Re: Taxation Thought Experiment

[dlv@bwalk.dm.com (Dr.Dimitri Vulis KOTM)]

"Michael Froomkin - U.Miami School of Law" <froomkin@law.miami.edu> writes:

> I think there's some funny accounting here...

Creative accounting is the name of the game. Pay attention, IRS...

> On Tue, 12 Nov 1996, Joseph M. Reagle Jr., for whom I have considerable
> respect and who ordinarily posts very sensible things but appears to have
> lent his account to someone else appeared to have written:

Another one of John Gilmore's electronic forgeries and fabrications (EFF)?

> > o TAXES THOUGHT EXPERIMENT
> >
> >  1) I generate $100 of productivity for my company
>
> I will assume you measure productivity by "sales".

No, I think he understands that the cost of good sold and other costs are
taken out of "sales" to compute his contribution.

> Note also that it's debatable whether this $100 of sales is exactly "your"
> productivity.  In some sense it's really the company's, ie a joint product
> of your labor, their capital, and the labor of other people in the
> production/sales chain:

And of course you use the infrastructure paid for with your taxes and
other people's taxes (state and federal).

> Note also that the analysis that follows is not really affected by whether
> you meant "sales"  or "my contribution to the sale".
>
> >  2) Company is taxed %30, $70 left
>
> No.  Company is NOT taxed on gross sales. Corporate income tax does not
> work like sales tax.  With some minor exceptions relating to pass-through
> rules, foreign sales, and some complex timing issues, corporate tax is
> ordinarily levied on NET PROFITS.  Thus, the company first deducts all the
> "costs" it can identify, even if those were not necessarily involved in
> producing that (or any) sales.  E.g.  advertising, your salary, corporate
> junkets, rent, etc.  And lets not forget corporate tax sheltering too...

In Germany, a company can put practicially inlimited amounts of money into
tax-deductible reserves. E.g., you can estimate that once in ten years you'll
be unable to collect a debt of 10DEM. Every year you set aside 1DEM as a sort
of self-insurance reserve. The revenue authorites don't bother you if the
assumption of 10DEM every 10 years is overly pessimistic. Therefore German
corporations generally pay little income tax.

> >  3) Company pay shareholders and costs, $30 is left
>
> Again, no.  Shareholders come AFTER payroll and costs.

Dividends are NOT tax-deductible in the U.S. On the other hand, interest is.
Therefore it's sometimes more profitable for a company to raise money by
issuing bonds (debt) and paying tax-deducuble interest than by selling its
stock (equity) and paying non-decuctible dividentds to stockholders.

> >  5) I pay 40% in taxes, so $18 left
>
> I'm afraid you are conflating the MARGINAL rate (and when you consider
> federal, state and local taxes varies by state) with the AVERAGE rate.
> Here in FL. for example there is no state or local income tax.  With tax
> sheltering, mortgage deductions etc. no one pays 40% -- the middle class
> pay a lower average rate, the upper class pay a much lower average rate.

That varies with the locale - here I pay the federal income tax plus the New
York State income tax plus the New York City income tax. I once had a job offer
from IBM at $79K/year in Boca Raton (which I eventually didn't take anyway) -
it's a ridiculous salary in NYC, but a decent one in Florida.

---

<a href="mailto:dlv@bwalk.dm.com">Dr.Dimitri Vulis KOTM</a>
Brighton Beach Boardwalk BBS, Forest Hills, N.Y.: +1-718-261-2013, 14.4Kbps