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Is Corporate Tax really Tax?

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(This thread deals with the ethical issues surrounding corporate tax specifically, I'll leave the economic arguments for another day)

Consider the following legal argument:

1) corporations are subject to corporate "tax"

2) however, whether if you incorporate your business or not is purely voluntary (there are plenty of other ways to carry on business)

3) so whether if you pay corporate "tax" or not, is actually voluntary (1+2)

4) so in that sense, corporate tax is not force, which means it's actually not a tax (depending on your definition of tax), it's actually more like some kind of voluntary fee arrangement

*and let's say if you don't pay it, no one forcefully takes money from you, you simply lose the benefits of incorporating (eg limited liability)

I'm talking about this arrangement in a hypothetical sense, I don't think this is how the current rules work but the point is: it seems possible to reform things in such a way so as to maintain the general concept of a corporate "tax" but have it not violate any ethical principles.

There are finer points to this argument, but I'll leave those until they come up.

Thoughts?

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So, by this rea

Thoughts?
Would you also argue that sales tax is not a tax because buying stuff is voluntary? Gas tax is not a tax because buying gas is voluntary? Income tax is not a tax because earning income is voluntary? Edited by softwareNerd
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If a gang of thugs hangs a sign at the entrance of an alleyway reading, "if you walk down this alleyway, you will be assaulted and robbed," does that make the mugging and robbing voluntary? Of course not, an individual should have the right to walk down an alleyway without being mugged (assuming the thugs don't actually own it), and a group of individuals should have the right to start their own corporatio unmolested.

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If a gang of thugs hangs a sign at the entrance of an alleyway reading, "if you walk down this alleyway, you will be assaulted and robbed," does that make the mugging and robbing voluntary? Of course not, an individual should have the right to walk down an alleyway without being mugged (assuming the thugs don't actually own it), and a group of individuals should have the right to start their own corporatio unmolested.

So that's the question then: is the legal mechanism realizing a corporation actually in some sense owned by the government? At first blush it seems that it does not, however if you consider what animating a corporation actually entails, it would seem that it's impossible to exist without constant interaction with the legal system. Take for example limited liability.

Corporations don't just provide limited liability against those whom you sign contract, you also get it against 3rd parties without notice. It doesn't seem possible to enforce limited liability in that scenario without state intervention.

What's important to realize here, is that corporations isn't necessarily just a mode of carrying on business, it also entails certain state protections if business goes south. So the question then is, if you form a corporation, should you have to pay for those protections?

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So, by this reaWould you also argue that sales tax is not a tax because buying stuff is voluntary? Gas tax is not a tax because buying gas is voluntary? Income tax is not a tax because earning income is voluntary?

I would distinguish it from sales tax and income tax on the basis of relating things back to the force/mind principle. if I remember correctly, the reason using force is wrong is because it infers with how the mind interact with the world, which in turn infers with your ability to make proper judgements and survive.

Now obviously people can't survive unless they buy things or generate an income (in which case imposing taxes would be unethical), however choosing a legal mode of carrying on business doesn't seem to be the same. Unless you want to argue that not being able to use the corporate method specifically (as opposed to partnerships or trusts for example) is somehow a threat to your survival.

Edited by Puzzle Peddler
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Now obviously people can't survive unless they buy things or generate an income (in which case imposing taxes would be unethical), however choosing a legal mode of carrying on business doesn't seem to be the same.
But using this argument, the government could exempt certain basic items of food, housing and clothing from sales tax and everything else would be legitimate. How could you use this line of reasoning to say it is wrong to tax the purchase of a Porche. Or, for that matter, if a single guy is buying a mid-sized car, is it legitimate to tax him if he cannot show that he can make do with a small car? Many jurisdictions exempt "essentials" from sales-tax (food in many U.S. states, and other things in other countries.)

How about income-tax which only kicks in once income is twice the poverty line? One could say that twice the poverty line is enough for anyone to survive. So, would taxing everything above that be fair game?

The way to think about corporate liability is that it is like a feature of a contract. If I -- a car dealer -- sell you a car and I stipulate that my liability is limited to the assets of my dealership, and does not extend to my personal assets, and if you buy the car on those terms, then it is just as voluntary as any other term of a contract.

If the government's law will protect other terms of my contract without any special tax, why not this one term?

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Let me clarify what I mean with an example here:

One key aspect of incorporating is that you get limited liability, which also includes limited liability against 3rd parties. So far example:

If I own a small private gas drilling corporation next to your farm. and through poor business practices I end up drilling into some underground water and cause a small flood, and let's say it destroys your crops. Now let's say the damage is worth $1 million. You can sue the corporation for the loss, but you can't sue me personally (that's the whole point of limited liability, and let's say there are no criminal charges here). Now if the corporation only owns $50k in assets, but I personally own $300k in assets, with limited liability you can only get at the $50k.

But you see the problem here is that limited liability would my right and the state would protect me because I incorporated, and it would only be my right after I incorporate. But you see this right has nothing to do with what I as a business owner have the freedom to do, it's just a restrict on how much money people can sue me for. So I guess the question becomes:

If it is possible to incorporate under Objectivism, would limited liability be recognized as a legal concept, and if so, on what basis? because it almost seems like a state enforced insurance scheme (it's basically a way to redistribute risk to your neighbours).

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But using this argument, the government could exempt certain basic items of food, housing and clothing from sales tax and everything else would be legitimate. How could you use this line of reasoning to say it is wrong to tax the purchase of a Porche. Or, for that matter, if a single guy is buying a mid-sized car, is it legitimate to tax him if he cannot show that he can make do with a small car? Many jurisdictions exempt "essentials" from sales-tax (food in many U.S. states, and other things in other countries.)

How about income-tax which only kicks in once income is twice the poverty line? One could say that twice the poverty line is enough for anyone to survive. So, would taxing everything above that be fair game?

Well if you go down that road I think there is a deeper problem here: flipping the argument around, if the original ethical principle is: force is wrong because it interferes with your mind and your ability to survive. Then why can't someone argue that certain types of force are actually ok, because they are so "minor" that they don't actually interfere with your mind or ability to survive? It seems that its actually the original Objectivist argument that's leaving some room for force to come back in here. The mind/survival part actually turns into a qualifier.

I'm not saying I agree with this position, I'm just saying there seems to be a hole here.

The way to think about corporate liability is that it is like a feature of a contract. If I -- a car dealer -- sell you a car and I stipulate that my liability is limited to the assets of my dealership, and does not extend to my personal assets, and if you buy the car on those terms, then it is just as voluntary as any other term of a contract.

If the government's law will protect other terms of my contract without any special tax, why not this one term?

I agree for contract situations there is no problem, but see my example above: what about situations where it covers you from people with whom you have no contract? Because if you limit it to situations where you have a contract with the opposing party, then in order for some global corporations to maintain limited liability, they basically have to contract with everyone on the planet, because you never know when some random person might bring a claim against you.

(now let me link the limited liability part to corporate tax: it seems like limited liability is almost a service that can't really be meaningfully privatized, because its actually also some kind of a right, and if it were really both a service and a right, then should the state manage that service in service in someway by: (a) making participation voluntary (which it is), and (b ) charge for those who wish to participate. Now given what I know about Objectivism, it seems that this can't possibly be justified, which means limited liability (and thus corporations) cannot be a legal method of conducting business in an actual capitalist society)

Edited by Puzzle Peddler
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A fee may be justified, but a tax is not. A fee would pay for the cost of the service and would be based on how much it costs the government to render the service. A tax could be any arbitrary amount and the excesses could be used for any arbitrary government program.

Edited by oso
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I see the point your making, but I disagree with it. I only have one objection, actually:

Limited liability isn't a privilege. Individuals have the right to sign contracts with a limited liability clause in them, and the government only has the right to charge for the cost of enforcement, not anything beyond it.

Any further charge is in fact aiding and abetting contract violators, and makes the government an accomplice to their use of force.

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While I had a snack, I thought of a better way to phrase the above point:

Establishing a monopoly on government involves the use of force, even if it's an LFC government. You are using force against everyone who wishes to establish a different government: they are not allowed to start acting as a second government. But that's OK, if your government is dedicated to defending individual rights, because then you're not initiating the use of force against anyone: anyone trying to establish a different government, and thereby initiating force against individuals (all governments except a LFC one are initiating force, by definition).

However, if your government is refusing to defend certain rights, then it is initiating force against any would be capitalist government that would, simply by holding a monopoly on government.

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  • 2 weeks later...
Limited liability isn't a privilege. Individuals have the right to sign contracts with a limited liability clause in them, and the government only has the right to charge for the cost of enforcement, not anything beyond it.

what about limited liability against people that you haven't contracted with? because that's what the current law allows for.

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  • 2 weeks later...

Excellent question. Through his post and responses, OP has covered most of the ground. So, I will just put a finer edge on one aspect of it. Yes, providing limited liability in exchange for the corporate tax would be reasonable as a government-citizen contract, but for one problem: does the government have the right to offer limited liability in the first place? Presumably, if a person (or collection of persons - i.e., a corporation) do harm to another person (e.g., the flood OP brings up in a response), they should be liable for the full damage under Objectivist principles. The two persons do not have a contract between them giving one or the other limited liability. Therefore, each person is responsible for the harm caused by their actions. The government does not "own" any right to absolve any person from taking responsibility for the damages they cause.

(Note: I am not an Objectivist. I happen to believe in limited liabiity, but for other reasons. I also believe in a progressive personal income tax but not a corporate tax, also for other reasons. Maybe some day I will get into these reasons, but they are irrelevant here because I intend to answer based on Objectivist principles. If you think I am wrong about Objectivism, please post a response.)

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Hmm. This is an interesting thread.

Leaving aside for the time being the (potentially also interesting) question of whether "limited liability" is proper at all, I wonder what the substantive differences are between this Corporate Tax and Rand's suggestion of a tax on contracts (to guarantee their enforceability) as being an example of voluntary government financing in a capitalist society...

oso wrote:

A fee may be justified, but a tax is not. A fee would pay for the cost of the service and would be based on how much it costs the government to render the service. A tax could be any arbitrary amount and the excesses could be used for any arbitrary government program.

Rand's idea of a tax on contracts is not based upon how much "it costs the government to render the service." It is anticipatory, and acts in the manner of insurance, as against the possibility that someone will violate the terms of the contract and need legal recourse. Under her proposal, some people would be charged this fee... and never use the justice system. (Or they could opt not to pay the fee, and leave their contract with no legal backing.)

This idea of an annual fee for "limited liability" really seems much the same, except that, as "limited liability" would be an ongoing protection (based upon the government's recognition of the entity as an "LLC"), it makes sense that there would be an ongoing cost, as opposed to a one-time payment. Kind of like keeping the justice system on retainer.

As for the "excesses," while it would be inappropriate to use them for "any arbitrary government program," it's unclear whether it would also be wrong to use them for the proper functions of government. Again -- though perhaps I misremember? it's been some time since I've read the pertinent essay -- I believe that Rand thought that an excess of revenue from her contract tax would be one of the good features, in that it would allow for a more general funding of a proper government.

I'm certain that someone here can correct me on any missteps I've made, but until then, this seems an intriguing avenue of proper government financing.

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what about limited liability against people that you haven't contracted with? because that's what the current law allows for.

What about it? Are you suggesting that it's a violation of rights?

If it is, then in the OP you're actually suggesting that the government should give someone the privilege to get away with violating other people's rights, in exchange for a tax.

But you're wrong, corporate law doesn't create any exemption of liability to third parties. The shareholders not being liable for the actions of a corporation has nothing to do with the corporate contract. Without any contract, simply handing someone your money to handle as he sees fit would actually exempt you from all liability of his actions. Not because the government says so, but because Reason and Logic say so.

And corporate law does not exempt employees and executive of a corporation from being held responsible for their actions.

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But you're wrong, corporate law doesn't create any exemption of liability to third parties. The shareholders not being liable for the actions of a corporation has nothing to do with the corporate contract. Without any contract, simply handing someone your money to handle as he sees fit would actually exempt you from all liability of his actions. Not because the government says so, but because Reason and Logic say so.

And corporate law does not exempt employees and executive of a corporation from being held responsible for their actions.

Actually, Nicky, you are the one who is "wrong". Acting through corporate form is not "simply handing someone your money to handle as he sees fit". That is a very un-Objectivist thing to say. All "owners" (aka shareholders) are responsible for their actions. Now, if you are thinking only about widely held corporations, you are on the right track for a non-Objectivist defense of limited liability. It is more efficient to allow large corporations to be formed. Small investors will only agree to invest if they get limited liability since they have no control over the underlying business that they "own" a piece of. Therefore, the "people" (I know Ayn Rand does not like that term) have a right to create a government and give that government the right to grant limited liability in order to make the economy more efficient.

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1. Yes, the Government takes wealth by force from those who own corporations in many ways, including income tax, corporate tax, capital gains tax, and many other ways to loot wealth they could not have created.

2. Incorporating is one of many options to be live productively, which means provide for your survival in a way that acts in your long range desire to thrive.

3. This does not follow. It is immoral for anyone to steal from you - Initiate force and take wealth you earned without your consent. Taking more wealth from you without your consent, simply because you do something they decide is plausible for more looting, is not consent. Protection rackets are for gangsters and the victim is not making a choice.

4. Shaking down someone for engaging in living is not choice driven by the victim and by definition the victim is always the person on the barrel end of the gun.

I get your intention here but you need to build from the individual outward, not society inward. I think you’ll get better results.

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  • 2 weeks later...

And, on that note, our conversation has met its unfortunate end.

LOL, can dish it out (rudely calling people "wrong" rather than politely disagreeing) but can't take it. But I do appreciate this diplomat way of ending conversation. Anyway, I've made my point, and won't be rude in future posts.

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LOL, can dish it out (rudely calling people "wrong" rather than politely disagreeing) but can't take it. But I do appreciate this diplomat way of ending conversation. Anyway, I've made my point, and won't be rude in future posts.

My issue is with the dishonesty and irrationality of your post (as best illustrated by the phrase I quoted), not with whether it is rude or not. If you had called me a motherf****r, while making an intelligent and honest point, I would've overlooked the insult and replied happily.

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For those who aren't familiar with the subject area, here's another example as food for thought:

consider this business strategy (common known as "thin capitalization", legal in most jurisdictions):

let say there's a corporation that owns 50 taxi cabs, in this situation if 1 of your taxi cabs hit an innocent pedestrian, all assets of the corporation will be on the hook for any impeding lawsuits (i.e. if the corporation lose the personal injury lawsuit all 50 taxi cabs may need to be liquidated to pay the medical bills).

But now consider this: corporation themselves are persons and can become shareholders of other corporations. Thus to further limit liability, the 1st corporation can do the following: create 50 new corporations, put 1 taxi cab into each one of the 50 new corporations. So now instead of having 1 corporation owning 50 taxi cabs, you have 1 parent corporation owning 100% of the shares in 50 subsidiary corporations, and each subsidiary owns 1 taxi cab. The employees, managers and owners in real life are still the same. The only thing that's changed is the paper work.

Now if they employed this strategy before the accident took place, and 1 of the taxi cabs hit a person, then that person can only sue that subsidary corporation (and not the parent corporation or any of the other subisdiaries) because they all seperate entities at law. So the end result ends being the following:

let's say each taxi cab can be liquidated for $10k

and that the injured person need $1million for medical bills and lost income

in scenario 1 (only 1 corporation) = the injured party can claim up to 50 x $10k = $500k in damages

but in scenario 2 (a corporation limiting it's own liability with another layer of corporations) = the injured party can only claim $10k maximum,

It is equivalent to being hit by a really poor person (when in reality the "business" as a whole does have the cash). Yes you can also go after the employee who drove the cab and caused the accident, but what if he's also a poor person and there's no point in suing him?

sketchy strategy? justifiable?

Edited by Puzzle Peddler
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But you're wrong, corporate law doesn't create any exemption of liability to third parties. The shareholders not being liable for the actions of a corporation has nothing to do with the corporate contract. Without any contract, simply handing someone your money to handle as he sees fit would actually exempt you from all liability of his actions. Not because the government says so, but because Reason and Logic say so.

Buying shares is not the same thing as handing your cash to a money manager (like a pension fund, although it might feel similar if you are playing with the stockmarket). You are buying ownership in the company, usually owners are responsible for what they own (but here they are not).

Consider this: if you buy a dog, and the dog bites someone, can you say that the dog is simply doing what "he sees fit" and so the owner is not responsible??

And corporate law does not exempt employees and executive of a corporation from being held responsible for their actions.

of course, but what if these people are too poor to pay the lawsuit, and it's the shareholders that has the cash?

edit:

upon further reflection I think we can reconcile things like this: the current corporate law language does not reflect the market situation, people on the stockmarket are not looking to buy a piece of a corporation when they invest they are just looking for returns on investment. It may be possible to reform the current laws to reflect this situation by framing stocks more as a loan (with contract terms that calls for returns based on company performance) from the shareholder to the company rather than some kind of property purchase. This seems viable...

But I have to wonder why this hasn't happened already, there may be some kind of mechanical problem that prevents this from happening.

Edited by Puzzle Peddler
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Yes you can also go after the employee who drove the cab and caused the accident

So you are saying that in this hypothetical scenario, the one and only person responsible for the accident is the driver of the cab?

May I ask, then, what possible reason would any Court of Law have to force anyone else, except the one person responsible, to pay so much as a dime to the victim?

What could possibly be wrong with the other 6.999.999.999 people on the planet, organized in whatever way they are organized, working for one or 50 different corporations, avoiding being held liable for the victim's medical costs?

Edited by Nicky
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