an idea absolutely repugnant to me. After all, this sort of thinking is what got the world into the mess it is in now.

Evidence?

The entire financial meltdown? You know, investment bankers making risky investments, because they would be paid huge bonuses depending only on the short term profits? Ignoring that sooner or later those risky investments would go kabloom, because at that point they would have made so much money they couldn't care less?

In the Spiegel (German news magazine), they had an article about the Deutsche Bank and their practices: The investment bankers got a salary of 100 thousand a year. In addition, they would receive 50% of any and all profits they made for the bank as a bonus. So, if they make an extremely risky investment, and they make 10 million in profits, they would receive more in bonuses than they would otherwise make in their entire lifetime. If they do not make a profit, they would be fired. The Deutsche Bank said they had to do it this way, because everybody else was doing it that way and they needed to be competitive. Looking at the baikouts now needed by all those banks, can you honestly say that these practices weren't damaging - not only for the company, but for the entire world?

You're simply strawmanning, at this point. The lesson of neoclassical economics is to align the incentives of agents with those of their principals to achieve efficient results.

What I described above (in this post) is what resulted when the lessons of neo-classical economics were implemented without restraint in the financial market. I think the results speak for themselves.

[Darth Holbytlan]

Why not, if it's paid from payroll?

Because a wage is defined as an hourly rate at which a worker is paid for doing a particular job, and a salary is an annual rate that the employee negotiates with the company. Neither aligns well with a bonus.

You know, you could just look this stuff up instead of pontificating...

Bonuses

You can generally deduct a bonus paid to an employee if you intended the bonus as additional pay for services, not as a gift, and the services were performed. However, the total bonuses, salaries, and other pay must be reasonable for the services performed. If the bonus is paid in property, see Property, later.

...

Property

If you transfer property (including your company's stock) to an employee as payment for services, you can generally deduct it as wages. The amount you can deduct is the property's fair market value on the date of the transfer less any amount the employee paid for the property.

...

So, yes, bonuses count, whether delivered as pay, stock, or anything else. If there is any extra limit on employee compensation for C-corps, I can't find any evidence of it.

[Master of Ossus]

So, yes, bonuses count, whether delivered as pay, stock, or anything else. If there is any extra limit on employee compensation for C-corps, I can't find any evidence of it.

So, DW's scheme wouldn't work because the bonuses he proposes are not commensurate with the services they rendered.

[Edi]

So, yes, bonuses count, whether delivered as pay, stock, or anything else. If there is any extra limit on employee compensation for C-corps, I can't find any evidence of it.

So, DW's scheme wouldn't work because the bonuses he proposes are not commensurate with the services they rendered.

You're assuming things here. If the businesses have latitude in determining what is and isn't commensurate due to "standard industry practices" or whatever, they can set them pretty much as they like if regulation is lax. And we all know that the regulation of corporate America has been for the past ten years rather ridiculously lax.

[Darth Wong]

So, yes, bonuses count, whether delivered as pay, stock, or anything else. If there is any extra limit on employee compensation for C-corps, I can't find any evidence of it.

So, DW's scheme wouldn't work because the bonuses he proposes are not commensurate with the services they rendered.

The employees actually do all of the work of the company. Precisely how would a distribution of profit as extra salary among the entire work force be something other than commensurate compensation for their work?

[Master of Ossus]

Well, its obvious that I see dividends quite differently from you. I see dividends as something that a company pays out when it has grown pretty much as far as it can (or wants) to get. Up until that point, the company is better of if it reinvests the profits they have into themselves in order to grow the company etc. Once that is no longer necessary, it can start paying out dividends to its stockholders, because they will get more value from that than by the company investing the money.

While your formulation is extremely crude, it still applies to the scenario that I provided for you: if the company isn't growing anymore, but is nonetheless suffering losses, why can't they pay out a dividend at that point?

Evidence?

The entire financial meltdown? You know, investment bankers making risky investments, because they would be paid huge bonuses depending only on the short term profits? Ignoring that sooner or later those risky investments would go kabloom, because at that point they would have made so much money they couldn't care less?

Can you actually provide evidence that they made these investments because they were paid huge bonuses depending only on short-term profits? Even the shareholders who sued (e.g.,) CitiBank attributed it not to a personal profit motive but a misjudgment of the non-diversifiable risk involved in certain securities.

In the Spiegel (German news magazine), they had an article about the Deutsche Bank and their practices: The investment bankers got a salary of 100 thousand a year. In addition, they would receive 50% of any and all profits they made for the bank as a bonus. So, if they make an extremely risky investment, and they make 10 million in profits, they would receive more in bonuses than they would otherwise make in their entire lifetime. If they do not make a profit, they would be fired. The Deutsche Bank said they had to do it this way, because everybody else was doing it that way and they needed to be competitive. Looking at the baikouts now needed by all those banks, can you honestly say that these practices weren't damaging - not only for the company, but for the entire world?

I don't see that at all in the various American investment banking firms: they're almost always paid largely in stock options (which are, of course, completely worthless now), given a reasonably substantial sum in stock (again, completely worthless), and given some bonuses tied to their own individual performance. Indeed, the contract structure you describe sounds like an American investment bank circa 1980 when there was a big uproar about how broker-dealers and investment advisors were paid.

What I described above (in this post) is what resulted when the lessons of neo-classical economics were implemented without restraint in the financial market. I think the results speak for themselves.

I think you're simply incapable of going through anything like a reasoned investigation of the subject because you have no actual interest in understanding things on anything beyond a superficial level.