Why do we tax profits and not losses?

Question

It seems backwards to me to tax profits and not losses. We want to incentivize profits, not losses, so why are we taxing them to incentivize the opposite? Aren't we encouraging shady accounting practices by incentivizing companies to disguise profits as losses?Would it mean that companies take fewer risks if the bill for a failed project would be higher? Does that stifle innovation?To preemptively qualify: I don't think taxes on profits should go away completely, but perhaps the tax burden could be shifted, so that some % comes from profits, and some % comes from losses, such that the net revenue to the government is the same, while still employing this new incentivization structure.

PopAlongKid · Accepted Answer

Not only are losses not taxed, but they are often deductible against other taxable (profit) income. I believe this is mostly out of a sense of fairness, and also because profitable business activities often start out as unprofitable, and we don't want to discourage that start-up phase, or we might not ever get profitable businesses.
edit: losses are not deductible in perpetuity, however. For small businesses, after several years of losses, the business is presumed to be a not-for-profit ("hobby") activity for which losses are not deductible. And larger businesses can only continue to generate losses by investors dumping more money in only to lose it. (U.S tax system)
>We want to incentivize profits
There is already plenty of incentive without any government intervention.
And as others have pointed out, taxes are heavily based on a ability to pay. For example, while cancelation of debt (forgiven loans) result in taxable income (U.S), there are exceptions for people who are insolvent (and therefore obviously can't really pay the tax).

mdnahas · Answer

Yes, it is backwards.But most economists agree that companies should not be taxed. Well, they should be taxed for things like carbon emitted, waste, resources used, value-added, etc.., but their income and profits shouldn&rsquo;t be taxed.Economists see the taxes paid by companies as being paid by their owners. So, if a poor person owns a share and you tax the company, the poor person pays taxes. Better to have the company disperse profits to their owners and then tax the rich owners.https://www.npr.org/sections/money/2012/07/19/157047211/six-...

jka · Answer

Here's a quote[1] from Adam Smith about the nature of effective taxes:
"Good taxes meet four major criteria. They are (1) proportionate to incomes or abilities to pay (2) certain rather than arbitrary (3) payable at times and in ways convenient to the taxpayers and (4) cheap to administer and collect."
Is it profit or revenue that is taxed, generally?
[1] - https://en.wikipedia.org/wiki/Theories_of_taxation

hcta · Answer

Losses are already disincentivized by virtue of their being losses. Your proposal would merely create additional risk for any action. I suppose the extreme would be to forcibly liquidate any company that ever loses money. If you can come up with an argument against doing that, I think the same argument would most likely refute your proposal without modification.

ziml77 · Answer

Companies wouldn't take risks at all if you're artificially increasing the financial impact of failure. And no one would want to give loans to businesses because if the business fails there would even less chance of getting paid anything back.

ada1981 · Answer

You don&rsquo;t want to compound losses by taxing losses.Profit taxing presumably takes what can be spared.

mbg721 · Answer

Because we don't want to send the message to future entrepreneurs "If you take a risk and it goes badly, we will crucify you,"?

yuppie_scum · Answer

If we did tax losses, Donald Trump might actually have to pay