How To Foster the Starting of New Businesses

The only government program that I have seen that really ever seemed to do any good as far as creating new businesses and new jobs was the plan that allowed people to take their unemployment compensation and use it to start a new business. I am sure that most of those businesses failed because most new businesses fail, but some surely succeeded and employed people. Everything else I see coming out of the government really is not much help to the really small business person.

First, the government needs to stop doing things that get in the way. In particular, the government needs to stop getting in the way of new businesses trying to raise capital. For example, the changing of a “qualified investor” was made five times as stringent during the last year of the Bush administration. Maybe it was time to do this if you believe that the old law made sense because inflation has surely changed the notion of what is a comfortable nest egg, but the old law limits the right of ordinary Americans to be capitalists as much as any law on the books.

Making this law more stringent is a huge case of Nanny-state. You can’t foster new businesses, i.e. encourage people to take risks, by saying that they are unqualified to take them. The government does far more to prevent people from investing in legitimate new businesses that should have a beneficial effect for the whole society than it does to put people like Bernie Madoff out of business. Whether or not you believe that protecting people from themselves is a legitimate role of government, you have to conclude that the current rules and processes do not do everything they can to promote new business. Let’s take a look at what else they could do.

Create a Special Tax Break for Providers of Start-Up Capital

Should the guy who makes a hundred grand betting on Joe’s Widgets pay the same tax as the guy who made a hundred grand on Bank of America? Not if you want people to be eager to participate in new ventures. Is this fair to Bank of America, Microsoft, and IBM, to name a few? Not really, but they don’t need start-up capital. The cost to them is small and likely is a less than appropriate tax on their hugeness. Do you want create more small businesses or cater to the status quo? If you want a vibrant economy, you better not be catering to the status quo.

I’d like to see the first hundred percent return on such investments be tax free. That is, if you put up a million dollars to get Joe’s widgets started, you would not pay any tax on the first two million you took back out after Joe hits it big. That is, you don’t get taxed on getting your money back, and you don’t get taxed on the first matching win. I’d go even further and tax only fifty percent of the next hundred percent, and only seventy-five percent of the next hundred percent.

I don’t think that this is overly generous since most new businesses fail without ever making a profit for the investors, but it is a heck of a lot better than the deal angel investors get today. (They call them angels because they require so much faith.) The only way to get more money into these operations is to change the risk/reward profile. Most investors are not math-impaired.

Should investors pay a higher tax rate if they made their money from an organization that got bailed out by the government? They should, and actually they already are because the government is taking a big cut.

Problem/Opportunity Funding

Our country faces many problems and many opportunities. There is even occasionally some degree of consensus on what is a problem and what is an opportunity. I think the government and/or private agencies need to be able to support new businesses that can demonstrate that they are solving a problem for the community or opening an opportunity that will increase the prosperity of the community. The problem with such programs are that they disrupt the status quo, but a healthy capitalist economy is one that fosters change. Change is always going to come, and it will run you over if you are not ready for it on every level.

Foster Competition

It was a sad day when Packard went out of business, but it wasn’t devastating. Packard was just one of many auto companies, and they failed all the time. I’m not sure how much GM and Chrysler ended up with, but we could have started hundreds of new car companies at one hundred million dollars a shot. Wouldn’t that be a better use of our money than giving it to people who have proven they can’t manage a company? Wouldn’t that provide more jobs for auto workers? Wouldn’t that ensure that we would offer the world a broader choice in automobiles? Wouldn’t that mean that all cars would get better. The answer to all of these questions has to be yes if you believe in capitalism.

The auto bailout is exactly the wrong thing to do if you want to solve the problem. If it works, we end up with companies that should have failed and which are almost certain to face the same kind of problem in the future. If it doesn’t work, we are out billions and still have the same economic problems we were trying to prevent. A future with fifty car companies is a future far less prone to economic stresses than a future with three.

Redefine Small Business

A Company with $250 M in revenues is not a small business that needs help from the government. By the time a company is generating $10M a year in revenue, it should be able to stand on its own and raise capital on its own. A company needs the most help when it is just a business plan, or a business that is attracting attention and needs a little help to get to the next level. These are the companies that will increase employment, but they are also the companies that have the hardest time getting money from the banking industry. We need a government-guaranteed loan program that focuses on really small businesses that need to get to the point where they can inspire faith.

The most explosive growth of business in the micro-capitalism sphere, and there is a huge gap between that level and the level where the government will even recognize you. We either need to come up with a private solution to this, or the government ought to jump in.

Conclusion

I believe that we can make American business young again with just a few simple changes in our tax law. If we let everyone use their own judgment about these bets, it will help even more.

The government shouldn’t need to participate beyond that, but if it does stick its nose in, the focus needs to be on solving the problem, not in protecting the status quo – the path of least resistance that government always follow.

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