Hacker News Reader

Comment by Matti | Hacker News Reader

Looking at the Nordic countries you might possibly make the counterpoint that publicly funded health care implies a taxation model that makes it economically unrewarding to become an entrepreneur.

View on HN

Is taxation actually higher in the Nordic countries for entrepreneurs?

If you bootstrap yourself to $100k as a 1-man company in the Valley, the taxes come out to something like:

    $7,000 CA income tax
   $14,000 self-employment payroll tax
   $16,000 federal tax (after deducting eligible portions of the above two)
   -------
   $37,000 (37%)

In Copenhagen, it would come out to [1]:

    $8,000 labor-market contribution (AM-bidrag)
   $24,000 municipal tax (kommune + healthcare tax)
    $7,000 national tax (grundskat+topskat)
   -------
   $39,000 (39%)

The tax is 2% higher, but the Danish version of the healthcare tax buys you healthcare coverage starting now, while the American one only buys you Medicare in the future. So I think you actually come out ahead in the Danish system.

[1] http://www.tax.dk/beregn/skat13.htm

Interestingly, in British Columbia a self-employed individual earning $100,000 with no deductions pays:

   $6,721 BC income tax
   $4,712 CPP (government pension plan payroll tax)
  $16,844 federal income tax
  -------
  $28,278 (28%)

Sounds like Canada is the low-tax paradise so many US entrepreneurs claim to be looking for.

You are missing 25% VAT in Denmark, vs 7.5%-10% sales tax in California.

True, although a VAT is complex in its effects. Since it's applied throughout the supply chain on added value, not only at the point of sale, it acts partly as a sales tax, partly as a corporate tax, and in some cases as an excise tax. It may push up final prices to consumers, but it may also push down wages, or push down corporate profits, or have effects anywhere else through the supply chain, depending on each party's pricing power at various stages.

How it impacts an individual also depends on how they spend their money. I spend a large proportion of my money on rent, airfare, and foreign trips, none of which incur Danish VAT, so it hits relatively little of my spending.

You imply that entrepreneurs do it primarily to get rich. That may be true for some, but it's not universally true. Many of us want to do interesting work to create something meaningful, while maintaining some control over our own lives. The way the US healthcare system is set up, leaving a big employer is incredibly hard after the age of 30-35. (I've done it myself.)

It's also not obvious that Nordic countries (e.g. Finland) have less entrepreneurship than the US does. If they do (I couldn't find hard data), it's as likely to be for cultural reasons as economic ones.

Scandinavia has produced a disproportionate number of artists and athletes - another kind of "entrepreneur." No doubt access to healthcare made it easier for them to pursue their passion.

You imply that entrepreneurs do it primarily to get rich.

Watching the ahem measuring contests people get into on HN, only caring about the exit number, I kind of believe it.

I've never understood this argument. Unless the marginal rate is actually 100% how does higher taxation cause business owners to want less money? This strikes me as employee (i.e. dollars for hours) thinking. If you had to work more hours to earn more than I could kind of see how a higher marginal rate would discourage you from doing that but the owner of a $5million/year business doesn't work 10 times more hours than the owner of a $500,000/year business.

You're right to look at the marginal tax rate but you're not considering all the options available. For goods like a hamburger it's easy to see why a tax on hamburgers makes people buy less hamburgers. Hamburgers cost more with the tax, so you can save money by buying chicken nuggets instead. This doesn't mean everyone will switch to chicken nuggets, just that many people who slightly preferred hamburgers to chicken nuggets before the tax will now switch over and slightly prefer the chicken nuggets after the tax.

For business and entrepreneurship the argument is the same. Increased taxes and other types of costs decrease the rewards so you'll end up with less of it. It's not that business owners don't want more money. It's that they are continually deciding between many options.

For example, years ago I had to decide between going to graduate school, getting a job in industry, and starting a business. The tax and subsidy breakdown is drastically different between all three. Of course tax implications wasn't the biggest factor in my decision, but it mattered.

At least in Finland entrepreneurs are taxed less than many full-time employees. Corporations are taxed at a flat percentage (about 28% of the profits), while income taxes are progressive and up to 50%. In fact, your argument doesn't make much sense.

High taxation doesn't logically imply that it's necessarily unrewarding to become an entrepreneur but rewarding to be a full-time employe. You can have high taxes for entrepreneurs and low taxes for employees, or high taxes for both, of low taxes for both, or high taxes for employees and low taxes for entrepreuners.

A lot of high-earning individuals are actually using the lower tax rate of corporations to lower their tax rate. If you look at a graph of tax rate versus income, it slowly increases, but after about 60k/year it becomes possible to lower the tax rate using tax palnning.

1. http://liljat.fi/2011/04/isojen-puolueiden-aanet-menevat-kan...

A 2010 headline from Arctic Startup read: Killing Finnish Entrepreneurship With Tax

http://www.arcticstartup.com/2010/02/24/killing-finnish-entr...

Skim through the comments to the article: what are the general themes that are brought up?

You can provide your own arguments.

Anyway, obviously there are people who think entrepreneurs are taxed too much in Finland. That has nothing to do with my point, though.

  > At least in Finland entrepreneurs are taxed less than many full-time employees.

It is true in high income levels that you can gain with tax planning, but I wouldn't say many are taxed less. Actually taxes/costs are pretty hurting for many starting entrepreneurs or small businesses.

If entrepreneur wants money out of the company (like for rent), she pays the taxes twice. Once as a corporation (28%) and then again as capital gains tax and/or as an income tax (+ all the costs that comes with employing yourself). Rule thumb for starting entrepreneurs that you need to make at least twice the money you want to make as an individual since taxes and costs the other half.

This is more of a case that wealthy individuals have more options and sometimes they use them and not about entrepreneurship. If you don't have a high income, you're probably paying more taxes(+costs) as entrepreneur than as an employee.

>If entrepreneur wants money out of the company (like for rent), she pays the taxes twice. Once as a corporation (28%) and then again as capital gains tax and/or as an income tax (+ all the costs that comes with employing yourself). Rule thumb for starting entrepreneurs that you need to make at least twice the money you want to make as an individual since taxes and costs the other half.

An entrepreuner may be taxed the same way for his/her work as an employee is if he/she wants to. If he pays the income tax, I think that can be reduced from the corporation's profit tax just like any other corporation. There's also tax free possibilities up to 60 000€.

I don't see why the entrepreneur wouldn't just pay herself a salary to make rent. That would be deductible from the corporate tax as an expense.

A lot of high-earning individuals are actually using the lower tax rate of corporations to lower their tax rate.

So, exactly what happens in the USA. The bottom rung gets no tax, the top rung evades tax, and the middle rung bears the brunt?

Reply on news.ycombinator.com