July 1, 2004

Higher Taxes Equals Less Entrepreneurial Economic Growth

Jeff Cornwall has a really excellent summary of a ground breaking study on the power of tax policy to effect entrepreneurial behavior. The study, by William M. Gentry, assistant professor of economics in the Department of Economics at Williams College and R. Glenn Hubbard, Dean and professor of finance and economics in the Graduate School of Business at Columbia University, found that progressive marginal tax rates (rates that increase at higher levels of income) "discourage entry into self-employment and business ownership."

Cornwall says the study has political implications given Sen. John Kerry's promise to raise marginal tax rates if he is elected president:

The implications of this study cannot be overstated. We face the possibility of a shift of policy at the national level that could result in higher marginal progressive tax rates. Sen. Kerry has made it clear he plans to raise the tax rates of what he calls "the rich". Many of them are entrepreneurs who pay personal taxes on their businesses due to their S-corp, LLC, or partnership status.

Why does tax policy have such an impact? Entrepreneurs who are considering expanding an existing business or starting another may think twice. Each expansion or new business carries risk. And if the rewards are reduced with each new initiative the entrepreneur undertakes, there comes a point when it just isn't worth the risk. So progressive marginal taxes create the most significant disincentives for the very entrepreneurs we want to encourage - those who have already succeeded with other ventures.

The changes being planned by the Democrats could act like a cold, wet blanket on our economic future.

Cornwall, by the way, in addition to being a blogger, is a professor of management and entrepreneurship.