The Taxing Will Continue Until Morale Improves

The Taxing Will Continue Until Morale Improves  

There is an increased fervor surrounding the issue of how to promote growth in local economies. Often policies are proffered for the good of the “job creators” who, if properly incentivized, will continue to produce jobs for the rest of the community. Reliably, these policies include some form of tax cut, tax relief or tax reform, but here’s the rub: real job creators simply do not care about most taxes. The real questions are 1) who are the job creators and 2) what do they want?

New companies (in particular high growth firms like those found in Inc. 500.) create almost all new net jobs, as discussed here, here, here, and here. While a firm might be entrepreneurial in that it is young or small, firms older than five years old, on average, don’t positively contribute to net new jobs. It may seem rather narrow to focus on just young, high growth companies, but encouraging their creation and easing their compliance burden will benefit other small businesses as well.

We have properly defined who are the real job creators. Now, we can hone in on what makes them successful, rather than just what we think they should have.

Give us your money and jump through all these hoops, please and thank you!

Entrepreneurs don’t really care about the rate at which they are taxed. They care about the complexity and the time associated with paying taxes.[1] Taxes are levied at the city, county, state, and federal level (not to mention special taxing jurisdictions, assessments etc.) Paying all the taxes owed by a business owner is a labor unto itself. Entrepreneurs spend more time and money complying with tax regulations than mature firms and this often times causes small business to under report income.[2] Worse, this compliance burden acts as a barrier of entry for new firms and suppresses competition.  Smart policy makes taxes easier to pay and compliance with other regulations sensible, whereas tax elimination fails to adequately target the issue.

Well, what about tax incentives? Let’s not forget the old economic development standby. If the point of tax incentives is to create jobs, the research says these policies have failed. Business tax incentives almost always go to larger, more mature firms, which again are not job creators.  From 2010-2014, larger firms were given $43,936,329 or 95 percent of all Kansas’ PEAK program awards. Over the same time period Missouri’s program, Missouri Works, gave larger firms $47,506,659 or 89 percent of all tax incentives. It should be noted the SBA classifies rather large firms as small businesses. The threshold of employees necessary to remain a small business varies across industries, but the lowest and most common is 499 employees. That means a business is still considered small with almost 500 employees.  With this classification, state programs can claim they are helping small businesses, but in reality they are not necessarily helping those we consider net job creators. These incentive programs have not proven to create jobs or spur entrepreneurship and instead they tend to favor incumbent, mature firms to the detriment of entrepreneurs.

Some state policies seek to increase a state’s ranking on certain business climate ratings with the hope of enticing new businesses to relocate or to dissuade existing businesses from leaving. However, none of these ratings have a proven positive effect on how business owners actually view the business climate within the state. In fact, it seems that how entrepreneurs view the business climate within the state is highly dependent on how well an individual owner’s firm is doing. 

Increase new firms, increase new jobs.

Instead of attacking taxes under auspices of growing the economy, policymakers need to focus on actually growing the economy by fostering entrepreneurship. It just so happens that there exists a handy guide to help policymakers down this path.  The heart of this strategy comes down to this: look around your community, then connect your entrepreneurs, investors, and support organizations. Make being an entrepreneur easier. How do you do that? Listen to your entrepreneurs, they will tell you.

Finally, entrepreneurs care a lot about quality of life and amenities. They care about proximity to talent, customers, and the support necessary for a vibrant entrepreneurial ecosystem. Importantly, these cities are home to the investment community necessary to grow their companies. On the anecdotal level, think of the pillars of entrepreneurship in the United States: Silicon Valley/San Francisco, New York, and Boston. All cities with high cost of living and all heavily taxed compared to other parts of the country. Yet entrepreneurs continually leave places like Kansas City for Silicon Valley. Why? It’s certainly not for the tax relief.

If you build a world-class city, the entrepreneurs will come. This kind of attractive city requires taxes, smart public spending, and long-term thinking.  Policymakers could benefit from disruption of traditional economic development and adopting some entrepreneurial thinking.

[1] Len Burman & John Iselin, Tax Compliance Costs and Business Formation, Urban Land Institute (2015).

[2] Id.

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