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A Tax Code for Job Creators and Growth

on December 13, 2010 Source: Policy Dialogue on Entrepreneurship

Jonathan OrtmansToday and tomorrow the Senate will vote on President Obama’s announced deal to extend for two years all of the tax cuts, both those from the Bush years and those for low-income workers from last year’s stimulus package. Under this proposal, recently expired benefits for the long-term unemployed would also be extended for another 13 months. In addition, the agreement would cut payroll taxes for one-year. What does all this mean for entrepreneurs?

The unemployment pressure does not appear to abate. Layoffs continue and despite massive government intervention for economic recovery, there is little evidence of anything more than a slow, prolonged recovery. This week it is likely the compromise deal will go into law but when tax reform is eventually revisited, it is time for policymakers to consider new ways at using the tax code to incentivize actions that lead to economic growth and reward those who put their wealth to work in expanding the economy.

Take the case of the proposed one-year payroll tax cut, for example, which is expected to put $120 billion in workers’ pockets (for a family earning $50,000 a year, it would amount to a savings of $1,000). A better approach would be to create an exemption from payroll taxes for young companies, as voiced earlier this year by Kauffman Foundation President and CEO, Carl Schramm in his State of Entrepreneurship Address. For the past 25 years, firms less than five years old have accounted for almost all net job growth. Simply put, it is young, growing firms that really drive job creation, so the focus of any tax break for employers should be on these young firms.

Of course, the natural corollary question about Obama’s compromise deal is whether as a nation we can afford the cuts in government revenue, at a time when the nation faces a worrying budget deficit and many long-term challenges such as a decaying infrastructure and education system, and the imminent retirement of the baby boomers. Tax breaks for employers based on firm age rather than size would lessen the impact on the deficit (with the proposed package, the payroll cut would cost $650 billion), and indirectly, through job creation, they would reduce the need for unemployment benefits.

A thoughtful approach for the upcoming months would be to revisit the entire tax code. While obvious, the first lesson I learned in my twenties working for a Congressman on the House Ways and Means Committee was that the tax code is a policy tool to incentivize behavior not simply a means of collecting revenue for the Treasury. The tax code is a package of incentives and can influence entrepreneurship as much as any policy, including hiring and financing decisions that determine the growth of new ventures and whether there are new jobs for Americans.

Mr. Obama and the country should not wait to explore the intersection of taxes and entrepreneurship. America already has a robust “super angels” community for example, but how should we treat capital gains for early stage seed capital intensive startups? What policies are conducive to creating billion dollar scale firms which, as outlined last week in Dr. Robert Litan’s paper, Inventive Billion Dollar Firms: A Faster Way to Grow?, are a fast track to increased GDP and accelerated real job creation? Lots of economic growth can be unleashed by removing fiscal barriers to growth entrepreneurship. A simple economic principle should be kept in mind: taxes should be highest where activity has negative social costs (e.g. health damages) and lowest where the activity has positive social benefits (e.g. innovation and job creation).

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Jonathan Ortmans is president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues. In this capacity, he leads the Policy Dialogue on Entrepreneurship, focused on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as a senior fellow at the Kauffman Foundation.

Category:  Growth & Poverty  Tax Code 

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