We venture to the very heart of the hell that is Scandinavian socialism—and find out that it’s not so bad. Pricey, yes, but a good place to start and run a company. What exactly does that suggest about the link between taxes and entrepreneurship?
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"The tax system is good—it's fair," he tells me. "What we're doing when we are paying taxes is buying a product. So the question isn't how you pay for the product; it's the quality of the product." Dalmo likes the government's services, and he believes that he is paying a fair price.
But there is precious little evidence to suggest that our low taxes have done much for entrepreneurs—or even for the economy as a whole. "It's actually quite hard to say how tax policy affects the economy," says Joel Slemrod, a University of Michigan professor who served on the Council of Economic Advisers under Ronald Reagan. Slemrod says there is no statistical evidence to prove that low taxes result in economic prosperity. Some of the most prosperous countries—for instance, Denmark, Sweden, Belgium, and, yes, Norway—also have some of the highest taxes. Norway, which in 2009 had the world's highest per-capita income, avoided the brunt of the financial crisis: From 2006 to 2009, its economy grew nearly 3 percent. The American economy grew less than one-tenth of a percent during the same period. Meanwhile, countries with some of the lowest taxes in Europe, like Ireland, Iceland, and Estonia, have suffered profoundly. The first two nearly went bankrupt; Estonia, the darling of antitax groups like the Cato Institute, currently has an unemployment rate of 16 percent. Its economy shrank 14 percent in 2009.
Moreover, the typical arguments peddled by business groups and in the editorial pages of The Wall Street Journal— the idea, for instance, that George W. Bush's tax cuts in 2001 and 2003 created economic growth—are problematic. The unemployment rate rose following the passage of both tax-cut packages, and economic growth during Bush's eight years in office badly lagged growth during the Clinton presidency, before the tax cuts were passed.
And so the case of Norway—one of the most entrepreneurial, most heavily taxed countries in the world—should give us pause. What if we have been wrong about taxes? What if tax cuts are nothing like weapons or textbooks? What if they don't matter as much as we think they do?
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The first thing I learned is that Norwegians don't think about taxes the way we do. Whereas most Americans see taxes as a burden, Norwegian entrepreneurs tend to see them as a purchase, an exchange of cash for services. "I look at it as a lifelong investment," says Davor Sutija, CEO of Thinfilm, a Norwegian start-up that is developing a low-cost version of the electronic tags retailers use to track merchandise.
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This may help explain why entrepreneurship in Norway has thrived, even as it stagnates in the U.S. "The three things we as Americans worry about—education, retirement, and medical expenses—are things that Norwegians don't worry about," says Zoltan J. Acs, a professor at George Mason University and the chief economist for the Small Business Administration's Office of Advocacy. Acs thinks the recession in the U.S. has intensified this disparity and is part of the reason America has slipped in the past few years. When the U.S. economy is booming, the absence of guaranteed health care isn't a big concern for aspiring founders, but with unemployment near double digits, would-be entrepreneurs are more cautious. "When the middle class is shrinking, the pool of entrepreneurs is shrinking," says Acs.
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Although Nicolaisen considers herself a conservative, she told me the issue that most animates her is poverty, not taxes. "Yeah, the wealth tax is a problem," she says. "But you have to make a choice. You can live in the Cayman Islands and pay no tax. But I don't want to live in the Cayman Islands. To live in Norway, you have to do what you have to. I think it's worth it."
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I visited Moods of Norway's offices on my last day in Norway and chatted with Flo and his co-founders, Simen Staalnacke and Peder Børresen. The three were able to start their company, which makes fashionable sportswear and suits, largely thanks to the beneficence of the Norwegian socialist system. In 2004, they received a $20,000 start-up grant from the Norwegian equivalent of the Small Business Administration. Staalnacke and Børresen enrolled in a local college, because doing so meant the government would cover most of their living expenses. This may be why, when I ask the three founders if they might become Cypriots anytime soon, they protest. "No, no, no," says Børresen. "We've received a lot from Norway and Norwegian society. Giving back is not a problem."
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Holte's American subsidiary pays annual health care premiums that make his head spin—more than $23,000 per employee for a family plan—and that make the cost of employing a software developer in the United States substantially higher than it is in Norway, even after taxes. (For a full breakdown, see "Making Payroll.") Holte is no pinko—he finds many aspects of Norwegian socialism problematic, particularly regulations about hiring and firing—but when he looks at the costs and benefits of taxes in each country, he sees no contest. Norway is worth the cost.
Of course, that's only half the question when it comes to taxes. The other, more divisive question is, What is fair? Is it right to make rich people pay more than poor people? Would paying a greater percentage of our income for more government services make us less free? "I'd rather be in the U.S., where you can enjoy the fruit of your labor, rather than a country like Norway, where your hard work is confiscated by the government," says Curtis Dubay, senior tax policy analyst at the Heritage Foundation, a Washington, D.C., think tank that advocates for lower taxes.
These are important moral issues, but, in America, they are often the only ones we are willing to consider. We have, as Holte suggests, become religious about economic policy. We are unable or unwilling to make the kind of cool-headed calculations about costs and benefits that I saw in Norway. "There's a disconnect in the way people think about paying taxes and funding public services that's worse here than in any other country," says Donald Bruce, a tax economist at the University of Tennessee. "We refuse to believe that taxes can be used for anything productive. But then we say, 'Stay out of my Social Security. And my Medicare. And don't cut defense or national parks.' "
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When lawmakers inevitably take up these issues, it's a sure thing that those who oppose raising revenue through tax hikes will make the argument that higher taxes will hurt entrepreneurs. They will make it sound as if even a modest tax increase would represent a death knell for American business. But the case of Norway suggests that Americans should view these arguments with skepticism—and that American entrepreneurs could stand to be less dogmatic about the role of government in society.
Norway: Start-ups Say Ja to Socialism
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Originally Posted by Nessus
