How Far Can We Push the Entrepreneurial Class?

The Taxpayers Alliance, an organization well-known here in London for getting its limited-government, lower-taxes agenda into the media and in front of politicians, released a new report, “Tax and Entrepreneurship,” this week.

The report calculates that under the UK’s current tax regime, marginal tax rates on entrepreneurs are so high that over 35 years, one invested British pound would only yield £2.68 compared to a pre-tax level of £28.10. The report calculates the current marginal tax rate on entrepreneurs at 90 percent, which will rise to 92 percent when the rate on top earners increases next April from 40 percent to 50 percent. In other words the tax increase will carve off another 20 percent of what is currently left over after the marginal rate does its dirty work.

The report raises a question that is relevant in leading developed nations such as the U.S. and UK right now: how far can we push the entrepreneurial class? When will the cost of starting and running an enterprise become so unappealing for so many that they will choose a “safe” job instead and thereby weaken an entire nation’s innovative edge?

No one knows the exact answer. And yet given what we know about the contribution of new enterprises to growth, it is surprising how little attention the enterprising class receives in public debates about the effect of policy choices (such as saddling tomorrow’s workers with massive debt or taxpayers with $1 trillion in new healthcare spending).

The preface to “Tax and Entrepreneurship,” written by entrepreneur and investor Julie Meyer, makes a few claims that should prompt policy makers and researchers to ponder:

We are fortunate that there exists that class of people . . . who are prepared to live abnormal lives in the bringing to life of their vision of the world, their products and services. Greatness drove them, not work life balance. They sought excellence, profits, and transparency, and made the impossible inevitable . . .

Many of us wouldn’t claim to call ourselves entrepreneurs, but we are part of a trend of what I call, ‘Individual Capitalism’—where the unit of business has shifted to the individual away from company man. No one under 30 that I know wants to work for anyone anymore . . .

Entrepreneurs instinctively shrug their shoulders when it comes to matters of government bureaucracy and tax.

Two interesting questions arise: Are entrepreneurs driven more by personal ambition and the culture out of which they grow than by tax policy and bureaucracy? Are we seeing a trend toward the “individual capitalist” that is driven by generational and technological change that is more powerful than any anti-entrepreneurial policies a government could reasonably enact?

One assumes that an enlightened liberal response would be “yes” to both questions—enlightened because any thinking liberal knows that the engines of growth need to keep firing to pay for new healthcare programs and the like. Conservatives and free-marketers, of course, would more instinctively say “no” to both questions. It seems clear at first glance that more entrepreneurship happens in the U.S. than the UK, and more in the UK than in France, because of tax policy and bureaucracy. But it also seems clear that below the national level, at the individual level, we don’t actually have a very good understanding of how the entrepreneurial class responds to policy.

Ryan Streeter is Senior Fellow at the Legatum Institute.