gbear Posted January 6, 2003 Share Posted January 6, 2003 Alright, so the arguement is that tax dividends are taxed twice. So if you make all dividends exempt, could somebody please explain why the following wouldn't happen: I own Gbear company. It's a sole proprietorship so that I only get taxed once. Now that the new dividend tax break is inacted, I decide to incorporate so that I can gain the legal protection of having my business as a seperate legal entity from me. Thus, I can never lose my home for stiffing somebody or hurting them. They can only take my company. Ordinarily, incorporating would mean that Gbear inc. has to pay taxes on profits. Then I'd have to give myself a salary, which would also be taxed. That's the price you pay for having a business as a separate legal entity. Now, I've incorporated. However, I've decided not to pay myself a salary. I'm simply going to give a stock dividend of 50k for each peace of stock. Okay, okay, so I own the only stock. If it's tax free, why wouldn't I do it rather than pay payroll taxes? I don't ask this to demean the tax cut. I just don't understand. I asked the accountant here at work, but she didn't know either. Does anybody here understand? Link to comment Share on other sites More sharing options...
Kilmer17 Posted January 6, 2003 Share Posted January 6, 2003 I have incorporated my new business this year and have had these very issues. But here's the deal. You HAVE to pay yourself a salary. Or more to the point, you have to report that you have paid yourself a salary. I guess you could try it your way, but you would likely end up on the automatic audit list for the rest of your life. Link to comment Share on other sites More sharing options...
gbear Posted January 6, 2003 Author Share Posted January 6, 2003 But, if it's legl, who cares if they audit? I guess the other question is what is to keep one from claiming a minimal salary and then taking the rest as dividends? Link to comment Share on other sites More sharing options...
Kilmer17 Posted January 6, 2003 Share Posted January 6, 2003 Because it's not legal. (at least according to my CPA) There is nothing to stop anyone from doing what you said next. In fact, that's how mine works. Currently though, it just saves me fica money. Link to comment Share on other sites More sharing options...
Darth Tater Posted January 6, 2003 Share Posted January 6, 2003 As Kilmer pointed out, its not legal. And from a theoretical standpoint, the corporation would have to have a profit to pay dividends, so its taxed anyway. A better question is why do I have to have a business in order to deduct the expenses that support the revenue? Link to comment Share on other sites More sharing options...
Kilmer17 Posted January 6, 2003 Share Posted January 6, 2003 The simple answer is you dont have to have a business. My wife is incorporated (insert joke here) and when filing, her business was reported as "sales" which can mean just about anything. Link to comment Share on other sites More sharing options...
@DCGoldPants Posted January 6, 2003 Share Posted January 6, 2003 Analysis Finds Little Gain in Tax-Cut Plan 2 Economists Assess Dividend Proposal By John M. Berry Washington Post Staff Writer Monday, January 6, 2003; Page A01 Eliminating taxes on dividends paid to individuals, the centerpiece of President Bush's stimulus package, would do little to spur economic growth or reduce the nation's jobless rate, according to an analysis this weekend by two prominent economists. Bush is to provide details of his plan in a speech tomorrow. Allen Sinai of Decision Economics and Andrew F. Brimmer, a former Federal Reserve Board member who heads a consulting firm, said that even a much broader combination of additional spending measures and tax cuts worth nearly $500 billion over the next five years would raise growth by only about a half-percentage point and reduce the unemployment rate by only one-tenth or two-tenths of a percentage point this year and next. The impact of a stimulus package much larger than the one the administration is expected to propose is so small, Sinai told a panel session at the annual meeting of the American Economics Association here, because "the economy is so large" relative to the amount of stimulus. Other economists on the panel did not challenge the conclusions of Sinai and Brimmer, but several criticized the stimulus packages analyzed because they would lead to rising federal budget deficits. Treasury Undersecretary John Taylor defended the administration's intention to propose a stimulus program, saying that it would improve the economy's ability to grow in both the short and long run. "Our pro-growth policies will act as much on potential gross domestic product as on actual GDP," Taylor said. Administration officials have indicated that the economic package would include spending and tax cut proposals totaling about $600 billion over the next 10 years. In addition to eliminating the tax on dividends, Bush plans to call for allowing businesses a faster tax write-off of the cost of investment in new equipment to spur such spending. According to the Sinai and Brimmer analysis, an alternative stimulus measure favored by many Democrats, a one-year reduction in Social Security payroll taxes paid by workers and employers, would also give the economy only a minor boost. Despite the relatively small impact on economic growth and unemployment, Brimmer and Sinai said they favor implementation of a large stimulus package because they fear the U.S. economic growth would not accelerate enough to regain the ground lost in the 2001 recession. "The need for additional stimulus seems apparent from the sub-par performance of the U.S. and global economies now in evidence," they said in the paper presented at the American Economics Association session. The large reduction in interest rates by the Federal Reserve, "while necessary, has not been sufficient to bring the economy back to [an] adequate performance." According to many forecasters, the U.S. economy grew by about 2.8 percent last year, but at only about a 1 percent annual pace in the final three months of the year. Last year's growth was not strong enough to bring down the unemployment rate, which reached 6 percent early last year, dipped slightly, and then returned to 6 percent in November. However, if the conflict with Iraq is settled either without a war or with a fight that is over quickly, many forecasters expect growth to approach an annual rate of 4 percent in the second half of the year. Sinai and Brimmer said they do not think growth will improve that much without additional fiscal stimulus. Among the panel members expressing concern about future budget deficits was Alice Rivlin of the Brookings Institution, a former director of the Congressional Budget Office and a deputy director of the Office of Management and Budget under President Bill Clinton. "You need to be very careful that you do not create an unfixable problem in the long run" by reducing federal revenue, Rivlin said. In particular, she criticized another part of the Bush package -- speeding up cuts in personal income tax rates now due in 2004 and 2006 and making them permanent. "Making the tax cuts permanent doesn't do much to help the economy in the short run and leaves policymakers a hell of a hole to climb out of in 2012," she said. Economist George Von Furstenburg of Indiana University sharply criticized the plan to cut taxes when the country has been hit with what he called "a permanent spending shock" from the terrorist attacks in September 2001. With federal spending going up to improve homeland security and probably to cover the cost of a war with Iraq, the Bush administration should take immediate steps "to stabilize tax rates to cover that spending," he said. Fed Gov. Edward M. Gramlich, also a former director of the Congressional Budget Office, told the session that monetary and fiscal policies should have "anchors" in the long run. For monetary policy, the anchor is keeping prices stable. "Fiscal policy should be anchored in the long run by the need to preserve overall national saving rates and prevent explosive growth in government debt," he said. "Over this long term, it is desirable to have budgets roughly in balance; or, to say it another way, the long-term budget constraint of the government should be satisfied without requiring unacceptable increases in future tax rates or cuts in future spending," Gramlich continued. That does not mean, he added, that you can have short-term actions to stimulate a lagging economy, but they should occur only while keeping that long-term goal in mind. Sinai is chief economist at Decision Economics in New York. Brimmer's consulting firm, Brimmer & Co., is based in Washington. © 2003 The Washington Post Company Link to comment Share on other sites More sharing options...
Atlanta Skins Fan Posted January 6, 2003 Share Posted January 6, 2003 Originally posted by gbear Now, I've incorporated. However, I've decided not to pay myself a salary. I'm simply going to give a stock dividend of 50k for each peace of stock. Okay, okay, so I own the only stock. If it's tax free, why wouldn't I do it rather than pay payroll taxes? The normal catches for running a C-corporation in this way are: The corporation pays its federal/state income taxes prior to dividends. If the corporation makes more than 50K profit, this puts you into a high-rate corporate tax. Under 50K profit, the corporate tax is 15% plus state taxes. You have to pay yourself a "reasonable" salary, subject to the usual personal income and payroll taxes. The dividend income to you is taxable at your marginal personal tax rate. The Bush plan proposes to eliminate the third catch, which is the most difficult catch. You can assign yourself a fairly nominal "reasonable" salary, so long as you can justify it. This takes care of most of the 2nd catch. The first catch is a catch if your corporation make more than 50K profit. You can reduce that profit through deductions, but if this fails, you can just start new corporations and shuttle income around the corporations. One corporation might taken in most of the income from clients, but the other corporations can subcontract for some of the work. Enron made such "related companies" into an art form, to avoid taxes while simultaneously boosting profits (illusively) to impress shareholders. So, netting this out, the Bush proposal means that any private corporation owned by an individual can, through various paperwork hoops, reduces its effective corporate/personal tax rate to close to 15%, even if the profits are in the millions. And if the corporation is formed in Nevada or similar state, there is no state tax at all. The Bush proposal is thus an incredibly bald tax-avoidance scam being passed to corporations and the shareholders who control them. The difference between this loophole and the usual corporate loopholes is that it's open to small-fry folks instead of just big corporations, so it's a kind of "trickle-down-Republicanism" for the small business owner and creative tax avoiders. Equal opportunity for all. As far as any benefit for the economy, it might have a neglible effect, counterbalanced by the major loss in federal tax revenue. There are many more efficient ways to stimulate the economy (and it's questionable whether that should even be a goal), so the economic benefits are clearly not driving the proposal. Personally, I wish they'd just eliminate the entire corporate and personal income tax system altogether and institute a sales tax on goods and services. The income tax system is a grotesque mess, with this proposal being just the latest example. However, as I do run my own business, I can't help but take notice that at least this corporate loophole is open to folks like me and you. Link to comment Share on other sites More sharing options...
@DCGoldPants Posted January 6, 2003 Share Posted January 6, 2003 Link to comment Share on other sites More sharing options...
gbear Posted January 6, 2003 Author Share Posted January 6, 2003 Bufford, the sad part of the graph is that it is only current spending. It ignores that we have a lot of outstanding debt. I would point out one more good point though. It appears that the deffecit as a percentage of GDP is still lower in recent years than the growth of GDP. The latest figures I saw for this year indicated a 2.8% increase in GDP. If we increase the defecit by less than 2.8%, we're gaining on it (atleast in terms of how much it will hurt to pay it off). It's liking knowing that you get a 2.8% raise every year. If your debt only goes up 1% a year, every year it should get easier for you to pay off the debt. Afterall, the total debt as a percentage of your salary should go down. Still, at somepoint we have to pay off the debt, and it would be better to do that before any new expenses occur (war, another terrorist strike, various costs associated with an aging population and workforce, ect.). Link to comment Share on other sites More sharing options...
Art Posted January 6, 2003 Share Posted January 6, 2003 A dividend tax break is so incredibly simple and logical it must be controversial. As has been pointed out in this thread, in order to pay a dividend, your company has to make a profit. All profit is going to be taxed. That's a given. What we're talking about here, and ALL we're talking about here is whether it benefits the country more to have businesses hold their profits in a bank, or whether it'd help that we NOT tax a dividend given to a shareholder, thereby putting the companies money back into the hands of shareholders. For the most part dividends don't make sense for mose businesses because shareholders know a dividend is simply the distribution of profit, which is already taxed. The question then comes into play whether you want that same money TAXED AGAIN by giving it to shareholders, or, whether you just keep it in the bank for corporate reinvestment. If you cut the dividend tax out you'll cause more companies to distribute dividends which is an excellent idea. Link to comment Share on other sites More sharing options...
Atlanta Skins Fan Posted January 6, 2003 Share Posted January 6, 2003 Originally posted by Art If you cut the dividend tax out you'll cause more companies to distribute dividends which is an excellent idea. Art -- that's the theory. Check my post above: in practice, this is a massive loophole for tax evasion by closely held corporations, as well as larger corporations that can issue dividends to selected interests (which they can accomplish via payments to related corporations whose shareholders are executive cronies). It's a loophole so large, every executive in America could down a bottle of Jack's and drive through it with a bulldozer backwards. Of course, that's a loophole open to everyone who can create a corporation, so in that sense it's fair for everyone. At least everyone smart. It's Bush's way of looking out for the little Republicans as well as big Republicans -- kind of heart-warming, I guess. Link to comment Share on other sites More sharing options...
Art Posted January 6, 2003 Share Posted January 6, 2003 ASF, I saw your post above and thought it seemed pretty logical to me. Burdensome tax systems that hinder business harm all of us and I'm happy there are loop holes to allow our nation's businesses to lessen the impact of the taxes levied against them. But, none of that is one bit meaningful. Microsoft has billions in the bank because it doesn't do any good to do anything else with it for them. If you remove the dividend from the shareholder, you'll find Microsoft suddenly paying a fat dividend check and this type of practice will be followed at dozens of companies and that benefits all of us. It's not hard. It's not Republican or Democrat centered, unless you're of the mind that all businessmen are Republicans and all of the 50 percent of Americans who pay 5 percent of the taxes in this country are Democrats. This is an idea that allows everyone a chance to keep some of their money and it gives companies an incentive to pull cash out of the bank and give it back to their stock holders. And companies will do this. I presume you're one of those guys who thinks people who already don't pay taxes should get tax money back. I'm not. I think they should actually start to pay some tax and let me and those like me keep more of my money. That would be a great Republican idea. You know, the one that recognizes that we're not the Soviet Union . Link to comment Share on other sites More sharing options...
Atlanta Skins Fan Posted January 6, 2003 Share Posted January 6, 2003 Originally posted by Art I presume you're one of those guys who thinks people who already don't pay taxes should get tax money back. I'm not. I think they should actually start to pay some tax and let me and those like me keep more of my money. That would be a great Republican idea. You know, the one that recognizes that we're not the Soviet Union . Art, if you think I'm on the left on this issue, I'm not. You won't find many more passionate opponents of our punitive income tax system than me. I prefer the direct approach: tear the fvcker down, burn it, bury it in toxic waste, then blast the stinking mess into space. Then have a nice, simple sales tax for goods and services. No evasion, nothing complicated. Then when the masses realize how much tax money the government is taking, we begin the shared effort to reduce taxes in a big way. The Republican attitude seems to be, "Aw, fvck it." And they just unlock some doors in the back of the building for themselves and their buddies. Different approaches, same goal. My approach requires fewer accountants. Link to comment Share on other sites More sharing options...
Darth Tater Posted January 6, 2003 Share Posted January 6, 2003 ASF, I don't believe a national sales tax will work in implementation. We live in a country were Fish-Mongerers are a protected class! :laugh: Link to comment Share on other sites More sharing options...
Art Posted January 6, 2003 Share Posted January 6, 2003 ASF, I'm all for complete and total reform of the tax code. I'm all for a total repeal of income taxes. But, there's a term you may not be aware of. It's called creeping conservatism. It's a term taken from creeping liberalism. Republicans can't overreach. They can't change the world because in two years there won't be enough evidence that the world is changed to satisfy people and the Dems will break everything again. You have to implement change in pieces. You have to bring change slowly. You can't do what you're saying. What you can do is give people who pay taxes more money back. You can keep doing that until we get to a point where what should be done is possible. You can't tear it down from here. You have to tear it down when the whole thing is weakened a bit. Link to comment Share on other sites More sharing options...
Atlanta Skins Fan Posted January 7, 2003 Share Posted January 7, 2003 Originally posted by Art ASF, I'm all for complete and total reform of the tax code. I'm all for a total repeal of income taxes. But, there's a term you may not be aware of. It's called creeping conservatism. Oh, so *that's* what it is. I thought it was "creepy conservatives". I need to listen more closely. :laugh: You have to implement change in pieces. You have to bring change slowly. You can't do what you're saying. What you can do is give people who pay taxes more money back. You can keep doing that until we get to a point where what should be done is possible. You can't tear it down from here. You have to tear it down when the whole thing is weakened a bit. I get it now! It's the epic movie "20th Century Tax-and-Spend Liberalism" -- played backwards, slowly! That's a movie I definitely want to see. Can't they speed it up? I want to jump straight to the opening credits. Link to comment Share on other sites More sharing options...
Art Posted January 7, 2003 Share Posted January 7, 2003 Speeding it up will be hard. Especially when people like you produce tenuous complaints that the concepts are fundamentally flawed and headed for corruption. The thing you don't realize from your earlier post is that removing the second taxation on dividends would essentially end all Enron-type problems for companies offering a dividend. The reason is simple. You can't pay a dividend without cash on hand to do it. You have to have the dollars and as we know with Global Crossing, Enron and Worldcom, they were lying about their earnings and fictionalizing their returns so they would be unable to offer dividends since they lacked the cash to pay them. And, when you allow for the incentive to companies to offer dividends you'll find people gravitating toward investments in companies that provide them and spurning those that do not. It's a beautiful thing that is so simple that it actually will combat corruption simply by the very nature of requiring cash to pay the dividend off. Can't argue with that. So don't. The more people like you who claim to want change in the tax code b!tch about any change in the tax code the harder it will be to enact change in the tax code. Link to comment Share on other sites More sharing options...
Guest SkinsHokie Fan Posted January 7, 2003 Share Posted January 7, 2003 Here is hoping by the time I am 50 (a long long way away by the way) there is a flat tax system. Most logical thing ever. Link to comment Share on other sites More sharing options...
Art Posted January 7, 2003 Share Posted January 7, 2003 True Hokie. A flat tax would be the easiest thing in the world. If the tax code was written that there was a flat income tax and that the same money could not be taxed more than once, we'd be able to pay off the national debt by firing 75 percent of the IRS :0. Link to comment Share on other sites More sharing options...
Kilmer17 Posted January 7, 2003 Share Posted January 7, 2003 Ive been a HUGE proponent of a national sales tax for years. It makes the most sense. Tax everyone on their spending rather than their earning. Their are studies that show a national sales tax of 20 percent will erase the debt and deficit (2 seperate numbers for this study) on the tax recieved from illegal enterprises alone!!!!! Think about it. A national sales tax mean that every drug dealer, every prostitute, mobster, thief, etc will have to pay taxes. CUrrently they dont. But to the Dem/GOP debate, the Dem talking points are that the BUsh plan will only give the middle class (by their definition any family earning under 93k per year) a break of 89 dollars and give bigger amts to the "rich". (My wife and I are rich because she's a teacher and I have started my own business according to the dems.) Of course, the Dems plan would increase that money to the "middle class" to a whopping 122 dollars. Link to comment Share on other sites More sharing options...
Riggo-toni Posted January 7, 2003 Share Posted January 7, 2003 Oddly enough, the greatest tax plan proposed was put forth by none other than wacky space cadet liberal Jerry Brown - 13% VAT and 13% flat tax. Look, the recent Wall St rally is pretty good evidence that cutting the taxes on dividends is probably the best remedy the gov't can give to jumpstart the economy. It certainly makes more sense then Dems' proposals to just spend more $$$, when the GOP led House has been increasing spending at ridiculous levels over the last several years. A cut in dividend taxes will push stock prices up, thus promoting consumer confidence (over 60% of Americans now are in the Stock Market), The payouts will stimulate consumption. This combined with a TEMPORARY payout to States to help them balance their budgets over the next 2 years are the ONLY things the Gov't should do as far as stimulus goes. It would be nice if we could finally get some restraint on discretionary spending, but nobody has the cajones to do that anymore. Link to comment Share on other sites More sharing options...
joe Posted January 7, 2003 Share Posted January 7, 2003 It's been a long time since I took a course in corporate tax, but I believe that this is still true. Gbear Inc, as a very small corporation, should have so few shareholders that it comes under the Subchapter S provision of the tax code. There is no double taxation for this type of corporate entity. It is created to limit liability for those who do not wish to lose their house, as you indicated, but would otherwise like to operate as a sole propiatership or small partnership. As for the double taxation question, I read an article by a Post finance analyst, Samuelson, who made a pretty convincing case that what they should eliminate to spur the economy is the initial taxation on the corporation, not the taxation on the dividend. It was a few weeks ago so you might be able to still find it on Washingtonpost.com. I find that a national sales tax and a flat tax are too regressive. They cause the less fortunate to pay a much higher percentage of their income in tax than rich, so that is really not the answer, unless you are very wealthy. As for taking things in small bites. That is the only way anything gets accomplished. Overreaching on a program is the surest way to get it killed in Washington. We saw that with Jimmy Carter's gasoline tax reforms and Clinton's health coverage, both of which had some merit, but were killed through bungling, and a lack of political savvy, by their proponents. I don't see this happening with Bush. He seems to be pretty good at getting his programs implemented. To me, the easiest way to balance the budget is to legalize marajuana and tax the heck out of it. That would also have the added benefit of clearing the courts of meaningless cases. Link to comment Share on other sites More sharing options...
Kilmer17 Posted January 7, 2003 Share Posted January 7, 2003 That is not true. The "less fortunate" would not pay more under a national sales tax plan. They would get the same breaks that they recieve under the current sytem. Link to comment Share on other sites More sharing options...
joe Posted January 7, 2003 Share Posted January 7, 2003 I don't see how that is possible. If person A pays X percentage everytime he buys a necessity and makes Y amount of money per year he is going to be paying a percentage of tax of X/Y. If person B makes $200,000.00 more per year than person A he is going to be paying a percentage tax of X/Y+200,000, which is less This, of course, assumes that both persons A and B have the same necessities. Link to comment Share on other sites More sharing options...
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