Make companies pay taxes before reinvesting
There is a difference in what you can deduct as a company compared to an employee to ensure that you do not have to pay tax. After all, companies can do something very strange that would never be allowed by employees. They can postpone paying the tax for the future by not paying out the profits they have received, but reinvesting them. This idea may be the closest to the pension an employee saves, but it is not the same. The employee does not yet receive part of his money with a pension, so does not have to pay tax. By the time it is paid, tax must still be paid as if it were salary. Everything that it has become more valuable in the meantime through investments and is therefore paid out more, is therefore taxed more. Pension is therefore mainly a postponement of paying income tax.
A pension is therefore not quite the same as the benefit that companies enjoy from reinvestment. If an employee dies early, the remainder of the accrued pension will be used to pay out to others, or will benefit the profit of an insurer. However, companies do not have such an automatic link that it is ever paid out. To begin with, a company may decide that while profit was made that year, it would rather use that profit to purchase another business or to finance a new development.
By allowing the company to invest with the profit already made, it actually becomes speculative whether tax will ever be paid on that profit. If all that profit is invested in loss-making ideas, then there will never be any more profit and therefore never more corporate tax. In fact, the company is speculating with the unpaid corporate tax from the past. But even if a return is made on the investment, it is not necessarily paid out. For example, it is much more beneficial to allow a share of the company to increase in value by not making a profit and then selling the share than it is to distribute the profit. That is why most millionaires mainly have wealth in the shares of their companies and finance their private expenses with the sale of a few more valuable shares.
The system is therefore designed in such a way that the money must remain in a company for as long as possible and there must never be any profit or profit distribution. After all, the latter two are associated with paying taxes – and thus with contributing fairly to society. It is understandable that there is only profit when the costs have been deducted from the revenues. And that concerns all costs associated with those revenues. So the purchase costs, wage costs and depreciation of investment costs that have contributed directly to the relevant revenues. If you use this definition, companies have made a lot more profit in the past year and have to pay a lot more corporate tax than they do now. That’s because I deliberately haven’t mentioned two deductions yet: past investment failures and upfront deductions for future business.
There is, of course, something to be said for a right to deduct the failed investments of the past. This alleviates the suffering of the wrong decision or wrong guess. The question is whether the taxpayer should make an indirect contribution to this or whether this is simply an entrepreneurial risk that is covered by less profit distribution. If no profit is ever made in a company because of wrong guessing, then there is no question of recovering taxes. A company with other activities and therefore a different profit from which the loss can be deducted is therefore favored compared to a start-up company. That cannot really be the intention. In addition, sometimes strategies are implemented whereby failed investments of subsidiaries are written off as a loss, whereas if they made a profit it would never be included in the central profit and would not be taxed by the parent company. The tax authorities therefore have the burdens, but never the benefits, because they go to another country. It is therefore better to apply stricter rules there and only accept investment losses if all comparable profits are also booked.
There is no reason to be so flexible for investments into the future. Profit has been made, so tax must be paid on that profit. The entrepreneur can decide to leave the remainder in the company and therefore not to pay a dividend. That money can then be used to make an investment for future profit. Once that profit has been realized, the depreciation of the investment can then be included. In this way, it is avoided that a company just keeps on growing to avoid paying tax on its profits.
Ultimately, an employee is also not given the choice to invest his income in a company before he has to pay income tax. He can do this after the income tax has been transferred and there is enough money left. That difference should therefore not exist for the tax authorities between companies and employees. As mentioned in this article, it should be quite normal that when money reaches an individual, the same effective tax is paid on it. The route via corporate tax combined with dividend tax should yield the same result as the income tax. Requiring companies to pay corporate tax before reinvestment closes an important loophole in the tax code and ensures a level playing field between start-ups and growing companies