Ten reasons capital and salary should not be taxed the same

At a time where French entrepreneurs are actively fighting the new French finance law for 2013, it might be good to remind our politicians of a few reasons why it is a not-so-good idea to consider that a salary and a revenue from capital should be taxed the same way.

I’m only referring here to capital invested in a small or medium business, not about speculative capital that goes into publicly traded companies, in derived financial products, in property or in art. According to what I read online, all of these are “protected” in the new finance law, for reasons that really elude me.

Here are ten good reasons why revenues from the capital are markedly different from a salary:

  1. Capital creates more jobs. It is fairly infrequent for a salary to create ten stable jobs. For capital, it’s so frequent that it’s the norm. It is so normal that entrepreneurs are rarely congratulated for creating jobs, although criticizing them for “destroying” these jobs is a national sport in France, cf. recent criticism against the Peugeot family.
  2. Capital creates value and wealth. An investor chooses to put money in a startup that has a potential to attract customers. A salary, on the other hand, is a retribution for value created by the employee, value that has already been created, typically thanks to the initial capital.
  3. Capital is already taxed at the source. Money injected in an SMB came from somewhere. Whether it was salaries, investments, sale of goods, inheritance, in all cases the French State already took a pretty meaty share…
  4. Capital is already taxed while it’s being used. When the capital is used to pay salaries (the primary expense at the beginning of a startup), a large fraction of that investment goes to the state in the form of mandatory witholdings, every month, and this even if the company has no revenues whatsoever. Should the company start creating some value, the State will take a big fraction thanks to value added tax and corporate tax.
  5. Capital is a commitment. When an entrepreneur or an investor puts some money in a SMB, he or she makes a strong commitment, often for several years. There is no such commitment for salaries: an employee rarely commits to staying 5 years on the job.
  6. Capital is risky. There are good chances for an investment in a SMB to simply evaporate, in which case the State does not offer compensations or protection like it does when you lose a regular job. A salary, on the other hand, offers some form of safety, even if it is pretty limited in the current economic context.
  7. Capital is money that was already earned. You earn your salary as you go. An employee cannot consider the salary for the coming year as due. An investor who puts one year’s worth of salary in a startup can legitimately consider that this was his money to start with.
  8. Capital is driven by emotion, it’s a personal choice often driven from the hear. This is rarely the case for a salary. There is always some kind of emotional aspect to an investment in a startup. Associative negative emotions such as fear or anger to this kind of investment is likely to negatively impact them.
  9. Capital flows where it wants. It’s a consequence of the two previous points that an investor is never forced to invest in a startup. He or she can send this money elsewhere. By contrast, the typical salaryman cannot choose to receive his salary in Switzerland or in the United States.
  10. Capital is driven by numbers. Any investor will evaluate the “return on investment”. This is less often the case for a salary. Changing the equation of this ROI will automatically impact how every single investor will act in the future.

You can find many more reasons. But the ten reasons listed above seem sufficient to conclude that you can’t just assimilate revenues from capital to salaries and use that basis to tax them the same way.

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