

The Simplicity Test: A Simple Policy Guide for Job Growth - stakent
http://blogmaverick.com/2010/01/31/the-simplicity-test-a-simple-policy-guide-for-job-growth/

======
fortes
Amen. (Although this will never happen).

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.

~~~
vaksel
why do you need licenses? Are you a brick and mortar business?

~~~
fortes
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.

------
Eliezer
Another brilliant idea that makes you cry with the impossibility of anyone
ever doing it.

~~~
timr
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.

~~~
cwan
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.

~~~
timr
_"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.

~~~
cwan
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.

~~~
timr
_"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.

~~~
SwellJoe
_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.

~~~
timr
_"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.

~~~
jdminhbg
'But when Mark Cuban says "reduce small business taxes to fix the economy", I
think he's wrong.'

He did not say that. He called for a simplification of the tax code and easing
the regulatory environment, not for lower taxes.

~~~
timr
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.

------
logicalmind
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.

~~~
loumf
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.

~~~
dantheman
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.

------
breck
This is so true.

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.

~~~
loumf
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.

------
joelhaus
The concept is sound; however, the execution is far from trivial.

GAAP (<http://en.wikipedia.org/wiki/GAAP>) and IFRS
([http://en.wikipedia.org/wiki/International_Financial_Reporti...](http://en.wikipedia.org/wiki/International_Financial_Reporting_Standards))
are two great examples of accounting standards which approach regulation from
two very different perspectives. I'd be interested if someone has info
comparing administrative costs for businesses operating under each regime.

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.

~~~
skmurphy
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.

~~~
joelhaus
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.

[UPDATE: here's some info on California S corp vs. LLC:
[http://en.wikipedia.org/wiki/S_corporation#California.2C_New...](http://en.wikipedia.org/wiki/S_corporation#California.2C_New_York_City_additional_taxes)]

~~~
skmurphy
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.

~~~
joelhaus
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...](http://web.archive.org/web/20021001165628/http://www.aicpa.org/members/div/tax/praguide.htm)

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!

------
nazgulnarsil
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.

~~~
fortes
Just reducing the number of separate agencies you need to deal with would be a
help, even if the net amount of taxes remains the same.

------
anigbrowl
_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...

[http://www.businessweek.com/smallbiz/running_small_business/...](http://www.businessweek.com/smallbiz/running_small_business/archives/2010/01/what_obama_said.html)

------
Mz
_That government is best which governs least._ \-- Thomas Paine

Something the American government seems to have completely forgotten.

~~~
jbellis
The voters forgot first.

------
larsberg
What about people starting small businesses in accounting and law?

~~~
lionhearted
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:

<http://en.wikipedia.org/wiki/Parable_of_the_broken_window>

~~~
logicalmind
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.

------
holdenc
One way around the complexity: establish permanent residency in a more
friendly tax home.

