I thought of writing about this to ArcticStartup since it relates to the startup ecosystem so closely, but decided to post it on my personal blog as it is such a strong personal opinion.
Taxes in society work to distribute wealth, run governmental organisations to generate services for everyone, enable running of cultural services that wouldn’t be possible under market conditions, make education free in our country and for a ton of other reasons. In the end, they are in place to make our society a better place for everyone to live in.
Finland, like most civilised countries aim to treat all its citizens and organisations in an equal manner. This guarantees equal opportunities and rights for everyone involved. However, in some cases it is not favorable for the society as a whole to apply the same set of rules to everyone. Examples of this can be seen in our progressive taxation, the more wealthier you are the more you pay taxes in relation to your income. Everyone understands that while those being taxed more understandably do not prefer to be taxed more, but it works extremely effectively to generate more wellbeing for everyone else – thus justifying the unequal treatment of tax payers.
Like progressive tax, I strongly believe there is a case for a similar kind of unequal treatment in taxes for entrepreneurs. I’m talking about entrepreneurs here in general and not distinguishing between growth entrepreneurs and other kind. Unfortunately very few people in our society have realised the importance of this group to our social well being.
While two thirds of the Finnish population work at large companies, it may not be obvious to them that 95% of all companies registered in Finland are SMEs. Not only does one third of the population directly depend on entrepreneurship as their prime source of income, it is a key component of our economy in the way of generating employment, goods and services that larger companies will never engulf on. To generalise, we can say that entrepreneurs are a key component of welfare in our society.
In the recent years Finland has taken many steps toward making entrepreneurship more appealing, having finally realised its importance as large companies aren’t always employing as planned. However, there is a very simple yet extremely effective mechanism left unused that I strongly believe would only bring value to our society in the long term.
The mechanism I’m talking about, after the long prelude, is income tax for young companies. I have no understanding what so ever, when our government believes it is building a better society in the long term by taxing growing companies in the short term.
We have worked extremely hard for the past 2,5 years to build ArcticStartup the phenomenon it is today. We’ve put in tons of sweat and countless amounts of midnight oil to build it into a successful company. In 2009 we worked close to 10 months, alongside our day time jobs to make the machine turn – effectively keeping its costs down to a minimum. We also managed to sell quite a bit of advertising and visibility to our partners who have received very valuable coverage in a tough niche. All this hard work has resulted in us creating a profit for 2009, which does not carry over too well through 2010 as we’re putting in a lot resources to developing our business further.
All our hard work, countless hours and determination give us the opportunity to enjoy a very limited profit for 2009 which is then taxed on by the government. While I understand that taxing is in place to build more value, I believe in this case it does dramatically more harm than originally thought.
While the amount of taxes we accrued is very reasonable, I think there are justified reasons why young companies should not be taxed on their income during their first years of infancy. The very essence of effectiveness; startups have a chance at success because they create things thousand times more effectively than large organisations could ever do. This applies to the government as well, entrepreneurs make a lot more good with the money than our governments could ever do – at least on this scale.
It’s not recommended to whine in length about something if you don’t offer a solution. Here are my 2 cents. Any form of legal corporate entity that is under three years of age or has accrued less than 500 000 euros of profit and keeps that money in the company (as opposed to paying out dividends) – should not be taxed on their possible profit. While this might lower the amount of income tax the government collects from young companies, it supercharges them for success in the long term.
This single change in tax law, would make the Government of Finland our economy’s largest venture investor. This would create incredible implications in the long term through more possibilities for entrepreneurs to succeed, which in turn would make entrepreneurship more appealing and in the end – it would make our society a much better place to live in.