Entrepreneurship down as progressivity goes up

by Ryan Streeter on July 20, 2012. Follow Ryan on Twitter.

That’s the theme of my latest column in the Star, which I paste in its entirety below since the Star doesn’t archive its content long-term:

The Real Job Growth Problem

July 19, 2012

As the economy moves along in slow motion, President Obama is talking about raising taxes on the wealthy again. This obvious political ploy is an attempt to make the super-wealthy Mitt Romney defend tax cuts for the rich. For his part, Romney has not yet succeeded in convincing voters he has a plan to restart the economy, as a recent Fox News poll has shown. The mainstream media dutifully does its part to create political theater out of these dynamics rather talk about real issues such as jobs.

All of this obscures or overlooks two important facts that the media don’t cover or policymakers faintly grasp or both.

The first fact concerns the nature of job creation, which politicians love to talk about even when they don’t understand it. They typically believe that job creation happens when existing businesses, big and small, hire more people. That seems reasonable, but it’s not quite right. The reality is that almost all new jobs five years from now will be created by companies that don’t exist today. Job growth in America is driven almost entirely by new companies, or what we typically call “startups.” According to Hudson Institute economist Tim Kane, new companies created 3.5 million jobs in 2005, while 10-year-old companies the same year created 355,000 jobs but lost 422,000.

Governors and mayors hold ribbon-cutting ceremonies in front of new plants to celebrate 500 new jobs while three other plants close somewhere else and lose 800 jobs. Meanwhile, a new startup down the street no one has heard of is growing at 20 percent and creating new jobs with no ribbons, silver shovels and politicians in hard hats.

The reason this fact is important to grasp is because startups themselves are declining. Based on the best estimates I’ve seen from Kane’s work, we would have roughly 2 million more jobs each year in America if we were creating new firms at the same rate as in the 1980s. In other words, despite what we tell ourselves, entrepreneurship is declining in America, and job creation is suffering as a result.

Reversing this trend should a primary policy debate in the presidential race. If you try to identify policy changes in the past 20 years that have decisively helped entrepreneurs, you come up with a short list. Instead, we have Obamacare’s penalties on companies with more than 50 employees, the nearly $2 trillion the Small Business Administration says federal regulations suck out of the economy each year, and a tax code that favors the interests of larger companies, for starters.

The second fact concerns tax rates. The left loves to claim that the rich don’t pay enough taxes. President Obama talks about this all the time, and Warren Buffett regularly complains publicly that he pays only 17.4 percent in federal income taxes, a lower rate than his secretary pays.

A report last week from the nonpartisan Congressional Budget Office showed why this line of thinking is misleading. The report shows that the richest one-fifth of Americans pay an average federal tax rate of 23.2 percent. The remaining four-fifths pay 15.1, 11.1, 6.8, and 1 percent, respectively. The richest 1 percent pay 28.9 percent. Buffett’s case is an exception because of the nature of his income. So let’s cut through the fog and admit the obvious: We have a progressive tax system. Is it progressive enough? That depends on how you define “enough.”

The CBO report shows that people in the lowest 20 percent receive $3 in transfer payments for every $1 they pay in taxes. Even the middle quintile receives more in transfer payments than it pays in taxes. Meanwhile, the top quintile pays 68 percent of all federal taxes, up from 59 percent 20 years ago. All other quintiles’ shares have dropped. The growing share the rich pay has continued apace since the Bush tax cuts went into effect. So what exactly is the Obama-Buffett ideal? No one, including them, knows — or is willing to say. Should we tax millionaires at 100 percent? Even if we did, anyone with a calculator can tell you it would fund the government for less than half a year.

In sum, over the past 20 years, America has grown less entrepreneurial at the same time our tax code has grown more progressive. Those are the facts. I, for one, would love to see Obama and Romney argue about what those facts mean for you, me, and the future of our economy.