md95065

Actually they penalize (tax) the employer.
If you happen to be self employed then you are your own employer and get to pay the tax.

JAJ

As far as I know, you may be able to deduct the "employer" portion as a business expense, against federal income tax.

hoffage123

Thanks JAJ

Steve_

Because (a) a lot of immigrants to the US were German;
(b) it's the largest developed country in the world;
(c) because it's the largest developed country in the world you end up with lobby groups that in Canada would consist of a few thousand people that consist of tens of thousands of people in the US so they can make more waves.

The endless attempts to abolish the $1 bill being a good example.

Just makes it much much harder to reach a consensus. Canada for example abolished the mortgage tax credit back in the 1970s, iirc. Plus the bigger a country is, the more unusual situations develop, so some sort of law has to be made to address it.

I never really understand why people use tax software in Canada, our returns are so much more simple because there are so few credits you can claim by comparison to the US. I always find it ironic that TurboTax is made by a Canadian company.

Steve_

The problem is the US has very high payroll taxes, which does provide a big disincentive towards self-employment. And it also provides a big incentive to employers to make as much of their staff self-employed as possible.

The US tax system was conceived around the idea of factory workers, so the IRS would find it easier to go after employers rather than employees. The US for example has the highest corporation taxes in the developed world except for Japan, because it's easier for the IRS to track down a company than an individual.

Out of step though with the modern world as you can see from the recent mess with healthcare. Employer provided health insurance makes sense when your economy is manufacture based, but it doesn't now with a more fragmented service-based economy. So there are all these gaps to fill - people don't have enough money in retirement, hence social security. Employers can pay for health insurance in retirement, hence Medicare. A lot of employers don't provide health insurance now because they're too small and can't afford it - hence ACA.

Michael

That may appear to be true but over 10% of the S&P500 companies pay no corporate income tax, the US is ranked 6th from the bottom among OECD countries for corporate taxes as a percentage of gdp, and many American companies move patents to places like Ireland so that that taxes on royalties will be less.

Therefore the majority of large US companies don't want the tax law to change since a fair 20% tax rate would cause their 0%, 5%, 10%, or 15% effective tax rate to increase. Under the Bush administration, it was argued that since US corporations already pay corporate taxes before they pay dividends, dividends should be taxed at a preferential rate and the law was passed. However a company like EXXON pays no US corporate income taxes but dividends are taxed preferentially.

It's easy for a small country (Switzerland, Luxembourg, Ireland, Cayman Islands, etc.) to be a tax haven since they can have low corporate taxes but don't have the burden of expensive infrastructure or many employees to support the businesses. If those countries can collect half of their corporate taxes at half the rate of other countries from shell companies, then they'll likely break even with their own companies at half the rate.

robin1234

I agree with your reasons a, b and c. I think the big one is,
(d) because of the constitution, Congress, separation of powers, etc., the default for reform is accretion of further amendments, fixes, and new laws, rather than replacing an old, flawed system with something new and improved. Alternative Minimum Tax and Affordable Care Act are just two examples. And I agree, with the dollar coin, WTF ???

Steve_

Yes because of inversion, the point I was getting at historically is that the IRS doesn't have that many tax inspectors and people don't like tax inspectors. So when the tax system was designed the largest employers were farms and factories so in essence they decided it was easier to go after big physical companies than private individuals.

All of that has changed now, but the core of the tax system has not.

The logical thing imv to do is to reduce corporation taxes and increase personal income taxes, because with less corporation tax, companies then have more money to pay higher salaries, so taxation is then drawn from individuals.

That's the logical thing to do, but first of all they've got to stop tax avoidance measures like inversion and the idea of lowering corporation taxes isn't politically popular among the uninformed (nasty big business) and no-one wants their taxes raised either.

Steve_

Plenty of countries have laws based in antiquity that no-one has the courage to change. E.g. the tax year in the UK starts on April 5th.

I can think of endless examples. In the US it is even harder though due to the sheer size of the country.

Pulaski

Do you know why it's April 5th? It didn't use to be, it used to be March 25.

rpjs

As I like to say, the US was originally settled by the British and the Germans. Its bureaucracy could have had German efficiency and British flexibility but ended up with the exact opposite.

jmood

Yes but what you pay is already a federal contribution/tax. How can you deduct federal from federal?

jmood

What's inversion and how do major (not weird ones who can hide in tax havens) US companies avoid paying corporation tax?

JAJ

Sigh.

Because you can. If self-employed.
Self-Employment Tax (Social Security and Medicare Taxes)

Self-EmploymentTax Deduction
You can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your self-employment tax.

The thinking is that normally, an employer can normally deduct (employer) FICA as a business expense. So a self-employed person should also be able to do the same and deduct the "employer" component of FICA as a business expense, against federal income tax.

jmood

So FICA is calculated based on your self employment earnings, your adjusted gross income includes your self employment earnings, then you deduct FICA from your earnings to determine your adjusted gross income. Right?

So does this mean that FICA is not based on adjusted gross income but is based on your total self employment earnings regardless of whatever expenses or deductions you may have?