How to Jumpstart the Economy - Tax Free Small Businesses | Hacker News Reader

How to Jumpstart the Economy - Tax Free Small Businesses

blogmaverick.com

43 pointsdrm23744 comments

This will positively not work.

I live in Romania. Starting 1999 (IIRC) and ending 2006, there has been some very similar legislation in effect. The only result was a tremendous drop in income tax (which, admittedly, had been very high) since everybody and their grandma opened a small business, quit their job, and immediately came back to the same position as a consultant paid by their own company. Many employers applied gentle pressure in that direction since it got them cost cuts as well.

The clinch is that all these new small businesses contributed absolutely nothing new to the overall economy - the result was a net loss in taxes without economic growth to offset it - which is why the corresponding legislation was abolished in favor of a flat tax on income, profit, and so on (which, in turn, was quite successful at jumpstarting the economy.)

I don't think that there would be any additional advantage to doing that under the model Cuban is proposing. Business owners would still pay tax on their personal income. The actual dollar amount of tax paid by a one person company that pays all profits to its owner/employee would be the same with or without small business taxes, since the business always has a profit of 0.

Business owners may prefer contractors for various reasons still, but this wouldn't add to it. Did business owners in Romania also get a break on the money paid out from the small business as personal income?

Good point reit. Just eliminating the double taxation thing could be huge.

Indirectly, yes, since they didn't have to pay the social security contributions affixed to salaried positions - and since those contributions are considerable (depending on the job function, to the order of 30% up to 80% of the pre-tax wage) it was easier to do this than to avoid paying them at all (also a common practice since tax collection, alas, moves incredibly slow...)

America is not Romania.

However, people are people.

> The only result was a tremendous drop in income tax

Looks like Romania enjoys pretty good growth and low unemployment compared to the rest of Europe http://www.heritage.org/index/country.cfm?id=Romania are you sure low taxes haven't helped?

The level of taxation is not important per se, the only important thing is how the collected taxes are distributed and what they're used for.

Low taxes have helped somewhat (mostly by indirectly expanding the tax base) but the current economic situation (not very much affected by the global financial crisis) is a somewhat coincidental effect of the still large disconnect between the Romanian economy and the global markets.

What I'm arguing is that such a loophole will only create inflation by directing the indirect tax cuts to spending.

> What I'm arguing is that such a loophole will only create inflation by directing the indirect tax cuts to spending.

Inflation would be caused here as the total amount of money in the country is the same. It's just that the people are spending more money and the government less money. You only get inflation when the total volume of money increases.

You can also create inflation by any number of different means. One very good way is to encourage consumer spending (not investment!) when most of what consumers are buying is manufactured in other countries then imported.

Spending can't cause inflation as there's no increase in the money supply, and so prices can't uniformly rise as there's not the actual physical cash to pay all those higher prices.

Sure it can. both trade deficit and expectations of inflation play very important roles.

It's a little cute hearing multi-billionaires talk about how tax cuts must be the answer to, you know, everything.

I don't think new business are worried about paying taxes, they're worried about dealing with them period. Making taxes trivial to deal with up to a certain point would be much more of a jump-starter.

True, but the simplest way to do that is to get rid of the damn things altogether.

I think 25 is a bit high of a cut-off point, but at least 5-people businesses should escape somehow...

There'd have to be more metrics than that, but again, I don't think it's paying that worries people. Most startups with a good accountant won't pay much in taxes initially, but maybe if you set something like:

If you are not a subsidiary of another company, have got under 5 employees, under $50k in the bank and under $200k in annual revenues, you have the option just paying $1000 in taxes for up to two years.

Basically a 1040 EZ for small businesses. I bet people would jump all over it to just have it done without worrying.

How many employees does Berkshire Hathaway have again? Something like 12 at HQ, I think. That would be a lot of tax revenue to disappear.

> How many employees does Berkshire Hathaway have again? Something like 12 at HQ, I think. That would be a lot of tax revenue to disappear.

How much does BH currently pay in taxes?

I note that Buffet's estate will go largely untaxed, so it's no skin off his back to argue that for estate taxes.

You'll still have to do all the paperwork to report your employees income etc. + small businesses make up like 99% of gov't revenue from business, so I doubt they'll want to cut you a break.

What they need to do is come up with a better web based solution. Right now the state websites are crap, they don't even tell you which forms you need to do. They need to come up with 1 government website, where you select what your business does, input how many employees you have, input your revenue and expenses, and then based on that info you get a generated list of all the forms you need to submit, already pre-typed with your relevant info. Then add email notifications for when its time to submit a new form.

Seriously why the hell do all government websites look like they were made in the 90s?

Seriously why the hell do all government websites look like they were made in the 90s?

Because they were.

I know that, but wtf really, The whole tax system is retarded...ooh I know lets make it hard for people to give us money.

Also, they don't really benefit from providing better customer service.

This sounds like a business opportunity for someone.

In fact, there are people who have done this. I believe Intuit has a pretty good package for that matter.

They need to come up with 1 government website

Scary.

Maybe not if it's the local government: have it so that the federal government collects the taxes from the state governments, who collect taxes from the local governments. That way, you (as an individual and a business) only deal with your local government.

I totally agree with him - all the paperwork and bs involved with getting a company started is an artificial barrier to entry because it has nothing to do with the company making money. It's just a test to see if the founder can push paper through a broken system and I'm sure it has stifled a lot of innovation in the US.

Damn straight. Now all we need is for the government to actually implement this.

Shouldn't take any time at all, I'm sure they'll be done by tomorrow evening.

Motion to table!

The loopholes would be too big. The solution is actually quite simple: cut government spending and lower taxes. Jobs and companies would insource instead of outsource. Anyone who thinks the government is effectively spending tax dollars is out of their mind.

Thanks, Dr. Paul.

No, but really, I agree with you. However, this might still be a step in that direction, as less tax money for the government to spend means less spending.

I know you were half kidding, but I'm _not_ saying eliminate 90% of the government or put an end to all government programs or anything like that. Cutting spending by 20% would work wonders. And while I admire the awareness Ron Paul has raised about government waste, he's crazy and has yet to accept evolution.

Better than tax-free big businesses.

The loopholes this would create would lead to some very well paid accountants. I'm all for the idea of letting small businesses get tax breaks, but I think that Exxon could find a way to break themselves up into 25,000 smaller companies.

Cuban included in his "proposal" the restriction that this should be allowed only for individuals and only for one business. If you do it right, there won't be any Exxons taking advantage of it.

If I worked for Exxon and something like that passed, I would probably become the sole proprietor of Exxon[205.5] with an offshore company as my main shareholder, to whom I pay dividends.

Accountants are sneaky, that was my main point, anyways.

IRS issues + health care have been the two greatest areas of stress when running my own business. I was a bit naive about both the first time around, I'm not sure I'll do it a second time.

Same here. Incredibly stressful. The only positive side is that after screwing taxes up for a few years and even being audited, the IRS has treated me with the utmost respect. They have waived penalties and interest and given me ridiculously forgiving extensions. A little humility mixed with a touch of patronization can go along way.

I don't get it. The author starts by explicitly saying that the tax rate has not been a big factor in his decision to start a business, and ends by suggesting that if taxes on small businesses were eliminated, it would stimulate the economy.

In between, he mentions the paperwork and regulatory hoops that you have to jump through to start a business, but lowering the tax rate isn't going to make the paperwork less annoying, and many of the regulations only apply to businesses with a certain number of employees.

I think he just changed his mind halfway through the post - he started out talking about taxes but realized that he really meant regulations.

Too bad he was writing in pen the whole time, eh?

Yeah, this sounds like a great idea:

No taxes of any kind on small businesses with 25 or fewer employees. No employer payroll tax. No state or local taxes. No taxes on earnings. Nada. The business owners will pay income taxes on their personal income they pay themselves, but not corporate earnings

I guess I will start a business that contracts my time out. This company will pay for my insurance, and I'll live in my office. (What can I say, sometimes I work too late to commute home. Which I don't actually have.) One of the perquisites for working for "jrock.us consulting" is that all meals are paid for by the company. The company has a super-fast DSL connection, an HDTV, an extensive array of XBox games, oh... and a Netflix subscription. It will also pay for my trips to conferences (and "conferences"), and if I recall correctly, the contract said the company would buy my girlfriend a diamond once a year!

And oh look, I didn't make any personal income this year! Damn unprofitable company...

My point is, if this is implemented, nobody will pay taxes anymore. That's why it's not been implemented.

In spite of the measures he names, you'll still end up with big businesses made up of a whole lot of small business structured "cost centres" owned by themselves, their wives and their children. This will then have an impact on the tax take, with only a proportion of it being recovered in resulting growth.

I agree with the sentiment - I'm genuinely of the opinion that the only difference between the majority of the tax take and stealing is that the former is done in open. But with huge government industries and debts to maintain there's no room for tax cuts. And if you cut that, you could eventually just issue even tax cuts.

Thought experiment: Why not just go all the way and eliminate taxes altogether?

Let the government send you an itemised bill each year with a suggested amount based on your income. Then you choose whether to pay for each part or not.

Don't like the war in Iraq - don't pay for it. Like public schools - pay double.

I love the concept, but I don't know that it motivates folks that don't have a business to get out there and start one.

It takes a special kind of mindset to want to strike it out on your own without that safety net.

This is a good idea. If you are fully vested at and risk in your business and it's a small one, you shouldn't be hounded by every little government agency that can come by for a piece of you.

We want hundreds of thousands of little experiments, not just thousands.

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