French Entrepreneurs Revolt
mondaynote.com
mondaynote.com
The government complains about "la fuite des cerveaux" (brain drain), but they're not doing much to prevent it (whether it is for entrepreneurs or researchers— I've been in both camps).
I'm a French "entrepreneur/engineer adult" and I have no reason to leave France.
I randomly watch news/docs about some French "startup", and the spread mean size seems to be 20 to 100 employees. That's enough to make you think what "bootstrapping" means here.
Even without talking about that side of things, it's extremely hard to find anyone technically truly competent to sidekick with, let alone in technologies compatible with startup rhythms (even Rails and Django are a rarity, the huge flock only knows C# and Java at a very, ahem, academic level). Not exactly helpful if you want to build your MVP quickly.
I'm not even talking about the legal paperworks that would sink a founder's time like your nearby blackhole. I'm contemplating doing this myself since a few years and the amount of crap you have to wade through is astounding. The sanest solution is moving to the UK (but my personal situation prevents that, for now).
The whole ecosystem is heavyweight and not nimble at all.
For starters, there's a lot of biomedical entrepreneurial technology work done outside of these two area.
Or look at the mini-mill revolution in steel production (http://en.wikipedia.org/wiki/Minimill).
Those are just two examples where the state of the art is being pushed hard. Less technologically advanced (often disruptive innovations (which mini-mills sort of are due to their feedstocks vs. equipment)) happen all over the place, I could dig up a bunch of examples in firearms, especially accessories (e.g. EOTech in Ann Arbor, Michigan). Or my parents in the early '80s when consumer use of C-band transmissions took off (for people in areas not served by cable companies; this is now down in the K-band by Direct TV and Dish):
They first helped the first company to develop remote control systems that would move your dish from satellite to satellite. One eventual extension of this or spinoff was small (e.g. 4 feet) dishes that would fold down for travel, e.g you could put one on top of your RV.
But the more interesting work was in LNBs (http://en.wikipedia.org/wiki/Low_noise_block-downconverter), which combine a low noise amplifier with down conversion for easy signal transmission to the receiver inside the home. This was fairly advanced stuff for the era, the usual analog stuff, surface mount construction way before it was (widely) used in computers, they'd put them in a freezer and bake them, etc.
All done in the deepest of Red State SW Missouri, in the Joplin area.
There's lots more entrepreneurial stuff my family did from this location, that's just one of the the highest tech examples.
Also look at where US job growth comes from in modern times. Smaller companies that were startups, not big established companies.
For one thing, US - New York - Silicon Valley has basically none of the social-democratic benefits of living in Europe.
For another thing, America really does make it dirt easy to register some kind of small business with a state or municipal government as existing and doing business in... something. This doesn't mean doing it right is easy, but doing it at all is very easy, and it's also correspondingly easy to go back and reregister your business when someone experienced tells you what to actually do.
Of course. I meant in terms of entrepreneurial energy and opportunity. On everything else (vacation, healthcare, affordable college) Europe is light-years ahead of the U.S. at this point.
Actually, they plan to tax all capital gains as ordinary income, most of that comes from stock/financial investments. The article doesn't mention that this was not meant to impact entrepreneurs but is merely a side effect. As I understand it, there will most likely be an exemption for this case.
I'm no economist, so maybe there's another good reason to give the highest earners a lower effective tax rate, but I don't see it.
Also middle class people can (and do) take advantage of the exact same mechanism.
(I realize that equity instruments are far riskier than working, but debt instruments really aren't. With a bond or loan, the company owes you the money either way, just as it does when working for salary.)
I see no reason that realized capital gains shouldn't just be treated as Yet Another Source of Income.
If you're talking about Federal income taxes, that isn't true. Marginal rates for the middle class can exceed 15% (a married couple would have to earn ~$80K jointly before that happened), but the effective income tax rate for the median household is much lower than, say, Mitt Romney's.[1]
Payroll taxes make this a closer run thing, but that's another story, and the trend since the Medicare reforms of the '90's (removing the FICA tax cap) and the ACA today (higher FICA tax on high income, new cap gains tax) has been to push the costs of broad social welfare programs onto high earners.
Basically, the lower classes pay around 40% taxes (compared to their income). The middle class pay around 50%. Rich people pay around 30%, and the riches pay even much less (percentage wise). Apparently, wealthy people are better at exploiting loopholes in our tax system.
It doesn't explain everything however: The top 2% (or is it 0.2%?) pay less than 10% taxes. Direct income tax alone is supposed to approach 50% for those incomes.
I don't know how it's done in France, but in the USA corporate income is taxed at a theoretical rate of 35% and the gains from that stream of profits, whether dividends or capital gains, are taxed at 15% on the individual level. That 15% comes after excluding the taxes paid at the corporate level. If an individual had earned that money himself without forming a corporation, he would have paid a 35% maximum rate.
Real estate income is usually taxed like corporate income. Capital gains from non tax paying assets like art and collectables don't reflect double taxation and therefore don't get the lower capital gains tax.
Of course it's more complicated than that. Corporate taxes are filled with loopholes. The 15%+35% is often less in total than the simple 35% if your accountant is talented. That doesn't mean the system is wrong, just that the loopholes reflect corruption.
Suppose you write an app and put it on the Google app store (because who wants to publish on a phone that can't even produce a decent map?).
Now in a parallel universe, you first form a corporation to publish your app. Maybe you're hoping to establish a brand or get easier credit or take investors or keep accounting simpler when the business grows. For whatever reason, you incorporated the app business first and then published to the app store.
Your app is a big success and makes a million dollars, ninety-nine cents at a time.
Remember that in the original story, you wrote the app and published it yourself. In the parallel incorporated universe you wrote the app and published it yourself, but through a corporation in which you are the sole shareholder. Either way the writing act and the value delivered are the same and the money collected are the same.
The taxes won't be the same because sole proprietors (that's you alone running a business), partnerships (two or more people running a business without incorporating), and corporations are taxed differently. Those differences can be useful and beneficial or distortionary depending on circumstances. From a policy-making point of view we don't want the ultimate total tax liability to be very much higher or lower for any kind of organization. Well, we might want them to be different if we want to discourage one form of business organization, but then we might as well just make it illegal from the start.
So let's consider how much tax you pay on your app.
In the original plan, you pay personal tax rates up to 35% (39.6% next year) plus FICA (2.9% marginal, but half deductible against income and FICA itself(!)) and state income taxes (about 7% average).
You'll be left with about 57 cents from your marginal dollar.
In the corporate parallel, you pay 35% corporate rates plus state income tax (5% average). Then you pay yourself dividends or capital gains. Dividends can be converted to capital gains by dissolving the corporation or stock buy backs. The current capital gain rate is 15% federal plus state income tax (again).
You'll be left with 62 cents after corporate taxes (state taxes are deductible against corporate levies) and then 50 cents after personal taxes.
So the corporate route costs you about 7 cents per dollar in higher taxes. Raising the dividend or capital gains rate to the personal rate would leave you with 35 cents and make a total cost of 22 cents per dollar for choosing the corporate form.
The corporate form has some tax benefits that can justify part of the seven cent burden. There are benefit programs and deductions available more easily to corporations. They cannot make up anything like a 22 cent difference.
Charging tax rates so high on corporate profits will lead to tax dodges like hoarding profits inside the company, paying executives outrageous hidden tax-free beenfits, and using the corporate tax-free interest paid loophole to make things even worse from a tax and corporate integrity perspective.
Now the USA has the highest corporate income tax rate in the world (matched with Japan). Obama has proposed dropping that rate along with eliminating deductions to keep it revenue neutral. He also wants to raise capital gains and dividend taxes to 20% or possibly higher. That would be a good trade-off for everyone but it's important to remember that your choice of business organization should not make so much difference in your tax paid that it takes the decision from you.
Aren't state income taxes completely deductible from federal income taxes? So shouldn't that be just a 38% income tax for a sole proprietorship?
For the corporate side, i think you glossed over the part of who (the corporation, or me the ceo and code writer) owns the code and how much you (i) was paid by the corporation for it. It seems like in your example that the author gave the code to the corporation for free.
Wouldn't it be better for the author to charge (either as a licenseing fee, or as something like x% of the gross profits for 5 years after ownership of the code is transferred) the corporation a fixed percentage of gross profits for the code? That way that part is only subject to personal income tax, and the rest subject to the 35% corporate tax minus anything paid to the author of the code as a standard business expense.
I am also curious why you didn't account for the business expense of paying the code author/ceo, which should be directly deductible from the total corporate tax owed, right?
I think I am getting confused by the relationships between the corporation and the ceo, and the corporation and the code author. Isn't the corporation supposed to be its own person in the case of income tax that then pays its employees and dedcuts those payroll costs from its taxes?
Finally,it might surprise you based on the last few comments i've made, but i'm not a fan of any corporate income tax at all, because it think it makes the tax laws and the line between natural person and non-natural person much more complicated. I think it would be much easier to only tax natural persons on their income/benefits/investments. There's also a direct benefit to the consumer, since a few studies/articles I've read have claimed that all corporate taxes are just passed onto the consumer as a price increase.
Finally, while the US might have the highest corporate tax rate on paper, I think it's entirely relevant that it has an effective/empirical corporate tax rate of only 12.1% (source: [1]).
[1]: http://thinkprogress.org/economy/2012/02/03/418171/corporate...
sorry for the blog link, but wsj is behind a pay wall, and this has the relevant part quoted.
With the corporate arrangement, you are paying those additional 7 percentage points of tax for a big privilege, granted by the government: limited personal liability for the debts, losses, or contracts engaged by the company. That's a legal bonus you simply don't get when acting as a proprietor.
During the life of the company the structure paid social and income tax. Strongly taxing what remains (wealth) is not only unfair (What, how did you manage to produce wealth? Let's tax it!) but results in, in fact, a double tax.
While the double taxation argument seems to be popular, it is relatively weak. Some of the important reasons that are often overlooked:
- Long-term capital gains are not indexed for inflation. For investments held multiple years, this compounds into a very substantial loss that cannot be deducted from the nominal paper gain. You can pay significant capital taxes for a real loss. For short-term investments and income, this loss is nominal and can easily be accounted for in other ways. The lower tax rate on long-term capital returns is a simple way to approximately account for that loss without complicated math.
- Long-term capital taxes are not efficient relative to other taxes. Taxes adversely impact the economy from which tax revenue is derived, so preference is given to taxes that have the least negative impact for every dollar collected. In this regard, capital taxes are among the least efficient of the common taxes. By comparison, both income and consumption taxes do much less damage to economic growth for the amount of revenue generated. From the standpoint of maximizing tax revenue, taxing long-term capital investments is not a good way of going about it.
In short, long-term capital gains are taxed at a lower rate because (1) you can't deduct the substantial inflation losses which make long-term investments otherwise unattractive and (2) even if you could, it is a lousy way for governments to generate tax revenue over the long term relative to other tax sources. While they are associated with high earners, that is mostly incidental. Governments generally have a vested interest in balancing growing the tax base and maximizing revenue, arbitrary notions of fairness aside.
So being forced into an austerity budget you have two levers, cutting spending or increasing taxes. Both will hurt the economy, the question is which is worse. France being richer than, for example, Spain has a little more room to maneuver. Entrepreneurs like to look at the so-called supply-side arguments but the mirror demand-side argument is frequently ignored, if people don't have money to spend they're not going to buy what you're selling. Economics being the joke science that it is these issues are argued endlessly without resolution, though there is some evidence that tax policy does not have that big of an effect on economic growth. But what we can say for sure about cutting social services is that lower and middle class people will suffer more from these cuts than the entrepreneurs will suffer from tax hikes since normally the entrepreneur will have more personal money to absorb the hit.
Again, this could be avoided if ECB would adopt more pro-growth monetary policy.
Enrepreneurs who are now wealthy often had to struggle for many years in poverty without much social security before they achieved that kind of success. Many fail as well. I think you're mixing up entrepreneurs and big corporations. Big corporations can absorb or avoid paying taxes in any particular country, but entrepreneurs often can't.
I do agree with you that monetary policy should be counter cyclical and it is. The ECB has tripled its balance sheet since 2007 and it has lowered interest rates to 0.75%, which is way below CPI. I agree that they should have been even more aggressive but there's a political reality as well.
Monetary policy is not the issue here. The problem is counter cyclical fiscal policy. It has to stand on both legs. If you don't run a surplus in boom times you're not going to be able to spend enough during downturns.
But our political systems seem to be structually pro cyclical. During boom times, the right wants to cut taxes or fund wars and the left wants to extend benefits. Nobody wants to run a surplus and pay down debt.
[1] Relatively speaking
[2] http://www.dailymail.co.uk/news/article-2174704/Wealthy-Fren...
According to Eurostat there are more British people in France than French people in UK ( http://www.guardian.co.uk/news/datablog/2012/jan/26/europe-p... ). Not to mention the coast of Spain which is "England in the Sun". I can't find figures on cities.
There are always people who move around./
But frankly, saying that social democracy can't ever work because neoliberalism murdered it is not exactly a good theory.
Hey, though, I'm as in favor of smashing capitalism once-and-for-all as you are.
Others (including myself) focus on the money. Is the money being used efficiently for things the population wants? How can people more efficiently allocate money so that we all benefit. After all, if the money is being used to its maximum effectiveness, shouldn't all the people benefit? Let's look at the money, decide how efficiently we can get that to move around, then the people will follow along behind that.
Capital gains is where this difference in philosophy hits hardest. Do we want rich folks paying the same as wage earners? Or do we want people who are better at allocating money to things that advance the species in general to have more ability to do more of that?
There's no right or wrong answer. People on both sides take the arguments too far. But when you have no entrepreneurial community and the few that you have are publicly screaming at you to slack off, perhaps you've gone a little too far in one direction.
My question is "How do governments learn what is a happy medium?" I think the answer is regularly changing up who is in charge, because there is no exact and unchanging answer. Here's hoping the French will have a chance to adjust before they destroy what little is left of their startup economy.
I'd also note that laws and policy many times are made based on the public's caricatured idea of something instead of the thing that actually exists. In the U.S., it's common to hear politicians rail against "big corporations" while proposing policies that would sack the local stock broker or web startup guy. Meanwhile the truly large corporations have lawyered up and done enough regulatory capture that they skate through. There can be a huge difference between what's advertised and what the public actually gets.
I disagree, I don't think most entrepreneurs invest to advance the species in general, from my point of view they invest in things that have a potential to make money, while the government has a better incentive to fund something useful but with less direct financial benefits. But of course you can give a lot of counter-examples.
All western governments, with some rare exceptions, are highly indebted. Those debts were just created to keep the machine running, not to make investments.
One could therefore say that governments destroyed wealth and contributed to an excessive growth of a financial economy through loans.
An individual taking the same course of action would end up being bankrupt and would not take millions of persons with him in the process.
Taxes are not just a question of rich vs poor.
Please stop furthering the myth that Europe has no startup scene.
"Here's hoping the French will have a chance to adjust before they destroy what little is left of their startup economy."
I'm not sure anyone knows how this will be implemented yet. Just like US startups are incorporated in Delaware, European startups can, and some are, be incorporated in countries like Luxembourg or the UK. That's just one example how things could work in practice. I think (at least part of) the French startup community is doing themselves a huge disservice at the moment. Drawing premature conclusions and throwing in gripes for good measure.
Big businesses get subsidies, tax breaks, bank bailouts etc: Corporatism
Corporatism is good for businesses, capitalism is good for consumers.
What you describe is closer to an oligarchy or plutocracy, with corporate indirection acting as a shield to scrutiny, rather than a shield from unfettered associative liability.
But yes, capitalism is good for consumers (and capitalists and entrepreneurs).
Big government has big contracts that need big companies to deliver and manage them; solution, smaller government. (Corporate) welfare government wants to make sure everyone gets a fair chance (via stimulus), including enterprises that productive capital markets find too risky; solution, smaller governmental budgets. Utopian governments believe that society and the world can be engineered to a certain "perfection" (insert megalomaniacal vision here) if just enough constraints (ie, regulations) are placed upon it, like choke collars; solution, fewer constraints.
Big corporations provide the anonimity and scale to meet the needs of large contracts, be non-personal recipients of stimulus (as "job creators"), and have enough contentrated power to scale or bypass the regulatory walls. Small organizations and individuals cannot meet any of these needs effectively.
The solution is to get rid of big government. :-)
Really?
You don't understand the difference between putting up taxes and running the Gulag Archipelago?
Try renouncing US citizenship; you'll have to pay a big penalty to the IRS to do so...
Bernard Arnault should be hailed as an example, not a traitor, for leaving France and getting a Belgian citizenship.
Postulating a Unified Europe by pushing the ongoing de-nationalization of the EU member countries is absolutely antithetic to the expectation that tax payers should feel obliged to pay taxes to their home country, and not switch to the one most beneficiary for them.
Which is precisely why de-nationalizing Europe is such a bad idea.
I think you'll find that it is in fact seed capital and small business loans that back innovation, and that these facilities are generally provided by government not the private sector.
I think you'll find that what low capital gains taxes do is allow hedge fund managers to get a lower tax rate by reclassifying their income.
Seems legit.
Don't worry though. When all of the rich leave, there will be nobody left to tax.
Here is an economical review from the law (translated from french) : http://goo.gl/70xwI
The tax is not 60%, but 40%, worst case scenario ; and can be as low as 20% if conditions are met (keeping the business a long time, reinvesting money in an other company).
Also, the purpose was not to blame rich ones, it was to tax transaction incomes at the same level as work income. Not more.
Fighting an oil war in the desert is closer to that.
Since when has a monopoly ever been a good thing?
"tougher environmental regulations"
France also based many of them on the idea that we have man-made global warming.
"5 weeks of paid vacation for all working people"
I would rather leave that up to companies and have 30%+ more of my taxes.
"Fighting an oil war in the desert is closer to that."
You gave me 3 simple examples. Every government in every country is inefficient. France somehow believes that those inefficiencies will go away by taking away more money from its citizens.
In the U.S., it is the healthcare providers who form for-profit monopolies that jack up the prices and screw over the consumer - see for example: http://runningahospital.blogspot.com/2012/07/well-done-partn...
I'm not a fan of monopoly, but I'd rather have a monopoly that works in the interest of getting all patients healthcare and bargaining down consumer prices, rather than a monopoly that creates higher costs to feed the profits of providers.
5 weeks of paid vacation for all working people ... I would rather leave that up to companies
I would rather have the vacation time. The problem is that most companies exist in a competive market, productivity is not absolute, but relative. If our company unilaterally allowed everyone to take 5 weeks vacation, the revenue would not fall 5% based on the lost productivity. It might fall 20 or 30% or more, because we would lose market share to our competitors, and we are fighting in a winner-takes-all market. But if all companies in our market had to offer 5 weeks vacation, and this was enforced, then we would all be on the same footing, and all would be better off. It's a classic collective action problem. And the way to solve a collective action problem is that you form an organization and agree on binding rules with punishment for defecting - this is called a government.
Where are you getting this from? They have the same type of labor laws in the US and even in China (how it is enforced is up for debate). You agree to work a certain amount of hours (35-40), you go over the company pays more. And they can't make you agree to more than that.
Holidays aren't mandatory, they are an entitlement. I may or may not work during Labor Day or Christmas. Most offices choose to shut down during holidays because, unless it is critical, with everyone else closed you it's almost impossible to get anything done.
But you'll have to take my 25 day holiday allowance out of my cold, dead fingers. My kids get to grow up just once, and I'm absolutely going to be there to see it.
This is perhaps accurate about North Korea or Congo. France, not so much.