Wednesday, November 5, 2008

Taxes and Entrepreneurship

I pulled from this post by Mark Cuban earlier, but this part now seems relevant (BlogMaverick):
Entrepreneurs who create something out of nothing don’t care what tax rates are. Bill Gates didn’t monitor the marginal tax rate when he dropped out of Harvard and started MicroSoft (btw, it was a ton higher than it is today). Michael Dell didn’t wonder what the capital gains tax was when he started PC’s Limited, and then grew it into Dell Computer. I doubt that any great business or invention started with a discussion or even a consideration of what the current or projected income or capital gains tax was or would be.
You can believe that taxes have important incentive effects at the margin and still believe that an entrepreneur will not focus solely on taxes when deciding whether or not to start a new business. With the amount of uncertainty involved in a new venture, it's far from obvious that a startup will ever actually make a profit, let alone have taxable income. Now, if taxes reduce the return on investment too much, then people will simply work for someone else rather than starting something from scratch. It's a tricky balance.

Judging from the 15 tax lawyers the TaxProf blog surveyed, there's lots of demand to test that balance. David J. Ventry Jr., for example, writes:

My tax policy wish list under President Obama begins and ends with the hope that the 44th president of the United States will abide by the words of the 32nd president, Franklin Roosevelt: “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.”

Taxes raise revenue, just as they surely distort economic and social decisions. But most taxes (except, perhaps, confiscatory levies) provide benefits that far outweigh any conceivable burdens.

[...] In the end, my hope is that President Obama encourages us to view taxes as an opportunity rather than a burden--as a path toward collective rather than selective prosperity.

Collective prosperity doesn't exactly sound like the entrepreneurial spirit we need, but presumably with The Great Recession currently raging, President Obama will hold off on tax increases. I do imagine we'll be having conversations about deadweight losses soon enough, however.

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