The Effect of a Tax-based Optimization of a Selfemployed Entrepreneur

Per Houg Lund & Dennis Jørgensen

Student thesis: Master thesis

Abstract

In this text, the effects of optimizing the income of a self-employed entrepreneur are calculated and compared to a sub-optimized calculation using the same parameters and assumptions. The optimizations are based on a tax-paradigm and not an investment-paradigm, to exploit the effects of using the deductions and progressions of the Danish tax-system up to certain limits. The entrepreneur has a business, which generates a certain income, which then are both consumed (financing the entrepreneur’s lifestyle) and invested or put on loan (which is the excess cash flow).
Based on a series of assumptions and parameters, which include both the entrepreneur’s civil status and business, in addition to macro-economic tendencies, the calculations show only a minor effect of t. DKK 216 in personal equity over a 30-years period in favor of the tax-optimization compared to a sub-optimization, the latter which has a focus of enhancing the cash flow early in the calculated period to make larger investments.
The minor difference is a consequence of both the positive exploitation of the Danish tax system in favor of the optimized calculation, and the greater private consumption which diminishes the cash flow of the suboptimized calculation.
At the end of both calculations though, the accumulated assets are distributed differently, with different opportunities available to both, to avoid paying the highest tax bracket, but the best opportunities are mostly in favor of the optimized calculation. This means that at the time of retirement, the best options are available at the optimized calculation.
But the consumption value of the generated cash flow (the financing of the entrepreneur’s lifestyle), is greatest in the suboptimized calculation, during the working years. Because of the numerous assumptions and parameters, just a few changes to these will bring a different result to both calculations.
This ultimately means, that the best solution when comparing both calculations is more dependent on qualitative values, than the quantitative. This means the choice of lifestyle, wish of age for retirement, family circumstances etc. have the final say, more than the calculated wealth.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2021
Number of pages118