Can someone please explain corporate taxes to me?

Discussion in 'Political Discussions' started by Maniac Craniac, Dec 22, 2011.

  1. Maniac Craniac

    Maniac Craniac Moderator Staff Member

    I have been trying to wrap my head around something and after checking several different sources, I'm somewhat stumped in trying to figure this debate out. I figure it's time I just break down and ask somebody. Since this is the only forum I'm a member of (no, that other site doesn't count...) I might as well ask the highly motivated, well-learned DegreeInfo community.

    What in the world are corporate taxes?!

    The surface of the debate is that corporations need to pay their "fair share," vs allowing the free market to prosper by letting it alone. Then there is the debate about who really ends up paying, the firm itself or the customers.

    Backing up just a bit, what taxes, exactly, is it proposed they should be paying? When a corporation takes in money, this is its revenue (duh...), however its profits are determined by subtracting business expenditures from the revenue (duh...). Here is where I get lost. When a corporation spends money on capital and production costs, these are business expenses and do not count towards profit. When a corporation spends money on labor, it is the wage earners who pay income and payroll taxes on the money that they earn. So what is left? What needs to be taxed?

    Let's say a corporation earns $1 million in revenue and has $900k in expenditures. Is it proposed that the $100k profit gets taxed? But what will that money be used for? Let's say that in the next year, the corporation spends that money on production. Then we have a situation where tax was already collected on money that should have been tax deductible. :confused: Or if they spend it on labor, taxes should have been collected from the wage earner :confused: I don't understand how a business of any sort can "earn profit" when a business is not a person, it is an entity comprising of people- people who get individually taxed already for their earnings :crazy:

    I feel like I'm missing something big, or just misunderstanding something entirely. Please be gentle. I'm attempting to fix my ignorance :dunce:
  2. BobbyJim

    BobbyJim New Member

    You might need to pick up a textbook on financial accounting and read up on fixed vs. variable a starter.
  3. Maniac Craniac

    Maniac Craniac Moderator Staff Member

    I understand that distinction.
  4. DLer

    DLer New Member

  5. StefanM

    StefanM New Member

    Taxes typically don't work this way. If you personally earn $10,000 on Dec. 1 and donate the money to charity on Feb. 1, you pay taxes on the money the first year and deduct it the next. If you donated on Dec. 31, however, you could tax the tax deduction in the same year. Arguably, this would make the best financial sense unless you had some other reason to wait until the following year.

    What will the money be used for? There are a few options. The money could be held in reserve as cash or cash equivalents, or the money could be held for investment in some future venture. It could also be returned to the shareholders in the form of a dividend (which is actually taxed first at the corporate level and then taxed again on the personal level---this is why often an individual is better off having the corporation retain the cash assets. An increase in stock price could allow the individual to gain stock value for future capital gains..but I digress). If the company doesn't want to pay taxes on the profit, it should spend it. Of course, there are very creative ways to minimize tax expenditures due to the complexity of accounting regulations. That's how some companies pay little or no corporate tax. They find ways to minimize their tax liability. If you (generically, not you in particular) think the businesses aren't making money, you're crazy.

    Taxes will be paid by the wage earner, yes.

    And a business can pay tax because it is legally a "person." Furthermore, you don't really need to look at a corporation as consisting of people. There is a reason "Human Resources" exists. Employees are individuals hired by the corporation to perform tasks. Employees are little more than a resource for gaining value. The corporation is a legal vehicle for generating value for its owners, the shareholders. A corporation could theoretically exist without any paid employees.

    Even in small businesses, you are not part of the business because you work there. In a sole proprietorship, you own the business entirely. Your employees are your employees; they do not constitute the business.

    In a partnership, only the partners constitute the business. Any employees of the partnership do not constitute the partnership.
  6. friendorfoe

    friendorfoe Active Member

  7. ITJD

    ITJD Active Member

    Hi -

    1. A corporation in the United States is legally considered a person with all rights inherent to a person. If you look back historically at the development of corporations in America, they are tied back to the emancipation acts and resulting legal arguments. If "blacks were to be considered citizens, companies should be." I know it's morally wrong, but it is what it is.. Look up the series "The corporation" on youtube.

    2. Because of this basis, corporations are considered individuals separate from their shareholders and "owners". There's more to it than that, but that was the drift.

    3. Next, any "profit" read as income minus expenses at its simplest recorded at the end of the "year" again at its simplest, are taxed by the government at around 35-40 percent.

    There are many, many, many ways to work books legally such that recorded profit is minimized for the purposes of taxes. This is why the whole "don't tax business" argument put before us by the GOP is silly. If you tax businesses heavily, data shows that the businesses with the money to tax, simply put it into better investment mechanisms that avoid taxes but otherwise stimulate the economy (again at its simplest).

    If you really wanted to accomplish something, tax any company that does business in the United States on the percentage of its profits earned in the United States and make things such that to avoid taxes on those profits, they'd have to be invested in the United States.

    Hard to police but it cuts to the chase.
  8. Maniac Craniac

    Maniac Craniac Moderator Staff Member

    Yikes. I guess I need to learn more about the structure of a corporation before this can even begin to make sense.
  9. friendorfoe

    friendorfoe Active Member

    I disagree, tax avoidance strategies do not, nor are they intended to stimulate the economy. They remove discretion from the equation and within recent decades have resulted in money that would have been spent within the U.S. to be pushed for overseas investment. Recent example: Ford recently announced that they were building a new parts manufacturing plant in India rather than Detroit because to do so within the U.S. (though it would have been a tax deductible expense) would have cut into future earnings of the plant at a rate greater than 37%. The GOP's argument to cut corporate taxes allows management to invest in the U.S. long term with an eye at eventually turning a profit which is hard to do with a 30-40% financial burden placed upon the bottom line from jump street. This greatly slims margins, discourages local investment (and R&D) and forces businesses to outsource commoditized labor, focus upon core competencies and reduce risk exposure. Providing a 12 to 36 month tax shelter just doesn't cut it.
  10. GeneralSnus

    GeneralSnus Member

    Do you have a citation for this? It doesn't seem to make sense on its face. It seems if Ford is opening a plant in India, it would be to produce for the Indian market, which is one of the two fastest-growing markets for automakers. It would only make sense to open such a plant in India for numerous reasons, not the least of which include much lower costs for both labor and professional services, avoidance of import tariffs, and lower transportation costs.
  11. DLer

    DLer New Member

    I think Ford is expanding overseas because they feel that 70% of their growth will come from India, China etc. Ford has every right to do that.
    Ford Global Expansion and Growth

    This is the same strategy that Japanese and European automobile manufacturers used when opening plants in the US.
  12. Ted Heiks

    Ted Heiks Moderator and Distinguished Senior Member Staff Member

    Actually, it is:

    Revenue minus expenses equals net income (aka net profit).
  13. Kizmet

    Kizmet Moderator Staff Member

    I think that corporate taxes are the monies that the democrats want companies to pay and the republicans help them to avoid paying.
  14. friendorfoe

    friendorfoe Active Member

    You are correct however I seem to recall engine or engine parts specifically for the Ford Focus being exported from India into the U.S. I can't source it now and for all I know I recall this from reading a blog somewhere, but divorced of this example the rest of my argument on corporate taxes impacting localized investment still holds, even if for nothing other than R&D or market investment.
  15. friendorfoe

    friendorfoe Active Member

    Corporate taxes make up 12% of overall tax income for the feds, the amount of debate dedicated to this small of a slice of the pie is staggering. Unfortunately the proportion of the impact is has upon the economy is far greater than the amount of revenue the feds could expect by raising rates. The GOP basically feels that if you cut corporate taxes, they hire more employees which raises the amount paid into payroll taxes and income taxes.
    Last edited by a moderator: Dec 23, 2011
  16. SteveFoerster

    SteveFoerster Resident Gadfly Staff Member

    If by "democrats" you mean ordinary people who identify with the Democratic Party, then maybe. But if you mean politicians with a (D) after their name, then I have a great deal for you on some swampland in Florida.
  17. BobbyJim

    BobbyJim New Member

    I was hinting at the tax treatment (credits and political mandated 'super-credits') of these expenditures. :sad:

    Not trying to be a pain in the….., but maybe rephrasing the original question would help?
  18. BobbyJim

    BobbyJim New Member

    'C' corporations vs 'S' corporations

    MC, for your reading pleasure: here is a NY Times article explaining how federal corporate tax rates impact ‘C’ type corporations, while the remaining ‘S’ type corporations (also partnerships and sole-proprietor companies) are subject to non-corporate tax rates. The author also touches on the subject of ‘C’ corporation shareholder dividends double taxation as part of his argument that other factors need looking at besides just the corporate tax rates.

    Bruce Bartlett: Cutting the Corporate Tax Rate Is No Economic Panacea -
  19. Kizmet

    Kizmet Moderator Staff Member

    Yes, I understand that that is the theory. However, we have a situation where many large corporations are basically paying zero corporate taxes and still not hiring people. So, it doesn't seem to actually work in practice. They seem to be much better at giving themselves huge bonuses rather than hiring new employees.
  20. Kizmet

    Kizmet Moderator Staff Member

    You know Steve, I actually think you're right. Both parties are equally complicit in this matter.

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