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Derrick Z. Jackson

The tax man cometh, and it isn’t bad for business

By Derrick Z. Jackson
Globe Columnist / March 26, 2011

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TO MARK the one-year anniversary of the health care law, Republicans went on the attack against its new revenue sources and their impact on the economy. Representative Michele Bachmann of Minnesota called it the “crown jewel of socialism.’’ Representative Sam Graves of Missouri, chairman of the House Small Business Committee, said the “high taxes’’ of health care reform on small business owners have “severely slowed’’ economic growth.

The rhetoric that high taxes directly destroy entrepreneurship is so unchallenged that President Obama himself has said that he cut taxes for small business 16 times.

But there is little conclusive data on the direct relationship between taxation and entrepreneurship, and plenty of examples where nations with high taxes have robust small businesses. Last month, Inc. magazine detailed how Norwegians pay nearly half their income to the government, yet measures of entrepreneurial activity are about the same or even a bit better than the United States.

According to the Global Entrepreneurship Monitor, cofounded by Babson College, the percentage of US early-stage entrepreneurs who find starting a business more difficult than the year before is double that of Norway. The perception of good opportunities for entrepreneurs was far higher in Sweden, Finland, Norway, Iceland, Denmark, and the Netherlands than here. All those nations, according to the tax and auditing firm KPMG, have top personal income rates of between 46 percent and 57 percent, compared with 35 percent in the United States.

Inc. senior writer Max Chafkin said his Norway reporting disabused him of the old argument that some high-taxing countries can produce world-class businesses because they are relatively small and homogeneous. “They think harder than we do as to what their taxes are buying,’’ Chafkin said by phone. “Equality, such as their top people not being paid as much as our top wealthy, is just a huge cultural component in a way that it just isn’t here.’’

But Niels Bosma and Donna Kelley of the Global Entrepreneurship Monitor both cautioned against saying Nordic countries are dramatically better than the United States, which still ranks near the top in many measures of entrepreneurship. In fact, the Netherlands borrowed from US deregulation a quarter-century ago to get more young people into businesses, Bosma said.

“You can have two different tax policies and they can both be good,’’ Bosma said. “What is far more important is the system. It’s about the choices. In the Netherlands everyone has the same health care for the same price. We fixed maternity leave to include self-employed people in small businesses.

“If you are open to a larger government, and the underlying objectives are to support education and the general welfare of the people, that can work. Entrepreneurs need qualified workers and they need customers who have good income,’’ Bosma said.

Zoltan Acs of George Mason University, former chief economist for the Small Business Administration’s Office of Advocacy, coauthored a report last year that said the United States remained a world leader in start-up skills and developing new technologies. But the report warned that the rest of the world was catching up to us as we have noticeable weaknesses in the tech sector and in cultural support for entrepreneurship. He said it is possible that lower taxes might indeed be good for small business, “but the question is, what are we giving up?’’

Letting the Bush-era tax cuts expire for all Americans, he said, would solve “80 percent’’ of our current fiscal problems, but instead, the tax cuts have been extended, leaving politicians to “to balance the budget on social programs that might help produce more educated workers and economic growth.’’

Acs said a major problem he sees with the tax cut argument is that “tax cuts for small business tend to be more about the income of the president of the company than growing the business. It’s not about the mom and pop bait store making $30,000 on the Chesapeake selling worms.’’ He said if the country could rethink “high taxes,’’ there is probably a top personal income tax rate of between our current 35 percent and northern Europe’s 50 percent that small businesses could live with.

But it still gets back to larger choices. “If all the taxes go to war and not education, that’s not conducive, either,’’ Acs said. The United States may never be a crown jewel of socialism. But we could at least learn from other nations on taxes before we have no entrepreneurs to tax.

Derrick Z. Jackson can be reached at jackson@globe.com.