Economic justification for taxes and some little known facts

1. No matter what the corporate income tax rate, all corporations will contribute net $0 in taxes over their lifetime.
The taxation philosophy of the US and Canada (and I assume everywhere else) allows losses in one year to be applied to profits in preceding or future years, and so allows corporations to receive income tax rebates for those years with losses.  This is philosophically justified in that your taxes over a 5 year period should be the same if your total net profit over the 5 years was the same.

While the tax code does try to prevent the length of time that losses can be allowed to be carried back, and tries to keep some of the income taxes corporation pay through other codes, the fact that tax losses are transferable/sellable to other companies upon bankruptcy, means that, since all corporations eventually go bankrupt, all income taxes paid by them are eventually refunded to some corporation.

2. If all countries have the same corporate tax rate, there will be more investment at a 90% tax rate than at a 0% tax rate,
assuming that tax rebates for losses are quick convenient and accessible.  Under both tax rates, an obviously profitable investment will be undertaken.  It is risky, inherently uncertain investments that will be undertaken at a high tax rate and not at a low tax rate.

Consider an investment opportunity that with 60% chance will double in one year, and a 40% chance will lose all of its value.  The expected return is 20%.  Company A0 lives in a 0% taxation world, and company B90 in a 90% taxed world.  If there is unlimited investment possible, then A0 investing $100K will make or lose as much after tax as B90 if it invested $1M.  If B90 loses $1M, they get a 900K rebate from government.   If they win $1M, they keep 100k after tax.  B90 creates 10x the investment and economic activity that A0 does.

Consider if both companies only have 100K total capital.  A0 would never rationally invest it all on this investment because it faces bankruptcy if it fails.  B90 only risks 10k when investing $100k.  If we add into the world, banks with the same taxation rate as the company,

• company A0 can only afford to borrow $45K@10% and invest $50K of its own funds if it is forced to be able to repay the bank even if it loses.  If it wins, it earns $90,500, while it loses $99500 the other 40% of the time.  A $14500 expected gain, but still 40% chance of (near) bankruptcy.  
• B90 can afford to borrow $900K@10% and invest none of its funds.  If it wins, it earns $810K before tax, $81K after tax.  While it loses 990K before tax, 99K after tax the other 40% of the time.  A $9K expected gain.

While the expected gain is a bit better for A0, keep in mind that 9x the economic activity is created by B90,  and the returns from unused funds by both companies were not include.  Also, the bank in both cases has no risk, and makes 20x more money pretax by lending to B90 and 2x more after  tax.  The bank makes as much lending at 5% to B90 as it does at 10% to A0.  In a 90% taxed world, all loans/investments are inherently 10x less risky.

Putting a real world face on the above investment, let's say it involves hiring an engineer or scientist to design something useful for his corporate masters at a $100k annual salary.  40% chance he will come up with nothing, and 60% chance he will come up with something worth on average double his salary.  A0 is risking its entire company by hiring one engineer.  B90 can take advantage of diversification and hire up to 10 engineers for the same after tax cost and risk.  The expectation is that 4 engineers will fail, and 6 engineers will succeed.  Most importantly, the risk that all 10 will fail, and cause bankruptcy, is only 0.01% (bankruptcy defined as losing $100K, since if all engineers fail, B90 would receive $900k tax rebate).  Both A0 and B90 still have the same expected after tax return.  Because of diversification, B90 can still afford to hire extra engineers even if the 9th and 10th engineer only have a 51% chance of success.

The other real world impact of high tax rates on investment is that for B90 all investments and expenses cost 1/10th what they do for A0.  B90 can buy nicer computers, more or nicer company cars, hire someone's idiot nephew, and generally be nice to members of the organization, because being nice costs 1/10th what it does for A0.  A0 has to cut costs to the bone, and invest in only sure things, because it pays full price for everything.

The headline of this section included the assumption of uniform tax rates in all nations.  This requirement is eliminated by natural taxation policies discussed below, but the reason that the assumption is necessary is that if companies A0 and B90 were owned by the same multinational, then through accounting tricks, it would make all of its profits in A0 and all of its losses/expenses in B90.

Taxation is neither waste nor theft
Combining the previous 2 sections, despite the net 0 lifetime taxes paid by corporations, a 90% tax rate will not only provide the same after tax profit to companies, but with a 40% net personal tax, will also generate a social fund of $180k (on $200k pretax profit for B90) + $400K (on personal income taxes paid by engineers).  A total of $580K.  In addition to creating 10 good jobs, that social surplus could be distributed to the population giving them more power to afford B90's products and thus increase its sales and profits.

value and waste
When a billionaire gives $1000 to 1 Million people, value is created for the entire society.  If the society had only 2 buisnesses: food distribution and yacht sales, then because 1M people are able to purchase more food, it will increase sales and profits for the food industy, and thus create more potential customers for the yacht salesman than if he were to only rely on the initial billionaire.  Money is never wasted when it is transferred to someone else.

There are 3 important kinds of waste

• waste of people's time: When you hire someone to dig a hole and then refill it, you gained no value, and wasted his time.  If you gifted him the money without requiring work, he could have been learning, entertained, or working for someone else for additional money.  Wasting people's time is the least important kind of waste because there is usually slack in the labour force, and the most likely alternative scenario to wasting someone's time is that he would have wasted his own time.  
• waste of money's time: Any money that is not spent or invested is wasted for the time that it is not.  Savings, though a personal necessity at some level, is a waste if the savings level could be made non-necessary.  Waste of money's time is a very serious waste, because if money is spent and invested more, increasing its velocity, then more people's time can be used in activities that receive that money.
• waste of resources: Transforming a lump of iron into a car does not waste the iron because the car is generally considered more valuable/useful, and it can always be recycled back into a lump of iron.  Building and rebuilding homes in an area where hurricanes will knock them down regularly is wasteful of building materials and people's time.  Transportation tends to be wasteful of energy, especially non renewable fuels.  War wastes people's time and resources to destroy resources and people.

Value can be defined as creating happiness or things people want, and reducing waste.  The concept of net value and net waste can be comparable to net profit, in that we can hope that any waste incurred in creating value is less than the value created.

Taxes are not waste
While the transfer of money is never waste, some spending can be.  Useless programs waste people's time and war is a larger waste.  But it is the spending and not the taxation that is wasteful.  Since redistribution of wealth towards the poor always creates value by reducing money's waste of time (increases total spending), and any useless programs involved in filtering who is eligible to receive funds can be eliminated, and the funds distributed equally to everyone who asks (or just everyone) instead, there exists at least one use of taxation that cannot be waste, and so any waste on the process is entirely attributable to spending choices.

Income Taxes are not theft
Success can be based on hard work, showing up, and practiced talent, but always involves luck.  Sometimes, luck is the main factor for success.  Health, parents, asset performance, marriage, insurance, timing, and showing up are all luck based factors that will influence success.  Progressive taxation is an entirely fair system to distribute wealth from the lucky to the unlucky.  If society was a gambling game, or like in the corporate taxation example above, every game participant would accept taxation rules without objection. If they wanted to play with more risk, they would simply have to bet more.

One of the most pernicious, but little understood thefts, by society and government is inter-generational theft in terms of  both social debt, and retirement safety nets that exist for the current generation of seniors, but will be taken away from future generations due to crushing past debt, an aging population, and a self-interested voting block naturally more concerned with preserving their own entitlements than caring for the sustainability of civilization after thier deaths.

Despite the existence of social programs that are wasteful or program structures that are thievish, it is the spending that is wasteful or thievish, and not the taxation.  All tax revenue distributed back to the public through spending, will be returned to businesses who will be able to continue supporting existing employees, and hire new ones.  When tax funds are spent right away rather than saved for future retirees, money's time is not wasted, and it is returned more quickly for the benefit of taxpayers and the poor.  Basic income entitlements are thus less wasteful than properly funded retirement entitlement programs.

Sales taxes can be considered theft or wasteful because they are regressive and waste money's time by discouraging spending.

Natural taxation as a basis for cooperation among neighbouring societies
Natural tax policies focus on preventing the waste of money's time, but also solve issues with globalization and  having a prosperous high taxes society along side low taxed societies.  Key features:

• Taxation based on cashflow: Cash inflows (revenues) are taxed in the jurisdiction they are earned (in importing country).  Cash outflows (expenses) are a tax deduction in the home jurisdiction.
• Your nation's exporters can receive large tax rebates, while much of your nation's tax collections come from firms you import from.
• Investment inflows (loans/ share purchases) into a corporation are taxable if not spent by the corporation within a time limit, and result in a tax credit (but not refund) for the investor.  
• Investment outflows (interest and dividends) are tax deductible by the corporation, and the investor pays a non-refundable 10% tax on such investment income in his home jurisdiction, and pays an income/corporate tax on the remainder in the business's jurisdiction.  Similar tax transactions occur on gains or losses from the investment.
• Personal income tax deductions include reinvestment of all investment income, and (re)investment of up to 70% of all employment and business income.  Any withdrawals from investment accounts, or loans received, are counted as income.  Allowable investments include providing 0% interest loans to family members or personal service providers, so individuals can shelter and split up to 70% of all employment, business income and investment withdrawals

Natural taxation achieves social goals and several eliminations of wastes

• The tax deductibility of dividends to businesses likely results in them paying no taxes, and encourages them to pay back their investors.  This reduces the waste of money's time by circulating corporate cash hordes back into the economy.
• Social tax revenue becomes a combination of 10% of investment income + a progressive consumption tax
• The ease of income splitting and obtaining personal services in a tax sheltered manner would increase demand for such labour intensive occupations, and so reduce the waste of labour's time, increasing employment, labour force participation, and wages
• If all people are in an income tax bracket that is lower than the corporate tax rate, or if there is a fixed tax rate on investment income that is lower than the corporate rate, then paying dividends for companies always reduces the overall tax burden to shareholders.  The availability of many high (dividend) yielding investments increases the income stability, and reduces risk, of investment portfolios.  Stability of investment income reduces the waste of money's time because additional savings  (as investment portfolio) are less necessary if existing savings/investments are reliable.
• Simplifying income splitting leads to more income equality.  The tax deductibility of personal services leads to those services in the official, rather than underground, economy, and result in taxes paid by the personal service providers.
• Even if there are high marginal tax rates for personal income, natural tax policies don't discourage working "hard" for one year, because of the ease with which to shelter income (through investment deduction) to use in future years.
• While all corporations that pay no dividends will pay net 0% income taxes in their lifetimes, Natural cashflow taxation allows society to extract non-refundable taxes on dividends and imports.  Though exports are a drain on the tax pool, they are a net cash inflow into the society available to be spent within the society.

Economic justification of taxes without government programs

With the right (natural) taxation rules, a society can promote R&D and other economic activity, and income equality, by encouraging investment and spending.  The alternative of 0% taxation leads to hoarding, expense cutting and risk-aversion to investments, because every cash outflow is fully borne by the payer.  This in turn results in fewer or more difficult sales because your potential customers are hoarding too.

So, even if the only government programs are tax collection/enforcement, and the distribution of tax revenue as a cash social dividend (equal distribution to all citizens), natural taxation creates economic activity and less income disparity independently of the usefulness or wastefulness of any other government function or program.

Natural Corporate tax policy refined and explained

Natural Cashflow Taxation taxes cash flow instead income of businesses.  It is designed primarily to fix abuses of tax code by multinationals and encourage/discourage exports and imports according to society's interests.  It is designed to replace sales, payroll, and other taxes, and can be applied within regional concentric or even overlapping jurisdictions.  The original post on natural taxation

First, the current tax treatment of exports between Canada and the US is very close to natural taxation goals. Basically the exporter gets substantial leeway in including connected costs (costs of goods sold) in the sale and pays tax on the gross profit.  The one change recommended by natural tax policy is that the tax would be paid to the importing jurisdiction at their local tax rate even when the exporter is not a multinational (with Permanent Establishment (PE) in the importing country).  No tax on the sale is incurred in the home country, and under natural taxation, a cash rebate from losses up to the amount of foreign profits could be obtained.

While the GST/HST (national sales tax) is a regressive tax that harms the economy by discouraging sales and economic activity, one of its justifications is helping exports and discouraging imports.  Exports pay no HST on sales, but get HST rebates on costs.  (resellable) Imports have full HST paid on sales with no HST deduction on costs.

The alternate natural tax structure for achieving export/import balance is simply a higher corporate rate with easier access to rebates for losses.  With lower taxed neighbours, it allows the higher taxed jurisdiction to heavily promote exports and obtain social funding from imports.

Where the rules for natural taxation differ from Canada-US code is that all cash flows are taxed as income and expenses, including interest and dividends.  When one national member is receiving cash from another nation's member, it is treated as an export for the one receiving cash.  Bank deposits are tax debited as if they were revenue for the bank, and withdrawals tax credited.  If someone from Toronto lends to or buys shares in a company in Detroit that is in its own separate tax jurisdiction, it receives a tax credit from Detroit tax authority, and when the loan is repaid or shares sold or provide dividends, tax debits first offset the tax credits, and then cash taxes are payable to Detroit once additional payments are made and the tax credits are exhausted.  Dividends, interest and investment gains are subject to up to 10% tax in receiving jurisdiction and if those gains are received by corporations, can get be passed along to its investors in exempt-from-10% form.

Employees also act as exporters to the jurisdiction they earn income in.  Natural taxation is suitable to many layers of jurisdictions (municipal (and smaller), county, state/province, national, international association income tax rates).  Each are suitable to fund basic income/social dividends within their overlapping (or) concentric jurisdictions.

Natural taxation is fundamentally fair because people and corporations have the freedom to not trade/earn income in a jurisdiction they deem unfair or oppressively taxed, and a society has the obvious right to tax those who earn money from their members.  If their home government has offensive taxes, they may sell to acceptable jurisdictions instead.  Selling goods, services and labour to high taxed jurisdiction is usually attractive regardless of the applicable tax rate.  Because of the discretion for the exporter in determining connected costs, exporters will make more after tax profit by exporting regardless of the tax differential between the countries.

• When exporting to a higher tax jurisdiction, they set high connected costs, make low profits on the exports, but have less expenses remaining at home, and thus more profit on (lower taxed) domestic operations.  
• When exporting to a lower tax jurisdiction, they can set low connected costs, making high (lower taxed) profits on the exports, and have more remaining expenses at home, and thus less (higher taxed) profits on domestic operations.

The key to natural taxation's ability to prevent multinational corporations tax evasion is taxation based on cash flows, and especially investment flows.  Regardless of where head offices are located, there is no way to transfer profits made from US operations to a tax haven country.  Current tax laws allow multinationals to transfer funds tax free from any nation by using investment flows.

With natural taxation, a country or community can shape how globalization affects it, and shape its competitiveness and export/import balance through setting of tax rates.  A high tax rate, will

• increase R&D by subsidizing risk taking, 
• increase the tax share paid by foreign operations (mostly of services) that are imported, 
• subsidize exporting firms by providing them effective tax rebates
• fund cities that are employment hubs
• encourage paying dividends and salaries due to all of these being tax deductible under natural taxation.

In a closed economy (one without exports or imports), with personal tax rates equal to corporate tax rates, and no personal deductions, taxes collected in any one year is theoretically the tax rate * all sales from corporations to consumers, since all sales revenue to consumers can be broken down as profit to the seller, its suppliers, or their employees.  Special extra taxes on natural resources can increase total taxes collected further.  When we add exports and imports into the economy, there is no incentive to lie regarding connected costs (tax rates are the same in all countries) under natural tax rules, so:

• for exports, only the profits by local firms and local wages on connected costs (costs of goods sold) contributes to the local tax revenue.  The exporter does not deduct these costs for local taxes.
• If all of an exporter's revenues come from exports, then the local society pays/subsidizes all of the local costs of the exporter with a tax rebate for those costs.  This subsidy just results in net 0 revenue to the society (on local cost portion), since the tax rebate is offset by taxes on the local profits and wages that made up those local costs.  This results in more social revenue than a sales tax model, because that model creates rebates without offsetting revenue.
• For an importing corporation that has tax deductibility for imports, the local society loses tax revenue by collecting taxes only on the gross profit of the import, but providing a tax credit on the full cost of the import.  A direct-to-consumer import generates social tax revenue equal to an entirely local sourced sale.  A service import (no connected costs) to a corporation generates net 0 taxes, as the importer's rebate offsets the exporter's tax payment.
• While imports cause a negative flow of cash and exports a positive flow to a society, there is a reverse flow of goods and natural resources occurs.  Even in the case of importing labour or services, the importing society gains labour and time from the rest of the world that can be used to improve its own goods and services.  So it is not a simple case of declaring exports good, imports bad, even though the flow of funds can be an economic drain or stimulus on the local economy.  A nation's wealth/health is usually considered better if foreign slave-equivalents make its socks and underwear than if it is itself making the items for foreigners.

When tax rates are equal everywhere, then each firm and individual pays the same taxes regardless of where their revenues are earned and expenses are incurred.  However, when an importer's tax rates are higher than an exporter, the exporter's connected costs (tax deductible on the trade) are likely to be inflated, and this causes an even wider tax loss for the importing society (tax revenue from exporter based on gross profit of exporter, while tax rebate to importer based on full sale value of export).  So having a lower tax rate than your neighbours, will lead you to collect taxes on larger import margins, and offer tax rebates on fewer exporter "remaining expenses".

Rationale and alternatives for connected cost treatment

If connected costs were not deductible in the exporting jurisdiction, then it would make taxes simpler by just looking at the sale price, and it would result in net 0 taxes from activity (including suppliers and employees) by exporters, and always contribute at least 0 in taxes from imports.  Simpler, preventing distortions of truth, subsidizing exports, and penalizing imports seems to be better in all respects.

To examine issue with this approach consider a US corp tax rate of 50% trading with Bermuda taxed at 0%.  If no connected costs are deductible on sale, then

•  a US computer company can sell goods that cost in $1M for $500k in Bermuda, and break even (because it will receive $500K US tax rebate).  To make $200k, it would sell to Bermuda for $700K
• a Bermuda computer company must sell goods that cost it $1M for $2M in the US in order to break even, because it will pay $1M in US taxes.  To make $200K profit, it must sell to US for $2.4M
• A US company can sell to bermuda for $500k, and then buy them back for $1M, and everyone breaks even including the US government.

This results in tremendous competitive advantage for the US firm because it can sell well below costs of its Bermuda competitor in both the US and Bermuda markets.  This is actually not the case, if the computers all come from Taiwan, because what Taiwan would sell to the US for $1M, it would sell to Bermuda for $500K with the same net revenue.  Still, the country with the highest tax rate is always more competitive and so there would be competition to be the highest taxed country.

One problem with this policy is that if exporters are extremely competitive, then they will attract all the resources and labour of the country, shipping those out, and at best contributing no social revenue from the activity.  Over-encouraging the export sector results in crowding out local economic activity that produces both social (tax) revenue and keeps the resources and goods local.  In the above example, A US company would only sell in the US if more profitable Bermuda buyers didn't want any more computers.

Another problem that compounds the first, if Canada had a 90% tax rate, then the cost of imported clementines (Which Canada cannot grow) would be 10x the price in Bermuda.  For a country that is forced to import many things it cannot produce, Being high-taxed would force higher after-tax-wages.

Despite these issues, the no-connected-cost-deduction version of natural taxation can be simpler/more natural and workable if the tax rate differentials are narrow.  Jurisdictions that want to focus on production, industry and exports can choose higher tax rates, while those that want to promote consumption can choose lower rates.

The case for equalized/normalized tax rates across nations is easy under basic income/social dividends (natural governance) because raising revenue does not imply spending it.  Extra tax revenue should be redistributed back equally to citizens.

Natural Tax policies result in 0 corporate tax payable
Because corporations can deduct dividend payments from profits, under natural tax policy, all corporations will be able to pay at most 0 taxes if they are dutiful to shareholder interests, by paying out all profits as dividends.

Under natural tax policies, society obtains all of its revenue from the personal tax side.  Some recommended features are

• a 10%, non-deductible, tax on all investment gains (interest and dividends included).  
• The top personal marginal rate should be equal to  the corporate rate.  
• An individual can reinvest all investment income (after 10% tax) as a tax deduction.  
• An individual can invest (deducting from taxable income) up to 70% of his employment and business (investment returns from businesses he controls) income.  
• Allowable investments include 0% interest loans with no mandatory payments to family members and personal assistants, thereby allowing an investment account to be a form of income splitting.  
• Receiving loans would count as income, while repaying them would be tax deductible.  
• Shelter and transportation would not be deductible, and they could have imputed income based on the cost of the home, if financed through investment account that doesn't collect sufficient rent.

The result is that society's tax revenue is 

• 10% of all investment and business income
• Progressive tax brackets on consumption (including homes and autos)
• Within a basic income framework, recommended marginal tax brackets of 15% (combined federal and local) at 10k income going up 5% every additional 10k until 40% @ 60K income, then gradually higher to 60% above 600K income.

Every person in any tax bracket gains the ability to shelter most of his income through investments or income splitting, and so equalizes the opportunities for tax planning among rich and middle class.  This is likely to make taxable income very flat, as there is a significant tax advantage to making less fortunate friends, or "spending" (giving 0% interest loans) on personal services.

The strong encouragement for dividends would substantially boost personal income, and effectively act as a 10% corporate tax.  It is a tax that is non-avoidable if the corporation respects shareholder interests. 

Alternet's 6 corporate tax dodges, and how natural finance eliminates them

Alternet provides a concise explanation of 6 ways Corporations avoid taxes.  I summarize each much more briefly and explain how natural tax policy would not permit them.

1. Boeing Double Dip: R&D tax credits for R&D paid by government.  Natural taxation policy (NTP) would treat any external funding source of R&D as taxable revenue.  Instead of R&D tax credits, NTP would allow tax rebates (refunds) if losses occur as a result of R&D spending.
2. GE Offshore profits:  Foreign active financing exempt from US taxes.  Under NTP, interest earned in one country is taxed in that country.  So, Car loans made to Americans is US income.  Car loans to Bermudan's Bermudan income, regardless of the location of the loan office.
3. AIG Stealth bailout: tax losses persist and are carried forward despite $182B taxpayer bailout.  Under NTP, $182B bailout would be taxable (though tax payment deferrable for 2 years).  Previous tax credits would be used up quickly.
4. Apple and FB equity options: Executive Stock options grossly overvalued on balance sheet while true cost claimed for taxes.  Natural Finance hates stock options due to them being a tool for corruption, and the problem isn't a taxation issue and just a corporate governance one, but NTP treatment would simply count an option's exercise as taxable revenue in the amount of the strike price, and not care about the destruction in value of the equity on a per share basis.  Diluted shares outstanding should already reflect outstanding options.
5. Pfizer shifts domestic profits overseas:  By giving its patents to affiliates in tax havens and then licensing them from the affiliates.  Under NTP, selling the patent to an Irish affiliate is taxed in Ireland, but any licensing fees paid to the affiliate are taxed in the US.  The company could still do its R&D in the highest taxed locations to its benefit of higher tax deductions or rebates.
6. Betchel's mini masquerade: using small business meant S-Corps to avoid double taxation.  NTP would treat all corporations a bit like S-Corps except for a 10% extra tax on dividends.  I do not know the details of Betchel's ownership structure, but I imagine all of its owners pay the top 35% personal income tax on the S-Corp earnings.  Many C-Corp (public company) executives and owners have a 15% tax rate on very large income.  Larry Ellison of Oracle has used a 0% tax strategy by borrowing against his shares instead of selling them.  Shares that can currently be transferred tax free to heirs.  NTP closes such loopholes by taxing loans, and having a unified tax rate for investment and employment income.

The Original Natural Tax Policy proposal