Memo To: Chairman Bill Archer [R-TX], House Ways&Means
From: Jude Wanniski
Re: Nurturing Entrepreneurial Spirit
It was encouraging to see you announce last week that if, by chance, Congress cuts the capital gains tax this year, the effective date will be July 1. I know you'd like to have it cut to zero, and so would I, but even getting it to 15% would be a triumph. Remember when George Bush ran for President in 1988, he promised to cut the rate to 15% from 28%? To get it nibbled down to 20% in the last Congress, in 1997, is one of the biggest reasons for the current strength of the economy, the stock market, and the positive budget projections well into the next century. You know I have been thinking about "bottom-up" entrepreneurial capitalism for 25 years, Bill, and while a low capital gains tax is not the only necessary ingredient to fostering an entrepreneurial spirit, the lower the rate the more capital will flow from those who have it in surplus to those who are in deficit. It is not the entrepreneur who thinks about the tax he or she will have to pay if the enterprise they undertake is successful. It is the investor who makes those calculations, which is why at the margin more top-to-bottom capital is created as the rate is lowered.
Capital gains in many places of the world are taxed at rates lower than in the United States, sometimes not at all, and yet an entrepreneurial spirit does not develop. The WSJournal had a story on Friday, July 2, by Julia Flynn, "Europeans Lack Entrepreneurial Spirit." In brief, the story says "the proportion of Americans starting up new businesses is far higher than the rate for Europeans, according to a 10-nation study by the London Business School and Babson College. Europeans are much more risk-averse than Americans and Canadians, and they fear the stigma of failure, the researchers found.
In the U.S., 8.5 percent of the U.S. adult population will start a business at some time in their lives -- while the rate for Canadians is 6.8 percent.
That compares with 3.3 percent of Britons, 2.2 percent of Germans, 2 percent of Danes, 1.8 percent of the French and 1.4 percent of Finland's adult population.
Italians were the most entrepreneurial of the Europeans, with 3.4 percent of adults starting businesses at some point during their lifetimes.
The study demonstrated a strong link between new business start-up rates and growth in gross domestic product.
"Despite policy-makers' efforts to encourage entrepreneurialism, the cultural barriers among Europeans remains steep. Germans were found to be particularly risk-averse and prone to put safety first. The French reportedly give in to social pressure to conform -- and prefer working for large organizations. Italians are more willing to take a chance, the researchers say, because high unemployment there is shrinking the number of jobs available in the public sector for younger workers.
"Nevertheless, the study found that Germany's entrepreneurial climate has improved recently, and most German adults -- in contrast to Britons -- show a relatively high regard for people involved in starting new businesses."
One of the big reasons why the entrepreneurial spirit flourishes in America is that as a people we seem to be more tolerant of failure. This is reflected in the generosity of our bankruptcy laws, which permit people who fail in business to start again with a clean slate. We're taught from little up that If at first you don't succeed, try, try again. In many parts of Europe, one failure dooms the bankrupt party for life, his credit rating dependant upon liquidation of his past debts. Access to capital and credit is more often a family affair, where the upper crust perpetuates itself. Financiers here may even look with favor on a new venture by a party who has been around the track already, know the same mistakes will not be made. I became a successful entrepreneur when I was 42 years old, when I started Polyconomics in July of 1978. The first thing I did was ask a successful small businessman for his advice on how I should get started. The best advice he gave was recommending I immediately hire an assistant to handle all the paperwork required by the different tiers of governments -- someone who could also do all the managerial work that goes into processing the product I was selling -- my economic and political analysis. I sometimes wonder if I could have survived the barriers that clog the entrepreneurial pipeline these days if I had not taken his advice.
Corporate capitalism is the natural adversary of entrepreneurial capitalism. Established enterprise would like nothing better than a system that prevents fresh competition. Please note the Business Roundtable, which represents the creme de la creme of the business establishment, has traditionally opposed a lowering of the capital gains tax. They will even contribute to the propaganda of liberal Democrats that a lower capgains tax only benefits rich folks, like themselves. They will favor lowering the capital gains tax only if it applies to existing wealth. In Mexico, for example, only shares traded on the stock exchange are exempt from capgains tax. And to get your shares traded on the Bolsa, you need to be a member of the power elite. The entrepreneurs of Mexico are the adventurous men who give up on their own system and find a way to get into the U.S. One of the consequences of lowering the rate here, Bill, is that at the margin more Mexicans will leave and set up shop in Texas, Arizona, New Mexico and California. The solution, of course, is to persuade the Mexican government to nurture the entrepreneurial spirit of its people by giving the little guys the same tax breaks as the big guys.