I live in Romania. Starting 1999 (IIRC) and ending 2006, there has been some very similar legislation in effect. The only result was a tremendous drop in income tax (which, admittedly, had been very high) since everybody and their grandma opened a small business, quit their job, and immediately came back to the same position as a consultant paid by their own company. Many employers applied gentle pressure in that direction since it got them cost cuts as well.
The clinch is that all these new small businesses contributed absolutely nothing new to the overall economy - the result was a net loss in taxes without economic growth to offset it - which is why the corresponding legislation was abolished in favor of a flat tax on income, profit, and so on (which, in turn, was quite successful at jumpstarting the economy.)
I don't think that there would be any additional advantage to doing that under the model Cuban is proposing. Business owners would still pay tax on their personal income. The actual dollar amount of tax paid by a one person company that pays all profits to its owner/employee would be the same with or without small business taxes, since the business always has a profit of 0.
Business owners may prefer contractors for various reasons still, but this wouldn't add to it. Did business owners in Romania also get a break on the money paid out from the small business as personal income?
Indirectly, yes, since they didn't have to pay the social security contributions affixed to salaried positions - and since those contributions are considerable (depending on the job function, to the order of 30% up to 80% of the pre-tax wage) it was easier to do this than to avoid paying them at all (also a common practice since tax collection, alas, moves incredibly slow...)
The level of taxation is not important per se, the only important thing is how the collected taxes are distributed and what they're used for.
Low taxes have helped somewhat (mostly by indirectly expanding the tax base) but the current economic situation (not very much affected by the global financial crisis) is a somewhat coincidental effect of the still large disconnect between the Romanian economy and the global markets.
What I'm arguing is that such a loophole will only create inflation by directing the indirect tax cuts to spending.
> What I'm arguing is that such a loophole will only create inflation by directing the indirect tax cuts to spending.
Inflation would be caused here as the total amount of money in the country is the same. It's just that the people are spending more money and the government less money. You only get inflation when the total volume of money increases.
You can also create inflation by any number of different means. One very good way is to encourage consumer spending (not investment!) when most of what consumers are buying is manufactured in other countries then imported.
Spending can't cause inflation as there's no increase in the money supply, and so prices can't uniformly rise as there's not the actual physical cash to pay all those higher prices.
I live in Romania. Starting 1999 (IIRC) and ending 2006, there has been some very similar legislation in effect. The only result was a tremendous drop in income tax (which, admittedly, had been very high) since everybody and their grandma opened a small business, quit their job, and immediately came back to the same position as a consultant paid by their own company. Many employers applied gentle pressure in that direction since it got them cost cuts as well.
The clinch is that all these new small businesses contributed absolutely nothing new to the overall economy - the result was a net loss in taxes without economic growth to offset it - which is why the corresponding legislation was abolished in favor of a flat tax on income, profit, and so on (which, in turn, was quite successful at jumpstarting the economy.)