Taxes and job creators

Via Robert Waldmann Richard Thaler at Bloomberg provides a different take on innovators and job creators:

A recurring theme of this year’s presidential campaign is the need to encourage the formation of new businesses. Republicans in general, and Mitt Romney in particular, have stressed that the best way to stimulate such startups is via low tax rates on high-income earners.

In other words, this is a strategy that emphasizes maximizing the after-tax returns if and when you hit it big. Yet if you think about the way most new businesses are started, it should be clear that these tax incentives have very little to do with the decisions facing most new entrepreneurs.

The typical business startup (think Joe the Plumber) begins with an initial stake that has been saved or borrowed, and 97 percent of small-business owners make less than $250,000 a year. It is a good bet that when Bill Gates, Steve Jobs and Larry Page were creating their new businesses in their proverbial garages, they weren’t giving much thought to the tax rate they would have to pay if they struck it rich.

The essence of Stewart’s idea goes to the heart of why our economy is largely organized around limited-liability public corporations. When successful entrepreneurs decide to take their businesses public, they are selling some of the upside to other shareholders in return for making sure that they can’t lose all their wealth if something at the company goes wrong.

So-Called Reform

What about smaller startups that don’t begin their lives as corporations? One thing that would help stimulate this sort of business creation is making sure that a business bankruptcy is not ruinous to the entrepreneur’s family. But the Republican- sponsored bankruptcy “reform” law of 2005 changed the rules in the opposite direction. For someone who uses a credit card to help open a bakery or landscaping business, this law raised the cost of failure.

Austin Goolsby speaks to the issue on the Jon Stewart Show,  and Jon is spot on.

Tags: , , , , , Comments (1) | |