Entrepreneurs—where would the economy be without them? Nowhere.While established businesses are important, entrepreneurs are an economic driving force.
A few years ago the U.S. Small Business Administration reported that:
- it is small firms—not the big companies—that generate more than half of the non-farm private economy and employ more than half of the U.S. work force;
- produce 13 to 14 times more patents per employee than large patenting firms; and
- provide 39 percent of the jobs for high-tech workers.
Countries around the world—along with states for that matter—wanting to spur their economic growth are asking what they can do to ensure strong entrepreneurial activity.
Well, we have a suggestion. Perhaps the best place for lawmakers to start is with tax policy.
In her doctoral dissertation at the University of Tennessee last year, Tami Jean Gurley found “convincing evidence that tax rates have important effects on entrepreneurial entry and survival.” Lower marginal tax rates in the wage sector “decrease the probability of entrepreneurial entry. . . .” That is, when tax rates are higher, people tend to leave their salaried jobs to become entrepreneurs.
This isn’t to say that taxes on wage and salaried employees should be hiked to give entrepreneurs a boost. It just indicates that taxes on entrepreneurs should be lowered because that increases entrepreneurial duration.
For example, a single percentage point fall “in the marginal tax rate facing entrepreneurs would lengthen an entrepreneurial spell by 32.5 percent for single filers and 44.8 percent for married filers.”
Cutting both rates, however, would “lead to higher levels of entrepreneurship … due both to increased entry and decreased entrepreneurial exit.”
The lesson to take from Gurley’s work is simple. The lower the tax burden, the better.