Why taxes are damaging

Published October 26th, 2008 edit replace rm!

There have been two related blog posts in the last couple of days :The Cure to Our Economic Problems by Mark Cuban and Amen Brother Cuban by Matt Maroon that I can absolutely sympathise with. True entrepreneurs are so focused on their idea that they will find a way.

Mark says:

The impact of tax rates on productivity and development is something economists masterbate about, enterpreneurs don’t waste their time thinking about it. We have business to do.

Matt replies:

Exactly. When I started my first company I’d never even heard of capital gains taxes, and had no clue what I’d be paying even at the personal rate. All I knew was that I had an idea for a web site that I thought would be pretty successful (and it was) and I wanted the corporate veil for protection.

The current tax rates in the US aren’t so bad that they necessarily stop entrepreneurs. In particular entrepreneurs who aren’t focused yet on profits or business models are not particular worried. However before we start voting in more taxes, please listen to this cautionary example of Denmark.

It is possible to kill entrepreneurship through taxes. In my country Denmark taxes are pretty much double than what they are here in the US. When it reaches those levels it plays mind tricks on even the most devout entrepreneur. It colors your strategy and makes you do things you wouldn’t normally do if you were living in a more forgiving tax world. In the US Matt doesn’t have to know about Capital Gains Tax in Denmark he does.

Many Danish entrepreneurs that I know leave the country and go to more forgiving tax climates before they start their business. Just think of all the potential great business ideas that get left on the floor because potentially great people end up fearful to start their business in their own country.

If you start your business and then move to England or Spain you are forced to sell your business to yourself and pay at least %33 capital gains on it. Just imagine if you had to do that moving from say California to Oregon. Rather than face this many Danes never end up pursuing their dreams.

There are all sorts of loopholes and tricks that people who really want to pursue their dream in Denmark have to learn and go through. Isn’t it better to focus on your business than whether or not the computer you are buying to run your business is tax deductible or not.

You can read more about the problems facing startups in Denmark or my bootstrappers guide for Denmark.

One thing that Denmark has that the US doesn’t is a fairly reasonable corporate tax rate. Most European countries now have fairly low corporate taxes yet get you on their sky high personal income taxes and sales taxes.

The US could definitely do with a lower corporate income tax. We have the second highest in the OECD. As a startup the workaround for this is S Corps or LLC’s, where you are taxed at individual rates.

More important though than plain lower taxes would be a simplification of the tax structure. The US tax code is extremely complex. Intuit and various accounting firms have been lobbying to keep it as it is for years as it is obviously beneficial for them. We the individuals as well as startups suffer the consequences of this. It needs to be made simpler. Like what Mart Laar did in Estonia.

While I do think Taxation borders on the immoral, I think that an even worse side effect of taxation than taking your money is that it changes the way you think and manage your business and daily life. Lower it, but more important simplify it.

Posted October 26th, 2008

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Comments
dougalcorn@gmail.com

Doug October 26th, 2008

Here in the US we often leave ideas on the table over lack of health insurance. That held me back for years before I was ready to go put on my own.

Also, our nominal Corp tax rates are misleading due to the vast amounts of loopholes, kickbacks, and the like. If the “real” tax rate was as high and disproportionate as it looks we’d have more corp move overseas.

brian@yamabe.net

Brian Yamabe October 27th, 2008

I think Cuban is right that entrepreneurs aren’t weighing the tax implications when they are trying to start a venture. I disagree with his position that taxes don’t have any affect. Tax rates affect how much a business can reinvest and grow.

themaroon@gmail.com

Matthew Maroon October 27th, 2008

I don’t think I would say they have no effect, though I would say capital gains have close to none and they create a giant tax loophole for the wealthy.

We’ve determined from history that obscene taxes are bad (US used to have top rates of up to 70%) but can actually show that within the range of up to about 40% they have no noticeable effect.

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