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.
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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.
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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.
All this is well and good. Afterall, what was great about our economy was that we structured it so that the government absorbed the risk of living the further down the income ladder one was. We reversed all that. Now the further up the income ladder the more risk the government absorbs (see to big to fail).
However, the real issue with starting a business still comes down to customers. The customer pie is getting smaller, not in mumbers of customers but in purchasing power (dollars in hand). This has to be reversed if we want to stimulate the economy such that we have more risk takers.
We can reverse it in a number of ways. Redistribute via taxes. Redistribute via improving the power of labor. Redistribute via the breakup of the mega companies.
In the past when we understood “economic royalty” we used all 3. But in a nation that looks at Solyndra as a bad and even criminal experience, I don’t hold out much “hope”.