24 February 2011

Taxes and Entrepreneurship

I read an interesting article this week in Inc. magazine which suggests that there is no correlation between a country's tax environment and entrepreneurship. This theory runs counter to the common belief that profit incentives drive innovation and new enterprise. Isn't this the crux of capitalism - self-interest creates economic value?

Meet Norway - the exact opposite of the US. A country where there so many taxes that even Nancy Pelosi would say no: 50% on income, 3 times US payroll, 25% sales, and even a 1% "wealth tax" on total assets on people making more than $120k per year. Stifling for business, right? Apparantly not. Per capita, there are more entrepreneurs than there are stateside. The rate of startups exceeds the US and the gap continues to widen. Government programs seed startups in Norway because of its large coffers. And Norweigan entrepreneurs don't seem to mind paying the lion share of their profit to support the greater good.

There are many reasons why according to the article, but i'll discuss a couple relevant to this topic. For one, people don't worry about education, health care, and retirement. All bills paid by Uncle Sven. Think about the contrast in the US; most of us are tied to our corporate job specifically because of these things. We'll stay in suboptimal situations rather than launch a risky new venture where no health benefits exist for example. Also, entrepreneurs are not driven purely by money. They want to build businesses, their reputation, and make a mark on society. Sure money helps, but successful entrepreneurs have loftier goals in mind. Warren Buffett and Bill Gates didn't start businesses to make millions; it was the effect of them building great businesses.

Are we jeopardizing the long run for short-term wins? By not providing the necessities, are we incentivizing corporate drones at the expense of the next game changing industry? Is our money-centric culture preventing us from seeing the bigger picture of what business is designed to do (such as raise the standard of living for its residents)?

I'm not convinced that socialism is a business incubator at all. I think Norway has succeeded in spite of their tax code rather than because of it (due to factors such as its net exporter situation, small size, etc...). How many Googles or IBMs has Norway produced? The US simply has done it for a longer period of time and on a much greater scale than any other country in the world. And I do think free enterprise is the most efficient vehicle to change the world for the better. But it raises an interesting question, do we undermine the power of entrepreneurship by focusing only on the wallets of the entrepreneur ?

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