Why companies should pay loss taxes.

In my article “Unconditional revolution, digital basic income“, I briefly touched on an issue that I am repeatedly asked about. And triggered numerous discussions: replacing profit taxes with loss taxes for companies. A thought experiment.

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From another time

The concept of profit tax is an old one. And at first glance, it makes perfect sense: companies that make a lot of profit can and should pay a lot of tax.

This creates corresponding incentives. On the one hand, as a company I want to make as little profit as possible, as I receive no direct value for the taxes (sic!). On the other hand, I try to minimize my taxes as much as is legally possible.

Social interest

However, companies that make a lot of profit would be of interest to society. Because companies that make a lot of profit,

1. either form reserves,
2. invest these profits (and/or reserves) in new initiatives and products
3. or pay out these profits to investors.

All three options are beneficial for the company. Reserves mean that the company is better able to absorb losses in difficult times. New initiatives and products promote the future viability of the company and profits that go to investors promote confidence in the company. In addition, investors make capital available to other companies.

Fail slow

The current tax system thus unwittingly promotes the slow failure of companies. This has serious disadvantages for society: employees are employed for long periods of time without an economic basis and then, if the company goes bankrupt, are made redundant in one fell swoop. The losses cause further debts to accumulate, which suppliers, the state and lenders then have to pay. Suppliers, for example, usually find it difficult to compensate for these losses, which leads to further bankruptcies.

Instead of giving companies that get into difficulties every incentive to return to profitability as quickly as possible, the tax system does the opposite: it favors companies that make losses.

Polluter pays principle

The polluter pays principle applies to many social issues. In the relationship between the state and economic entities, however, it seems to be the other way around. The damage “caused” by the economy is paid for by the state and therefore the taxpayer. It is clear that in the end it is a zero-sum game.

Companies need money to get ahead

Companies can create sustainable new jobs if they start to shape new technology into new products and services. Existing companies should be able to finance this process themselves. This is only possible if profits have been generated beforehand. We should therefore have a vital interest in companies making massive profits.

Existing products and services do not create new jobs. On the contrary. Existing products and services are optimized and rationalized. Only new technology and methodology really create jobs in the medium term.

But we also need to encourage companies to remain entrepreneurial in the first place. In other words, not just to optimize themselves to death, but to invest money in the development of new products and services. To take risks.

Loss taxes

We should therefore not only make companies pay taxes on losses, but also create incentives for generating profits. According to the motto: the more profit, the more benefits.

This goes against the grain in our minds and the short-term thinking financier will wonder how the tax losses are to be compensated. The answer is simple: not at all.

Bonus – Malus

One idea that we have loosely developed in discussions is a kind of bonus/malus system. Certain indicators are subject to a tax penalty, others to a bonus. For example, 30 bonus and 30 malus factors would be defined, each of which would strongly favor genuine entrepreneurial activity. Of course, this is not without its problems. As we all know, humans are pretty good at fulfilling such regulations “by the book”. But it’s no different in today’s tax system.

Long-term effect

In the long term, stable companies will result in much lower costs for the state. What is much more important, however, is that the taxpayer always pays for everything in the end. That is the real advantage.

Fail fast

By taxing losses, we are exacerbating natural selection. Companies that are not doing well disappear more quickly. This is much more efficient than companies being kept alive artificially and then disappearing by the skin of their teeth.

Need for reform

The principle of profit taxation in modern times is over 200 years old (Adam Smith, 1776, principle of equal taxation). 200 years ago, there was almost nothing that we hold dear today, except water, sunlight and air.

I think we as a society should start to venture into new concepts in the political process. There is a huge need for reform, and not just in the area of public finance. By sticking to the old concepts and developing them inadequately, we are doing the same as companies that accumulate losses. We keep going until there is no other way.

But that doesn’t have to be the case. Today, we already have the knowledge and the political capacity for action and discourse to develop and evaluate different concepts at an early stage. We just have to do it.