I have a simple S Corporation setup in Washington. I have to deal with:
- City government (license & tax)
- County government (property tax)
- State government (license, 3 different taxes)
- Federal government (payroll, etc)
This is for a one-man corporation in a state without state taxes. The amount of paperwork and agencies is a total time-sink. Outsourcing it cheap for a small business either (need more volume to amortize the cost).
Sadly, I don't see simplification happening in politics anytime soon. Not only does it require cooperation between different levels of government, it would create fewer loopholes for businesses.
It's the same reason we'll never see a simple flat tax for personal taxes. Makes it too difficult to hide all the political favors.
The Lessig video that I just submitted has a great analysis of the incentive facing government representatives and why these kind of reforms are impossible. You might want to check it out.
Doesn't matter if you're brick and mortar, you still need licenses having a basic business.
In general, the laws aren't really made with small/virtual businesses in mind. You need physical locations, in-person meetings, non-electronic paperwork, etc, etc.
Far better and simpler than flat taxes would be to eliminate all income taxes, both business and personal, and depend entirely on tariffs, excise taxes, and fees. Arithmetically this is completely feasible. Imagine if outside of import and export business and those industries affected by excise people had practically no interface with the federal government on a year by year basis.
You write that like membership in the WTO is necessarily a good thing. It isn't. International organizations range from "mostly harmless" to horrorshows. (The mostly harmless ones are a basically specialized phone books with an information exchange/meet people conference every year or so - think ACM.)
Tariffs are a bad thing, but the US is a big enough gorilla that the WTO would figure out some way to accomodate the US in that circumstance.
Let me rephrase that. Pissing on _every_ _single_ other country we do business with by unilaterally ending free trade after we've spent decades setting up free trade agreements (and organizations like the WTO) seems like a suboptimal stratagem to me.
Except, it's not brilliant, and we've been doing it for years. This post is a hollow re-tread of the "lower my taxes and I'll trickle it down" argument, which has been the primary platform of the Republican party (and wealthy people) since I've been alive. Our tax rates are dramatically lower than they were even 20 years ago, and I have to say...it doesn't seem to be working that well.
Two observations that came immediately to mind while reading this post:
1) Accountants and lawyers are people with jobs. Fire them and replace them with non-accountant, non-lawyer jobs, and all you've done is shuffle the jobs around.
Yes, you can argue that every dollar spent on non-administrative expenses can be invested into productivity, but that leads me to my second observation:
2) Small businesses just don't spend that much on administrative overhead.
I've worked at far more small businesses (<20 employees) than large ones, and all of them -- every single one -- has out-sourced the accounting expenses to such a degree that I doubt there's a single full-time equivalent lost in the shuffle. Legal expenses can be more variable, but typically not because of government overhead.
When I hear this argument coming from extremely rich people, my natural instinct is to assume that they're using the populist vision of the "struggling small business owner" to promote policies that would benefit their personal bottom line. Quite honestly, this looks like more of the same. Mark Cuban has a lot more to gain from cuts in the corporate tax rate than does your average small business owner -- yet he'll never employ enough people to make up the difference.
It's not just administrative overhead, it's friction in getting things done. There is such a thing as objective value creation.
The complexity of the tax code in the US has been increasing with ever larger loopholes to satisfy lobbyists and curry favor with various special interests. This isn't even about taxes - it's about simplifying something that shouldn't even be complex. Further, the irony is the people who lobby for the complexity are often the "extremely rich people".
I don't know whether to laugh or cry at your argument that moving jobs from tax accounting/legal which attempt to manage friction in transactions to professions that create goods and services people actually want to pay for is just "shuffling the jobs around". As an extension of your argument, shouldn't the government employ everyone by fiat and simply abolish unemployment? This is especially made particularly absurd that the US Treasury Secretary couldn't even figure out how to pay his own taxes but now runs the IRS. There is something very very wrong with this picture.
"It's not just administrative overhead, it's friction in getting things done. There is such a thing as objective value creation."
Yeah, which is why I said you could make that argument, and why I mentioned my second point -- small businesses just don't spend that much on this kind of thing. It's a red herring.
"I don't know whether to laugh or cry at your argument that moving jobs from tax accounting/legal which attempt to manage friction in transactions to professions that create goods and services people actually want to pay for is just 'shuffling the jobs around'."
You shouldn't laugh or cry, because it's just a statement of fact. I said that people who have jobs as accountants and lawyers are, by definition, people with jobs. So if you eliminate one accountant's job, and replace it with some other kind of job, you haven't increased the number of jobs. At best, you've made some small move toward "increasing productivity", which will then perhaps have a non-linear increase in other jobs, but that's an extremely tenuous argument for most small businesses.
"As an extension of your argument, shouldn't the government employ everyone by fiat and simply abolish unemployment?"
No. That would be stupid. It has nothing to do with my argument.
" This is especially made particularly absurd that the US Treasury Secretary couldn't even figure out how to pay his own taxes but now runs the IRS. There is something very very wrong with this picture."
Straw Man. I'm not arguing that the complexity of the tax code is a good thing; I'm arguing that reducing the complexity of the tax code is very different than "lowering the corporate tax rate". I'm also arguing that rich people like Mark Cuban have a disproportionate interest in doing the latter, in the guise of doing the former.
Small businesses do spend increasing amounts on tax accounting and legal. There's a very real and tangible cost to complexity in both regulations and taxation.
"No. That would be stupid. It has nothing to do with my argument." You're right it would be a stupid argument except according to you, a job is a job. Not sure how it's even a tenuous argument to point out that reducing friction increases jobs as it not only frees up people who have to navigate the complexity - ie the tax accountants and lawyers to doing something more productive but it also reduces the costs of compliance for companies themselves. The US tax code is now over 16500 pages with non-compliance a criminal offense.
I find it remarkable that you don't think there's an increasing cost to this compliance. Ask just about any internal accountant or anyone in a position of leadership and they'd tell you differently especially over the last 15 years.
"reducing friction increases jobs as it not only frees up people who have to navigate the complexity - ie the tax accountants and lawyers to doing something more productive"
Har. Yes...because if we reduce the complexity of the tax code, somehow, droves lawyers and accountants (who chose to do what they do, and spent years training to do it) are going to switch to "productive" jobs.
I get it. You don't like lawyers and accountants. But I think you need to separate your judgments of these jobs from the reality that these people do productive work that is clearly valuable -- even outside of the need for tax code compliance. Lawyers and accountants are not going away.
"I find it remarkable that you don't think there's an increasing cost to this compliance."
I didn't say that. I said that small businesses don't spend that much on compliance relative to all other factors, and that I'm therefore skeptical of the claim that reducing tax code complexity will increase jobs in any substantive way.
Har. Yes...because if we reduce the complexity of the tax code, somehow, droves lawyers and accountants (who chose to do what they do, and spent years training to do it) are going to switch to "productive" jobs.
There are legal and accounting tasks to be performed in any company that are not related to tax and regulatory compliance. Lawyers will still be lawyers, and accountants will still be accountants, but instead of working (indirectly) for the government doing nothing that provides value to consumers or the business, they would be working on things that are of value to consumers or the business. Contracts need to be written and negotiated, books need to be kept, projections need to be made, copyrights and trademarks need to be defended, etc. These things make our world run smoother, and our economy grow, and helps small businesses defend themselves against larger incumbents, and helps them plan and finance growth.
We're talking about a baroque tax code and regulatory environment for business. This cost is relatively higher for small business than large business (because large business has full-time legal and accounting staff, while small businesses must outsource or do it themselves, poorly, and at the expense of productive expenditures of money or time).
I'm, frankly, stunned that you believe that small business "don't spend that much on compliance". I spend about two days a month on it for our three-man company; that's more than 13% of my productivity gone to keeping us out of trouble with the government. Given that the other two people are part-time employees, it's about 6% of our entire available work. You consider that small, when it does nothing for our business' growth or for our customers? When added to the actual taxes we pay out, it's a wonder any small business can get off the ground while staying legal.
Note that while I'd also enjoy seeing small business tax obligations reduced, I'd be extremely happy to see reduction in the complexity of paying those taxes at both the state and federal level. If I can put off employing lawyers and accountants (who make more money than I, as CEO, currently make, lawyers, in particular, who make more than I've ever made even when I was a well-paid contractor) for another year, that'd allow me to grow faster, and hire another employee this year.
And, of course, if it means lawyers don't work quite as much, and have to put off buying that new BMW for another three months, I think I can live with that.
"I'm, frankly, stunned that you believe that small business "don't spend that much on compliance". I spend about two days a month on it for our three-man company; that's more than 13% of my productivity gone to keeping us out of trouble with the government. Given that the other two people are part-time employees, it's about 6% of our entire available work. You consider that small, when it does nothing for our business' growth or for our customers?"
I consider it far less than a single full-time job, or even a part-time job. Even if you could eliminate all of this overhead (which you can't), you wouldn't be able to hire a new employee with the savings.
Look, if you think my argument is that the tax code shouldn't be simple, you're not reading me correctly. Low compliance costs should always be the goal. But when Mark Cuban says "reduce small business taxes to fix the economy", I think he's wrong. It won't move the needle on hiring, because in 99% of the businesses that matter for employment, hiring is limited by consumer demand, not corporate taxes.
You have to be able to read between the lines. "Dramatically streamline the tax code" is classic political double-speak for "flat tax", which means the elimination of most forms of taxation on US corporations. Much of the "complexity" of US tax code is part of the long legislative history of closing tax loopholes that large businesses have successfully exploited to escape taxation in the past.
But even if you don't take my word on this, he actually does call for tax cuts in the post:
"Make capital gains on investments up to $1mm in small companies tax free"
This has nothing to do with "streamlining" the tax code. Cuban wants the ability to invest in hedge funds and other "small businesses" without paying capital gains tax on the profits, and he's framing it as a way of "encouraging investment" in the mom and pop store down the street (who will never, ever be assisted by this kind of a policy change). In reality, Cuban is proposing yet another loophole that would be used primarily by rich people and large corporations to escape taxation.
So why not just make it so complex that every business needs to hire 100 accountants to overcome the red tape? Under your theory this seems like a plausible way to eliminate unemployment.
It's not a dislike of lawyers/accounts it's a desire to make things more efficient. Every cost that is paid is a lost opportunity to grow the business in a more productive direction. Even small losses in investment over time can make large differences.
Actually, it worked exceedingly well. I mean, breathtakingly well. Basically, the economy expanded incredibly, aside from a brief and mild recession at the end of elder Bush's tenure, from the time Reagan enacted his tax cuts, to midway through younger Bush's presidency. Reagan experienced an unparalleled peacetime expansion and then Clinton broke his record.
We are in a recession now, but it's pretty hard to link a causal chain including tax cuts to it. In fact, we know exactly what caused our current situation, and no one thinks it was "the tax rate was too low".
You've worked for a small business, but have you ever owned and/or ran one?
The time I have to spend on government forms (taxes, business registration, etc) takes away time from other activities (SEO, new blog posts, software development).
Yes, I can outsource this, but I still have to deal with it. And it adds no value for my customers. Accountants and Lawyers don't get software built, they don't get blog posts published. They handle my interaction with the government.
At my current company (day job) we're spend a lot of time working out some stimulus package details. It's a bunch of overhead, we have to track our time on it, and for a reimbursement of 80 cents on the dollar.
So, if you think that lawyers and accountants somehow get things to customers, yes, you have a valid argument. I haven't found that to be the case.
Speaking as a small business owner, (3 people) I'd prefer a higher tax with less complexity over a lower tax rate with more complexity.
Yeah, I have an accountant who handles all that stuff for me. (Now, I should have a lawyer, but right now I honestly dont even know enough to know /when/ I should ask the lawyer, so I mostly rely on the fact that it's not worth suing a company with my revenue.)
The problem is that when I have a new business idea, there are a myriad ways that intersects with tax law. I run all new business ideas past my accountant right now, because I'm wholly unqualified to understand that intersection.
To give you an example, for most larger customers, it would make a lot of sense (well, they would pay less) if they bought hardware and I hosted it for them; the thing is, I can obtain high-ram hardware much cheaper than my customers can, and obviously, if it's exactly the same as all the other hardware I have I will be better equipped to manage it, as I have spare parts and experience with any problems the gear may have. So, the obvious idea is for me to sell the hardware to my customers, then charge them for manging said hardware. But apparently there are some complexities with sales tax (right now, I buy all my server parts retail... apparently there is some accounting complexity in then making sure that I keep track of drive with serial number X and how much I paid for it, then it went in server Y I sold for Z dollars.) Right now, I don't need to screw with sales tax; I just keep track of all the server parts I buy.
Just doing that accounting easily doubles the work required to assemble a server. (server assembly isn't exactly /rocket science/ keep your ground strap on and you'll be fine.) So, I continue to rent servers rather than selling them, providing less value than I would have to the larger customers.
Reshuffling jobs from nonproductive to productive is a huge increase. Ask yourself, would you rather have less accountants and lawyers and have more people who actually produce something that makes your life better -- whether it be new software, improved medical care, better food, etc.
When you think "small business", don't think "startup". Instead, think "neighborhood shop" -- these kinds of small businesses represent the vast majority of hiring, and they hire help in response to customer demand. So even if they could save the equivalent of one full-time employee on accounting and legal (an exaggeration, but let's go with it), they'd only re-invest that savings into other employees if it made sense to do so in light of current demand.
The general problem I have with the assertion that lowering taxes will create jobs, is that it assumes that taxes are the limiting step. In my experience, that's not the case for small businesses. The much bigger problem is ensuring that customers are always walking in the door.
Yes, but they'd have more money to spend. They'd be getting value for their money, whether it is expressed through corporate spending or through their personal spending. As it is right now their is giant drain on the us economy where people have to spend tons of money preparing taxes when a much simpler system could easily be used.
the thing about lowering taxes is that other than through increased consumer spending, it does not free up more money for me (the business owner) to hire people. I pay people out of pre-tax money; I'm going to have the same amount of pre-tax money no matter if the tax rate on the money I pay myself is 20% or 70%
Complexity, on the other hand, is paid for out of pre-tax money. If you go from me spending 10% of my pre tax money on accounting overhead to 20% of my pre-tax money on accounting overhead, that money comes out of my budget for employees and equipment. I mean, that money still goes to jobs, but those are /defensive/ jobs- I pay for an accountant, not because it gives me an advantage over the competition, because it does not. If anything, it slows me down. However, if I don't pay for the accountant, then I am at risk of being destroyed by the IRS. That is money I don't get to spend on beating my competition.
Just looking, it appears that my accounting overhead is a noticeable fraction of my personnel costs. my personnel costs are dwarfed by equipment and power costs. So yeah, it isn't that bad. But still, if you ask me how the government could help my company, the first thing I would ask for, before tax cuts or subsidies or anything is for a reduction of the complexity of tax, employment, and other laws I need to deal with.
> 2) Small businesses just don't spend that much on administrative overhead.
I may not be a typical case, but this is false for my business.
I am the founder and sole employee, although I have used contractors for jobs before.
My first year, I spent at least 2-3 hours / week on average learning and dealing with the accounting and legal needs for having a corporation. There are a lot of agencies and each have their own rules. Just keeping up with all the tax law changes is a fair amount of work, nevermind the risk that you've misunderstood / forgot something.
Obviously, it wasn't my full-time job, but it took a big enough chunk of my time (and therefore potential income) to be a real hassle.
The next year, I outsourced much of it and ended up paying around $2,000 (not including the actual taxes and license fees). I realize that isn't much, but for a one-person entity that's a non-trivial amount of money. (yes, cost of doing business, blah, blah, blah ...)
Lower taxes != less complex taxes. They've only gotten more complex. And this is too the benefit of large companies who can hide tax loopholes in the code. It also benefits the large accounting/tax companies. They will have a great business as long as we have a complex tax code.
"IRS Commissioner Douglas Shulman does not file his own taxes in part because he believes the tax code is complex."
> This post is a hollow re-tread of the "lower my taxes and I'll trickle it down" argument, which has been the primary platform of the Republican party (and wealthy people) since I've been alive. Our tax rates are dramatically lower than they were even 20 years ago, and I have to say...it doesn't seem to be working that well.
You don't think life has gotten much better for poor people over the last 20 years in the United States? I mean in absolute terms.
The real impossibility is getting this idea passed through congress. Unfortunately, you don't get votes by simplifying things. Instead, you have to make "progress" by adding on pork projects, subsidies, tariffs, quotas, etc. that benefit your constituents.
That I think was the conventional thinking but it's gotten to a tipping point with massive new proposals for complexity / government spending/programs. I think a large part of the popularity of the tea party/'throw the bums out' movement and perceptions of corruption in Washington is the result of push back. Irrespective of political leanings, the loss of the seat Ted Kennedy for decades in Massachusetts to a Republican has to be a shocker (even to the republican leadership that didn't spend much time or energy backing their candidate until the last few days). Simplification means less corruption and fewer costs not only for small business but for everyone.
A useful reference point is to consider the positive relationship between economic growth and reduced regulation and you can see that through the World Bank's Doing Business guide comparing various states (http://www.doingbusiness.org)
Another aspect of it that gets to me is the competitiveness drain that all of these add to a company. If a competitor in another county, state, or country has less bureaucracy to deal with, or has to pay lower fees (not in dollars, for example), they can win.
Amen. While I don't always agree with what he says, Cuban is good at making points. Especially from the perspective of making things easier on entrepreneurs, since he started out and just happened to make that big deal to turn him into a billionaire.
I'm all for simplifying the overhead on companies, but to translate that into creating jobs is a bit of a stretch. If you cut all of the taxes on an existing company they would not simply add jobs to their company. The only way jobs are added is if they're necessary. This usually means an increase in sales/revenue and the need for more resources.
To take a modern example, the recent recession caused companies to go on a spree of job cutting. This wasn't because of any change in tax or overhead. It was the result of lost revenue. Increased revenue causes job increases. Not the efficiencies of overhead.
Exactly. The easiest way for the government to get people to hire is to start buying stuff from them. It's a buyers market right now and there are many ways for the government to use that for the public good and incidentally to create jobs.
The government cannot afford to buy anything it is worse than broke, it is in serious debt. The amount of unfunded liabilities that are coming down the pipeline are ridiculous.
> but to translate that into creating jobs is a bit of a stretch.
I don't think it's too much of a stretch. It's generally not a good idea (or practiced in reality) to hire people until you have a corporation setup.
The largest barrier to setting up a corporation is cost and paperwork time. If you reduced or eliminated those, you would very likely see a lot more corporations spring up and then a lot more jobs created.
Even if many of these corporations went bust and the jobs didn't last at these ones, at least you would greatly reduce the time and cost for experimenting with a new company and you'd see the number of successful companies (which add permanent jobs) increase.
If your barrier to entry is the cost to incorporate, how could you afford to create a job? Surely, in any state in the union the cost of even a minimum wage salary exceeds the cost to incorporate. That's not even considering the salary cost of skilled labor.
Hiring someone is far more complex than just having the funds to do so. Ignoring all the taxes, there is a lot of paperwork and agencies you have to deal with.
I would hire someone right now if it were easier, but I can't afford to hire someone once I factor in the administrative and tax overhead.
I was referring to the type of small businesses that start very slowly, as is the case when someone with a current job wants to start a business but doesn't have the money to do so full time.
Most people I know who start non-tech businesses fall into this category. It may be a year or two before they are able to support themselves full time.
For them, they could use that $1,000+ to pay part time workers to help them grow faster.
When I was a teen I started an LLC in MA. It was simple and cost $100.
3 years ago I started another and the price had gone up to $500. For adding a row to a database, $500.
>Like the administration before it, the current administration seems to have no concept of what it takes to start, run and grow a small business. None.
Mitt Romney was governor during this increase in MA. I couldn't believe he would allow such a thing. But then I realized he had no experience starting a small business without millions of dollars in capital from the get go.
The Romney administration increased fees across the board. They wanted to claim "no tax increase" and hid the tax increase in these fee increases. It's politically easier to increase a fee because not everyone pays it immediately or thinks that they necessarily will.
Regarding the tax code, my opinion is that all corporate income tax should be eliminated in favor of steeper progressive tax rates for individual income taxes. Effectively eliminating this burden from corporations and shifting it to the wealthiest who can afford the administrative costs, while also having a neutral effect on government revenues.
By its nature, capitalism demands regulations to inspire confidence in investors. So don't fool yourself into believing "all regulation is bad." The question remains, "what is the most effective & efficient means of regulation?"
Finally, here's some advice, an LLC is generally the most effective form for a small business to take. When you get to the point where additional equity must be issued or raised, you might then consider the advantages of C or S corporation.
In California an LLC pays a franchise tax on gross revenue that SubS is not subject to (in addition to all of the fees that both owe) Unless you have foreign nationals as founders SubS is probably preferable in California.
So form your business elsewhere. It's true that some states are more friendly to small businesses than others, but generally the reasoning holds true. If that's not enough, you could always pick up shop and shift your nexus to another state.
It's really up to the owners judgment, but a significant franchise tax bill on a small business might be preferred over the additional administrative requirements for running an S corp. At least in the former scenario, you are bringing in some nice revenue.
If you are physically present in California you will end up paying CA Franchise taxes (and corporate income taxes on revenue generated in CA). The additional administrative requirements for a SubS are at most an hour a year for a small firm.
Please don't confuse revenue and profits, it's possible to generate revenue, pay the CA LLC Franchise tax on it, and still have a loss on the year if expenses exceeded revenue. With a SubS you only pay tax on profits, which I agree for early years may be close to zero.
I think it's fair to say that you should consult a tax professional before forming a legal entity; however, it's also important to have a general understanding of each entity types' cost/benefit. There's plenty of info on the web.
Additionally, for purposes of this discussion, legal entities are formed exclusively under state laws. While you can incorporate anywhere, most states require a registered agent be present domestically. You can hire firms like CTcorp to fill this role. The second consideration is your "physical" location. What constitutes nexus (especially for technology companies) is the subject of some controversy, but the specific legislation varies among states. Generally, nexus for income tax occurs in the locations where value is generated. This usually means the location of a firm's assets and employees. Sales tax nexus is even more ambiguous. Here's a better explanation than I could ever give: http://web.archive.org/web/20021001165628/http://www.aicpa.o...
Treatment at the federal level is uniform. Imagine that a significant portion of HN visitors are located in CA, so skmurphy's advice is worth paying attention to!
anyone that has ever run a small business know how taxation and regulation make it much harder to hire new employees. sure, monetarily, but also in terms of simple time and increased risk (lack of ability to make truly binding employment contracts). you discourage things by taxing them, you encourage things by subsidizing them. if you reduce taxation on new employment (such as, say, waiving payroll taxes for the first 3 months of employment) it will increase the ability of employers on the margin to hire.
Forget government loan guarantees. Make capital gains on investments up to $1mm in small companies tax free. Make this process paperwork free for the small business and a 1 page form for the investor.
Someone wasn't paying attention to the State of the Union speech...
Exceptionally smart and driven people generally - they'll move into doing more productive things than dealing with the government. Also, thinking that creating new bureaucracy creates new value through accounting/legal probably is an example of the Broken Window Fallacy:
Some of the smartest people I know work, or have worked, for NASA. Some of the most cutting edge work is done in aeronautics for military aircraft. The Manhattan Project had its share of exceptionally smart people.
I think you're confusing exceptionally smart with exceptional business skills.
I have a simple S Corporation setup in Washington. I have to deal with:
- City government (license & tax)
- County government (property tax)
- State government (license, 3 different taxes)
- Federal government (payroll, etc)
This is for a one-man corporation in a state without state taxes. The amount of paperwork and agencies is a total time-sink. Outsourcing it cheap for a small business either (need more volume to amortize the cost).
Sadly, I don't see simplification happening in politics anytime soon. Not only does it require cooperation between different levels of government, it would create fewer loopholes for businesses.
It's the same reason we'll never see a simple flat tax for personal taxes. Makes it too difficult to hide all the political favors.