This is a good point that you have about the recent developments in the taxation. However, this is hardly anything new in Finland. The entrepreneurs here have always struggled with high taxes and probably always will.

It's a bold prediction about Nokia leaving Finland but you're unfortunately correct. Already now are many new companies started in Estonia instead of Finland just for the enormous tax incentives. Entrepreneurs have in general always been the best optimizers so they will choose the model that is cost effective and under EU legislation this plan tax optimization has become easier than even before.

Great news is that because of Internet, it's easier than ever to incorporate in another country. Some people prefer US Delaware LLCs but there's another options also that doesn't involve country under martial law.

I think if these changes goes thru without major changes there will be major shift how small tech companies incorporate. It's really not that hard once you have all the facts to make profit with foreign mother company and have company in Finland for payroll purposes only. They are about 10 years too late with these changes.

If I were a lawyer in this field I would start learning corporate taxation and other issues related in forming/running corporation in popular foreign countries right now.

"Politicians have a tendency to go from one extreme to other and I’m afraid Finnish entrepreneurship could end up paying for this."

Thumbs up. That's exactly the problem in Finnish politics in particular.

Good post! Agree with most of the problems, though I still (want to) believe that Nokia - who can compete in this difficult environment fairly well - will never leave Finland. The truth is that there is no tax code that could save this country at that point anymore, so better do the political decisions today in such way that this day never arrives.

Why can't they just do an exception with the doctors taxation, since this hole really pisses everyone off?

As an entrepreneur, I am troubled when following this discussion: There seems to be a surprisingly strong consensus among the different political parties that the taxation of entrepreneurs should be increased. And suprisingly, there seems to be a complete silence regarding the actually much needed changes in taxation.

It is quite clear to me that in the future the public finances need to be balanced: The costs need to be reduced and taxation level raised. However, when it comes to taxation, one of the first priorities should be in reducing or completely getting rid of the unnecessary tax deductions (like the mortgage interest tax deduction). If the taxation task force headed by Martti Hetemäki does not even suggest these changes, it is quite clear that groups' suggestions are mainly politically motivated and not to be taken seriously.

The first politican that comes out and clearly advocates the corrections to these ridiculous deductions has my vote in the next elections. No matter what political party, and regardless if he/she would also support increasing the taxation of dividends in non-listed companies. :)

For me the main question is always attitudes. I think entrepreneurs need right attitude to be successful. But it is the same for all communities and nations. And I think these tax issues are just one example, what are attitudes, and how people see entrepreneurship in Finland. That's why I see a lot of issues to make great success stories there. Unfortunately.

I'm personally more than willing to relocate our company to some other country if the last remaining incentives for entrepreneurs are going to be scrapped.

The problem I think is with the media -- by now, I think 90% of the population think that entrepreneurs don't pay any taxes whatsoever up until 90,000 euros. And I'm serious: media has brainwashed people so badly during the past 2-3 years about this issue that I've had to explain even to my own parents that, yes, I actually do pay taxes and I that more than 90% of my salary is taxed as income tax, just like anyone else's salary (just under worse terms than regular worker's taxation is done).

What Sinnemäki and other seem to forget is that the "build a big war chest and you can take out certain portion of the dividents without double-taxation" legislation was created (by our government..) after the economy collapsed in early '90s -- just to ensure that companies _do_ have the war chest in place when needed.

Look at the bankruptcy figures in current recession and compare them to those we had 18yrs ago. Did it make sense to encourage companies to build decent war chests? Yes, it did. We have tons of companies that will survive this recession, simply due their reserves.

From a politician perspective I would also like to give thumbs up for Ville for raising this topic into discussion on this forum as well!

I could not agree more to Ville´s opinions about the Hetemäki´s scenarios and Anni Sinnemäki´s suggestion. There are few things that would be more harmful to entrepreneurship in Finland than Sinnemäki´s idea becoming reality.

The main problem, seen from a politician perspective, is the complexity of the taxation as well as the general lack of knowledge and interest about the system. 99% of the people are not particularly aware about the details in our tax code and/or it´s implications to different stakeholders.

Huge majority of people actually just think that due to the increasing public debt levels it is perfectly okay to tax companies more than before. Without that they would think about the broader implications of these actions. For a politician this road is often, sadly but true, the easiest way to follow, given that we do are currently struggling with increasing public debt.

Let´s hope that political process does not decide to follow the easiest visible tracks, but rather decides to follow the road that is the tougher one but also in the end leads to a brighter future for the society as whole.

Good points Lasse. Succeeding in politics means many times bad policy choices, and succeeding in policy means many times bad politics.

[...] Read the rest here: Killing Finnish Entrepreneurship With Tax [...]

Even though as an expat I can hardly be considered a specialist in Finnish politics, the real question is why those people are in a position to take such decisions. Aren't politicians supposed to be an extension of "us", the people?

Having lived in Finland for more than 7 years, and having seen many expats leave the country because of the high taxes, I am not at all surprised with this proposal. Everything that even remotely smells like luxury or success is taxed like crazy.

Is it that there is no real liberal alternative to the left wing block which dominates the political landscape or is it that people don't really care and are happy with a more socialist approach to society? I have heard many many Fins complain about the high taxes on cars for example, but when challenged as to why they don't revolt against it or punish politicians when they cast their vote, they shrug their shoulders and say it will not change anyway?

Should you try to rally supporters around you and step into politics? You will at least have my vote!

The views you present in this blog are a bit narrow.

First you have to define what is the problem(s) that the parliament is trying to solve.

Here are my assumptions (albeit not fully informed, I admit)
1. Entrepreneurs should keep the money *in* the company and grow it, instead of taking out dividends. Raising the taxes on *dividends* encourages the entrepreneurs to keep the money in the company and grow (or try) the business

2. Create a better environment so that we have *more* entrepreneurs. This would be helped more by a simple tax code than a +-10% discussion on the actual *dividend* taxes

3. Compete with Estonia. I'm afraid that this is a losing battle. If entrepreneurs are willing to open an office in Estonia they will, no matter what the cost is. Offshoring a bad business is cheaper than having a good business, and people will do it for good or bad reasons independent of the taxation (only BIG companies actually benefit from taxation differences between countries).

Having these problems in mind and discussing the implications to each is much more productive than just "bashing" any taxation changes. Yes, sure everybody wants lower taxes, but lower taxes mean increased costs elsewhere (schools, services, etc.). Let's discuss what would help create a more entrepreneurship-friendly system overall rather than just closing our eyes and discussing only taxes.

Vasco,

I'm not trying to be all things to all people and have to choose my battles. Thus, not going to comment on the bigger problem here because it gets philosophical very quickly, but let's assume that in our case parliament is trying to make sure taxation will, on one hand, secure stable economic growth and, on the other, ensure that the public books are balanced in long term over economic cycles (thus aiming for increased wellbeing and quality of life for the constituents of the state with the tax authority).

When talking about economic activity in relatively open markets I believe it all boils down to how the incentive system in structured (micro economics!). Again, we can go in the long discussion on the purpose of firm and how taxation affects wealth creation in a corporation, and whether dividends should be raised or left into the company, but at the end of the day when considering our personal choices we tend not to choose alternatives (e.g. setting up a company) if it seems not make sense economically.

"Having these problems in mind and discussing the implications to each is much more productive than just “bashing” any taxation changes. ... Let’s discuss what would help create a more entrepreneurship-friendly system overall rather than just closing our eyes and discussing only taxes."

I agree with you here and hope this is exactly the type of conversation you're looking for. At least that's the purpose of the piece I wrote.

After following and being part of the Finnish entrepreneurial ecosystem for a good 2 to 3 years now, everything considered, the taxation is a big big part of, as you put it, helping to create a more entrepreneurship-friendly system overall. I reiterate what I said before: If Finland will tax our entrepreneurs to death, the smart ones that will most likely build those success stories will set up their companies elsewhere. The trade off if too severe in a world where goods, services, people and capital flow across the borders as easily as they do today.

It is true that it can get "philosophical" very fast once we discuss this issue.

But let's start from the premise you hold: "taxation is a big big part of helping to create a more entrepreneurship-friendly system overall."

Let's take it a bit further and say: taxation is the biggest incentive/obstacle to entrepreneurship.

What taxation approach would help create a better environment for many more small companies to be created (and fail -- which is a natural consequence of having more companies starting).

Certainly we have to consider the "other effects" of taxes. Will entrepreneurs start a company in a country where they have no health care? Or no education (which gives us highly-qualified workers)?

Of course not, so we have to accept "some" taxes. Now, we have to decide where to take those taxes from. Do we take them from "capital gains" (i.e. corporate profits) or from "dividends" (personal profits).

This discussion is quite important because capital gains tax increases have a much higher impact on the "money flow" (because of stock-related issues and big companies moving more money). So, a government is faced with this choice. Which one is better? (none is good, obviously).

Yet another option is to tax salaries. Is that a better solution?

I believe that taxes are a part of what makes a country more or less entrepreneur friendly, but anyone that has had to wait for hours/days in line to get a business started (I have) understands that our tax money pays for a lot of benefits that we don't talk about when we put the questions in such a black and white format.

BTW: what if the money raised from these taxes would go to business incubators? Shouldn't we be talking about where the money is actually used?

Flattered, but that decision must wait for some time.

Now, don't get me wrong. I'm in favor of a healthy tax base and don't want to see a neoliberal free market to take all conquer all. I value what we have in Finland and don't want to make a cut throat winner takes all environment.

That said, I don't believe the options are quite as black and white as you make them appear. I thinks saying "Will entrepreneurs start a company in a country where they have no health care?" shifts the conversation a bit too close to the populism we tend to see from the politicians themselves.

When I say this, keep in mind the forum we're dissing on (ArcticStartup) and that I'm biased in favor of entrepreneurship. In my mind the problem is this: Entrepreneurship and building new companies that can consequentially create tax income and jobs is SO essential for us the the opportunity cost of not maximizing the changes of seeing those companies born and grow in Finland is so big and yet the money from double taxation relatively so small that we should let kill that tax. Options are another area, but let's not go there now.

Loosing the direct perceived incentive to start a company, or having one directly against it rather, in my mind, does not account for the amount of tax income that government receives from this. It will be such a detrimental blow to the future of entrepreneurial culture, which is currently a house of cards really, that I would hope we can scrap it.

What comes to other taxes, I agree with Michael Falck's comment above. We need a simple tax code, period!

In the meantime (I do agree that Ville should consider politics!) be sure that I will battle in the field of politics with this agenda ;)

Vasco, you are making a valid point about keeping the money in the company to grow it, but don't you think the entrepreneurs are the best people to judge when to take money out and when to invest it back in growth? I'm sure if the entrepreneur sees a good opportunity to grow the company by investing the earnings back to the company, he/she will be smart enough to do so.

If the society really wants to help companies invest their earnings for future growth, how about follow the example of countries like China, where new companies are exempt from income tax for the first 3 years of profit-making and then pay half tax (normal tax rate is 15%) for the next few years.

This would be another way to avoid double-taxation. Tax the dividends, or the company earnings, but not both.

As for Sinnemäki, she should go back writing lyrics for songs. That is something she was good at. I have no idea why she was elected.

I think one side of the whole tax discussion has been left out (apologies if not). It is the fact that governments themselves rely on third party incubators and organisations to help people start businesses, without realising they hold the keys to the biggest incentives ever possible for starting your own company.

The actions governments can take for young entrepreneurs (and by this I mean people whose companies are, say, less than 3-4 years old) are immense. We don't have to go and re-design the whole tax code to create incentives for starting your own company.

Usually the first years of running your business are the most difficult. If your business expands and grows larger, it usually gets slightly more easier (as you have a proven customer base as well as a business model). Therefore, one could argue that the problem is not in making companies already in Finland more successful financially, as opposed to creating more of successful companies in Finland.

What I personally would like to see improved is the first steps these companies take. Governments can create immense implications in the possibility of success for companies if they would be helped during their first years.

Consider it this way; money acquired in the form of investments from the private market are able to take companies further when governments ease up a little on the obligatory costs (tax, social, etc.) of running that business. This does not have to continue forever, but a little nudge from the government in many cases could be the differentiator between success and failure.

In fact, another change in the tax code should be the way investments in start-up companies are taxed. Profits from investments to early stage start-up companies should be taxed at a lower level due to the higher risk and especially due to the benefit to the society as a whole. Instead of trying to tax the high earnings or high net worth individuals out of the country, the government should make it easier for them to invest in new companies (which, in turn, creates jobs, increases the total tax collected, etc...)

I actually don't know how investment losses are treated for non-professional angel investors, but any individual investing in start-up companies as an angel investor should also be able to deduct losses from such investments from future earnings (perhaps they already can?)

Hm. Good post, but might it overlook something?

As you wrote, those "tax free" (i.e. after corporate taxes) dividends are only 9 % of company assets, to a maximum of 90 000 a year.

To be frank, I'm not sure whether dividends really are financial motivators for entrepreneurs. Unless I'm mistaken, at most you can save around 25-30 % (and likely far less than that) compared to taking the same money through wages, and taking any appreciable sums via dividends requires pretty significant assets.

I don't see us, for example, ever having assets exceeding 100 000 €, if that - I'd like to lease or rent everything if at all possible. Granted, we're in consulting - not exactly an asset-intensive business - but still, in my vision of the future companies and especially startups are very agile firms with little fixed assets.

In my view, 9 % tax free dividends are largely an extra bonus to established businesses, and cause inefficient capital allocation since firms have an incentive to boost their assets, even if they could get a better deal by renting or leasing. This leads directly to inflexibility!

I do agree that Sinnemäki was speaking out of her backside (as usual), and I agree that the attitude of politicians towards entrepreneurship leaves a lot to be desired, but in the long run, we might nevertheless be better off without these loopholes and with a simpler tax code.

But I might be wrong, as I haven't really studied this matter. Other readers might know better, so: are dividends (tax free or otherwise) really an incentive for entrepreneurs?

Janne,

Thanks for the comment. There's truth to what you wrote, but firstly, we're talking about growth entrepreneurship in this forum above and beyond everything else. This choice assumes the entrepreneur thinks BIG, in which case assets exceeding 100 000 € is not an exception, but a rule. Not in reality, but in mindset. Secondly, as a smart person that I know you are, you know what drives behavioral economics and here PERCEPTIONS heavily influence our thinking and when putting our tax code into the international context, it does not incentivize to set up shop in Finland. It's rather depressing actually.

The idea that someone taxes (double!) my hard earned euros with a 40% to 50% after the fact that I have set out against all odds and taken the entrepreneurial risk sounds wrong given what other countries are running at.

It's another issue what entrepreneurs like us end up paying in reality, but the focus should be on the signal we send to the young guns in universities, the serial entrepreneurs, the skilled and educated people thinking of migrating from abroad to Finland, the ones graduating from our universities, and other would-be entrepreneurs. To change the culture, you need to talk the walk. Talk is cheap, support mechanisms just more red tape, but taxes are real. And people do remember how they are taxed.

Agree, entrepreneurs should think big. However, I do think this is one of the loopholes that aren't really that incentivizing for growth companies, even if they have significant assets - as a rule, shouldn't a growth company plow profits into expansion, rather than pay them out as dividends?

As I said, I see it mostly as an extra bonus for established, cash cow-type companies that can't figure a better way to invest their money than pay dividends. In other words, they are not growth companies. This brings to my mind an interesting question: if we want to encourage companies to invest more in growth, shouldn't we actually make dividends less and investment more attractive?

The main problem with this loophole, in my opinion, is that perverse incentive that biases companies for owning assets instead of leasing them. For the reasons of strategic flexibility and lower up-front costs, I'd still recommend leasing for growth companies, not just for our consulting gig.

But I might be wrong, hence I'd like to hear from real growth entrepreneurs whether they are planning to pay dividends and what kind of changes to the tax code would incentivize them the most.

Whether people respond to imagined opportunities is another, quite interesting matter (and you may very well have a very good point there). I confess I was thinking of dividends when I first became interested in entrepreneurship, but experience has teached its lessons :).

Good points all above.

Let's start with simple tax code.

And more importantly, what principles are used to build one?

1.Everybody should be treated equally. 2. Code should be wide enough to tax everything which it should. 3. It shouldn't smother all financial activity...

Mayby we should only talk about the first point. Should entrepreneurs get facilitated with easier treatment. That's what we are talking about here.

Corporate taxation is lighter than taxation on personal income already. And more important it's a flat rate, when you are earning dividends from a bigger company (it's been years since I studied the subject). So, when we talk about treatment versus big companies and smaller ones, there is already motivation built inside the system Grow bigger, get more. And bigger companies are better for Finland. No? (And I don't mean BIG companies like Nokia, but big enough to employ people and what resources to develop things).

it is always difficult to decide which rules give you right to exception. Now you can get relief on the taxation, when the company has assets. Janne Korhonen makes a good point that this can be restricting. But where is the risk without assets? And if company revenue only comes from the labour of the owners, there is always the possibility that the whole company is build for avoiding personal taxation. Ok, one principle could be how many employees the company has, that could be a good measurement too (if all are not owners, that is).

One point against any leniency is distortion. If one way to use capital is taxed differently it can create problems how financial markets function. They may become ineffective and money goes a waste. Ok, mayby no money spend on a start-up is a waste considering the opportunity for the whole country a start-up could represent. So as a nation we should tolerate that.

However, losses are already deductible from the profits. Even from future profits. And if there is profit, how does that benefit anybody, if it isn't used to make the company bigger. And you don't usually make profit if you have a plan. Which you should have. And if we talk about VC's or other investors, there is always the tension between different investment opportunities and risk assessments. Should we artificially tamper with that?

OK. This is not a rant..:), and I don't know the answers. Just wanted to give some more things to may by talk about.

I think what makes changes difficult (and I am not against those) is that we have a principle in taxation that everybody in same situation should be treated equally. To change that and have exception to the rule, we need good arguments. And all exceptions work against simple tax code..

At least government has put up a working group. I do know from previous experience that these are usually a bona fide attempts to find solutions.

If you want to help them in their work, know the arguments they use and create a channel to communicate with the group to present your solution. If not otherwise, I think you can find Hetemäki's phone number calling 09-16001.

Br,

Henrikki (thebluenile)

Henrikki, the idea that the tax code should treat everyone equally will never be possible in Finland. There is a very strong opinion that those with more money or higher incomes should pay proportionally higher tax, no matter what their other contributions to the society are.

However, this is a question that cannot be considered in isolation. On one hand you could say that entrepreneurs, especially successful ones, will be taxed heavily and then the country will first get more jobs and later can also reap the benefits by taxing the company and the entrepreneur.

But the reality is that Finland is already losing entrepreneurs who are moving to other countries, so the "fair" taxation you mention only results in less job opportunities and lower tax income. Finland needs a lot more new companies to generate jobs and and taxable revenue (yes, even if the company profits were not taxed at all, there is always a significant positive impact... income tax from employees, VAT from sales, etc).

I would go as far as suggesting that tax code should not be equal for everyone. Someone who starts a new company and grows it into a successful corporation should be allowed to reap much of the benefits not only from dividends but also when the company is sold. The odds are, he or she will do it again by starting a new company and investing into other start-ups as well.

I would argue that a smart business person will get a lot better return for the money than the government. If you let an entrepreneur keep more of the money he generates, the money will in fact return back to the system in ways that generate even more tax revenue for the state, so it is a net win, not a loss. The only negative side effect is that some people will get jealous of the success, but it is a necessary step on the path to a society where entrepreneurs are respected for the work they do and for the risks they take.

One of the things coming up once and a while is also the following: the smartest person may often choose a career path that has highest probability of giving respect and good financial returns to an individual (and his/her family).

Currently, judged on that aspect, a smart person does not become an entrepreneur. It is far more safer (still) and more rewarding with a good salary and possibly stock options to stick with somebody else's company - to be a salaryman as they say in Japan.

Well, that means I'm not so smart as I happen to be an entrepreneur :-)

Taxation is one of the signals showing how entrepreneurship is respected. If it is made worse for entrepreneurs, it's a signal of decreased (relative) respect. It may make salaryman career more interesting, and making an entrepreneurial career even less interesting?

Of course it should not be like that. And it's not that straightforward, as there are many other reasons to be an entrepreneur.

... that said, I still claim that as we do not have enough entrepreneurs (see also http://bit.ly/5gH4nf) its relative interestingness should be increased, not decreased.

Forget Finland. Just register and do your business in Estonia or some other location. It's a free open world and its just plain silly to thibk you have to do business in your home country. Forget words. You need action, leading by example.

Not sure I understand your point here Henrikki?

I don't think you're alone with the opinion JK.

"the smartest person may often choose a career path that has highest probability of giving respect and good financial returns to an individual"

...not only may, but I like to believe that we do choose that path.

JK, this thing always comes up into my mind as well.

By the way, do we have any representatives from the "official side" here, those representing the government, participating the discussion?

Good to remember that in this conversation it's as much (or more) about the perceived message the policy sends as its about the specific numbers and what they might mean at the end of the day. The former creates the culture that has lasting effects.

Antti,

Either the policy makers and/or politicians are not following the conversation or don't want to discuss the issue openly (excluding Lasse!). Let's hope they find the forum, the courage, and decide to chip in. Otherwise the conversation is a bit one sided. Would love to have all the stakeholders discuss the issue and bring in the points of view we are missing or straighten our facts.

Competing with Estonia was mentioned in one comment.

I am quite familiar with the estonian taxation, law and company registration and here are some bits about Estonia:
- Firstly registering a company is relatively easy. You must have 40 000 EEK on a local bank account. Everything else can be done through the internet. Even with a Finnish mobile-id: https://ettevotjaportaal.rik.ee/index.py?chlang=eng. You do need an address.
- You probably need an accountant. If you run a small internet company with little amount of transactions that will cost you a minimum of 1000 EEK/month. But you can always negotiate. However it would be wise to have a good accountant if you are not very familiar with the law and that will cost you about 1500 EEK/month.
- The best part of Estonian taxation is that company profits are not taxed at all. So if you get a net profit that you can keep.
- The dividends are taxed with an income tax - 21%. So if you pay the money out of the company you have to pay taxes.
- The salary taxes are relatively high: 33% social security, unemployment fund tax, pension fund tax and income tax. You can calculate the numbers at www.kalkulaator.ee. So paying to employees in Estonia is not cheap.
- The Value Added Tax is 20% and you must start calculating it if your yearly revenue exceeds 250 000 EEK.

Hopefully Estonia will make it to the Euro zone in 2011 and all these numbers will be in euros. (The current exchange rate is 1 euro=15,6466 EEK)

Taxes are not the only factor to choose a location. But of course it is a relevant component. But generally I really think Finns could also think more, where to incorporate a company, and how to build the whole structure. It is important part of the business to have optimal structure for the business. We all know Israeli model, but there are many options depending on business and needed resources.

I have personally incorporated several companies around the world, and it is not too difficult. I would say taxes have normally been a small component in this consideration, but then tried to combine all other relevant aspects: competences, funding, resources, customers, right attitude environment, etc. I have recommended many entrepreneurs to consider this carefully when they start a business. A typical answer is "we just want to get it to move on, and we can consider that later". But my recommendation is to think this really in the beginning, it is not too easy to change it later.

Märt,

Thanks for the valuable perspective and info on Estonian system! Would love to hear similar specs on other countries if someone has the info at hand?

Jouko,

Could you walk us through a case example? A set up you could recommend to a startup from Finland? Where to set up and what to consider beyond tax? I have my own ideas, but would love to hear from someone with extensive experience on the topic.

Ville, I can write you better consideration about location with better time. Give me a week.

Well; i tried to make several points about that there should be grounds to make exceptions for start-ups compared to other companies,

I understand that I wans't that clear on my comment, but I meant that the principle is that taxation should be equal among peers.

And as I have understand a some kind starting point to this conversation is the way start ups are taxed.

To justify different treatment for different kind of companies, there should be given good grounds. Just saying, it's not fair is not enough.

And let's be clear about one other thing too. There is always going to be taxation. So when you said about:

"Someone who starts a new company and grows it into a successful corporation should be allowed to reap much of the benefits not only from dividends but also when the company is sold. The odds are, he or she will do it again by starting a new company and investing into other start-ups as well"

Do you mean that there shouldn't be any taxation on that transaction?

That is unrealistic.

So, corporate and capital tax are always compared to income tax. There should be relation with these as we have noticed about the public debate on the matter. You can challenge it, but you better make good case for it.

As I remember, and I should check this out, the total corporate taxation is not that out of whack compared to other European countries. USA is of course different matter.

It would be really interesting to read your piece about choosing a location.

As I have remember it, taxation is not that severe in Finland compared to other European countries.

Have you read what the working group have created so far?

"the total corporate taxation is not that out of whack compared to other European countries."

Would not call it that competitive either, given the high income tax for say foreign talent to top that. http://www.tax-consultants-international.com/read/worldwide_tax_rates

On the light of those figures can understand why many wouldn't jump up and down in excitement to set up their HQ in Finland when given choice.

I mean, you mention some of working groups solutions, but mainly focus on the double taxation.

Do they have any good or working recommendations?

In my comment I tried to answer both to your article and some of the replies to it, I may not have succeeded in that so well..:).

My first question came through twitter and is still the same what would be a good model then? I am not sure concentrating on the negative (like Sinnemäki's comments) is taking us anywhere.

Rebuttal is best made with a better solution.

good points Ville, its not nice to be taxed more than others on the same income.

HOWEVER, your title is misleading or you should look at research on the drivers of entrepreneurship.

Taxation has not much to do with entrepreneurial levels of any given area, but "entrepreneurial spirit".

So Its a cultural thing. Presumably you know this since you run this website and community.

i,

Thanks for the comment. My point was and is, that one should not stare only at the specific figures, but the message the such a set up sends. Now it's not very encouraging, which affects the very culture you're talking about. The very culture most of the readers of this blog are very concerned about.

What drives this is the taxation, because nationally and internationally it's the most direct and transparent signal one can have about the environment in a given country.

People won't move into a country which taxes the living life out of entrepreneurs. In fact, they don't even consider it because they short list their options based on those that have the most favorable environment. And in the long run this builds into culture with the critical mass migrating to such locations.

That is why taxation has everything to do with entrepreneurship. To keep the successful Finnish entrepreneurs in Finland, to get more Finnish people to choose entrepreneurship and to attract foreign talent to build firms in Finland.

This is the best post I've read on AS. I'd love to see this media become openly the torch-bearer for the small innovation industry in the Nordics, and that includes covering the politics around the issues. More like this!

Taking a step back from the issue at hand, this is nothing very new. The left has tried to push these reforms in Finland for a long time. Now that there is a working group preparing potentially sweeping changes to the tax code it seems like a good time for the left to dial up their rhetoric on this (I haven't followed the FI politics closely lately though). Not all of Hetemäki's groups suggestions look bad, though.

What unnerves me about this is that the change proposed by Sinnemäki are categorical, and can make a big difference to whether a small company is a viable unit in Finland at all. In effect, the worst case would be that a new tax law hijacks the competitive ability of Finnish SME's. And you should never negotiate with hijackers.

dRD wrote:

"What Sinnemäki and other seem to forget is that the “build a big war chest and you can take out certain portion of the dividents without double-taxation” legislation was created (by our government..) after the economy collapsed in early ’90s — just to ensure that companies _do_ have the war chest in place when needed.

Look at the bankruptcy figures in current recession and compare them to those we had 18yrs ago. Did it make sense to encourage companies to build decent war chests? Yes, it did. We have tons of companies that will survive this recession, simply due their reserves."

Somehow I initially missed dRD's excellent comment, but after reading it, I'm actually willing to reverse my initial position.

This is probably *the* best single argument for the current system I have ever heard: tax break as an incentive for survival-enhancing redundancy. I repeat: this argument needs to be examined, and if proven correct, communicated repeatedly to the politicians.

If it can be shown that this 9 % "tax free" dividend leads to companies building redundancy via larger war chests, then I'd consider it a very important factor in stabilizing the entire economy.

Silly me, I'm the one who's been preaching the need for increased redundancy in business and economy, even been planning a PhD thesis broadly on the topic, and still I get these brain seizures and start reciting from the neoliberalist playbook :). Goes to show what some economics education can do to a man's soul...

While my initial argument still stands - the current system is an incentive for "inefficient" capital allocation - I hadn't considered the systemic positive effects of "inefficiency" (or, in other words, redundancy). There is a reason why most of our vital organs are in a duplicate; redundancy is not all bad. From the long-term viewpoint of society, incentivizing some redundancy might actually be even more important (because of their smoothing effects on the business cycle) than incentivizing entrepreneurs (which is also important).

If I had time, I'd build an agent-based model that would show how changes in redundancy (i.e. size of the war chest) influence volatility due to external shocks. From the top of my head, based on the writings of Kauffman, Beinhocker, and others, I'm pretty certain that low redundancy leads to very large volatility, meaning a rollercoaster-like economy with very little stability, while high redundancy leads to low volatility and smoother sailing.

Nevertheless, this inefficiency argument is a real one and something those who argue for the current system need to take on. Any suggestions?

I didn't mean there would be no tax at all, I just said it is in fact better if the entrepreneur makes more than if he makes less. I currently live in Switzerland where there is no capital gains tax for individuals. I used to live in Nevada in the US, where there was is no income tax for any individual, but corporations are taxed quite a bit. Obviously Nevada lives off of tourists, and Switzerland is the haven for rich people, so they have their reasons.

Neither of these models probably work for Finland, but I wouldn't call any option unrealistic without carefully considering it. The Finnish thinking seem to be that everything that can be taxed, needs to be taxed, but that is not always a good idea.

You are comparing capital gains tax and corporate tax to an income tax - why? Entrepreneur doesn't enjoy (or expect) most of the security and support an employee does. No reason to think they should be taxed equally either. Capital gains tax also is not designed for entrepreneurs, it is for investment income, and thus doesn't really work well.

Corporate taxes are obviously just one thing, but that happens to be the topic of this article. There are changes needed for the treatment of entrepreneurs and board members in case of bankruptcy, for example. There needs to be a change in the way stock options in start-up companies are taxed (especially in early stage start-ups they could be used as a way of "investment", where a lower salary is compensated with options to the company shares... the employee carries some risk, the company saves capital. In essence it's wrong to tax these the earnings the same way as income). And there are other examples as well. As many have said in this discussion, we need a change of attitude towards entrepreneurship in Finland.

Thanks to AS for keeping this issue in discussion. I've been talking with many politicians and officials about the need to make the finnish tax system more supportive for entrepreneurs. It seems that the issues are so loaded politically, that the only way to push things in the right direction is to bring these views in public discussion. In the end, politicians make the decisions based on public sentiment.
In addition to the Hetemäki paper, there are some other quite interesting studies underway as well. First, Professor Vesa Puttonen will give his proposals on how to make the Finnish innovation system more efficient in April, and tax incentives are a part of this paper. Second, Ministry on Employment and the Economy (TEM) will have the 2009 paper "Supporting Growth Entrepreneurship through Tax Incentives" (my translation of title..) updated in light of the current tax incentive proposals. These proposals will be public roughly at the same time with the Hetemäki paper. My feeling is that they will be more strongly supportive of entrepreneurship.
The point I'm trying to bring across in all discussions is that we need to make sure we have strong incentives for growth for all entrepreneurs and businesses. That is the only way to make sure we can continue to support our high level of welfare, which I also support very strongly. And taxes are the most powerful tool in steering the entrepreneurial crowd. In fact, there is no such thing as perfectly level and equal taxation, there's always incentives for some kind of activity and discouragement for something else. What should be taken care of is that these are in the right place. Right now the taxation discourages growth and encourages suboptimization such as maximizing capital gains income.

You have good point about redundant cash on companies stabilizing the economy. This cash is usually used to decrease companies fixed expenses i.e. companies owning their own premises etc. so this money is creating value to company/owner.

I have this feeling that some political parties don't want companies to be too independent nor create too big "war chest". One day a company/owner can realize that he can just quit the business and live on income that company's balance sheets "financial income" -line is creating. Then entrepreneur might think about relocating to somewhere else.
When companies are in dept they need to be agile and create profits from the normal business to stay afloat. State can also better control those companies because they don't have an easy opportunity to relocate.

This applies to rich individuals too and we tax-regulators have done a good job while trying to make sure that no rich people want to live in Finland.

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