Ask HN: How much would changes in tax policy affect entrepreneurship? | Hacker News Reader

Ask HN: How much would changes in tax policy affect entrepreneurship?

7 pointsimpendia8 comments

I don't have a particular horse in this race, but as an academic far removed from the world of business, let me ask the HN community something I've long been curious about.

How much would/do changes in tax policy affect entrepreneurship and willingness to take risks?

As an example, there was a recent controversy in San Francisco as to whether to offer Twitter an exemption to its payroll tax, to entice them to stay in the city.

More generally, we hear proposals to raise the top marginal income tax rates back to 39.6%, or higher, or to tax capital gains as regular income, or what have you. The most common argument advanced against this that I hear is that it would stifle business, entrepreneurship, and job growth.

Would it? If you started (or intend to start) a startup, would you still have done it if any windfall was subject to, say, 65% taxation?

Not trying to start an argument, I promise! Indeed, the perspectives and motivations of individual founders or potential founders are what they are, and as far as this debate goes, they seem to be the closest thing we have to hard facts. Hence my curiosity.

For someone who's starting up a brand new business, tax considerations aren't top-of-mind. Questions like what to make, for whom, how to price it, who to hire, and what technologies to use are much more important.

Of course, the accountants will now scowl at me, because I've said something stupid (to their tax-obsessed minds), and of course I should be thinking about tax rates. Well, my response would be to look for some data. People don't move to the Bay Area to create a tech startup because costs are low.

The Twitter example isn't very useful because Twitter was no longer a startup by the time the SF payroll tax exemption idea came up. (Wikipedia says Twitter has 450 employees and launched in 2006.)

Indeed, I see my Twitter example is a bit off...

I agree the person starting a new business won't take into account tax implication but investors surely do.

It depends on the kind of investor. Buffett makes investment decisions irrespective of taxes. A day trader would obviously be affected by short-term capital gains rates.

I'm not demotivated by taxes as such. What demotivates me a bit is when high taxes are applied to moderate incomes (see cold progression http://www.economypoint.org/c/cold-progression.html as we call it in Germany). What demotivates me more is when I fundamentally disagree with the (ab)use of tax money, e.g., giving it to the social welfare industry, the big corporations, a.s.o., but it just demotivates me to pay taxes in this country (to say it this way), it certainly won't stop me from doing business.

I have co-founded one successful company and am a co-founder in a current startup. I do think explicitly about tax effects when making business decisions, and there are definitely tax rates that would have changed my decisions, particularly taxes on wealth or investment income that make it less valuable to have savings. High enough taxes could also cause me to leave the U.S.

Regulation, however, is a much bigger impediment to innovation than (current levels of) taxes - there are no companies that I have not started because of taxes, but there are a dozen that I haven't started because regulations would make them impractical or make political influence more competitively important than good execution.

A huge amount because and raise changes every ROI calculation. You can look back in history and see that the wealthy move their assets to tax-free shelters as tax rates rise. Take two companies A and B, under two different tax rates 10% and 90% respectively. For an investor to earn the same return company B would have to be 9x as profitable as company A (made simplifying assumptions). That's why increasing tax rates hurts, it makes competitive investments next to impossible to find, so investors shelter their money instead slowing growth, job creation, and wealth creation.

The extents that I have gone to to limit my tax liabilities in the past are ridiculous. To think how much time and money I have wasted that could have been put towards productive aims. It's sad.

Thanks to all for your responses!

Reply on news.ycombinator.com