Government ownership as alternative to corporate income tax

[Aimless]

What consequences could we expect if a country removed corporate income tax (for companies that have employees and owners in that country) in exchange for 5% of preferred stock in all companies? Would that country become more or less interesting for businesses? Would it have a better or worse climate for innovation? Would it successfully capture sufficient wealth? Would the incentives for all parties involved be good or bad? Would tax lawyers and accountants be dealt a crushing blow? In which ways would the system be abused or sabotaged?

Income tax for individuals would remain and may be adjusted as needed. VAT, sales tax, pigouvian taxes, etc would all remain if necessary, and adjusted as required. The government's shares would form a huge passively managed fund that could be used eg. as collateral, for pensions, etc.

[RandBlade]

Implausible and impossible to create. Corporation Tax doesn't just apply to publicly traded companies but also wholy owned limited companies, including those run by sole traders like plumbers and electricians. Will the government just seize that 5% of capital invested (in which case why invest) or would the government invest its own capital at a 95%:5% ratio which could be easily abused by small companies going bust?

Furthermore the numbers simply don't work. Corporation Tax in the UK for small companies is 20% of all profits which is one of the lowest of major western nations. 5% of all stock would mean the only income is 5% of all dividends (which is a fraction of that which come out of after-tax profits) so it simply doesn't work. To replace income from Corporation Tax with income from Dividends the proportion would need to be MORE than the tax rate. Under the law it is illegal to give dividends out of anything other than untaxed profits (a company that has made a loss can't give dividends) and since companies retain profits to re-invest the percentage of dividends is capped and almost certainly lower than the percentage of profits. Yes the government will be gaining capital by 5% of those retained earnings but since it can't sell that capital it can't really use it.

[Aimless]

Implausible and impossible to create. Corporation Tax doesn't just apply to publicly traded companies but also wholy owned limited companies, including those run by sole traders like plumbers and electricians. Will the government just seize that 5% of capital invested (in which case why invest) or would the government invest its own capital at a 95%:5% ratio which could be easily abused by small companies going bust?

Though I mentioned stocks as with publicly traded companies, there's no reason why a similar level of ownership could not be possible with other kinds of companies, eg. LLC:s. However, to keep things simple, we can say that this would apply only to companies with publicly traded stocks, and everyone else would continue to follow the present rules wrt corporate income tax.

Re. the "why invest?" question, the same question can be asked by anyone who has to pay a 20% corporate income tax. If the government will take 20% of your profits, why invest anything with the intention of making profits? If this scheme would, as you suggest, result in lower income for the govt. and consequently lead to greater wealth for private investors, then this should be more lucrative than paying a 20% tax on corporate income.

I don't know what things look like in the UK, but, in the US at least, there seems to be a significant discrepancy between statutory and real corporate income tax. Taxation of corporate income seems to be a great way to encourage the development of creative tax-avoidance schemes, such as the ones used by a number of large multinational corporations who've become very good at not paying much in the way of corporate income tax in the UK. This method would be one way for the government to enjoy some of the fruits of tax-avoidance as well as of greater productivity.

Furthermore the numbers simply don't work. Corporation Tax in the UK for small companies is 20% of all profits which is one of the lowest of major western nations. 5% of all stock would mean the only income is 5% of all dividends (which is a fraction of that which come out of after-tax profits) so it simply doesn't work. To replace income from Corporation Tax with income from Dividends the proportion would need to be MORE than the tax rate. Under the law it is illegal to give dividends out of anything other than untaxed profits (a company that has made a loss can't give dividends) and since companies retain profits to re-invest the percentage of dividends is capped and almost certainly lower than the percentage of profits. Yes the government will be gaining capital by 5% of those retained earnings but since it can't sell that capital it can't really use it.

Corporate income tax accounts for less than 10% of total tax revenues in the UK as it is, and any loss of income from that source could (if necessary) be compensated for by higher taxation elsewhere.

The key question, I believe, is whether or not companies would be okay with handing over a 5% stake to the government in return for not having to pay any taxes on corporate income (assuming they pay much in the way of income tax at all). If so, then we can discuss possible benefits and disadvantages to the government or to society, eg. effects on willingness to invest/reinvest, attracting foreign companies, freeing up wealth for consumption, etc, all as a possible result of increased and improved economic activity. If companies would not be willing to make such a deal, or if this would have a negative impact on economic activity, then obviously the government's wishes would be uninteresting, not least because implementing such a change would amount to biting the hand that feeds you. Assuming it's feeding you at all, that is

[RandBlade]

Having two systems would make a complicated system even more complicated. The idea that publicly traded and limited companies would have entirely different systems is a byzantine nightmare. No, that's silly it either needs to work as your system or not. So to address your point no it completely wouldn't work without destroying the entire tax system. Its far more complicated than you're giving it credit for. I'm going to tackle this from a UK perspective as I am familiar with UK tax laws. But most of these points would go over to other nations too I expect.

Corporation Tax is Income Tax by another name, it is integrated with Personal Income Tax. Yes you pay a 20% tax on profits (for small companies), for low incomes the income tax is 20%. If you are on the regular tax threshold and are paid a dividend (which is paid out of post-tax corporate income) then no income tax is payable on those dividends. None at all. This is because there is nominally a tax due, but the government gives a tax credit back for the corporation tax already paid and therefore the tax paid as corporation tax paid for your income tax due. For higher income rates there are differing levels of income tax on wages, for higher-rate dividends there is a tax on them too but not as high as higher-rate income tax because the Corporation Tax has already been paid. This means that if a sole trader works as an electrician and takes the money as wages he pays 20% basic rate tax, if he forms an electrical company he pays 20% corporation tax on profits which he can then withdraw as dividends with no income tax. If he invests in a FTSE 100 company he pays tax on his share of the profits (28% from memory) but no income tax. Its essentially the same thing.

You can invest because you're seeking an income, and only pay corporation tax in the same way as you pay income tax - on profit only. If you invest and make no profit, you've made no income and so no tax is due. If you make a loss, no tax is due.

Many nascent companies make a loss for their first few years of trading as they spend on investing and marketing before they become established. The government doesn't tax these companies on profits as none exists (note other taxes are applicable eg on land, sales, payroll etc). Only once the company is healthy does the government start taxing its income. You can invest without being put off by income tax as income tax is essentially inevitable and so you are being treated same as everyone else and only pay it if it can be afforded.

Your alternative would have 5% of equity not of income being seized up front. You are immediately penalised the moment you invest.

As for Corporation Tax being less than 10%, that doesn't make it insignificant that is billions we are talking about. Furthermore it is not in isolation, it is part and parcel of the whole income tax system.

This doesn't work in any way as a system.

[Loki]

The key question here is what exactly is the benefit of this arrangement? I can think of several pretty significant disadvantages, but absolutely nothing positive. Or do you just want a quasi-communist system where the government gets a say in where all capital is invested?

[Khendraja'aro]

I was replying to that one, Loki:

[...]I can think of several pretty significant disadvantages, but absolutely nothing positive.[...]

In my books, such absolute statements are usually disproven by a single instance of counter-evidence. I'm also not sure about your use of the past tense.

[Aimless]

In my books, such absolute statements are usually disproven by a single instance of counter-evidence. I'm also not sure about your use of the past tense.

It is an absolute statement, but it is a statement about the overall situation (as he expects it to be) and, as such, a single positive example does not suffice to counter it.

[Khendraja'aro]

It is an absolute statement, but it is a statement about the overall situation (as he expects it to be) and, as such, a single positive example does not suffice to counter it.

Well, he didn't exactly provide any substantial evidence which strengthens his arguments either, so currently it's a load of hot air.

[Enoch the Red]

Well, he didn't exactly provide any substantial evidence which strengthens his arguments either, so currently it's a load of hot air.

Isn't the onus on the person making the positive assertion to provide evidence substantiating their claim? Loki's argument is rooted in skepticism, not hot air.

[Aimless]

The key question here is what exactly is the benefit of this arrangement? I can think of several pretty significant disadvantages, but absolutely nothing positive. Or do you just want a quasi-communist system where the government gets a say in where all capital is invested?

Don't be ridiculous. Not only would the govt. have no say in "where capital is invested", it would not realistically be able to involve itself in the affairs of every single company in the way an individual investor might. The govt's involvement would be passive rather than being that of an active private investor. The success of the Norwegian (and other) oil funds notwithstanding, I don't think it's a good idea for the government to invest actively in the market.

What I was thinking was that these (violently confiscated ) assets would be held in a large state-owned exchange-traded fund of which the state could sell shares to the public and, of course, take a regular income tax from any profitable trades between individuals in those shares. There are many examples of different state-owned funds (not of this type) and similar assets. However, this aspect of my idea would, I think, run into significant problems and be an entirely different kind of beast from other state-owned funds.

What I'm wondering is if this might be a feasible and attractive alternative to taxation for both the govt. and for businesses. Could there be any advantage, for a business, in giving the govt. a small stake in the business in exchange for never having to pay any tax on corporate income?

As long as the business is not profitable, or operates at a loss, the government's stake in that business isn't worth anything more than a promise (except perhaps 5% of whatever you might get by liquidating all its assets, but even that might amount to essentially nothing after debts etc have been paid). Is that a significant penalty or burden, considering the possibility of untaxed corporate profits for all time?

For the government, this would be a way to have a finger in all pies with a little less effort and perhaps a little more success.

Re. tax code complexity, I am not sure I see how this would constitute a significant increase in complexity from the PoV of businesses. Different forms of businesses are, in many countries (including the US) already treated as different tax entities, each with its advantages and disadvantages, which is something that influences--to some extent--what form of business you choose to create. Businesses that have more than one owner, eg. in the form of partners or shareholders, already have to deal with complexities in the tax code. Sole traders pay taxes as individuals.

From the PoV of the state, however, this may or may not be significantly more complex. One advantage would be that the state could simply disregard all the tax-issues that involve corporate income, eg. trying to deduce taxable income after deductions etc. One disadvantage may be that it'd have to keep track of hundreds of thousands of companies. Of course, it already has to do that

I can think of some ways in which this could be abused, but, in most cases, anyone who would try to game the system for profit would probably have to pay a tax on those profits.

[Khendraja'aro]

For something positive, the percentage would need to be large enough to gain a blocking minority. Like Lower Saxony does with VW (which owns 20.2% of the stock).

[Loki]

Because we want the government to have the ability to block business decisions? Because it knows better than the actual owners of the company? And of course the politicians wouldn't make decisions based on political considerations...

[Khendraja'aro]

Well, we do indeed have this economical system called "social capitalism", y'know? I thought you of all people would have known about that particularity of Germany's economy?

And if I consider some of the epic failures of your lauded "owners" of companies, then I'm not quite sure where you get your confidence from that this is such a bad idea in all cases. Not to mention that your goverment already blocks business decisions.

[RandBlade]

I have zero concerns with owners of companies failing. You put in the investment, you take the risk, you take responsibility.

[Khendraja'aro]

Four words: "too big to fail"

[RandBlade]

Four words: "too big to fail"

One word: Bollocks.

Companies can fail, any company should be allowed to fail.

[Khendraja'aro]

One word: Bollocks.

Companies can fail, any company should be allowed to fail.

Okay, so you have this bank which, if it did indeed fail, would also drag the whole country with it into the abyss. What do you do to prevent such an outcome?

[RandBlade]

Okay, so you have this bank which, if it did indeed fail, would also drag the whole country with it into the abyss. What do you do to prevent such an outcome?

No bank would drag the whole country into the abyss.

Let the bank fail, let the bank shareholders lose every penny they have invested. Take over in an emergency fashion the core required functions and honour guarantees.

[Loki]

Except with a controlling stake, the government can block ALL decisions. Want to increase prices? Nope. Want to cut jobs? Nope. Want to hire an unpopular CEO? Nope. Want to move production abroad? Nope. Want to take a major risk? Nope. Great recipe for success.

[Khendraja'aro]

I don't know. Is VW really that unsuccessful a company?

[Loki]

Is that your only come back? That it worked for one company? If the government is better than private actors in making business decisions, why not just have the government take control of the means of production?

[Loki]

The bank wouldn't get so close to the abyss if it wasn't confident of being bailed out.

[Flixy]

The bank wouldn't get so close to the abyss if it wasn't confident of being bailed out.

Well, if you set aside incompetence, ignorance, and short-term thinking

[Khendraja'aro]

The bank wouldn't get so close to the abyss if it wasn't confident of being bailed out.

Well, that's kind of a non-answer.

Consider this scenario: A Mafia boss holds a gun to the head of a child after being confronted by the police in a public restaurant.

Your answer: Well, he did that because he's confident that he'll be allowed to escape due to his hostage.

My original question: Why did they confront him in a public restaurant to begin with?

See? Your "answer" doesn't fit my question.

No bank would drag the whole country into the abyss.

Let the bank fail, let the bank shareholders lose every penny they have invested. Take over in an emergency fashion the core required functions and honour guarantees.

Sure about that? Ever heard of "(Global/Domestic) Systematically Important Banks"?

Well, if you set aside incompetence, ignorance, and short-term thinking

You're obviously forgetting that capitalists are perfect, unfailing creatures!

[Aimless]

To be fair, he said, "I can think of several pretty significant disadvantages, but absolutely nothing positive." The most charitable interpretation of that statement would be that, there may be advantages, or I may have something in mind that I consider an advantage, but he can't think of any such advantages and doesn't see what I may be looking at as an advantage. Of course, knowing Loki that'd just be a circumspect way of saying there are no advantages at all ever

[Aimless]

Another kind of situation in which some of the burden of proof may lie on the party making a seemingly negative claim: "We almost certainly won't go bankrupt tomorrow", "This probably won't have disastrous consequences", "We probably haven't missed anything important in our analyses", "We probably don't have to worry about it raining on our wedding-day tomorrow", etc. Sometimes you actually have to defend negative statements, because, just as it is infeasible to prove a negative claim, it may be infeasible to prove a positive claim until it's too late.

[Being]

What consequences could we expect if a country removed corporate income tax (for companies that have employees and owners in that country) in exchange for 5% of preferred stock in all companies? Would that country become more or less interesting for businesses? Would it have a better or worse climate for innovation? Would it successfully capture sufficient wealth? Would the incentives for all parties involved be good or bad? Would tax lawyers and accountants be dealt a crushing blow? In which ways would the system be abused or sabotaged?

Income tax for individuals would remain and may be adjusted as needed. VAT, sales tax, pigouvian taxes, etc would all remain if necessary, and adjusted as required. The government's shares would form a huge passively managed fund that could be used eg. as collateral, for pensions, etc.

Didn't Hitler try that?

[Aimless]

Didn't Hitler try that?

Did he?

[Hazir]

Didn't Hitler try that?

No, he didn't. You're thinking most likely of corporatism, which is a system that forces owners and workers to cooperate for the common good without actually changing anything in the ownership.

I don't see what's intrinsically bad about a system that replaces one tax with another tax. One practicle advantage would be the end of a whole lot of tax-reporting and/or auditing thereof. Another would be a quantitative measure of the piggy bag the state claims for its own use rather than the more fleety 'wealth of a nation'.

[Khendraja'aro]

Yes, he made a claim. And? I could also claim that black holes are really purple. And your other arguments are equally shoddy. You're intellectually lazy here, my dear. Until you clean up your act I think I'll simply ignore what you're saying because it makes no sense whatsoever.