4 ms·

Why do you think that there is nothing wrong with the first example?

lordnacho 11y ago
It's more or less open to everyone who has a business, costs barely anything. Any accountant will know about it, and they won't make the wink-and-nudge like there's special about it. If you ask about the schemes, the advisor will openly tell you they expect a ruling, ie there is some contention about whether it's actually legal.
saiya-jin 11y ago
It's considered OK by system in most, if not all european countries. Some rules apply, some places are more restrictive than others, but at the end, this is all legal and supported by law. So yes, there is legally nothing dodgy or wrong there. Quite large parts of populations are employed in this way. More work, more reward. Now why people need to resort to these practices to get more fair share of their brutto income is completely different topic, something around "voting with your taxes" about how public cash is spent (usually pretty badly). FYI, I don't do it anymore, got a perm job, but when I was doing consulting this way, I had all the possible support of my local tax office when something was unclear.
- _delirium 11y ago
  Some European countries handle this by allowing it to be legal, but designing the tax rates so that you pay the same tax either way, so it's not really a tax dodge. In Denmark, for example: marginal income tax rate on salary/wages for higher earners is around 55% (including all the payroll taxes and such). Marginal rate if you pay yourself dividends instead: 23.5% corporate income tax up front, plus 42% personal dividend tax on the paid-out amount, or effectively... 55% again. In fact I believe the dividend tax level was chosen precisely to make it come out the same overall. (The story comes out similarly if you look at effective instead of marginal tax rates, e.g. for $100k income, it's about 40% effective tax either way.)
deleted 11y ago
[deleted]
Spooky23 11y ago
It makes sense to conduct business as a company for liability and tax reasons. A doctor typically has a staff, or may want to have the ability to sell the practice later on. If you make $600,000 a year, why should you have to pay 40-45% tax on that income when $250k will be invested back into the business anyway? Why should you be compelled to subject your spouse and children to the liability of the business? A real estate investor will often setup LLCs to isolate the liability associated with one property from the overall portfolio. Again, a legit business use. Obviously there are abuses here, but the fundamental concept isn't wrong. Typically the abuses are when there isn't a bona-fide business. Some financial dude setting up a shell company for his bonus is an example of a questionable use of this approach in my book. When a person sets up a chain of shell companies to obfuscate the ownership or transfer of assets, that's obviously crossing the line into money laundering territory!
- tomp 11y ago
  You're conflating wuite a bit things here. Nothing, except tax avoidance of course, prevents the doctor from forming a company and taking money out as salary instead of dividends, thus paying his "fair" (which, obviously, is debatable) share of tax.
  - Nrsolis 11y ago
    And there is much debate about what "fair" means. If by "fair" you mean we all pay a roughly equal amount, then I'm cool with that. If by "fair" you mean that people who are more productive contribute a greater share of that production to the pot to achieve the social justice goals of others, then that's where I think there is room for debate.
    - arethuza 11y ago
      In that first case - do you mean equal amount or equal proportion?
      - Nrsolis 11y ago
deleted 11y ago
[deleted]
ska 11y ago
Possibly a variant of the "hard cases make bad law" issue. Finding a bright line differentiation between formation of a company for "legitimate" (what does that even mean?) reasons vs. tax avoidance/optimization is likely impossible. It's quite likely that even pursuing this in legislation would only result in a net loss due to regulatory burden etc. without any real gain.
sokoloff 11y ago
In the plumber's case, he's created two kinds of value: one, from his direct labor on jobs, "ought" to be paid out in salary. The other, inherent in the operation of the business itself (markup on equipment sold, face value of service contracts sold, etc) is value created by the business, and profits not retained "ought" to be paid out as dividends to the owner (the owner just happens to be the same guy). Further, the business could decide to buy the tools, supplies, and provide the plumber's van. In exchange for providing all these supplies (which are deductible for the business), there's a strong argument that the salary due the plumber is less than if he had to provide all those tools himself. There's a fair amount of flexibility in determining how much of the total is salary and how much is dividends and that's why there's "nothing wrong" with the first example when properly applied. Saying a plumber worked 100 jobs for a penny-per-job is not reasonable, but there is a broad range of reasonable. To put it in our field, suppose I had the fortune to create the next modest sized thing that was purchased by Facebook for $10MM in cash. Suppose that a team of 2 of us (me and one other) created this over a 1 year period and it was 100% funded by me (no VC, no angel, etc). Suppose that I paid the other person $200K salary for their efforts. How should the remaining $9,800,000 be divided on my tax return? Surely you wouldn't argue that my "salary" was $9,800,000, but rather my salary should be $200K and I should receive the $9,600,000 as non-salary compensation (capital gains in this case, presumably, but not W-2 salary).

It's more or less open to everyone who has a business, costs barely anything. Any accountant will know about it, and they won't make the wink-and-nudge like there's special about it. If you ask about the schemes, the advisor will openly tell you they expect a ruling, ie there is some contention about whether it's actually legal.

saiya-jin 11y ago

It's considered OK by system in most, if not all european countries. Some rules apply, some places are more restrictive than others, but at the end, this is all legal and supported by law. So yes, there is legally nothing dodgy or wrong there. Quite large parts of populations are employed in this way. More work, more reward. Now why people need to resort to these practices to get more fair share of their brutto income is completely different topic, something around "voting with your taxes" about how public cash is spent (usually pretty badly). FYI, I don't do it anymore, got a perm job, but when I was doing consulting this way, I had all the possible support of my local tax office when something was unclear.

_delirium 11y ago
Some European countries handle this by allowing it to be legal, but designing the tax rates so that you pay the same tax either way, so it's not really a tax dodge. In Denmark, for example: marginal income tax rate on salary/wages for higher earners is around 55% (including all the payroll taxes and such). Marginal rate if you pay yourself dividends instead: 23.5% corporate income tax up front, plus 42% personal dividend tax on the paid-out amount, or effectively... 55% again. In fact I believe the dividend tax level was chosen precisely to make it come out the same overall. (The story comes out similarly if you look at effective instead of marginal tax rates, e.g. for $100k income, it's about 40% effective tax either way.)

deleted 11y ago

[deleted]

Spooky23 11y ago

It makes sense to conduct business as a company for liability and tax reasons. A doctor typically has a staff, or may want to have the ability to sell the practice later on. If you make $600,000 a year, why should you have to pay 40-45% tax on that income when $250k will be invested back into the business anyway? Why should you be compelled to subject your spouse and children to the liability of the business? A real estate investor will often setup LLCs to isolate the liability associated with one property from the overall portfolio. Again, a legit business use. Obviously there are abuses here, but the fundamental concept isn't wrong. Typically the abuses are when there isn't a bona-fide business. Some financial dude setting up a shell company for his bonus is an example of a questionable use of this approach in my book. When a person sets up a chain of shell companies to obfuscate the ownership or transfer of assets, that's obviously crossing the line into money laundering territory!

tomp 11y ago
You're conflating wuite a bit things here. Nothing, except tax avoidance of course, prevents the doctor from forming a company and taking money out as salary instead of dividends, thus paying his "fair" (which, obviously, is debatable) share of tax.
- Nrsolis 11y ago
  And there is much debate about what "fair" means. If by "fair" you mean we all pay a roughly equal amount, then I'm cool with that. If by "fair" you mean that people who are more productive contribute a greater share of that production to the pot to achieve the social justice goals of others, then that's where I think there is room for debate.
  - arethuza 11y ago
    In that first case - do you mean equal amount or equal proportion?
    - Nrsolis 11y ago

deleted 11y ago

[deleted]

ska 11y ago

Possibly a variant of the "hard cases make bad law" issue. Finding a bright line differentiation between formation of a company for "legitimate" (what does that even mean?) reasons vs. tax avoidance/optimization is likely impossible. It's quite likely that even pursuing this in legislation would only result in a net loss due to regulatory burden etc. without any real gain.

sokoloff 11y ago

In the plumber's case, he's created two kinds of value: one, from his direct labor on jobs, "ought" to be paid out in salary. The other, inherent in the operation of the business itself (markup on equipment sold, face value of service contracts sold, etc) is value created by the business, and profits not retained "ought" to be paid out as dividends to the owner (the owner just happens to be the same guy). Further, the business could decide to buy the tools, supplies, and provide the plumber's van. In exchange for providing all these supplies (which are deductible for the business), there's a strong argument that the salary due the plumber is less than if he had to provide all those tools himself. There's a fair amount of flexibility in determining how much of the total is salary and how much is dividends and that's why there's "nothing wrong" with the first example when properly applied. Saying a plumber worked 100 jobs for a penny-per-job is not reasonable, but there is a broad range of reasonable. To put it in our field, suppose I had the fortune to create the next modest sized thing that was purchased by Facebook for $10MM in cash. Suppose that a team of 2 of us (me and one other) created this over a 1 year period and it was 100% funded by me (no VC, no angel, etc). Suppose that I paid the other person $200K salary for their efforts. How should the remaining $9,800,000 be divided on my tax return? Surely you wouldn't argue that my "salary" was $9,800,000, but rather my salary should be $200K and I should receive the $9,600,000 as non-salary compensation (capital gains in this case, presumably, but not W-2 salary).