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• W254409019 abstract "While there is recognition that tax laws affect business growth, it is unclear whether the full ramifications of changes in tax codes are understood. This paper considers the effect of taxes on business decision making. It considers both income taxes and social insurance employment taxes. It develops a model to give after tax returns to the owner/managers of businesses under various tax rates. The actual effect of tax rates is then considered in comparing Hungary and the U.S. as representative countries with high and low social insurance taxes respectively. While the US and Hungarian overall tax levels are quite similar for profitable firms, different incentives emerge in firm's minimizing their overall taxes. In Hungary, the tax minimization strategy finds dividends preferred to high wages for owner/ managers. In the U.S., the opposite exists. Further the after tax cost to the firm of paying workers in the U.S. is substantially less than their nominal wage as the firm's taxes are reduced for the wage expense. In Hungary the after tax costs are almost equal from the high social insurance taxes. The tax deduction encourages US firms to comply with tax laws while the Hungarian firm has the opposite incentive. When comparing the after tax cost of inputs to their before tax outlays, the rates create a higher after tax cost of labor to employers in Hungary when compared to their after tax capital costs. In the U.S., the costs are almost equal. I. INTRODUCTION Different countries assess different taxes and collect them at different rates. Most countries tax both firm and individual income as well as imposing social insurance taxes such as FICA in the USA. This paper will show that these tax rates have an effect on the relative after tax costs of capital and labor and influence the degree to which firms voluntarily comply with tax laws. This occurs because regardless of how the law is presented; taxpayers, both individuals and businesses, will structure themselves to minimize their total tax burden for a given income level. In most countries, tax laws are in a constant state of flux. For example, in the U.S., there have been at least three major modifications to the tax code within the past 10 years. In a parliamentary system, the tax law can change several times each year as the party in power merely changes the tax laws. However, one thing is for certain; no one likes to pay taxes. This paper analyzes the effect of tax codes on incentives facing a firm attempting to maximize after tax value. Several specific decisions are affected by tax laws. Among those decisions are selecting the mix of labor and capital inputs to minimize costs for various production levels, the extent that firms comply with tax laws, optimal business size, and whether the owner should receive cash in the form of wages or dividends. Thus, the structure of taxes or their relative levels determine how efficiently taxes are imposed, the relative cost of production inputs, and finally how firms are organized and pay out funds to their owners. These aspects are particularly important for new businesses. Specifically we consider the tax laws of two countries: Hungary and the United States. We model how an owner/manager of a firm can receive the maximum after tax disposable income. We find that when all taxes, including social insurance, are included, in the U.S. the owner is better off receiving income in the form of wages rather than dividends. The Hungarian counterpart will maximize after tax income by paying maximum dividends and a minimal wage. This analysis demonstrates the effect of tax laws on tax compliance and how tax rates must be set to create the incentive for firms to expand and hire workers, which expand the economy. Under the Hungarian tax law, it is more difficult to justify hiring legal employees since the after tax cost to the firm for each employee exceeds the cost of the stated wages for that employee. …" @default.
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• W254409019 modified "2023-09-23" @default.
• W254409019 title "Taxes and the Tax Rate Effect on the Capital/Labor Decision: An International Comparison" @default.
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