Regressive Taxation Based on Risk?
So what can governments throughout the world do in order to encourage new start-ups? Well there are many tools at policy makers’ disposal. However, I think one method in particular would not only encourage more start-ups but skew the culture of society towards a more pro entrepreneurship stance.
People involved in start-ups should be given a lower tax rate than other segments of society. This reflects the risks involved in starting, investing in, or working for a start-up company. This lower tax rate needs to be available to start-up entrepreneurs and their employees along with start-up investors.
Lets look at it from an employee’s standpoint. Working for a start-up is risky. The statistics show this. As a result, they are taking these risks on a personal level and if the business fails they are out of a job. In order for start-ups to get high caliber employees, this personal risk needs to be addressed by policy makers. By offering a lower tax rate to employees of new start ups, governments are giving these employees who have accepted higher risk employment, which has the potential to benefit the broader economy, a fair deal.
In some cases, it would allow cash conscious start-ups to pay less while the employee would get the same take home pay.
Obviously, lower Capital Gains Tax rates for entrepreneurs and investors will be helpful. Investing in a start-up should be rewarded more than investing in an s&P 500 company.
Any tax jurisdiction that implements such policies will reap great economic rewards. This change in taxation policy would create activity in the most important area of the economy for recovery. Globalization means that the country with the best climate for start-ups will eventually win.
Wouldn’t it be nice for politicians to take a big picture view once in a while, and cut everyone involved in the start-up community a break?
I disagree with your proposal on the principal of “moral hazard.” All individuals must be treated equally fair, or there will be many more problems to deal with. What I would suggest is an income tax rate that escalates proportionally with amount of income.
AJ, what makes you say that a tax structure with progressively higher rates is “fairer”. Fairer to whom? If the tax rate were a flat x%, someone making $200k per year would pay twice as much in tax as someone making $100k per year. Why is that inherently unfair?
For that matter, I’d suggest that REVERSING our idea of progressive tax rates might be more fair, as people in higher income brackets are consuming *less* of public goods, and therefore should pay less to support government services.
Certainly, someone making $200K is not imposing twice the drain on public services that someone making $100K is, so why should he have to pay twice the tax?
I’d propose we have an “upside-down J-shaped curve” of a tax rate. At the very low end, people would pay less tax, simply because you can’t get blood from a stone. But at the higher end, the actual percentage paid should decrease, eventually to zero so that there is a maximum of annual tax any individual would have to pay regardless of his income.
Wouldn’t you work harder and try to succeed if you knew there was a chance of making enough to be “exempt” from further taxes? I know I would!
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Keb’m
There was some progress on this matter in the Irish budget 2009, where the government announced a three year tax exemption for start ups, http://www.business-startup.ie/finance/tax-exemption-for-start-up-companies.html
The golden rule: He who has the gold makes te rules! What makes a person worth ? millions of dollars in bonuses per year? Is it the fact that they can hijack the economic system, rebranding risk and selling it as security? If there are few to no controls on how much “top talent” can pay itself, why should there not be specific controls that they simply cannot evade, such as a maximum wage per year imposed through taxation? Do you think top talent works harder than you or I? Do you think they really have more responsibility than you or I (to the rest of mankind)? Is success defined by the size of the pedestal you build for yourself? William Gates Sr. said it (Business Week) after the dot-com bust: “We risk creating a new aristocracy!” Well, it seems he was right!